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 September 30, 2009
   ̈
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For the
transition period from ________ to ________
 
 Commission
File Number 000-50954
  
 NESS
TECHNOLOGIES, INC.
 (Exact
name of registrant as specified in its charter)
 
 Delaware
              98-0346908(State
      or other jurisdiction of
              (I.R.S.
      Employerincorporation
      or organization)
              Identification
      Number)
 
 Ness
Tower
 Atidim
High-Tech Industrial Park
 Building
4
 Tel
Aviv 61580, Israel
 Telephone:
+972 (3) 766-6800
 (Address
of registrant’s principal executive offices and registrant’s telephone number,
including area code)
  
  Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  x Yes   ̈ No
  Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).   ̈ Yes   ̈ No
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
 Large
      accelerated filer  ̈
                  Accelerated
      filer x
                  Non-accelerated
      filer  ̈
                  Smaller
      reporting company  ̈
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).   ̈ Yes  x No
  As of
October 30, 2009, 38,451,090 shares of the issuer’s common stock, $0.01 par
value per share, were outstanding.
  
 
  NESS
TECHNOLOGIES, INC. AND SUBSIDIARIES
 
 INDEX
  PART
      I – FINANCIAL INFORMATION
                                
                                3Item
      1. Financial Statements
                                
                                3Consolidated
      Balance Sheets – December 31, 2008 and September 30, 2009
      (Unaudited)
                                
                                3Consolidated
      Statements of Income – Three and nine months ended September 30, 2008 and
      2009 (Unaudited)
                                
                                5Consolidated
      Statements of Cash Flows – Nine months ended September 30, 2008 and 2009
      (Unaudited)
                                
                                6Notes
      to Interim Consolidated Financial Statements – September 30, 2009
      (Unaudited)
                                
                                8Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
                                
                                22Overview
                                
                                22Recent
      Developments
                                
                                23Consolidated
      Results of Operations
                                
                                23Three
      Months Ended September 30, 2009 Compared to the Three Months Ended
      September 30, 2008
                                
                                24Nine
      Months Ended September 30, 2009 Compared to the Nine Months Ended
      September 30, 2008
                                
                                27Results
      by Business Segment
                                
                                30Liquidity
      and Capital Resources
                                
                                31Forward-Looking
      Statements and Risk Factors
                                
                                33Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk
                                
                                34Item
      4. Controls and Procedures
                                
                                34Evaluation
      of Disclosure Controls and Procedures
                                
                                34Changes
      in Internal Control Over Financial Reporting
                                
                                35PART
      II – OTHER INFORMATION
                                
                                36Item
      1. Legal Proceedings
                                
                                36Item
      1A. Risk Factors
                                
                                36Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
                                
                                36Item
      3. Defaults upon Senior Securities
                                
                                36Item
      4. Submission of Matters to a Vote of Security Holders
                                
                                36Item
      5. Other Information
                                
                                36Item
      6. Exhibits
                                
                                36SIGNATURES
                                
                                37EXHIBIT
      INDEX
                                
                                38
  
  PART
I – FINANCIAL INFORMATION
  Item
1. Financial Statements
  NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES
 Interim
Consolidated Balance Sheets
 U.S.
dollars in thousands
 
 December
                    31, 2008
                
                
                September
                    30, 2009(Unaudited)ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
                
                $
                50,659
                
                
                $
                45,954Restricted
      cash
                
                
                2,331
                
                
                
                2,398Short-term
      bank deposits
                
                
                5,703
                
                
                
                22,703Trade
      receivables, net of allowance for doubtful accounts of $4,287 at December
      31, 2008 and $5,715 at September 30, 2009
                
                
                200,118
                
                
                
                138,419Unbilled
      receivables
                
                
                35,585
                
                
                
                36,278Other
      accounts receivable and prepaid expenses
                
                
                31,344
                
                
                
                37,248Work
      in progress
                
                
                1,532
                
                
                
                3,445Total
      current assets
                
                
                327,272
                
                
                
                286,445LONG-TERM
      ASSETS:Long-term
      prepaid expenses and other assets
                
                
                6,806
                
                
                
                7,225Unbilled
      receivables
                
                
                9,220
                
                
                
                5,238Deferred
      income taxes, net
                
                
                8,356
                
                
                
                6,629Severance
      pay fund
                
                
                46,478
                
                
                
                51,117Property
      and equipment, net
                
                
                36,733
                
                
                
                37,903Intangible
      assets, net
                
                
                22,073
                
                
                
                16,836Goodwill
                
                
                290,055
                
                
                
                299,019Total
      long-term assets
                
                
                419,721
                
                
                
                423,967Total
      assets
                
                $
                746,993
                
                
                $
                710,412
  The
accompanying notes are an integral part of the interim consolidated financial
statements.
  – 3
–
  NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES
 Interim
Consolidated Balance Sheets
 U.S.
dollars in thousands (except share and par value data)
 
 December
                    31, 2008
                
                
                September
                    30, 2009(Unaudited)LIABILITIES
      AND STOCKHOLDERS’ EQUITYCURRENT
      LIABILITIES:Short-term
      bank credit
                
                $
                18,072
                
                
                $
                12,983Current
      maturities of long-term debt
                
                
                7,089
                
                
                
                23,205Trade
      payables
                
                
                47,072
                
                
                
                23,830Advances
      from customers and deferred revenues
                
                
                33,280
                
                
                
                30,348Other
      accounts payable and accrued expenses
                
                
                124,697
                
                
                
                87,520Total
      current liabilities
                
                
                230,210
                
                
                
                177,886LONG-TERM
      LIABILITIES:Long-term
      debt, net of current maturities
                
                
                60,973
                
                
                
                57,434Other
      long-term liabilities
                
                
                6,444
                
                
                
                7,375Deferred
      income taxes
                
                
                2,673
                
                
                
                2,014Accrued
      severance pay
                
                
                55,014
                
                
                
                56,781Total
      long-term liabilities
                
                
                125,104
                
                
                
                123,604COMMITMENTS
      AND CONTINGENT LIABILITIESSTOCKHOLDERS’
      EQUITY:Common
      stock of $0.01 par value –Authorized:
      76,500,000 shares at December 31, 2008 and at September 30,
      2009;Issued: 39,628,994 at December 31, 2008 and 39,628,994 at
      September 30, 2009;Outstanding 39,087,253 at December 31, 2008 and
      38,451,090 at September 30, 2009
                
                
                396
                
                
                
                396Additional
      paid-in capital
                
                
                330,128
                
                
                
                332,641Accumulated
      other comprehensive income
                
                
                4,614
                
                
                
                17,969Retained
      earnings
                
                
                58,930
                
                
                
                62,342Treasury
      stock, at cost (541,741 shares at December 31, 2008 and 1,177,904 at
      September 30, 2009)
                
                
                (2,389
                )
                
                
                (4,426
                )Total
      stockholders’ equity
                
                
                391,679
                
                
                
                408,922Total
      liabilities and stockholders’ equity
                
                $
                746,993
                
                
                $
                710,412
  The
accompanying notes are an integral part of the interim consolidated financial
statements.
  – 4
–
  NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES
 Interim
Consolidated Statements of Income
 U.S.
dollars in thousands (except per share data)
 
 Three
      months ended
                    September
      30,
                
                
                Nine
      months ended
                    September
      30,2008
                
                
                2009
                
                
                2008
                
                
                2009(Unaudited)
                
                
                (Unaudited)
                
                
                (Unaudited)
                
                
                (Unaudited)Revenues
                
                $
                164,111
                
                
                $
                132,733
                
                
                $
                494,429
                
                
                $
                406,410Cost
      of revenues
                
                
                120,945
                
                
                
                96,753
                
                
                
                353,330
                
                
                
                298,186Gross
      profit
                
                
                43,166
                
                
                
                35,980
                
                
                
                141,099
                
                
                
                108,224Selling
      and marketing
                
                
                13,487
                
                
                
                12,094
                
                
                
                41,233
                
                
                
                35,047General
      and administrative
                
                
                24,986
                
                
                
                21,809
                
                
                
                73,908
                
                
                
                70,740Gain
      from sale of Israeli SAP sales and distribution operations,
      net
                
                
                (18,366
                )
                
                
                —
                
                
                
                (18,366
                )
                
                
                —Insurance
      settlement related to 2007 arbitration expense, net of related
      expenses
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (2,610
                )Commissions
      related to the sale of Israeli SAP sales and distribution
      operations
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (2,534
                )Total
      operating expenses
                
                
                20,107
                
                
                
                33,903
                
                
                
                96,775
                
                
                
                100,643Operating
      income
                
                
                23,059
                
                
                
                2,077
                
                
                
                44,324
                
                
                
                7,581Financial
      expenses, net
                
                
                (1,187
                )
                
                
                (399
                )
                
                
                (3,635
                )
                
                
                (2,431
                )Other
      expenses, net
                
                
                (392
                )
                
                
                —
                
                
                
                (392
                )
                
                
                —Income
      before taxes on income
                
                
                21,480
                
                
                
                1,678
                
                
                
                40,297
                
                
                
                5,150Taxes
      on income
                
                
                5,333
                
                
                
                836
                
                
                
                9,166
                
                
                
                1,738Net
      income
                
                $
                16,147
                
                
                $
                842
                
                
                $
                31,131
                
                
                $
                3,412Basic
      net earnings per share
                
                $
                0.41
                
                
                $
                0.02
                
                
                $
                0.79
                
                
                $
                0.09Diluted
      net earnings per share
                
                $
                0.41
                
                
                $
                0.02
                
                
                $
                0.78
                
                
                $
                0.09
  
 (*)    Includes
stock-based compensation, as follows:
  Three
      months ended
                    September
      30,
                
                
                Nine
      months ended
                    September
      30,2008
                
                
                2009
                
                
                2008
                
                
                2009(Unaudited)
                
                
                (Unaudited)
                
                
                (Unaudited)
                
                
                (Unaudited)Cost
      of revenues
                
                $
                64
                
                
                $
                63
                
                
                $
                208
                
                
                $
                183Selling
      and marketing
                
                
                59
                
                
                
                52
                
                
                
                173
                
                
                
                155General
      and administrative
                
                
                565
                
                
                
                748
                
                
                
                1,846
                
                
                
                2,281
  The
accompanying notes are an integral part of the interim consolidated financial
statements.
  – 5
–
  NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES
 Interim
Consolidated Statements of Cash Flows
 U.S.
dollars in thousands
 
 Nine
      months ended
                    September
      30,2008
                
                
                2009(Unaudited)
                
                
                (Unaudited)Cash flows from operating
      activities:Net
      income
                
                $
                31,131
                
                
                $
                3,412Adjustments
      required to reconcile net income to net cash provided by operating
      activities:Stock-based
      compensation-related expenses
                
                
                2,227
                
                
                
                2,619Currency
      fluctuation of long-term debt
                
                
                68
                
                
                
                —Depreciation
      and amortization
                
                
                12,571
                
                
                
                14,245Arbitration
      settlement and related charges
                
                
                (9,452
                )
                
                
                —Loss
      (gain) on sale of property and equipment and impairment and sale of cost
      investments
                
                
                501
                
                
                
                (138
                )Gain
      from sale of Israeli SAP sales and distribution operations,
      net
                
                
                (18,366
                )
                
                
                —Commissions
      related to the sale of Israeli SAP sales and distribution
      operations
                
                
                —
                
                
                
