Ness 10-Q 2007 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2007

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

For the transition period from ________ to ________

Commission File Number 000-50954

NESS TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

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

Ness Tower

Atidim High-Tech Industrial Park

Building 4

Tel Aviv 61580, Israel

Telephone: +972 (3) 766-6800

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer x Non-accelerated filer ¨

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

As of July 31, 2007, 39,192,916 shares of common stock, $0.01 par value per share, were outstanding.

NESS TECHNOLOGIES, INC. AND SUBSIDIARIES

INDEX

PART I - FINANCIAL INFORMATION	3
Item 1. Financial Statements	3
Condensed Consolidated Balance Sheets – December 31, 2006 and June 30, 2007 (Unaudited)	3
Condensed Consolidated Statements of Income – Three and six months ended June 30, 2006 and 2007 (Unaudited)	5
Condensed Consolidated Statements of Cash Flows – Six months ended June 30, 2006 and 2007 (Unaudited)	6
Notes to Interim Condensed Consolidated Financial Statements – June 30, 2007 (Unaudited)	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Overview	17
Recent Developments	18
Consolidated Results of Operations	18
Three Months Ended June 30, 2007 Compared to the Three Months Ended June 30, 2006	19
Six Months Ended June 30, 2007 Compared to the Six Months Ended June 30, 2006	21
Results by Business Segment	23
Liquidity and Capital Resources	24
Forward-Looking Statements and Risk Factors	27
Item 3. Quantitative and Qualitative Disclosure about Market Risk	27
Item 4. Controls and Procedures	27
Evaluation of Disclosure Controls and Procedures	27
Changes in Internal Control	28
PART II – OTHER INFORMATION	29
Item 1. Legal Proceedings	29
Item 1A. Risk Factors	29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3. Defaults upon Senior Securities.	29
Item 4. Submission of Matters to a Vote of Security Holders	29
Item 5. Other Information	30
Item 6. Exhibits	30
SIGNATURES	31
EXHIBIT INDEX	32

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES

Interim Condensed Consolidated Balance Sheets 

U.S. dollars in thousands

	December 31, 2006		June 30, 2007
			(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	46,675	$	32,724
Restricted cash		518		582
Short-term bank deposits		1,509		520
Trade receivables (net of allowance for doubtful accounts of $2,812 and $2,386 at December 31, 2006 and June 30, 2007, respectively)		136,952		136,902
Unbilled receivables		28,846		41,857
Other accounts receivable and prepaid expenses		15,862		23,573
Inventories		177		1,116
Total current assets		230,539		237,274
LONG-TERM ASSETS:
Long-term prepaid expenses and other assets		6,480		7,451
Investments at cost		1,193		1,251
Unbilled receivables		14,985		9,540
Deferred income taxes, net		7,529		5,911
Severance pay fund		42,321		42,670
Total long-term assets		72,508		66,823
PROPERTY AND EQUIPMENT, NET		28,279		29,733
INTANGIBLE ASSETS, NET		8,336		7,449
GOODWILL		201,718		204,143
Total assets	$	541,380	$	545,422

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

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NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES

Interim Condensed Consolidated Balance Sheets 

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

	December 31, 2006			June 30, 2007
				(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank credit	$	4,477		$	8,023
Current maturities of long-term debt		4,420			3,684
Trade payables		42,602			35,865
Advances from customers and deferred revenues		30,364			33,079
Other accounts payable and accrued expenses		76,128			64,867
Total current liabilities		157,991			145,518
LONG-TERM LIABILITIES:
Long-term debt and other liabilities, net of current maturities		3,703			4,323
Accrued severance pay		47,031			48,226
Total long-term liabilities		50,734			52,549
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY:
Common Stock of $0.01 par value - Authorized: 76,500,000 shares at December 31, 2006 and at June 30, 2007; Issued and outstanding: 38,638,682 shares at December 31, 2006 and 39,176,244 shares at June 30, 2007		387			392
Additional paid-in capital		317,799			321,323
Accumulated other comprehensive income (loss)		(415	)		2,378
Retained earnings		14,884			23,262
Total stockholders' equity		332,655			347,355
Total liabilities and stockholders' equity	$	541,380		$	545,422

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

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NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES

Interim Condensed Consolidated Statements of Income 

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

	Three months ended June 30,						Six months ended June 30,
	2006			2007			2006			2007
	(Unaudited)						(Unaudited)
Revenues	$	116,614		$	125,762		$	223,656		$	251,540
Cost of revenues (*)		83,981			89,677			159,697			179,353
Gross profit		32,633			36,085			63,959			72,187
Operating expenses:
Selling and marketing (*)		8,733			9,293			17,224			18,765
General and administrative (*)		16,426			21,367			31,356			41,281
Total operating expenses		25,159			30,660			48,580			60,046
Operating income		7,474			5,425			15,379			12,141
Financial income (expenses), net		(577	)		(74	)		(638	)		315
Other income (expenses), net		483			(62	)		444			(56	)
Income before taxes on income		7,380			5,289			15,185			12,400
Taxes on income		1,340			1,126			2,808			2,522
Equity in net losses of an affiliate		(90	)		—			(90	)		—
Net income	$	5,950		$	4,163		$	12,287		$	9,878
Basic net earnings per share	$	0.17		$	0.11		$	0.35		$	0.25
Diluted net earnings per share	$	0.16		$	0.11		$	0.34		$	0.25

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

	Three months ended June 30,				Six months ended June 30,
	2006		2007		2006		2007
	(Unaudited)				(Unaudited)
Cost of revenues	$	—	$	—	$	—	$	85
Selling and marketing		—		17		—		39
General and administrative		146		211		318		480