                (2,534
                )Decrease
      in trade receivables, net
                
                
                10,393
                
                
                
                62,996Decrease
      (increase) in unbilled receivables
                
                
                (8,525
                )
                
                
                4,722Decrease
      (increase) in other accounts receivable and prepaid
    expenses
                
                
                626
                
                
                
                (3,516
                )Increase
      in work-in-progress
                
                
                (1,101
                )
                
                
                (714
                )Decrease
      (increase) in long-term prepaid expenses
                
                
                1,193
                
                
                
                (260
                )Deferred
      income taxes, net
                
                
                6,897
                
                
                
                (92
                )Decrease
      in trade payables
                
                
                (5,845
                )
                
                
                (20,779
                )Increase
      (decrease) in advances from customers and deferred
revenues
                
                
                3,073
                
                
                
                (3,305
                )Increase
      in other long-term liabilities
                
                
                694
                
                
                
                498Decrease
      in other accounts payable and accrued expenses
                
                
                (5,447
                )
                
                
                (19,969
                )Decrease
      in accrued severance pay, net
                
                
                (2,253
                )
                
                
                (2,726
                )Net
      cash provided by operating activities
                
                
                18,385
                
                
                
                34,459Cash flows from investing
      activities:Proceeds
      from sale of investment at cost
                
                
                219
                
                
                
                —Proceeds
      from sale of Israeli SAP sales and distribution operations,
      net
                
                
                13,145
                
                
                
                —Additional
      payments in connection with acquisitions of subsidiaries in prior
      periods
                
                
                (5,973
                )
                
                
                (15,451
                )Proceeds
      from maturity of (investment in) short-term bank deposits,
    net
                
                
                1,267
                
                
                
                (16,822
                )Proceeds
      from sale of property and equipment
                
                
                115
                
                
                
                796Purchase
      of property and equipment and capitalization of software developed for
      internal use
                
                
                (10,595
                )
                
                
                (9,746
                )Net
      cash used in investing activities
                
                
                (1,822
                )
                
                
                (41,223
                )Cash flows from financing
      activities:Exercise
      of options
                
                
                4,317
                
                
                
                —Repurchase
      of shares
                
                
                —
                
                
                
                (2,037
                )Acquired
      subsidiary’s dividend to its former shareholder
                
                
                (10,048
                )
                
                
                (1,430
                )Short-term
      bank loans and credit, net
                
                
                13,737
                
                
                
                (4,970
                )Proceeds
      from long-term debt
                
                
                25,483
                
                
                
                15,000Principal
      payments of long-term debt
                
                
                (2,447
                )
                
                
                (4,411
                )Net
      cash provided by financing activities
                
                
                31,042
                
                
                
                2,152
  The
accompanying notes are an integral part of the interim consolidated financial
statements.
  – 6
–
  NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES
 Interim
Consolidated Statements of Cash Flows
 U.S.
dollars in thousands
 
 Nine
      months ended
                    September
      30,2008
                
                
                2009(Unaudited)
                
                
                (Unaudited)Effect
      of exchange rate changes on cash and cash equivalents
                
                
                (10,291
                )
                
                
                (93
                )Increase
      (decrease) in cash and cash equivalents
                
                
                37,314
                
                
                
                (4,705
                )Cash
      and cash equivalents at the beginning of the period
                
                
                43,097
                
                
                
                50,659Cash
      and cash equivalents at the end of the period
                
                $
                80,411
                
                
                $
                45,954
 
 
 Non-cash
      activityLoss
      from mark-to-market of foreign exchange forward contracts and interest
      rate swap
                  
                  $
                  7,972
                  
                  
                  $
                  48Receivable
      on account of sale of Israeli SAP sales and distribution
      division
                  
                  $
                  1,993
                  
                  
                  $
                  —
 
 The
accompanying notes are an integral part of the interim consolidated financial
statements.
  – 7
–
  NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES
 Notes
to Interim Consolidated Financial Statements
 U.S.
dollars in thousands (except share and per share data)
(Unaudited)
 
 Note
1: General
  Ness
Technologies, Inc. was incorporated under the laws of the State of Delaware in
March 1999. We operate through our subsidiaries in North America, Europe, Israel
and Asia Pacific.
  We are a
global provider of IT and business services and solutions with specialized
expertise in software product engineering; system integration, application
development and consulting; and software distribution. We deliver our portfolio
of solutions and services using a global delivery model combining offshore,
near-shore and local teams. The primary verticals we serve include high-tech
companies and independent software vendors; utilities and government; financial
services; defense and homeland security; and life sciences &
healthcare.
  Note
2: Significant Accounting Policies
  a.
              Unaudited Interim
      Financial Information
  The
accompanying consolidated balance sheet as of September 30, 2009, the
consolidated statements of income for the three and nine months ended September
30, 2008 and 2009 and the consolidated statements of cash flows for the nine
months ended September 30, 2008 and 2009 are unaudited. These unaudited interim
consolidated financial statements have been prepared in accordance with U.S.
generally accepted accounting principles for interim financial information. In
the opinion of management, the unaudited interim consolidated financial
statements include all adjustments of a normal recurring nature necessary for a
fair presentation of our consolidated financial position as of September 30,
2009, our consolidated results of operations for the three and nine months ended
September 30, 2008 and 2009 and our consolidated cash flows for the nine months
ended September 30, 2008 and 2009.
  The
balance sheet at December 31, 2008 has been derived from the audited
consolidated financial statements at that date but does not include all of the
information and footnotes required by U.S. generally accepted accounting
principles for complete financial statements.
  These
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and accompanying notes for the year ended
December 31, 2008 included in our Annual Report on Form 10-K filed with the U.S.
Securities and Exchange Commission (“SEC”) on March 16, 2009.
  Results
for the three and nine months ended September 30, 2009 are not necessarily
indicative of results that may be expected for the year ending December 31,
2009.
  Unless
otherwise noted, all references to “dollars” or “$” are to United States
dollars.
  b.
              Reclassification
  Certain
prior period amounts have been reclassified to conform to the current period
presentation.
  c.
              Use of
      estimates
  The
preparation of financial statements in conformity with United States generally
accepted accounting principles requires our management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Our management believes that the estimates, judgments and
assumptions used are reasonable based upon information available at the time
they are made. These estimates, judgments and assumptions can affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the dates of the financial statements, and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates.
  – 8
–
  NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES
 Notes
to Interim Consolidated Financial Statements
 U.S.
dollars in thousands (except share and per share data)
(Unaudited)
  d.
              Principles of
      consolidation
  Our
consolidated financial statements include the accounts of the company and its
wholly and majority owned subsidiaries, or the group. Inter-company transactions
and balances, including profit from inter-company sales not yet realized outside
the group, have been eliminated in consolidation.
  e.
              Fair
      value
  In
February 2008, the Financial Accounting Standards Board (“FASB”) approved FASB
Staff Position (“FSP”) FAS 157-2, “Effective Date of FASB Statement No. 157”
(“FSP FAS 157-2”), which allows companies to elect a one-year delay in applying
Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value
Measurements” (“SFAS 157”), to certain fair value measurements, primarily
related to non-financial instruments. We elected the delayed adoption date for
the portions of SFAS 157 impacted by FSP FAS 157-2. The partial adoption of SFAS
157 was prospective and did not have a significant effect on our consolidated
financial statements.
  Assets
and liabilities measured at fair value under SFAS 157 on a recurring basis as of
September 30, 2009 were presented on our consolidated balance sheets as follows
(in thousands):
  Total
                      
                      
                      Quoted
                          Prices in
                          Active
                          Markets
                          for
                          Identical
                          Assets
                          (Level 1)
                      
                      
                      Significant
                          Other
                          Observable
                          Inputs
                          (Level 2)
                      
                      
                      Significant
                          Unobservable
                          Inputs
                          (Level 3)Derivative
      instruments
                      
                      $
                      612
                      
                      
                      $
                      —
                      
                      
                      $
                      612
                      
                      
                      $
                      —Total
      assets
                      
                      $
                      612
                      
                      
                      $
                      —
                      
                      
                      $
                      612
                      
                      
                      $
                      —Derivative
      instruments
                      
                      $
                      674
                      
                      
                      $
                      —
                      
                      
                      $
                      674
                      
                      
                      $
                      —Total
      liabilities
                      
                      $
                      674
                      
                      
                      $
                      —
                      
                      
                      $
                      674
                      
                      
                      $
                      —
  f.
              Impact of recently
      issued accounting
pronouncements
  In April
2009, the FASB issued three related staff positions: (i) FSP No. 157-4,
“Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability have Significantly Decreased and Identifying Transactions That Are Not
Orderly” (“FSP 157-4”), (ii) FSP No. 115-2 and FSP No. 124-2, “Recognition and
Presentation of Other-Than-Temporary Impairments” (“FSP 115-2” and “FSP 124-2”),
and (iii) FSP No. 107-1 and APB No. 28-1, “Interim Disclosures about Fair Value
of Financial Instruments” (“FSP 107” and “APB 28-1”), which are effective for
interim and annual periods ending after June 15, 2009. FSP 157-4 provides
guidance on how to determine the fair value of assets and liabilities under SFAS
157 in the current economic environment and reemphasizes that the objective of a
fair value measurement remains an exit price. If a company concludes that there
has been a significant decrease in the volume and level of activity of an asset
or liability in relation to normal market activities, quoted market values may
not be representative of fair value and the company may conclude that a change
in valuation technique or the use of multiple valuation techniques is
appropriate. FSP 115-2 and FSP 124-2 modify the requirements for recognizing
other-than-temporarily impaired debt securities and revise the existing
impairment model for such securities, by modifying the current intent and
ability indicator in determining whether a debt security is
other-than-temporarily impaired. FSP 107 and APB 28-1 enhance the disclosure of
instruments under the scope of SFAS 157 for both interim and annual periods. The
adoption of these FSPs did not have an impact on our financial
statements.
  – 9
–
  NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES
 Notes
to Interim Consolidated Financial Statements
 U.S.
dollars in thousands (except share and per share data) (Unaudited)
  Also in
April 2009, the FASB issued FSP FAS 141(R)-1, “Accounting for Assets Acquired
and Liabilities Assumed in a Business Combination That Arise from Contingencies”
(FSP FAS 141(R)-1), which amends and clarifies SFAS No. 141(R), “Business
Combinations,” on the initial recognition and measurement, subsequent
measurement and accounting, and disclosure of assets and liabilities arising
from contingencies in a business combination. This FSP is effective for assets
or liabilities arising from contingencies in business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. The Company adopted this
FSP effective January 1, 2009. Accordingly, the effects of the adoption of
FSP FAS 141(R)-1 will depend upon the extent and magnitude of future
acquisitions. Under the recent codification standards issued by the FASB, this
new FSP guidance is now codified under Topic 805, “Business
Combinations.”
  In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”). SFAS 165
is intended to establish general standards of accounting for, and disclosure of,
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. It requires the disclosure of the date
through which an entity has evaluated subsequent events and the basis for
selecting that date, that is, whether that date represents the date the
financial statements were issued or were available to be issued. SFAS 165 is
effective for interim or annual financial periods ending after June 15, 2009.
The adoption of SFAS 165 did not have a material effect on our financial
statements.
  In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles” (“SFAS 168”).
SFAS 168 establishes the FASB Accounting Standards Codification, which will
become the source of authoritative U.S. GAAP recognized by the FASB. Following
this statement, the FASB will issue new standards in the form of Accounting
Standards Updates (“ASUs”). SFAS 168 is effective for financial statements
issued for interim and annual periods ending after September 15, 2009. The
adoption of SFAS 168 did not have any impact on our financial statements, as it
does not modify GAAP, except for the specific references to GAAP literature in
the notes to our consolidated financial statements.
  In August
2009, the FASB issued ASU No. 2009-05, “Fair Value Measurements and
Disclosures (Topic 820) – Measuring Liabilities at Fair Value” (“ASU 2009-05”).
ASU 2009-05 amends Subtopic 820-10, “Fair Value Measurements and Disclosures –
Overall,” for the fair value of liabilities. This update provides clarification
that in circumstances in which a quoted price in an active market for the
identical liability is not available, a reporting entity is required to measure
fair value of such liability using one or more of the techniques prescribed by
the update. The guidance in ASU 2009-05 will be effective for the first
reporting period after the issuance. The adoption of ASU 2009-05 is not expected
to have a material impact on our financial statements.
  In
October 2009, the FASB issued ASU No. 2009-13, “Multiple-Deliverable Revenue
Arrangements, (amendments to FASB ASC Topic 605, Revenue Recognition)” (“ASU
2009-13”) and ASU No. 2009-14, “Certain Arrangements That Include Software
Elements, (amendments to FASB ASC Topic 985, Software)” (“ASU
2009-14”). ASU 2009-13 requires entities to allocate revenue in an
arrangement using estimated selling prices of the delivered goods and services
based on a selling price hierarchy. The amendments eliminate the residual method
of revenue allocation and require revenue to be allocated using the relative
selling price method. ASU 2009-14 removes tangible products from the scope
of software revenue guidance and provides guidance on determining whether
software deliverables in an arrangement that includes a tangible product are
covered by the scope of the software revenue guidance. ASU 2009-13 and ASU
2009-14 should be applied on a prospective basis for revenue arrangements
entered into or materially modified in fiscal years beginning on or after
June 15, 2010, with early adoption permitted. The effects of the adoption
of ASU 2009-13 and ASU 2009-14 will depend upon the extent and magnitude of
revenue arrangements we enter into or materially modify after December 31,
2010.
  – 10
–
  NESS
TECHNOLOGIES, INC. AND ITS SUBSIDIARIES
 Notes
to Interim Consolidated Financial Statements
 U.S.
dollars in thousands (except share and per share data)
(Unaudited)
  Note
3: Acquisitions
  a.
              Goodwill
  In the
nine months ended September 30, 2009, we increased our goodwill by $8,964, which
consisted of adjustments with respect to prior-year acquisitions of $2,540 and
translation adjustments of $6,424.
  Under
SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill and intangible
assets deemed to have indefinite lives are tested for impairment annually, or
between annual tests in certain circumstances, and written down when impaired.
Goodwill is tested for impairment at the reporting unit level by comparing the
fair value of the reporting unit with its carrying value. We perform our annual
impairment analysis of goodwill as of December 31 of each year, or more often if
there are indicators of impairment present. As of December 31, 2008, we
performed our annual impairment test and determined that goodwill was not
impaired. As our market capitalization is lower than our stockholders’ equity
and in response to changes in our assumptions related to future cash flows and
market conditions during the nine months ended September 30, 2009, we updated
our analysis and performed an impairment test as of September 30, 2009. Each
time we performed the test, we compared the fair value of each reporting unit to
its carrying value. In such a test, if the fair value exceeds the carrying value
of the net assets, goodwill is considered not impaired, and we are not required
to perform further testing. We determined the fair value of each reporting unit
using the Income Approach, which utilizes a discounted cash flow model, as this
approach best approximates the reporting unit’s fair value at this time.
Judgments and assumptions related to revenues, operating income, future
short-term and long-term growth rates, weighted average cost of capital,
interest, capital expenditures, cash flows, and market conditions are inherent
in developing the discounted cash flow model. We corroborated the fair values
using the Market Approach. As a result of the analysis, we concluded that
goodwill was not impaired.
  As we
announced in our third quarter earnings press release and related Current Report
on Form 8-K, both dated November 3, 2009, we are considering a restructuring of
certain unprofitable business units during the fourth quarter of 2009. Our
year-end goodwill impairment test, which will be performed as of December 31,
2009 based on data available as of that date, will assess whether this
restructuring, or the evolving macro-economic conditions in the geographic
regions where we have operations, or the completion of our 2010 budget planning
cycle in December 2009, will have a material effect on our
goodwill.
  b.
              Pro Forma Financial
      Information
  The
following table presents certain combined unaudited statements of income data
for the three and nine months ended September 30, 2008 as if our 2008
acquisition of Logos, a.s. had occurred on January 1, 2008, after giving effect
to purchase accounting adjustments, including amortization of identifiable
intangible assets:
  – 11
–


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


Three
                    months
                    ended
                
                
                Nine
                    months
                    endedSeptember 30, 2008(Unaudited)
                
                
                (Unaudited)Revenues
                
                $
                177,544
                
                
                $
                534,922Net
      income
                
                $
                14,881
                
                
                $
                28,337Earnings
      per share:Basic
                
                $
                0.38
                
                
                $
                0.72Diluted
                
                $
                0.37
                
                
                $
                0.71




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




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




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




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




Note
6: Accounting for stock-based compensation




During
the nine months ended September 30, 2009, we granted options to purchase 197,750
shares of our common stock, at a weighted average fair value of $1.38 per
option, and 189,250 restricted stock units under our 2007 Stock Incentive Plan.
The options were granted at an exercise price of $4.53 per share. The options
and restricted stock units vest over the requisite service period of the
award.




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


– 12
–


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




Black-Scholes
                
                
                Monte CarloThree months ended
                    September 30,
                
                
                Nine months ended
                    September 30,
                
                
                Three and nine months
                    ended September 30,2008
                
                
                2009
                
                
                2008
                
                
                2009
                
                
                2008 and 2009(Unaudited)
                
                
                (Unaudited)
                
                
                (Unaudited)
                
                
                (Unaudited)
                
                
                (Unaudited)Dividend
      yield
                
                
                0%
                
                
                
                0%
                
                
                
                0%
                
                
                
                0%
                
                
                
                0%Expected
      volatility
                
                
                31.49%
                
                
                
                43.28%
                
                
                
                31.39%
                
                
                
                37.77%
                
                
                
                29
      – 31%Risk-free
      interest
                
                
                2.62%
                
                
                
                2.57%
                
                
                
                2.49%
                
                
                
                1.46%
                
                
                
                3.05
      – 4.95%Expected
      life (in years)
                
                
                3.50
                
                
                
                4.88
                
                
                
                3.29
                
                
                
                4.57
                
                
                
                N/A




As of
September 30, 2009, options to purchase 4,889,554 shares were outstanding with a
weighted average exercise price of $10.44 per share, and 644,750 restricted
stock units were outstanding. Options, restricted stock and restricted stock
units to purchase 1,986,852 shares were available for future grants as of
September 30, 2009.




Total
stock-based compensation expense was $688 and $2,227 for the three and nine
months ended September 30, 2008 and $863 and $2,619 for the three and nine
months ended September 30, 2009, and the total recognized tax benefit was $55,
$150, $167 and $342, respectively.




As of
September 30, 2009, $5,910 of total unrecognized compensation cost related to
stock-based compensation was expected to be recognized over a weighted average
period of 1.5 years. The total unrecognized stock-based compensation cost to be
recognized in future periods as of September 30, 2009 does not consider the
effect of stock options that may be issued in subsequent periods.




Note
7: Derivatives




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




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


– 13
–




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




At
September 30, 2009, we held interest rate swap derivatives to convert certain
floating-rate debts to fixed-rate debts. The interest rate swap derivatives
involve an agreement to pay fixed-rate interest and receive floating-rate
interest, at specified intervals, calculated on agreed notional amounts that
match the amounts of the original loans and paid on the same installments and
maturity dates. At September 30, 2009, the aggregate notional amount of the
interest rate swaps was $26,063 and there was no ineffectiveness related to
these derivatives for the nine months ended September 30, 2009, with all
unrealized losses being deferred in accumulated other comprehensive income. The
liability is presented within other long-term liabilities on the balance sheet
at September 30, 2009, as the interest rate swap derivatives expire in November
2012 through April 2013.




We enter
into foreign exchange forward contracts to hedge against the effect of exchange
rate fluctuations on forecasted cash flows denominated in Indian Rupees. At
September 30, 2009, the notional amount of foreign exchange forward contracts we
entered into was $34,500 and there was no ineffectiveness related to these
foreign exchange forward contracts for the nine months ended September 30, 2009,
with all unrealized gains being deferred in accumulated other comprehensive
income.




Derivatives
Instruments Not Designated as Hedging Strategy:




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




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




Fair Values of Derivative InstrumentsAssets
                
                LiabilitiesBalance Sheet Item
                
                September
                    30, 2009
                
                Balance Sheet Item
                
                September
                    30, 2009(Unaudited)
                
                
                
                (Unaudited)Cash
      flow hedging:Foreign
      exchange forward contracts
                
                “Other
      accounts receivable and prepaid expenses”
                
                $
                288
                
                “Other
      accounts payable and accrued expenses”
                
                $
                71Interest
      rate swap
                
                
                
                
                —
                
                “Other
      long-term liabilities”
                
                
                540Total
      cash flow hedging
                
                
                
                $
                288
                
                
                
                $
                611Derivatives
      not designated as hedging:Foreign
      exchange forward contracts
                
                “Other
      accounts receivable and prepaid expenses”
                
                
                324
                
                “Other
      accounts payable and accrued expenses”
                
                
                63Total
      derivatives
                
                
                
                $
                612
                
                
                
                $
                674




– 14
–





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





Gain
      (loss) Recognized in Statements of IncomeGain (loss)
                                                    Recognized in Other
                                                    Comprehensive
                                                    Income
                                                  
                                                  
                                                  
                                                  Three
                                                    months
                                                    ended
                                                  
                                                  
                                                  Nine
                                                    months
                                                    endedSeptember 30, 2009
                                                  
                                                  Statements
      of Income Item
                                                  
                                                  September
                                                    30, 2009
                                                  
                                                  
                                                  September
                                                    30, 2009(Unaudited)
                                                  
                                                  
                                                  
                                                  (Unaudited)
                                                  
                                                  
                                                  (Unaudited)Cash
      flow hedging:Foreign
      exchange forward contracts
                                                  
                                                  $
                                                  288
                                                  
                                                  “Cost
      of revenues” and “Total operating expenses”
                                                  
                                                  $
                                                  (566
                                                  )
                                                  
                                                  $
                                                  (3,519
                                                  )Interest
      rate swap
                                                  
                                                  
                                                  (540
                                                  )
                                                  “Financial
      expenses, net”
                                                  
                                                  
                                                  (174
                                                  )
                                                  
                                                  
                                                  (277
                                                  )Total
      cash flow hedging
                                                  
                                                  $
                                                  (252
                                                  )
                                                  
                                                  
                                                  $
                                                  (740
                                                  )
                                                  
                                                  $
                                                  (3,796
                                                  )Derivatives
      not designated as hedging:Foreign
      exchange forward contracts
                                                  
                                                  
                                                  
                                                  
                                                  “Financial
      expenses, net”
                                                  
                                                  
                                                  309
                                                  
                                                  
                                                  
                                                  (244
                                                  )Total
      derivatives
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  $
                                                  (431
                                                  )
                                                  
                                                  $
                                                  (4,040
                                                  )




Note
8: Commitments and Contingent Liabilities




a.
              Litigation




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




One of
our Israeli subsidiaries is currently involved in legal proceedings with the
Israeli Ministry of Justice (the “MOJ”). The legal proceedings relate to a
contract for the provision of an information system for the MOJ, executed in
November 2005 (the “MOJ Contract”). Following continued disputes, correspondence
and discussions, on February 9, 2009 we filed a claim with the Israeli District
Court located in Jerusalem claiming, among other things, a breach of the MOJ
Contract by the MOJ, including in connection with the MOJ’s demands for
revisions and changes to the software that were not contemplated in the MOJ
Contract. Our claim is for damages in the amount of NIS 20.7 million, or
approximately $5.5 million, using the exchange rate prevailing at the end of the
quarter. On February 11, 2009, the MOJ filed a claim against our Israeli
subsidiary in the Israeli District Court located in Jerusalem claiming, among
other things, that our Israeli subsidiary breached the MOJ Contract and failed
to fulfill its undertakings and obligations set forth therein. The MOJ’s claim
is for damages in the amount of NIS 79.5 million, or approximately $21.2
million, using the exchange rate prevailing at the end of the quarter. The MOJ
and our subsidiary have filed answers to the respective claims. We believe that
we have a substantial legal basis for our claim and valid defenses with respect
to the MOJ’s claim. While we intend to vigorously prosecute our claim and defend
against the MOJ’s claim, we cannot at this point predict the outcome of the
litigation. Adverse decisions in these legal proceedings may materially
adversely affect our financial condition.