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

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NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES

Interim Condensed Consolidated Statements of Cash Flows 

U.S. dollars in thousands

	Six months ended June 30,
	2006			2007
	(Unaudited)
Cash flows from operating activities:
Net income	$	12,287		$	9,878
Adjustments required to reconcile net income to net cash used in operating activities:
Stock-based compensation-related expenses		318			604
Equity in net losses of an affiliate		90			—
Currency fluctuation of long-term debt		88			24
Depreciation and amortization		5,641			5,853
Deferred income taxes, net		(586	)		454
Loss (gain) on sale of property and equipment		(139	)		101
Excess tax benefits related to exercise of options		—			(308	)
Decrease (increase) in trade receivables, net		(3,622	)		421
Increase in unbilled receivables		(11,581	)		(7,194	)
Decrease (increase) in other accounts receivable and prepaid expenses		332			(8,940	)
Decrease (increase) in inventories		2,080			(945	)
Increase in long-term prepaid expenses and other assets		(614	)		(771	)
Decrease in trade payables		(13,844	)		(7,191	)
Increase in advances from customers and deferred revenues		2,802			2,633
Decrease in other accounts payable and accrued expenses		(12,141	)		(1,302	)
Increase (decrease) in accrued severance pay, net		(242	)		877
Net cash used in operating activities		(19,131	)		(5,806	)
Cash flows from investing activities:
Net cash paid for acquisition of a consolidated subsidiary		(13,683	)		(2,495	)
Proceeds from sale of cost investment, net		—			1,866
Additional payments in connection with acquisitions of subsidiaries in prior periods		(5,277	)		(10,241	)
Proceeds from maturity of (investment in) short-term bank deposits		16,089			1,036
Proceeds from sale of available-for-sale marketable securities		2,779			—
Proceeds from sale of property and equipment		651			222
Purchase of property and equipment and capitalization of software development costs for internal use		(4,514	)		(4,980	)
Capitalization of software development costs		(255	)		—
Net cash used in investing activities		(4,210	)		(14,592	)

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

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NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES

Interim Condensed Consolidated Statements of Cash Flows 

U.S. dollars in thousands 

	Six months ended June 30,
	2006			2007
	(Unaudited)
Cash flows from financing activities:
Exercise of options	$	5,954		$	2,273
Excess tax benefits related to exercise of options		—			308
Short-term bank loans and credit, net		20,014			3,587
Principal payments of long-term debt		(1,487	)		(1,821	)
Net cash provided by financing activities		24,481			4,347
Effect of exchange rate changes on cash and cash equivalents		(1,898	)		2,100
Decrease in cash and cash equivalents		(758	)		(13,951	)
Cash and cash equivalents at the beginning of the period		33,579			46,675
Cash and cash equivalents at the end of the period	$	32,821		$	32,724

Non-cash financing activity

Receivables for exercise of options granted to employees	$	—	$	457
Reclassification to equity of redeemable options accrual upon partial exercise of options	$	1,868	$	—

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

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NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements 

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

Note 1: General

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

We are a global provider of information technology (“IT”) services and solutions designed to help clients improve their competitiveness and effectiveness. Our portfolio of solutions and services includes system integration and application development, outsourcing, software and consulting, and quality assurance and training. Offshore services and development are a significant component of each of these categories. We and our subsidiaries primarily serve the following vertical markets: government and defense, financial services, life sciences and healthcare, telecommunications and utilities, and independent software vendors.

Note 2: Significant Accounting Policies

a. Unaudited Interim Financial Information

The accompanying condensed consolidated balance sheet as of June 30, 2007, the condensed consolidated statements of income for the three and six months ended June 30, 2006 and 2007, and the condensed consolidated statements of cash flows for the six months ended June 30, 2006 and 2007 are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in accordance with U. S. generally accepted accounting principles for interim financial information. In the opinion of management, the unaudited interim condensed consolidated financial statements include all adjustments of a normal recurring nature necessary for a fair presentation of our consolidated financial position as of June 30, 2007, our consolidated results of operations for the three and six months ended June 30, 2006 and 2007, and our consolidated cash flows for the six months ended June 30, 2006 and 2007.

The balance sheet at December 31, 2006 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by U. S. generally accepted accounting principles for complete financial statements.

These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes for the year ended December 31, 2006 included in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on March 14, 2007.

Results for the three and six months ended June 30, 2007 are not necessarily indicative of results that may be expected for the year ending December 31, 2007.

Unless otherwise noted, all references to “dollars” or “$” are to United States dollars and all references to “NIS” are to New Israeli Shekels.

b. Reclassification

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

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NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements 

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

c. Use of estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

d. Principles of consolidation

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

e. Acquisition of subsidiaries

1. NessPRO Thailand

On May 15, 2007, we acquired all of the outstanding shares of Advanced Industrial Management Company Limited (“AIM”), a privately-held software distributor in Thailand, for a purchase price of $2,400 in cash and related purchase costs of $192. Additional payments totaling $1,350 may be made in 2008 and 2009, should AIM achieve certain business goals by the end of 2007 and 2008, respectively. AIM became a wholly-owned subsidiary of our U.S. subsidiary, NessPRO Inc. Upon completion of the acquisition, AIM changed its name to NessPRO Thailand Ltd.

The purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on their respective fair value. As part of the allocation, $1,905 was allocated to goodwill and workforce and $766 was allocated to amortizable intangible assets, license agreement and customer relations, that are being amortized over their estimated useful lives of five and six years, respectively. The goodwill related to the acquisition is nondeductible for tax purposes. The results of the aforementioned acquisition are included in our consolidated financial statements for the period subsequent to the acquisition date. Significant liabilities assumed included accounts payable and other accrued expenses in a total amount of approximately $542. We also recorded a deferred tax liability of $260 for the difference between the assigned values and the tax bases of the license agreement and customer relations acquired. The acquisition does not have a material effect on pro forma financial data.

2. The following table presents certain combined unaudited statements of income data for the three and six months ended June 30, 2006 as if the acquisitions of Ness IBS and NessPRO Spain had occurred on January 1, 2006, after giving effect to purchase accounting adjustments, including amortization of identifiable intangible assets:

	Three months ended June 30, 2006		Six months ended June 30, 2006
	(unaudited)		(unaudited)
Revenues	$	117,985	$	231,975
Net income	$	5,884	$	11,734
Earnings per share:
Basic	$	0.17	$	0.33
Diluted	$	0.16	$	0.32

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NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements 

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

f. Goodwill

On January 1, 2007 we realigned our segments slightly (see Note 5). There was no significant effect on the allocation of goodwill between the segments.

In the six month period ended June 30, 2007, we recorded additional goodwill and workforce resulting from the acquisition of NessPRO Thailand representing $1,905.

g. Accounting for stock-based compensation

During the six months ended June 30, 2007, we granted options to purchase 1,041,200 shares of our Common Stock under our U.S. and Israeli 2003 Stock Option Plans and our 2007 Stock Option Plan at a weighted average exercise price of $13.84 per share and a weighted average fair value of $5.03 per share.

Included are 666,000 options granted to our senior management. These options vest in accordance with certain performance conditions through April 1, 2010. From April 1, 2010 to April 30, 2010, the grantees have the right to redeem the vested unexercised options outstanding on April 1, 2010 at the price of $4.50 per each outstanding option. Given the specific characteristics of the options, we used a Monte Carlo simulation in order to estimate their fair value. We believe this valuation technique produces a better estimate of fair values than the closed form option pricing model, considering the guidance provided in FASB 123(R). We accounted for these options as tandem awards. The fair value assigned to the redemption feature will be marked to market in each reporting period. During the six months ended June 30, 2007, $113 of stock-based compensation expense related to these options was recorded against liability.

At June 30, 2007, options to purchase 3,371,294 shares are outstanding with a weighted average exercise price of $11.85 per share and options to purchase 2,709,038 shares are available for future grants.

We estimate the fair value of stock options granted using the Black-Scholes-Merton option pricing model for service options and the Monte Carlo option pricing model for performance condition options. The option-pricing models require a number of assumptions, of which the most significant are the expected stock price volatility and the expected option term. Expected volatility was calculated based upon actual historical stock price movements. The expected term of options granted is based upon historical experience and represents the period of time that options granted are expected to be outstanding. The risk-free interest rate is based on the yield from U.S. treasury bonds with an equivalent term. We have historically not paid dividends and have no foreseeable plans to pay dividends. The fair value was estimated at the date of grant using the following assumptions:

	Black-Scholes				Monte Carlo
	Three months ended June 30, 2007		Six months ended June 30, 2007		Three months ended June 30, 2007		Six months ended June 30, 2007
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Dividend yield		0%		0%		0%		0%
Expected volatility		31%		31%		29%-31%		29%-31%
Risk-free interest		5.10%		4.63% - 5.10%		4.61%-4.95%		4.61%-4.95%
Expected life (in years)		3.5		2 – 3.5		N/A		N/A

In the three and six months ended June 30, 2006, no options were granted.

As of June 30, 2007, approximately $2,609 of total unrecognized compensation cost related to stock-based compensation is expected to be recognized over a period of 3 years. The total unrecognized stock-based compensation cost to be recognized in future periods as of June 30, 2007 does not consider the effect of stock options that may be issued in subsequent periods.

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NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements 

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

Note 3: Commitments and Contingent Liabilities

a. Litigation

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

One of our Israeli subsidiaries is currently in a dispute with one of its clients, an Israeli insurance company, regarding the terms and conditions of a software development contract (the “Contract”). The insurance company claims that we have materially breached the Contract by not timely delivering the required software. The insurance company issued a contract termination notice on September 21, 2006, collected autonomous guarantees provided by our subsidiary in the amount of approximately $2.1 million on November 23, 2006, and is demanding payment of amounts it claims to have paid so far of approximately $4.1 million (excluding VAT), as well as damages of approximately $18.7 million. Furthermore, this termination could affect our reputation and impair our relations with another client as well as with additional prospects for the software. We believe that we have not materially breached the Contract and that the delays were caused by the insurance company's actions. However, we do not contest the insurance company’s right to terminate the contract for convenience, subject to certain provisions including proper settlement of payments, as per the Contract. The Contract provides for mandatory arbitration, which commenced in January 2007, in which we intend to vigorously defend our position. The insurance company and our subsidiary have both issued their respective claims to the arbitrator, as well as responses to the other party’s claims. The total scope of the project is approximately $9.2 million. With respect to this contract, approximately $5.3 million (excluding VAT) is included in our trade receivables and other accounts receivable and prepaid expenses. We can give no assurance at the present time of the exposure, if any, for these claims. We can give no assurance that our liability insurance policy, which has a cap of $5.0 million per claim, will cover such exposure. At this stage we can not estimate the result of the arbitration and we expect that the arbitration process may be protracted. If the outcome of the dispute is not in our favor and not in line with our position described above, it may adversely affect our financial position, results of operations and cash flows.

b. Guarantees

Guarantees are contingent commitments issued by us generally to guarantee our performance in different projects to our customers, such as tenders. The term of a guarantee generally is equal to the term of the related projects, which can be as short as 30 days or as long as 8 years. The maximum potential amount of future payments we could be required to make under our guarantees at December 31, 2006 and June 30, 2007, is $37,336 and $39,657, respectively. We do not hold collateral to support guarantees except when deemed necessary.

c. Liens and charges

To secure our liabilities, we and our subsidiaries recorded fixed and floating charges on our holdings in subsidiaries, and on our and our subsidiaries’ property and equipment and goodwill.