– 15
–




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




b.
              Guarantees




Guarantees
are contingent commitments issued by us generally to guarantee our performance
in different projects to our customers, such as tenders. The term of a guarantee
generally is equal to the term of the related projects, which can be as short as
30 days or as long as 8 years. The maximum potential amount of future payments
we could be required to make under our guarantees at December 31, 2008 and
September 30, 2009 is $48,146 and $42,195, respectively. We do not hold
collateral to support guarantees except when deemed necessary.




c.
              Liens and
      charges




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




Note
9: Stockholders’ Equity




a.
              Total comprehensive
      income:




Three months ended
                    September 30,
                
                
                Nine months ended
                    September 30,2008
                
                
                2009
                
                
                2008
                
                
                2009(Unaudited)
                
                
                (Unaudited)
                
                
                (Unaudited)
                
                
                (Unaudited)Net
      income
                
                $
                16,147
                
                
                $
                842
                
                
                $
                31,131
                
                
                $
                3,412Foreign
      currency translation adjustments, net
                
                
                (16,747
                )
                
                
                11,120
                
                
                
                8,551
                
                
                
                9,607Unrealized
      income (losses) on foreign exchange forward contracts and interest rate
      swap
                
                
                (681
                )
                
                
                366
                
                
                
                (5,138
                )
                
                
                3,748Comprehensive
      income (loss)
                
                $
                (1,281
                )
                
                $
                12,328
                
                
                $
                34,544
                
                
                $
                16,767




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




Nine months ended
                    September 30,2008
                
                
                2009(Unaudited)
                
                
                (Unaudited)Balance
      at the beginning of the period
                
                $
                —
                
                
                $
                4,000Mark
      to market of foreign exchange forward contracts and interest rate
      swap
                
                
                7,972
                
                
                
                48Loss
      recognized in earnings during the period
                
                
                (2,834
                )
                
                
                (3,796
                )Balance
      at the end of the period
                
                $
                5,138
                
                
                $
                252




c.
              Option
      exercises:




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




d.
              Treasury
      stock:




During
the three and nine months ended September 30, 2009, we repurchased zero and
636,163 shares of our common stock, respectively, on the open market for an
aggregate purchase price of zero and $2,037, respectively.


– 16
–




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




Note
10: Segment Reporting




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




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




Our
operating segments are:




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




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




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




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


– 17
–




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


The table
below presents financial information for our reportable segments:




Three months ended September 30, 2008Software
                      Product
                      Engineering
                  
                  
                  System
                      Integration &
                      Application
                      Development
                  
                  
                  Software
                      Distribution
                  
                  
                  Unallocated
                      Expenses
                  
                  
                  Total(Unaudited)Revenues
      from external customers
                  
                  $
                  26,092
                  
                  
                  $
                  126,552
                  
                  
                  $
                  11,467
                  
                  
                  $
                  —
                  
                  
                  $
                  164,111Operating
      income (loss)
                  
                  $
                  3,181
                  
                  
                  $
                  10,233
                  
                  
                  $
                  13,268
                  
                  
                  $
                  (3,623
                  )
                  
                  
                  23,059Financial
      expenses, net
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (1,187
                  )Other
      expenses, net
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (392
                  )Income
      before taxes on income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  21,480




Three months ended September 30, 2009Software
                  Product
                  Engineering
              
              
              System
                  Integration &
                  Application
                  Development
              
              
              Software
                  Distribution
              
              
              Unallocated
                  Expenses
              
              
              Total(Unaudited)Revenues
      from external customers
              
              $
              25,621
              
              
              $
              100,202
              
              
              $
              6,910
              
              
              $
              —
              
              
              $
              132,733Operating
      income (loss)
              
              $
              3,609
              
              
              $
              2,150
              
              
              $
              (782
              )
              
              $
              (2,900
              )
              
              
              2,077Financial
      expenses, net
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (399
              )Other
      expenses, net
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              —Income
      before taxes on income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              1,678




Nine months ended September 30, 2008Software
                      Product
                      Engineering
                  
                  
                  System
                      Integration &
                      Application
                      Development
                  
                  
                  Software
                      Distribution
                  
                  
                  Unallocated
                      Expenses
                  
                  
                  Total(Unaudited)Revenues
      from external customers
                  
                  $
                  71,360
                  
                  
                  $
                  377,672
                  
                  
                  $
                  45,397
                  
                  
                  $
                  —
                  
                  
                  $
                  494,429Operating
      income (loss)
                  
                  $
                  6,443
                  
                  
                  $
                  28,749
                  
                  
                  $
                  18,317
                  
                  
                  $
                  (9,185
                  )
                  
                  
                  44,324Financial
      expenses, net
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (3,635
                  )Other
      expenses, net
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (392
                  )Income
      before taxes on income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  40,297




– 18
–


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




Nine months ended September 30, 2009Software
                      Product
                      Engineering
                  
                  
                  System
                      Integration &
                      Application
                      Development
                  
                  
                  Software
                      Distribution
                  
                  
                  Unallocated
                      Expenses
                  
                  
                  Total(Unaudited)Revenues
      from external customers
                  
                  $
                  76,275
                  
                  
                  $
                  307,772
                  
                  
                  $
                  22,363
                  
                  
                  $
                  —
                  
                  
                  $
                  406,410Operating
      income (loss)
                  
                  $
                  11,819
                  
                  
                  $
                  6,783
                  
                  
                  $
                  928
                  
                  
                  $
                  (11,949
                  )
                  
                  
                  7,581Financial
      expenses, net
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (2,431
                  )Other
      expenses, net
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  —Income
      before taxes on income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  5,150




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




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




Three months ended
                      September 30,
                  
                  
                  Nine months ended
                      September 30,2008
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  2009(Unaudited)
                  
                  
                  (Unaudited)
                  
                  
                  (Unaudited)
                  
                  
                  (Unaudited)Revenues
      from sales to unaffiliated customers:Israel
                  
                  $
                  54,834
                  
                  
                  $
                  41,905
                  
                  
                  $
                  175,336
                  
                  
                  $
                  129,546North
      America
                  
                  
                  46,540
                  
                  
                  
                  42,115
                  
                  
                  
                  133,460
                  
                  
                  
                  128,138Europe
      (except Czech Republic)
                  
                  
                  40,845
                  
                  
                  
                  23,738
                  
                  
                  
                  120,495
                  
                  
                  
                  76,722Czech
      Republic
                  
                  
                  14,247
                  
                  
                  
                  18,439
                  
                  
                  
                  43,196
                  
                  
                  
                  53,575Asia
      Pacific
                  
                  
                  7,645
                  
                  
                  
                  6,536
                  
                  
                  
                  21,942
                  
                  
                  
                  18,429$
                  164,111
                  
                  
                  $
                  132,733
                  
                  
                  $
                  494,429
                  
                  
                  $
                  406,410




December
                      31, 2008
                  
                  
                  September
                      30, 2009(Unaudited)Long-lived
      assets:Israel
                  
                  $
                  20,030
                  
                  
                  $
                  22,130India
                  
                  
                  7,312
                  
                  
                  
                  7,163Europe
                  
                  
                  6,731
                  
                  
                  
                  5,297North
      America
                  
                  
                  2,245
                  
                  
                  
                  2,858Asia
      Pacific (excluding India)
                  
                  
                  415
                  
                  
                  
                  455$
                  36,733
                  
                  
                  $
                  37,903




– 19
–


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




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




Note
11: Income Taxes




As of
September 30, 2009 the total of our unrecognized tax benefits was $3,847, which,
if recognized, would affect our effective tax rates in future periods. Included
in that amount are accrued interest and penalties resulting from such
unrecognized tax benefits of $656 at September 30, 2009. During the nine months
ended September 30, 2009, we recorded $114 for interest and penalties expenses
with respect to uncertain tax positions. A reconciliation of the beginning and
ending amounts of unrecognized tax benefits as of September 30, 2009 is as
follows:




Balance
      as of January 1, 2009
                    
                    $
                    3,177Reductions
      related to changes in interest rates and foreign currency exchange
      rates
                    
                    
                    (159
                    )Additions
      related to tax positions taken during the period
                    
                    
                    186Balance
      as of March 31, 2009
                    
                    
                    3,204Additions
      related to changes in interest rates and foreign currency exchange
      rates
                    
                    
                    156Additions
      related to tax positions taken during the period
                    
                    
                    172Balance
      as of June 30, 2009
                    
                    
                    3,532Additions
      related to changes in interest rates and foreign currency exchange
      rates
                    
                    
                    104Additions
      related to tax positions taken during the period
                    
                    
                    211Balance
      as of September 30, 2009
                    
                    $
                    3,847




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




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




Note
12: Basic and Diluted Net Earnings per Share




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


– 20
–




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


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




Three months ended
                      September 30,
                  
                  
                  Nine months ended
                      September 30,2008
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  2009(Unaudited)
                  
                  
                  (Unaudited)
                  
                  
                  (Unaudited)
                  
                  
                  (Unaudited)Numerator:Net
      income, numerator for basic and diluted per share
                  
                  $
                  16,147
                  
                  
                  $
                  842
                  
                  
                  $
                  31,131
                  
                  
                  $
                  3,412Denominator:Weighted
      average number of shares of common stock
                  
                  
                  39,435
                  
                  
                  
                  38,451
                  
                  
                  
                  39,284
                  
                  
                  
                  38,653Effect
      of dilutive securities:Employee
      stock options and restricted stock units
                  
                  
                  396
                  
                  
                  
                  413
                  
                  
                  
                  645
                  
                  
                  
                  528Denominator
      for diluted net earnings per share - weighted average assuming exercise of
      options and restricted stock units
                  
                  
                  39,832
                  
                  
                  
                  38,864
                  
                  
                  
                  39,929
                  
                  
                  
                  39,181




The total
weighted average number of shares related to the outstanding options excluded
from the calculations of diluted net earnings per share, as they would have been
anti-dilutive for all periods presented, was 4,348,414 and 4,603,758,
respectively, for the three and nine months ended September 30, 2008 and
4,824,498 and 4,927,702, respectively, for the three and nine months ended
September 30, 2009.




Note
13: Subsequent Events




We have
evaluated the potential impact of subsequent events on the accompanying interim
condensed consolidated financial statements through November 6, 2009, the filing
date of this Quarterly Report on Form 10-Q.


– 21
–




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


You
should read the following discussion and analysis together with our unaudited
consolidated financial statements and the accompanying notes. This discussion
contains forward-looking statements, within the meaning of Section 27A of
Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation
Reform Act of 1995, including statements regarding our expected financial
position, business and financing plans. These statements involve risks and
uncertainties. Our actual results could differ materially from the results
described in or implied by these forward-looking statements as a result of
various factors, including those discussed below and elsewhere in our Annual
Report on Form 10-K filed with the SEC on March 16, 2009, particularly under the
headings “Disclosure Statement” and “Risk Factors.”
  Overview
  We are a
global provider of information technology, or IT, and business services and
solutions with specialized expertise in software product engineering; system
integration, application development and consulting; and software distribution.
We deliver our portfolio of services and solutions using a global delivery model
combining offshore, near-shore and local teams. The primary industries, or
verticals, we serve include high-tech companies and independent software
vendors, or ISVs; utilities and government; financial services; defense and
homeland security; and life sciences and healthcare.
  We have
operations in 18 countries across North America, Europe, Israel and Asia
Pacific. We combine our deep vertical expertise and strong technical
capabilities to provide a complete range of high quality services on a global
scale. By integrating our local and international personnel in focused business
and project teams, we leverage our corporate knowledge and experience,
intellectual property and global infrastructure to develop innovative solutions
for clients across the geographic areas and verticals we serve. Through our
global delivery model, which includes lower-cost offshore and near-shore
delivery capabilities, we can achieve meaningful cost reductions or other
benefits for our clients.
  Our
revenues decreased to $132.7 million and $406.4 million for the three and nine
months ended September 30, 2009, from $164.1 million and $494.4 million for the
three and nine months ended September 30, 2008, respectively. Net income
decreased to $0.8 million and $3.4 million for the three and nine months ended
September 30, 2009 from $16.1 million and $31.1 million for the three and nine
months ended September 30, 2008, respectively.
  The
dollar strengthened by an average of 10% and 13% against the New Israeli Shekel,
or NIS, and by an average of 17% and 24% against the Euro and other relevant
European currencies in the three and nine months ended September 30, 2009
compared to the three and nine months ended September 30, 2008, respectively.
Approximately 60% of our revenues and 80% of our expenses are denominated in
non-dollar currencies. We estimate that our revenues were $9.3 million and $44.6
million lower in the three and nine months ended September 30, 2009 as a result
of changes in foreign currency exchange rates versus their average rates for the
three and nine months ended September 30, 2008, respectively. There was no
material effect on our operating income in the three and nine months ended
September 30, 2009 as a result of changes in foreign currency exchange rates
versus their average rates for the three and nine months ended September 30,
2008, respectively.
  Our
client base is diverse, and we are not dependent on any single client. In the
three and nine months ended September 30, 2009, no client accounted for more
than 5% of our revenues and our largest twenty clients together accounted for
approximately 34% of our revenues. For the three and nine months ended September
30, 2009, the percentage of our revenues derived in aggregate from agencies of
the government of Israel was approximately 12%. Existing clients from prior
years generated more than 85% of our revenues in the three and nine months ended
September 30, 2009.
  Our
backlog as of September 30, 2009 was $655 million compared to $764 million as of
September 30, 2008, representing a year-over-year backlog decline of $87 million
plus a reduction in the dollar value of our non-U.S. backlog due to the stronger
dollar of $22 million. We achieve backlog through new signings of IT services
projects and outsourcing contracts, including for new and repeat customers. We
recognize backlog as revenue when we perform the services related to
backlog.
  – 22
–
  For the
three and nine months ended September 30, 2009, the percentage of our revenues
derived from clients in Europe was 32% and 32%, respectively; in Israel, 32% and
32%, respectively; in North America, 32% and 32%, respectively; and in Asia
Pacific, 5% and 5%, respectively.
  As of
September 30, 2009, we had approximately 7,780 employees, including
approximately 6,675 IT professionals. Of the 7,780 employees, approximately
2,805 were in India, 2,460 were in Israel, 1,590 were in Europe, 510 were in
North America and 415 were in Asia Pacific.
  Recent
Developments
  None.
  Consolidated
Results of Operations
  The
following table sets forth the items in our consolidated statements of income as
a percentage of revenues for the periods presented.
  Three months ended
                      September 30,
                  
                  
                  Nine months ended
                      September 30,2008
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  2009Revenues
                  
                  
                  100.0
                  %
                  
                  
                  100.0
                  %
                  
                  
                  100.0
                  %
                  
                  
                  100.0
                  %Cost
      of revenues
                  
                  
                  73.7
                  
                  
                  
                  72.9
                  
                  
                  
                  71.5
                  
                  
                  
                  73.4Gross
      profit
                  
                  
                  26.3
                  
                  
                  
                  27.1
                  
                  
                  
                  28.5
                  
                  
                  
                  26.6Operating
      expenses:Selling
      and marketing
                  
                  
                  8.2
                  
                  
                  
                  9.1
                  
                  
                  
                  8.3
                  
                  
                  
                  8.6General
      and administrative
                  
                  
                  15.2
                  
                  
                  
                  16.4
                  
                  
                  
                  14.9
                  
                  
                  
                  17.4Gain
      from sale of Israeli SAP sales and distribution operations,
      net
                  
                  
                  (11.2
                  )
                  
                  
                  —
                  
                  
                  
                  (3.7
                  )
                  
                  
                  —Insurance
      settlement related to 2007 arbitration expense, net of related
      expenses
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (0.6
                  )Commissions
      related to the sale of Israeli SAP sales and distribution
      operations
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (0.6
                  )Total
      operating expenses
                  
                  
                  12.3
                  
                  
                  
                  25.5
                  
                  
                  
                  19.6
                  
                  
                  
                  24.8Operating
      income
                  
                  
                  14.1
                  
                  
                  
                  1.6
                  
                  
                  
                  9.0
                  
                  
                  
                  1.9Financial
      expenses, net
                  
                  
                  (0.7
                  )
                  
                  
                  (0.3
                  )
                  
                  
                  (0.7
                  )
                  
                  
                  (0.6
                  )Other
      expenses, net
                  
                  
                  (0.2
                  )
                  
                  
                  —
                  
                  
                  
                  (0.1
                  )
                  
                  
                  —Income
      before taxes on income
                  
                  
                  13.1
                  
                  
                  
                  1.3
                  
                  
                  
                  8.2
                  
                  
                  
                  1.3Taxes
      on income
                  
                  
                  3.2
                  
                  
                  
                  0.6
                  
                  
                  
                  1.9
                  
                  
                  
                  0.4Net
      income
                  
                  
                  9.8
                  
                  
                  
                  0.6
                  
                  
                  
                  6.3
                  
                  
                  
                  0.8
  – 23
–
  Three
Months Ended September 30, 2009 Compared to the Three Months Ended September 30,
2008
  The
following table summarizes certain line items from our consolidated statements
of income (dollars in thousands):
  Three months ended
                      September 30,
                  
                  
                  Decrease2008
                  
                  
                  2009
                  
                  
                  $
                  
                  
                  
                  %Revenues
                  
                  $
                  164,111
                  
                  
                  $
                  132,733
                  
                  
                  
                  (31,378
                  )
                  
                  
                  (19.1
                  )Cost
      of revenues
                  
                  
                  120,945
                  
                  
                  
                  96,753
                  
                  
                  
                  (24,192
                  )
                  
                  
                  (20.0
                  )Gross
      profit
                  
                  $
                  43,166
                  
                  
                  $
                  35,980
                  
                  
                  
                  (7,186
                  )
                  
                  
                  (16.6
                  )Gross
      margin
                  
                  
                  26.3
                  %
                  
                  
                  27.1
                  %
  Revenues
  Our
revenues decreased from $164.1 million in the three months ended September 30,
2008 to $132.7 million in the three months ended September 30, 2009,
representing a decrease of $31.4 million, or 19.1%. This decrease was primarily
due to a sales downturn in our System Integration and Application Development
segment, primarily in Central and Eastern Europe and in Israel, representing
$29.0 million, foreign currency translation effects on our non-dollar revenues
attributable to the stronger dollar, representing $9.3 million, reduced sales in
our Software Distribution segment, representing $2.2 million, and lost revenue
from the sale in August 2008 of our Israeli SAP sales and distribution
operations, representing $1.8 million, offset by acquisitions, representing $7.9
million, and a write-off of trade receivables in the three months ended
September 30, 2008 resulting from the sale in August 2008 of our Israeli SAP
sales and distribution operations, representing $3.2 million.
  Cost
of revenues
  Our cost
of revenues, including salaries, wages and other direct and indirect costs,
decreased from $120.9 million in the three months ended September 30, 2008 to
$96.8 million in the three months ended September 30, 2009, representing a
decrease of $24.2 million, or 20.0%. The decrease was due primarily to a
reduction in our delivery staff in response to our decrease in revenues,
representing $22.3 million, foreign currency translation effects on non-dollar
expenses attributable to the stronger dollar, representing $6.7 million, and the
sale in August 2008 of our Israeli SAP sales and distribution operations,
representing $1.2 million, offset by acquisitions, representing $6.4
million.
  Gross
Profit
  Our gross
profit (revenues less cost of revenues) decreased from $43.2 million in the
three months ended September 30, 2008 to $36.0 million in the three months ended
September 30, 2009, representing a decrease of $7.2 million, or 16.6%. The
decrease was due primarily to the reduction in our revenues, net of lower
personnel costs, representing $9.1 million, foreign currency translation effects
on our non-dollar gross profits attributable to the stronger dollar,
representing $2.5 million, and lost gross profit from the sale in August 2008 of
our Israeli SAP sales and distribution operations, representing $0.6 million,
offset by a write-off of trade receivables in the three months ended September
30, 2008 resulting from the sale in August 2008 of our Israeli SAP sales and
distribution operations for which there was no corresponding amount in the three
months ended September 30, 2009, representing $3.2 million, and acquisitions,
representing $1.5 million. Gross margin increased from 26.3% in the three months
ended September 30, 2008 to 27.1% in the three months ended September 30, 2009
primarily due to the improved gross margin in our Software Product Engineering
segment and a write-off of trade receivables in the three months ended September
30, 2008 resulting from the sale in August 2008 of our Israeli SAP sales and
distribution operations for which there was no corresponding amount in the three
months ended September 30, 2009, partially offset by slowdowns in our Central
and Eastern European system integration business and our Software Distribution
segment.
  – 24
–
  The
following table summarizes certain line items from our consolidated statements
of income (dollars in thousands):
  Three months ended
                      September 30,
                  
                  
                  Increase
                      (Decrease)2008
                  
                  
                  2009
                  
                  
                  $
                  
                  
                  
                  %Selling
      and marketing
                  
                  $
                  13,487
                  
                  
                  $
                  12,094
                  
                  
                  
                  (1,393
                  )
                  