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NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements 

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

Note 4: Stockholders’ Equity

a. Total comprehensive income:

	Three months ended June 30,					Six months ended June 30,
	2006		2007			2006			2007
	(Unaudited)					(Unaudited)
Net income	$	5,950	$	4,163		$	12,287		$	9,878
Foreign currency translation adjustments, net		6,350		(60	)		3,535			2,793
Net unrealized gains on available-for-sale marketable securities		39		—			(21	)		—
Comprehensive income	$	12,339	$	4,103		$	15,801		$	12,671

b. Option exercises:

In the three and six months ended June 30, 2007, a total of 157,943 and 537,562 options, respectively, were exercised into common stock for aggregate consideration of $1,430 and $2,730, respectively.

Note 5: Segment Reporting

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

On January 1, 2007, we expanded our Managed Strategic Services (MSS) segment to include the non-financial services portions of Ness IBS (formerly Innova), a component of our “Other” segment, and we changed the name of MSS to Ness North America; and we moved our Ness UK organization from our “Other” segment to our Ness Europe segment. 2006 data for these three segments is reclassified to reflect the current organization of the segments.

Our operating segments are:

1. Ness North America (Ness NA), which includes India-based offshore services as well as system integration and application development and consulting services. Verticals served by this segment are: independent software vendors, life sciences and healthcare and others.

2. Technologies & Systems Group (TSG), which includes system integration and application development, real-time systems development, consulting and outsourcing services for the defense, government and homeland security vertical, as well as systems for the telecommunications vertical.

3. Ness Europe, which includes system integration and application development, outsourcing and software and consulting for Eastern European and Western European customers, including near-shore services from Eastern Europe for Western European customers. Verticals served by this segment are: telecommunications and utilities, financial services and others.

4. Ness Israel, which includes system integration and application development, outsourcing, software and consulting and quality assurance and training for customers in Israel within the following verticals: financial services, government, life sciences and healthcare, manufacturing, retail, transportation and others.

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NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements 

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

5. Other, which comprises operations representing, individually, less than 10% of our consolidated revenues and operating profit. These include our operations in Asia Pacific, the financial services component of Ness IBS division (formerly Innova) as well as the recently acquired NessPRO Spain (formerly Selesta España) and NessPRO Thailand (formerly AIM).

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

The table below presents financial information for our five reportable segments:

	Three months ended June 30, 2006
	Ness NA		TSG		Ness Europe		Ness Israel		Other		Unallocated			Total
	(Unaudited)
Revenues from external customers	$	26,323	$	12,635	$	23,949	$	44,255	$	9,452		—		$	116,614
Operating income (loss)	$	3,567	$	1,331	$	2,654	$	1,401	$	311	$	(1,790	)	$	7,474
Financial income, net															(577	)
Other income, net															483
Income before taxes on income														$	7,380

		Three months ended June 30, 2007
		Ness NA		TSG		Ness Europe		Ness Israel		Other		Unallocated			Total
		(Unaudited)
Revenues from external customers		$	26,313	$	13,212	$	24,350	$	49,169	$	12,718		—		$	125,762
Operating income (loss)		$	2,126	$	1,404	$	1,737	$	2,557	$	815	$	(3,214	)	$	5,425
Financial income, net																(74	)
Other income, net	��															(62	)
Income before taxes on income															$	5,289

	Six months ended June 30, 2006
	Ness NA		TSG		Ness Europe		Ness Israel		Other		Unallocated			Total
	(Unaudited)
Revenues from external customers	$	47,121	$	27,419	$	45,035	$	88,314	$	15,767		—		$	223,656
Operating income (loss)	$	6,151	$	3,192	$	4,336	$	4,537	$	412	$	(3,249	)	$	15,379
Financial income, net															(638	)
Other income, net															444
Income before taxes on income														$	15,185

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NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements 

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

	Six months ended June 30, 2007
	Ness NA		TSG		Ness Europe		Ness Israel		Other		Unallocated			Total
	(Unaudited)
Revenues from external customers	$	52,414	$	27,365	$	47,224	$	99,769	$	24,768		—		$	251,540
Operating income (loss)	$	4,129	$	3,774	$	3,188	$	5,646	$	1,408	$	(6,004	)	$	12,141
Financial income, net															315
Other income, net															(56	)
Income before taxes on income														$	12,400

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

The following presents total revenues for the three and six months ended June 30, 2006 and 2007, and long-lived assets as of December 31, 2006 and June 30, 2007:

	Three months ended June 30,				Six months ended June 30,
	2006		2007		2006		2007
	(Unaudited)				(Unaudited)
Revenues from sales to unaffiliated customers:
Israel	$	52,577	$	63,307	$	105,502	$	123,940
North America		34,989		29,368		63,315		63,756
Europe		24,603		27,407		45,879		52,708
Asia and the Far East		4,445		5,680		8,960		11,136
	$	116,614	$	125,762	$	223,656	$	251,540

	December 31, 2006		June 30, 2007
			(Unaudited)
Long-lived assets:
Israel	$	111,634	$	110,839
North America		81,755		84,480
Europe		34,567		35,666
Asia and the Far East		10,377		10,340
	$	238,333	$	241,325

– 14 –

NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements

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

Note 6: Income taxes

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”) - an interpretation of FASB Statement No. 109, “Accounting for Income Taxes.” The Interpretation addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on derecognizing, classification, interest and penalties on income taxes and accounting in interim periods, and requires increased disclosures. As a result of the adoption we recorded approximately $1.5 million of reserve as of January 1, 2007 for uncertain tax positions which, if recognized, would affect the effective tax rate. This amount includes accrued interest expense and penalties related to the unrecognized tax benefits. We recognize accrued interest related to unrecognized tax benefits in interest expenses. Penalties are recognized as a component of income tax expense.

The amount of income taxes we pay is subject to ongoing audit by federal, state and foreign tax authorities, which often results in proposed assessments. Management performs a comprehensive review of its global tax positions on a quarterly basis and accrues amounts for contingent tax liabilities. Based on these reviews, the result of discussions and resolutions of matters with certain tax authorities and the closure of tax years subject to tax audit, reserves are adjusted as necessary. However, future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are determined or resolved. Additionally, the jurisdictions in which our earnings and/or deductions are realized may differ from current estimates. We are no longer subject to U.S. federal, state and local, or non U.S. income tax examination for years before 2001.

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

Note 7: Basic and Diluted Net Earnings per Share

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

The total weighted average number of shares related to the outstanding options and warrants excluded from the calculations of diluted net earnings per share, as they would have been anti-dilutive for all periods presented, was 2,381,833, 1,081,955, 2,381,833 and 896,455 for the three months ended June 30, 2006 and 2007 and the six months ended June 30, 2006 and 2007, respectively.

– 15 –

NESS TECHNOLOGIES, INC. AND ITS SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements

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

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

	Three months ended June 30,				Six months ended June 30,
	2006		2007		2006		2007
	(Unaudited)				(Unaudited)
Numerator:
Net income, numerator for basic and diluted per share	$	5,950	$	4,163	$	12,287	$	9,878
Denominator:
Weighted average number of shares of common stock		35,602		39,041		35,239		38,957
Effect of dilutive securities:
Employee stock options and warrants		1,116		273		1,096		368
Denominator for diluted net earnings per share - weighted average assuming exercise of options		36,718		39,314		36,335		39,325

Note 8: Subsequent Events

On July 26, 2007, our Board of Directors approved the exercise of an option granted to us on October 25, 2006 to purchase all of the outstanding shares of Selesta S.p.A., a privately-held IT software distribution and systems integration company based in Italy, and its wholly-owned subsidiary Selesta Security Systems S.p.A. (together - "Selesta Italia"), subject to the closing of a Share Purchase Agreement signed between the parties on March 19, 2007. The purchase price will be €9.0 million. An additional payment of up to €9.0 million will be made during 2008 and 2009 based on the achievement of certain operating income milestones in 2007 and 2008.

– 16 –

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

You should read the following discussion and analysis together with our unaudited consolidated financial statements and the accompanying notes. This discussion contains forward-looking statements, within the meaning of Section 27A of Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, including statements regarding our expected financial position, business and financing plans. These statements involve risks and uncertainties. Our actual results could differ materially from the results described in or implied by these forward-looking statements as a result of various factors, including those discussed below and elsewhere in our Annual Report on Form 10-K filed with the SEC on March 14, 2007, particularly under the headings “Disclosure Statement” and “Risk Factors.”

Overview

We are a global provider of information technology, or IT, services and end-to-end business solutions designed to help clients improve their competitiveness and effectiveness. End-to-end business solutions encompass all stages of a client’s business process and incorporate all technologies and IT services related to that process. Our portfolio of solutions and services includes outsourcing, system integration and application development, software and consulting, and quality assurance and training. The primary industries, or verticals, we serve include government and defense, financial services, life sciences and healthcare, telecommunications and utilities, and independent software vendors, or ISVs.

We have operations in 16 countries across North America, Europe and Asia. We combine our deep vertical expertise and strong technical capabilities to provide a complete range of high quality services on a global scale. By integrating our local and international personnel in focused business and project teams, this global delivery model leverages our corporate knowledge and experience, intellectual property and global infrastructure to develop innovative solutions for clients across the geographies and verticals we serve. We complement this global delivery model with our offshore delivery capabilities to achieve meaningful cost reductions or other benefits for our clients.

Our revenues increased to $125.8 million and $251.5 million for the three and six months ended June 30, 2007, from $116.6 million and $223.7 million for the three and six months ended June 30, 2006, respectively. Net income decreased to $4.2 million and $9.9 million for the three and six months ended June 30, 2007, from $6.0 million and $12.3 million for the three and six months ended June 30, 2006, respectively, primarily as a result of exceptional expenses related to our management transitions of $0.8 million and $2.6 million, respectively, and losses from our United Kingdom operations of $0.5 million and $1.3 million, respectively.

Our revenue growth is attributable to a number of factors, including acquisitions we made, increases in the number and size of projects for existing clients, and the addition of new clients. Our client base is diverse, and we are not dependent on any single client. In the three and six months ended June 30, 2007, no client accounted for more than 5% of our revenues and our largest twenty clients together accounted for approximately 33% and 31% of our revenues, respectively. For the three and six months ended June 30, 2007, the percentage of our revenues derived in aggregate from agencies of the government of Israel was 14% and 12%, respectively. Existing clients from prior years generated more than 85% of our revenues in the three and six months ended June 30, 2007.