                  
                  (10.3
                  )General
      and administrative
                  
                  
                  24,986
                  
                  
                  
                  21,809
                  
                  
                  
                  (3,177
                  )
                  
                  
                  (12.7
                  )Gain
      from sale of Israeli SAP sales and distribution operations,
      net
                  
                  
                  (18,366
                  )
                  
                  
                  —
                  
                  
                  
                  18,366
                  
                  
                  
                  (100.0
                  )Total
      operating expenses
                  
                  
                  20,107
                  
                  
                  
                  33,903
                  
                  
                  
                  13,796
                  
                  
                  
                  68.6Operating
      income
                  
                  $
                  23,059
                  
                  
                  $
                  2,077
                  
                  
                  
                  (20,982
                  )
                  
                  
                  (91.0
                  )
  Selling
and marketing
  Selling
and marketing expenses decreased from $13.5 million in the three months ended
September 30, 2008 to $12.1 million in the three months ended September 30,
2009, representing a decrease of $1.4 million, or 10.3%. This decrease was due
primarily to a reduction in our sales and marketing staff in response to our
decrease in revenues, representing $1.8 million, and foreign currency
translation effects on our non-dollar expenses attributable to the stronger
dollar, representing $0.9 million, offset by the inclusion of marketing and
sales expenses from acquisitions, representing $1.5 million.
  General
and administrative
  General
and administrative expenses decreased from $25.0 million in the three months
ended September 30, 2008 to $21.8 million in the three months ended September
30, 2009, representing a decrease of $3.2 million, or 12.7%. This decrease was
due primarily to additional expenses in the three months ended September 30,
2008 related to the August 2008 sale of our Israeli SAP sales and distribution
operations for which there was no corresponding expense in the three months
ended September 30, 2009, representing $2.1 million, foreign currency
translation effects on non-dollar expenses attributable to the stronger dollar,
representing $1.6 million, and cost reductions, representing $1.2 million,
offset by increases in our Center of Excellence, IT, Human Resources and Finance
organizations throughout 2008 needed to support internal initiatives, together
representing $0.8 million, and acquisitions, representing $0.3
million.
  Gain
from sale of Israeli SAP sales and distribution operations, net
  In the
three months ended September 30, 2008, we recorded a gain of $18.4 million
related to the sale to SAP AG of our Israeli SAP sales and distribution
operations, which closed on August 14, 2008. The gain represents the portion of
the purchase price, €13.0 million, or $20.0 million, that was settled at
closing, offset by expenses of $1.6 million related to the sale. There was no
corresponding gain in the three months ended September 30, 2009.
  Operating
Income
  Operating
income decreased from $23.1 million in the three months ended September 30, 2008
to $2.1 million in the three months ended September 30, 2009, representing a
decrease of $21.0 million, or 91.0%. The major factors contributing to this
decrease were the gain in the three months ended September 30, 2008 from the
August 2008 sale of our Israeli SAP sales and distribution operations for which
there was no corresponding amount in the three months ended September 30, 2009,
net of related expenses and other charges, representing $13.1 million, a
decrease in operating income of our System Integration and Application
Development segment, representing $7.6 million, a decrease in operating income
of our Software Distribution segment due to reduced sales, representing $0.9
million, and acquisitions, representing $0.3 million, offset by an increase in
operating income of our Software Product Engineering segment, representing $0.5
million, and a decrease in unallocated expenses, representing $0.5 million. See
also “—Results by Business Segment.”
  – 25
–
  The
following table summarizes certain line items from our consolidated statements
of income (dollars in thousands):
  Three months ended
                      September 30,
                  
                  
                  Increase
                      (Decrease)2008
                  
                  
                  2009
                  
                  
                  $
                  
                  
                  
                  %Operating
      income
                  
                  $
                  23,059
                  
                  
                  $
                  2,077
                  
                  
                  
                  (20,982
                  )
                  
                  
                  (91.0
                  )Financial
      expenses, net
                  
                  
                  (1,187
                  )
                  
                  
                  (399
                  )
                  
                  
                  788
                  
                  
                  
                  (66.4
                  )Other
      expenses, net
                  
                  
                  (392
                  )
                  
                  
                  —
                  
                  
                  
                  392
                  
                  
                  
                  (100.0
                  )Income
      before taxes on income
                  
                  
                  21,480
                  
                  
                  
                  1,678
                  
                  
                  
                  (19,802
                  )
                  
                  
                  (92.2
                  )Taxes
      on income
                  
                  
                  5,333
                  
                  
                  
                  836
                  
                  
                  
                  (4,497
                  )
                  
                  
                  (84.3
                  )Net
      income
                  
                  $
                  16,147
                  
                  
                  $
                  842
                  
                  
                  
                  (15,305
                  )
                  
                  
                  (94.8
                  )
  Financial
expenses, net
  Financial
expenses, net, decreased from $1.2 million in the three months ended September
30, 2008 to $0.4 million in the three months ended September 30, 2009,
representing a decrease of $0.8 million, or 66.4%. This decrease was due
primarily to lower interest expense related to debt acquired for the purpose of
financing acquisitions, representing $0.6 million, and favorable impact of
exchange rate differences, representing $0.3 million. Our average net debt
changed from $30.7 million in the three months ended September 30, 2008 to $28.8
million in the three months ended September 30, 2009.
  Other
expenses, net
  Other
expenses, net, decreased from $0.4 million in the three months ended September
30, 2008 to zero in the three months ended September 30, 2009. This decrease was
due primarily to a loss on the sale of an investment at cost in the three months
ended September 30, 2008 for which there was no corresponding amount in the
three months ended September 30, 2009.
  Taxes
on income
  Our taxes
on income decreased from $5.3 million in the three months ended September 30,
2008 to $0.8 million in the three months ended September 30, 2009, representing
a decrease of $4.5 million, or 84.3%. This decrease was due primarily to the
decrease in our taxable income. Of the $4.5 million decrease in taxes on income,
$3.5 million represents taxes on the gain from the August 2008 sale of our SAP
sales and distribution operations in Israel, net of related expenses and other
charges. Our effective tax rate in the three months ended September 30, 2009 was
49.8%, compared to 24.8% in the three months ended September 30, 2008. The
reason for the higher tax rate was a significant decrease in the corporate
income tax rate in Israel, which required us to reduce the carrying value of
deferred tax assets, and losses in some jurisdictions in the three months ended
September 30, 2009 where we could not create deferred tax assets.
  Net
Income
  Net
income decreased from $16.1 million in the three months ended September 30, 2008
to $0.8 million in the three months ended September 30, 2009, representing a
decrease of $15.3 million, or 94.8%. The decrease was due primarily to our
decrease in operating income of $21.0 million, partially offset by our decrease
in taxes, representing $4.5 million, and our decrease in financial expenses,
representing $0.8 million.
  – 26
–
  Nine
Months Ended September 30, 2009 Compared to the Nine Months Ended September 30,
2008
  The
following table summarizes certain line items from our consolidated statements
of income (dollars in thousands):
  Nine months ended
                      September 30,
                  
                  
                  Decrease2008
                  
                  
                  2009
                  
                  
                  $
                  
                  
                  
                  %Revenues
                  
                  $
                  494,429
                  
                  
                  $
                  406,410
                  
                  
                  
                  (88,019
                  )
                  
                  
                  (17.8
                  )Cost
      of revenues
                  
                  
                  353,330
                  
                  
                  
                  298,186
                  
                  
                  
                  (55,144
                  )
                  
                  
                  (15.6
                  )Gross
      profit
                  
                  $
                  141,099
                  
                  
                  $
                  108,224
                  
                  
                  
                  (32,875
                  )
                  
                  
                  (23.3
                  )Gross
      margin
                  
                  
                  28.5
                  %
                  
                  
                  26.6
                  %
  Revenues
  Our
revenues decreased from $494.4 million in the nine months ended September 30,
2008 to $406.4 million in the nine months ended September 30, 2009, representing
a decrease of $88.0 million, or 17.8%. This decrease was primarily due to a
sales downturn in our System Integration and Application Development segment,
primarily in Central and Eastern Europe and Israel, representing $53.3 million,
foreign currency translation effects on our non-dollar revenues attributable to
the stronger dollar, representing $44.6 million, lost revenue from the sale in
August 2008 of our Israeli SAP sales and distribution operations, representing
$12.1 million, and reduced sales in our Software Distribution segment,
representing $8.1 million, offset by acquisitions, representing $21.3 million,
growth in our Software Product Engineering segment, representing $5.7 million,
and a write-off of trade receivables in the nine months ended September 30, 2008
resulting from the sale in August 2008 of our Israeli SAP sales and distribution
operations, representing $3.2 million.
  Cost
of revenues
  Our cost
of revenues, including salaries, wages and other direct and indirect costs,
decreased from $353.3 million in the nine months ended September 30, 2008 to
$298.2 million in the nine months ended September 30, 2009, representing a
decrease of $55.1 million, or 15.6%. The decrease was due primarily to foreign
currency translation effects on non-dollar expenses attributable to the stronger
dollar, representing $32.8 million, a reduction in our delivery staff in
response to our decrease in revenues, representing $32.6 million, and the sale
in August 2008 of our Israeli SAP sales and distribution operations,
representing $5.6 million, offset by acquisitions, representing $17.4
million.
  Gross
Profit
  Our gross
profit (revenues less cost of revenues) decreased from $141.1 million in the
nine months ended September 30, 2008 to $108.2 million in the nine months ended
September 30, 2009, representing a decrease of $32.9 million, or 23.3%. The
decrease was due primarily to the reduction in our revenues, net of lower
personnel costs, representing $23.1 million, foreign currency translation
effects on our non-dollar gross profits attributable to the stronger dollar,
representing $11.8 million, and lost gross profit from the sale in August 2008
of our Israeli SAP sales and distribution operations, representing $6.5 million,
offset by acquisitions, representing $3.9 million. Gross margin declined from
28.5% in the nine months ended September 30, 2008 to 26.6% in the nine months
ended September 30, 2009 largely as a result of slowdowns in our Central and
Eastern European system integration business and our Software Distribution
segment, the continued sales and pricing pressure on our U.S.-based financial
services business and severance expenses, partially offset by the improved gross
margin in our Software Product Engineering segment and a write-off of trade
receivables in the nine months ended September 30, 2008 resulting from the sale
in August 2008 of our Israeli SAP sales and distribution operations for which
there was no corresponding amount in the nine months ended September 30,
2009.
  – 27
–
  The
following table summarizes certain line items from our consolidated statements
of income (dollars in thousands):
  Nine months ended
                      September 30,
                  
                  
                  Increase
                      (Decrease)2008
                  
                  
                  2009
                  
                  
                  $
                  
                  
                  
                  %Selling
      and marketing
                  
                  $
                  41,233
                  
                  
                  $
                  35,047
                  
                  
                  
                  (6,186
                  )
                  
                  
                  (15.0
                  )General
      and administrative
                  
                  
                  73,908
                  
                  
                  
                  70,740
                  
                  
                  
                  (3,168
                  )
                  
                  
                  (4.3
                  )Gain
      from sale of Israeli SAP sales and distribution operations,
      net
                  
                  
                  (18,366
                  )
                  
                  
                  —
                  
                  
                  
                  18,366
                  
                  
                  
                  (100.0
                  )Insurance
      settlement related to 2007 arbitration expense, net of related
      expenses
                  
                  
                  —
                  
                  
                  
                  (2,610
                  )
                  
                  
                  (2,610
                  )
                  