Our backlog as of June 30, 2007 was $650 million compared to $532 million as of June 30, 2006. This $118 million increase in our backlog was due primarily to new bookings. We achieve backlog through new signings of IT services projects and outsourcing contracts, including for new and repeat customers. We recognize backlog as revenue when we perform the services related to backlog.

For the three and six months ended June 30, 2007, the percentage of our revenues derived from clients in Israel was 50% and 49%, respectively; in North America, 23% and 25%, respectively; in Europe, 22% and 21%, respectively; and in Asia and the Far East, 5% and 4%, respectively.

– 17 –

For the three and six months ended June 30, 2007, we derived 44% and 43%, respectively, of our revenues from outsourcing (including offshore development); 31% and 30%, respectively, from system integration and application development; 17% and 17%, respectively, from software and consulting; 7% and 7%, respectively, from quality assurance and training; and 1% and 2%, respectively, from our other offerings.

As of June 30, 2007, we had approximately 7,460 employees, including approximately 6,505 IT professionals. Of the 7,460 employees, approximately 3,320 were in Israel, 2,310 were in India, 555 were in North America, 880 were in Europe and 395 were in the Asia Pacific region.

Recent Developments

On May 15, 2007, we acquired all of the outstanding shares of Advanced Industrial Management Company Limited (“AIM”), a privately-held software distributor in Thailand, for a purchase price of $2,400 in cash and related purchase costs of $192. Additional payments totaling $1,350 may be made in 2008 and 2009, should AIM achieve certain business goals by the end of 2007 and 2008, respectively. AIM employs 35 people and for the year 2006 was profitable. AIM became part of NessPRO, our software product distribution business, currently operating in Israel, Spain, Portugal, Singapore and Thailand. AIM is expected to strengthen our current operations in Asia Pacific. Upon completion of the acquisition, AIM changed its name to NessPRO Thailand Ltd.

On July 26, 2007, our Board of Directors approved the exercise of an option granted to us on October 25, 2006 to purchase all of the outstanding shares of Selesta S.p.A., a privately-held IT software distribution and systems integration company based in Italy, and its wholly-owned subsidiary Selesta Security Systems S.p.A. (together - "Selesta Italia"), subject to the closing of a Share Purchase Agreement signed between the parties on March 19, 2007. The purchase price will be €9.0 million. An additional payment of up to €9.0 million will be made during 2008 and 2009 based on the achievement of certain operating income milestones in 2007 and 2008. Selesta Italia employs about 110 people and will become part of NessPRO. Selesta Italia is expected to strengthen our current operations in Europe. Upon closing of the acquisition, Selesta Italia will change its name to NessPRO Italy.

Consolidated Results of Operations

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

	Three months ended June 30,						Six months ended June 30,
	2006			2007			2006			2007
Revenues		100.0	%		100.0	%		100.0	%		100.0	%
Cost of revenues		72.0			71.3			71.4			71.3
Gross profit		28.0			28.7			28.6			28.7
Operating expenses:
Selling and marketing		7.5			7.4			7.7			7.5
General and administrative		14.1			17.0			14.0			16.4
Total operating expenses		21.6			24.4			21.7			23.9
Operating income		6.4			4.3			6.9			4.8
Financial income (expenses), net		(0.5	)		(0.1	)		(0.3	)		0.1
Other income (expenses), net		0.4			0.0			0.2			0.0
Income before taxes on income		6.3			4.2			6.8			4.9
Taxes on income		1.1			0.9			1.3			1.0
Equity in net losses of an affiliate		(0.1	)		—			0.0			—
Net income		5.1			3.3			5.5			3.9

– 18 –

Three Months Ended June 30, 2007 Compared to the Three Months Ended June 30, 2006

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

	Three months ended June 30,						Increase
	2006			2007			$		%
Revenues	$	116,614		$	125,762			9,148		7.8
Cost of revenues		83,981			89,677			5,696		6.8
Gross profit	$	32,633		$	36,085			3,452		10.6
Gross margin		28.0	%		28.7	%

Revenues

Our revenues increased from $116.6 million in the three months ended June 30, 2006 to $125.8 million in the three months ended June 30, 2007, representing an increase of $9.1 million, or 7.8%. Approximately $2.7 million of this increase was attributable to acquisitions. Of the $9.1 million increase in revenues, $4.7 million represents growth in software and consulting services and $4.4 million represents growth in our other offerings, comprised of outsourcing and offshore engagements, system integration and application development, and quality assurance and training. There was no significant change in our billing rates, or prices, from the three months ended June 30, 2006 to the three months ended June 30, 2007.

Cost of revenues

Our cost of revenues, including salaries, wages and other direct and indirect costs, increased from $84.0 million in the three months ended June 30, 2006 to $89.7 million in the three months ended June 30, 2007, representing an increase of $5.7 million, or 6.8%. Approximately $1.1 million of this increase was attributable to acquisitions, and $4.6 million was due to normal growth in our delivery staff needed to support our increased revenues.

Gross Profit

Our gross profit (revenues less cost of revenues) increased from $32.6 million in the three months ended June 30, 2006 to $36.1 million in the three months ended June 30, 2007, representing an increase of $3.5 million, or 10.6 %. The increase was primarily due to our increase in revenues. Approximately $1.6 million of the increase was attributable to acquisitions, and $1.9 million was related to our other revenue growth. Gross margin for the three months ended June 30, 2007 was 28.7%, compared to 28.0% in the three months ended June 30, 2006.

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

	Three months ended June 30,				Increase (decrease)
	2006		2007		$			%
Selling and marketing	$	8,733	$	9,293		560			6.4
General and administrative		16,426		21,367		4,941			30.1
Total operating expenses		25,159		30,660		5,501			21.9
Operating income	$	7,474	$	5,425		(2,049	)		(27.4	)

Selling and marketing

Selling and marketing expenses increased from $8.7 million in the three months ended June 30, 2006 to $9.3 million in the three months ended June 30, 2007, representing an increase of $0.6 million, or 6.4%. This increase was due primarily to the inclusion of marketing and sales expenses from our acquisitions, representing $0.6 million.

– 19 –

General and administrative

General and administrative expenses increased from $16.4 million in the three months ended June 30, 2006 to $21.4 million in the three months ended June 30, 2007, representing an increase of $4.9 million, or 30.1%. This increase was due primarily to exceptional expenses associated with our management transitions, representing $0.8 million, increases in salary expenses and related benefits, representing $0.6 million, doubtful accounts expenses in the three months ended June 30, 2007 compared to collection of doubtful debts in the three months ended June 30, 2006, representing $0.5 million, and acquisitions, representing $0.2 million.

Operating Income

Operating income decreased from $7.5 million in the three months ended June 30, 2006 to $5.4 million in the three months ended June 30, 2007, representing a decrease of $2.0 million, or 27.4%. The decrease was mainly attributable to the increase in our general and administrative expenses.

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

	Three months ended June 30,						Increase (Decrease)
	2006			2007			$			%
Operating income	$	7,474		$	5,425			(2,049	)		(27.4	)
Financial expenses, net		(577	)		(74	)		503			(87.2	)
Other income (expenses), net		483			(62	)		(545	)		N/A
Income before taxes on income		7,380			5,289			(2,091	)		(28.3	)
Taxes on income		1,340			1,126			(214	)		(16.0	)
Equity in net losses of an affiliate		(90	)		—			90			(100.0	)
Net income	$	5,950		$	4,163			(1,787	)		(30.0	)

Financial expenses, net

Financial expenses, net, decreased from $0.6 million in the three months ended June 30, 2006 to $0.1 million in the three months ended June 30, 2007, representing a decrease of $0.5 million. The decrease is primarily due to the increase in our average net cash from $2.0 million to $13.8 million, which allowed us to generate higher interest income, net, representing $0.2 million, along with the repayment of relatively expensive loans and favorable foreign currency exchange effects, together representing $0.3 million.

Other income (expenses), net

Other income (expenses), net changed from income of $0.5 million in the three months ended June 30, 2006 to expenses of $0.1 million in the three months ended June 30, 2007. This change was primarily due to consideration received for a third party transaction, representing $0.4 million, net of expenses, in the three months ended June 30, 2006.

Taxes on income

Our taxes on income decreased from $1.3 million in the three months ended June 30, 2006 to $1.1 million in the three months ended June 30, 2007, representing a decrease of $0.2 million, or 16.0%. This decrease is due primarily to the decrease in our income before taxes, partially offset by the utilization of tax loss carry-forwards in the United States and Israel. We expect our tax rate for the remainder of the year to be above 20%, due to the utilization of those tax loss carry-forwards by certain of our European subsidiaries and the changes in the tax rates in India.

Equity in net losses of an affiliate

Equity in net losses of an affiliate changed from losses of $0.1 million in the three months ended June 30, 2006 to zero in the three months ended June 30, 2007, reflecting the fact that we no longer have the affiliate.

– 20 –

Net Income

Net income decreased from $6.0 million in the three months ended June 30, 2006 to $4.2 million in the three months ended June 30, 2007, representing a decrease of $1.8 million, or 30.0%. The decrease in net income was due primarily to our decrease in operating income of $2.0 million, partially offset by the decrease in taxes on income, of $0.2 million.

Six Months Ended June 30, 2007 Compared to the Six Months Ended June 30, 2006

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

	Six months ended June 30,						Increase
	2006			2007			$		%
Revenues	$	223,656		$	251,540			27,884		12.5
Cost of revenues		159,697			179,353			19,656		12.3
Gross profit	$	63,959		$	72,187			8,228		12.9
Gross margin		28.6	%		28.7	%

Revenues

Our revenues increased from $223.7 million in the six months ended June 30, 2006 to $251.5 million in the six months ended June 30, 2007, representing an increase of $27.9 million, or 12.5%. Approximately $11.6 million of this increase was attributable to acquisitions, a significant portion of which was due to post-acquisition growth resulting from synergies with Ness. Of the $27.9 million increase in revenues, $10.4 million represents growth in software and consulting, $7.8 million represent growth in outsourcing and offshore engagements and $9.7 million represents growth in our other offerings, comprised of system integration and application development and quality assurance and training. There was no significant change in our billing rates, or prices, from the six months ended June 30, 2006 to the six months ended June 30, 2007.

Cost of revenues

Our cost of revenues, including salaries, wages and other direct and indirect costs, increased from $159.7 million in the six months ended June 30, 2006 to $179.4 million in the six months ended June 30, 2007, representing an increase of $19.7 million, or 12.3%. Approximately $7.1 million of this increase was attributable to acquisitions, a significant portion of which was due to growth in our delivery staff needed to support post-acquisition revenue growth resulting from synergies with Ness, and $12.6 million was due to normal growth in our delivery staff needed to support our increased revenues.