                  
                  N/ACommissions
      related to the sale of Israeli SAP sales and distribution
      operations
                  
                  
                  —
                  
                  
                  
                  (2,534
                  )
                  
                  
                  (2,534
                  )
                  
                  
                  N/ATotal
      operating expenses
                  
                  
                  96,775
                  
                  
                  
                  100,643
                  
                  
                  
                  3,868
                  
                  
                  
                  4.0Operating
      income
                  
                  $
                  44,324
                  
                  
                  $
                  7,581
                  
                  
                  
                  (36,743
                  )
                  
                  
                  (82.9
                  )
  Selling
and marketing
  Selling
and marketing expenses decreased from $41.2 million in the nine months ended
September 30, 2008 to $35.0 million in the nine months ended September 30, 2009,
representing a decrease of $6.2 million, or 15.0%. This decrease was due
primarily to a reduction in our sales and marketing staff in response to our
decrease in revenues, representing $5.2 million, and foreign currency
translation effects on our non-dollar expenses attributable to the stronger
dollar, representing $4.2 million, offset by the inclusion of marketing and
sales expenses from acquisitions, representing $4.8 million.
  General
and administrative
  General
and administrative expenses decreased from $73.9 million in the nine months
ended September 30, 2008 to $70.7 million in the nine months ended September 30,
2009, representing a decrease of $3.2 million, or 4.3%. This decrease was due
primarily foreign currency effects on non-dollar expenses attributable to the
stronger dollar, representing $7.8 million, cost reductions, representing $3.2
million, and additional expenses in the nine months ended September 30, 2008
related to the August 2008 sale of our Israeli SAP sales and distribution
operations for which there was no corresponding expense in the nine months ended
September 30, 2009, representing $2.1 million, offset by increases in our Center
of Excellence, IT, Human Resources and Finance organizations throughout 2008
needed to support internal initiatives, together representing $5.1 million, an
increase in severance expenses, representing $1.9 million, and acquisitions,
representing $1.3 million.
  Gain
from sale of Israeli SAP sales and distribution operations, net
  In the
nine months ended September 30, 2008, we recorded a gain of $18.4 million
related to the sale to SAP AG of our Israeli SAP sales and distribution
operations, which closed on August 14, 2008. The gain represents the portion of
the purchase price, €13.0 million, or $20.0 million, that was settled at
closing, offset by expenses of $1.6 million related to the sale. There was no
corresponding gain in the nine months ended September 30, 2009.
  Insurance
settlement related to 2007 arbitration expense, net of related
expenses
  In the
nine months ended September 30, 2009, we recorded income of $2.6 million, net of
related expenses, representing an insurance settlement we received from our
liability insurance provider related to the arbitration settlement we recognized
in the fourth quarter of 2007. There was no corresponding income in the nine
months ended September 30, 2008.
  Commissions
related to the sale of Israeli SAP sales and distribution
operations
  In the
nine months ended September 30, 2009, we recorded income of $2.5 million,
representing commissions related to the sale of our SAP sales and distribution
operations in Israel to SAP AG in August 2008, in connection with meeting
certain performance criteria for 2008. There was no corresponding income in the
nine months ended September 30, 2008.
  – 28
–
  Operating
Income
  Operating
income decreased from $44.3 million in the nine months ended September 30, 2008
to $7.6 million in the nine months ended September 30, 2009, representing a
decrease of $36.7 million, or 82.9%. The major factors contributing to this
decrease were a decrease in operating income of our System Integration and
Application Development segment, representing $20.8 million, the gain in the
nine months ended September 30, 2008 from the August 2008 sale of our Israeli
SAP sales and distribution operations for which there was no corresponding
amount in the nine months ended September 30, 2009, net of related expenses and
other charges, representing $13.1 million, a decrease in operating income of our
Software Distribution segment due to reduced sales, representing $3.9 million,
an increase in unallocated expenses, representing $3.8 million, a drop in
operating income of our Software Distribution segment due to the August 2008
sale of our Israeli SAP sales and distribution operations, representing $3.2
million, and acquisitions, representing $2.2 million, offset by an increase in
operating income of our Software Product Engineering segment, representing $5.3
million, income from an insurance settlement, net of related expenses,
recognized by our System Integration and Application Development segment related
to our 2007 arbitration expense, representing $2.6 million, and commissions
recognized by our Software Distribution segment related to the August 2008 sale
of our Israeli SAP sales and distribution operations, representing $2.5 million.
See also “—Results by Business Segment.”
  The
following table summarizes certain line items from our consolidated statements
of income (dollars in thousands):
  Nine months ended
                      September 30,
                  
                  
                  Increase
                      (Decrease)2008
                  
                  
                  2009
                  
                  
                  $
                  
                  
                  
                  %Operating
      income
                  
                  $
                  44,324
                  
                  
                  $
                  7,581
                  
                  
                  
                  (36,743
                  )
                  
                  
                  (82.9
                  )Financial
      expenses, net
                  
                  
                  (3,635
                  )
                  
                  
                  (2,431
                  )
                  
                  
                  1,204
                  
                  
                  
                  (33.1
                  )Other
      expenses, net
                  
                  
                  (392
                  )
                  
                  
                  —
                  
                  
                  
                  392
                  
                  
                  
                  (100.0
                  )Income
      before taxes on income
                  
                  
                  40,297
                  
                  
                  
                  5,150
                  
                  
                  
                  (35,147
                  )
                  
                  
                  (87.2
                  )Taxes
      on income
                  
                  
                  9,166
                  
                  
                  
                  1,738
                  
                  
                  
                  (7,428
                  )
                  
                  
                  (81.0
                  )Net
      income
                  
                  $
                  31,131
                  
                  
                  $
                  3,412
                  
                  
                  
                  (27,719
                  )
                  
                  
                  (89.0
                  )
  Financial
expenses, net
  Financial
expenses, net, decreased from $3.6 million in the nine months ended September
30, 2008 to $2.4 million in the nine months ended September 30, 2009,
representing a decrease of $1.2 million, or 33.1%. This decrease was due
primarily to lower interest expense related to debt acquired for the purpose of
financing acquisitions, representing $0.6 million, and the favorable impact of
exchange rate differences, representing $0.6 million. Our average net debt
changed from $22.9 million in the nine months ended September 30, 2008 to $32.9
million in the nine months ended September 30, 2009.
  Other
expenses, net
  Other
expenses, net, decreased from $0.4 million in the nine months ended September
30, 2008 to zero in the nine months ended September 30, 2009. This decrease was
due primarily to a loss on the sale of an investment at cost in the nine months
ended September 30, 2008 for which there was no corresponding amount in the nine
months ended September 30, 2009.
   Taxes
on income
  Our taxes
on income decreased from $9.2 million in the nine months ended September 30,
2008 to $1.7 million in the nine months ended September 30, 2009, representing a
decrease of $7.4 million, or 81.0%. This decrease was due primarily to the
decrease in our taxable income. Of the $7.4 million decrease in taxes on income,
$3.5 million represents taxes on the gain from the August 2008 sale of our SAP
sales and distribution operations in Israel, net of related expenses and other
charges. Our effective tax rate in the nine months ended September 30, 2009 was
33.7%, compared to 22.7% in the nine months ended September 30, 2008. The reason
for the higher tax rate was a significant decrease in the corporate income tax
rate in Israel, which required us to reduce the carrying value of deferred tax
assets, and losses in some jurisdictions in the nine months ended September 30,
2009 where we could not create deferred tax assets.
  – 29
–
  Net
Income
  Net
income decreased from $31.1 million in the nine months ended September 30, 2008
to $3.4 million in the nine months ended September 30, 2009, representing a
decrease of $27.7 million, or 89.0%. The decrease was due primarily to our
decrease in operating income of $36.7 million, partially offset by our decrease
in taxes, representing $7.4 million, and our decrease in financial expenses,
representing $1.2 million.
  Results
by Business Segment
  Our
segment information has been prepared in accordance with SFAS No. 131,
“Disclosures about Segments of an Enterprise and Related Information.” Operating
segments are defined as components of an enterprise engaging in business
activities about which separate financial information is available that is
evaluated regularly by our chief operating decision-maker in deciding how to
allocate resources and assess performance. Our chief operating decision-maker is
our chief executive officer, who evaluates our performance and allocates
resources based on segment revenues and operating profit.
  In
October 2008, we reorganized our operating segments to correspond to our three
primary service lines, in line with changes made in the company’s management
structure. Segment data for prior periods has been restated to reflect the
current organization of the segments.
  Our
operating segments are:
  1.
              Software Product
      Engineering, in which, through our Software Product Labs business
      unit, we offer software product research and development services. We set
      up these labs for clients and operate them on an ongoing basis, enabling
      us to collaborate with our clients’ engineering teams to extend their
      capacity and budgets throughout the software product life cycle. We locate
      our Software Product Labs predominantly in India and in Central and
      Eastern Europe and we operate them across multiple locations as needed to
      optimize global delivery. They primarily serve customers in North America
      and Europe, and may include team members local to the
    client.
  2.
              System Integration and
      Application Development, in which we offer a broad set of IT
      services to our clients in the areas of system integration, application
      development and consulting. We provide these services in 18 countries
      throughout North America, Europe, Israel and Asia Pacific. We deliver the
      services through a global delivery model that includes local teams as well
      as offshore and near-shore resources. We provide these services for a wide
      range of clients in many verticals, including utilities and government,
      financial services, defense and homeland security, life sciences &
      healthcare, manufacturing and transportation, retail, and
      others.
  3.
              Software Distribution,
      in which, through our NessPRO business unit, we market and sell enterprise
      software licenses of third-party software vendors to corporate clients in
      geographic areas that are partially or totally uncovered by the software
      vendors’ own sales forces. We also provide a range of implementation,
      customization and support services related to those licenses. We resell
      products mostly in Israel, Italy, Spain and Portugal for over 30
      third-party software vendors.
  Segment
operating profit is defined as income from operations, excluding unallocated
headquarters costs. Expenses included in segment operating profit consist
principally of direct selling, general, administrative and delivery costs.
Certain general and administrative expenses, stock-based compensation and a
portion of depreciation are not allocated to specific segments as management
believes they are not directly attributable to any specific segment.
Accordingly, these expenses are categorized as “Unallocated Expenses” and
adjusted against our total income from operations. Additionally, our management
has determined that it is not practical to allocate certain identifiable assets
by segment when such assets are used interchangeably among the
segments.
  – 30
–
  The table
below presents financial information for our reportable segments (dollars in
thousands):
  Three months ended
                      September 30,
                  
                  
                  Nine months ended
                      September 30,Segment
      Data:
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  2009Revenues:Software
      Product Engineering
                  
                  $
                  26,092
                  
                  
                  $
                  25,621
                  
                  
                  $
                  71,360
                  
                  
                  $
                  76,275System
      Integration and Application Development
                  
                  
                  126,552
                  
                  
                  
                  100,202
                  
                  
                  
                  377,672
                  
                  
                  
                  307,772Software
      Distribution
                  
                  
                  11,467
                  
                  
                  
                  6,910
                  
                  
                  
                  45,397
                  
                  
                  
                  22,363$
                  164,111
                  
                  
                  $
                  132,733
                  
                  
                  $
                  494,429
                  
                  
                  $
                  406,410Operating
      Income (Loss):Software
      Product Engineering
                  
                  $
                  3,181
                  
                  
                  $
                  3,609
                  
                  
                  $
                  6,443
                  
                  
                  $
                  11,819System
      Integration and Application Development
                  
                  
                  10,233
                  
                  
                  
                  2,150
                  
                  
                  
                  28,749
                  
                  
                  
                  6,783Software
      Distribution
                  
                  
                  13,268
                  
                  
                  
                  (782
                  )
                  
                  
                  18,317
                  
                  
                  
                  928Unallocated
      Expenses
                  
                  
                  (3,623
                  )
                  
                  
                  (2,900
                  )
                  
                  
                  (9,185
                  )
                  
                  
                  (11,949
                  )$
                  23,059
                  
                  
                  $
                  2,077
                  
                  
                  $
                  44,324
                  
                  
                  $
                  7,581
  Liquidity
and Capital Resources
  Overview
  As of
September 30, 2009, we had cash and cash equivalents, restricted cash and
short-term bank deposits of $71.1 million compared to $58.7 million as of
December 31, 2008. The funds held at locations outside of the United States are
for future operating expenses and capital expenditures, and we have no intention
of repatriating those funds. We are not, however, restricted in repatriating
those funds back to the United States, if necessary. While we expect that cash
generated by our non-U.S. subsidiaries will be reinvested locally to support
expansion of our business, to the extent that funds were remitted to the United
States in the form of dividend payments, those payments may be subject to
withholding taxes in their respective countries, and would be subject to tax in
the United States.
  Cash
Flows
  The
following table summarizes our cash flows for the periods presented (dollars in
thousands):
  Nine months ended
                      September 30,2008
                  
                  
                  2009(Unaudited)
                  
                  
                  (Unaudited)Net
      cash provided by operating activities
                  
                  $
                  18,385
                  
                  
                  $
                  34,459Net
      cash used in investing activities
                  
                  
                  (1,822
                  )
                  
                  
                  (41,223
                  )Net
      cash provided by financing activities
                  
                  
                  31,042
                  
                  
                  
                  2,152Effect
      of exchange rate changes on cash and cash equivalents
                  
                  
                  (10,291
                  )
                  
                  
                  (93
                  )Increase
      (decrease) in cash and cash equivalents
                  
                  
                  37,314
                  
                  
                  
                  (4,705
                  )Cash
      and cash equivalents at the beginning of the period
                  
                  
                  43,097
                  
                  
                  
                  50,659Cash
      and cash equivalents at the end of the period
                  
                  $
                  80,411
                  
                  
                  $
                  45,954
  – 31
–
  Nine
months ended September 30, 2009 compared to the nine months ended September 30,
2008
  Net cash
provided by operating activities was $34.5 million in the nine months ended
September 30, 2009, compared to $18.4 million in the nine months ended September
30, 2008. The major factors contributing to the increase were a larger decrease
in our trade receivables and unbilled receivables together, representing $65.9
million, and a $9.5 million payment made in the first quarter of 2008 in respect
of a 2007 arbitration settlement with a former customer for which there was no
corresponding amount in the nine months ended September 30, 2009, offset by a
decrease in trade payables in the nine months ended September 30, 2009 compared
to an increase in the nine months ended September 30, 2008, representing $14.9
million, a larger decrease in other accounts payable and accrued expenses,
representing $14.5 million, and lower net income, net of a gain from the sale of
our Israeli SAP sales and distribution operations, representing $9.4
million.
  Net cash
used in investing activities was $41.2 million in the nine months ended
September 30, 2009, compared to $1.8 million in the nine months ended September
30, 2008. The major factors contributing to the increase were investments in
short-term bank deposits in the nine months ended September 30, 2009 compared to
proceeds from maturity of short-term bank deposits in the nine months ended
September 30, 2008, representing $18.1 million, proceeds from the sale of our
Israeli SAP sales and distribution division in the nine months ended September
30, 2008, representing $13.1 million, and higher payments in connection with
acquisitions in prior periods, representing $9.5 million.
  Net cash
provided by financing activities was $2.2 million in the nine months ended
September 30, 2009, compared to $31.0 million in the nine months ended September
30, 2008. The major factors contributing to the decrease were proceeds from
short-term bank credit in the nine months ended September 30, 2008 compared to
repayments of short-term bank credit in the nine months ended September 30,
2009, representing $18.7 million, lower proceeds from new long-term bank loans,
representing $10.5 million, proceeds from exercise of options in the nine months
ended September 30, 2008, for which there was no corresponding amount in the
nine months ended September 30, 2009, representing $4.3 million, and the
repurchase of shares in the nine months ended September 30, 2009 as part of our
share repurchase plan, for which there was no corresponding amount in the nine
months ended September 30, 2008, representing $2.0 million, offset by lower
dividends paid by an acquired subsidiary to its former shareholder, representing
$8.6 million.
  The
effect of exchange rate changes on cash and cash equivalents was ($0.1) million
in the nine months ended September 30, 2009, compared to ($10.3) million in the
nine months ended September 30, 2008. The change was primarily due to the effect
of translation adjustments on our net current assets.
  Long-term
and Short-term Debt
  At
September 30, 2009, we had a short-term loan in the amount of $5.0 million from
a commercial bank, bearing an interest rate of LIBOR+2.25% and maturing in
January 2010. In addition, at September 30, 2009, we had three long-term loans
taken in 2007 to fund acquisitions: a long-term loan from a commercial bank in
the amount of €8.3 million, or $12.2 million, to fund the acquisition of NessPRO
Italy S.p.A., taken originally in September 2007; a long-term loan from a
commercial bank in the amount of €13.9 million, or $20.4 million, to fund the
acquisition of FMC Consulting and Informatics Ltd., taken in November 2007; and
a long-term loan from a commercial bank in the amount of $12.0 million to fund
the acquisition of MS9 Consulting LLC, taken in November 2007. In addition, we
had a long-term loan from a commercial bank in the amount of €12.0 million, or
$17.6 million, taken in March 2008 and a long-term loan from a commercial bank
in the amount of $14.1 million, taken originally in April 2009. The $14.1
million loan matures over four years with principal payments commencing in the
first year. Each other long-term loan matures over five years from the inception
of the loan with principal payments commencing in the third year. Each long-term
loan bears interest at fixed or variable rates, or a combination thereof, and is
paid quarterly. The long-term loans contain covenants which, among other things,
require a certain ratio of total financial obligations to consolidated EBITDA
and of total consolidated assets to consolidated stockholders’ equity, and place
limitations on our ability to merge or transfer assets to third parties. Our
failure to comply with the covenants could lead to an event of default under the
agreements governing some or all of this indebtedness, permitting the applicable
lender to accelerate all borrowings under the applicable agreement. As of
September 30, 2009, we were in compliance and expect to remain in compliance
with these covenants. In connection with the above-mentioned covenants, we
received the consent of the commercial banks during 2008 to record a fixed
charge on deposits in the amount of $2.4 million held by our Indian subsidiary
related primarily to the mark-to-market of foreign exchange forward contracts
into which we entered to hedge against the effect of exchange rate fluctuations
on cash flows denominated in Indian Rupees.
  – 32
–




In
addition, at September 30, 2009, one of our Israeli subsidiaries had a long-term
loan of NIS 14.7 million, or $3.9 million, from a commercial bank, taken
originally in March 2008, bearing interest at a fixed rate and maturing over
five years, with principal and interest paid quarterly; and a short-term loan of
NIS 30.0 million, or $8.0 million, from a commercial bank, taken in October
2008, bearing interest at a fixed rate paid semi-annually , and maturing over
one year. These loans and bank guarantees obtained by this Israeli subsidiary
contain covenants which, among other things, require a minimum stockholders’
equity of this Israeli subsidiary, and place limitations on its ability to
merge, transfer or pledge assets to third parties. Our failure to comply with
the covenants could lead to an event of default under the agreements governing
some or all of this indebtedness, permitting the applicable lender to accelerate
all borrowings under the applicable agreement and to foreclose on any
collateral. As of September 30, 2009, we were in compliance and expect to remain
in compliance with these covenants.




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




Anticipated
Needs




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




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




Critical
Accounting Estimates




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




Contractual
Obligations




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




Forward-Looking
Statements and Risk Factors




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




– 33
–




Item
3. Quantitative and Qualitative Disclosures About Market Risk




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




As an
example, a decrease of 10% in the value of the New Israeli Shekel relative to
the U.S. dollar in the nine months ended September 30, 2009 would have resulted
in an increase in the U.S. dollar reporting value of our operating income of
$0.2 million for that period, while an increase of 10% in the value of the New
Israeli Shekel relative to the U.S. dollar in the nine months ended 2009 would
have resulted in a decrease in the U.S. dollar reporting value of our operating
income of $0.3 million for that period. A decrease of 10% in the value of the
Euro relative to the U.S. dollar in the nine months ended September 30, 2009
would have resulted in an increase in the U.S. dollar reporting value of our
operating income of $0.5 million for that period, while an increase of 10% in
the value of the Euro relative to the U.S. dollar in the nine months ended
September 30, 2009 would have resulted in a decrease in the U.S. dollar
reporting value of our operating income of $0.6 million for that
period.




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




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




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




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




Item
4. Controls and Procedures




Evaluation
of Disclosure Controls and Procedures




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




– 34
–




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




Changes
in Internal Control Over Financial Reporting




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


– 35
–


PART
II – OTHER INFORMATION




Item
1. Legal Proceedings




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




One of
our Israeli subsidiaries is currently involved in legal proceedings with the
Israeli Ministry of Justice (the “MOJ”). The legal proceedings relate to a
contract for the provision of an information system for the MOJ, executed in
November 2005 (the “MOJ Contract”). Following continued disputes, correspondence
and discussions, on February 9, 2009 we filed a claim with the Israeli District
Court located in Jerusalem claiming, among other things, a breach of the MOJ
Contract by the MOJ, including in connection with the MOJ’s demands for
revisions and changes to the software that were not contemplated in the MOJ
Contract. Our claim is for damages in the amount of NIS 20.7 million, or
approximately $5.5 million, using the exchange rate prevailing at the end of the
quarter. On February 11, 2009, the MOJ filed a claim against our Israeli
subsidiary in the Israeli District Court located in Jerusalem claiming, among
other things, that our Israeli subsidiary breached the MOJ Contract and failed
to fulfill its undertakings and obligations set forth therein. The MOJ’s claim
is for damages in the amount of NIS 79.5 million, or approximately $21.2
million, using the exchange rate prevailing at the end of the quarter. The MOJ
and our subsidiary have filed answers to the respective claims. We believe that
we have a substantial legal basis for our claim and valid defenses with respect
to the MOJ’s claim. While we intend to vigorously prosecute our claim and defend
against the MOJ’s claim, we cannot at this point predict the outcome of the
litigation. Adverse decisions in these legal proceedings may materially
adversely affect our financial condition.




Item
1A. Risk Factors




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




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




None.




Item
3. Defaults upon Senior Securities




None.




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




None.




Item
5. Other Information




None.




Item
6. Exhibits




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




Exhibit Number
                      
                      Description31.1
                      
                      Certification
      of Principal Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
                      
                      Certification
      of Principal Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
                      
                      Certification
      of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.32.2
                      
                      Certification
      of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.


– 36
–


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


– 37
–


EXHIBIT
INDEX




Exhibit Number
                  
                  Description31.1
                  
                  Certification
      of Principal Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
                  
                  Certification
      of Principal Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
                  
                  Certification
      of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.32.2
                  
                  Certification
      of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.