Gross Profit

Our gross profit (revenues less cost of revenues) increased from $64.0 million in the six months ended June 30, 2006 to $72.2 million in the six months ended June 30, 2007, representing an increase of $8.2 million, or 12.9%. The increase was primarily due to our increase in revenues. Approximately $4.5 million of the increase was attributable to acquisitions, a significant portion of which was due to post-acquisition revenue growth resulting from synergies with Ness, and $3.7 million was related to our other revenue growth. Gross margin for the six months ended June 30, 2007 was 28.7%, compared to 28.6% in the six months ended June 30, 2006. This increase in gross margin was not significant.

– 21 –

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

	Six months ended June 30,				Increase (decrease)
	2006		2007		$			%
Selling and marketing	$	17,224	$	18,765		1,541			8.9
General and administrative		31,356		41,281		9,925			31.7
Total operating expenses		48,580		60,046		11,466			23.6
Operating income	$	15,379	$	12,141		(3,238	)		(21.1	)

Selling and marketing

Selling and marketing expenses increased from $17.2 million in the six months ended June 30, 2006 to $18.8 million in the six months ended June 30, 2007, representing an increase of $1.5 million, or 8.9%. This increase was due primarily to the inclusion of marketing and sales expenses from our acquisitions, representing $1.2 million.

General and administrative

General and administrative expenses increased from $31.4 million in the six months ended June 30, 2006 to $41.3 million in the six months ended June 30, 2007, representing an increase of $9.9 million, or 31.7%. This increase was due primarily to exceptional expenses associated with our management transitions, representing $2.6 million, our acquisitions, representing $1.9 million, increases in salary expenses and related benefits, representing $0.9 million, and doubtful accounts expenses in the six months ended June 30, 2007 compared to collection of doubtful debts in the six months ended June 30, 2006, representing $0.5 million.

Operating Income

Operating income decreased from $15.4 million in the six months ended June 30, 2006 to $12.1 million in the six months ended June 30, 2007, representing a decrease of $3.2 million, or 21.1%. The decrease was mainly attributable to the increase in our general and administrative expenses.

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

	Six months ended June 30,						Increase (Decrease)
	2006			2007			$			%
Operating income	$	15,379		$	12,141			(3,238	)		(21.1	)
Financial income (expenses), net		(638	)		315			953			N/A
Other income (expenses), net		444			(56	)		(500	)		N/A
Income before taxes on income		15,185			12,400			(2,785	)		(18.3	)
Taxes on income		2,808			2,522			(286	)		(10.2	)
Equity in net losses of an affiliate		(90	)		—			90			(100.0	)
Net income	$	12,287		$	9,878			(2,409	)		(19.6	)

Financial income (expenses), net

Financial income (expenses), net, changed from expenses of $0.6 million in the six months ended June 30, 2006 to income of $0.3 million in the six months ended June 30, 2007, representing an increase of $1.0 million. The increase is primarily due to the increase in our average net cash from $13.1 million to $21.9 million, which allowed us to generate higher interest income, net, representing $0.4 million, along with the repayment of relatively expensive loans and favorable foreign currency exchange effects, together representing $0.6 million.

Other income (expenses), net

Other income (expenses), net changed from income of $0.4 million in the six months ended June 30, 2006 to expenses of $0.1 million in the six months ended June 30, 2007. This change was primarily due to consideration received for a third party transaction, representing $0.4 million, net of expenses, in the six months ended June 30, 2006.

– 22 –

Taxes on income

Our taxes on income decreased from $2.8 million in the six months ended June 30, 2006 to $2.5 million in the six months ended June 30, 2007, representing a decrease of $0.3 million, or 10.2%. This decrease is due primarily to the decrease in our income before taxes, partially offset by the utilization of tax loss carry-forwards in the United States and Israel.

Equity in net losses of an affiliate

Equity in net losses of an affiliate changed from losses of $0.1 million in the six months ended June 30, 2006 to zero in the six months ended June 30, 2007, reflecting the fact that we no longer have the affiliate.

Net Income

Net income decreased from $12.3 million in the six months ended June 30, 2006 to $9.9 million in the six months ended June 30, 2007, representing a decrease of $2.4 million, or 19.6%. The decrease in net income was due primarily to our decrease in operating income of $3.2 million, partially offset by the increase in financial income (expenses), net, of $0.9 million.

Results by Business Segment

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

On January 1, 2006 we completed the reorganization of our operations into operating segments. Our chief operating decision-maker is our chief executive officer, who evaluates our performance and allocates resources based on segment revenues and operating profit.

On January 1, 2007, we expanded our Managed Strategic Services (MSS) segment to include the non-financial services portions of Ness IBS (formerly Innova), a component of our “Other” segment, and we changed the name of MSS to Ness North America; and we moved our Ness UK organization from our “Other” segment to our Ness Europe segment. 2006 data for these three segments is reclassified to reflect the current organization of the segments.

Our operating segments are:

1. Ness North America, which includes India-based offshore services as well as system integration and application development and consulting services. Verticals served by this segment are: independent software vendors, life sciences and healthcare and others.

2. Technologies & Systems Group, which includes system integration and application development, real-time systems development, consulting and outsourcing services for the defense, government and homeland security vertical, as well as systems for the telecommunications vertical.

3. Ness Europe, which includes system integration and application development, outsourcing and software and consulting for Eastern European and Western European customers, including near-shore services from Eastern Europe for Western European customers. Verticals served by this segment are: telecommunications and utilities, financial services and others.

– 23 –

4. Ness Israel, which includes system integration and application development, outsourcing, software and consulting and quality assurance and training for customers in Israel within the following verticals: financial services, government, life sciences and healthcare, manufacturing, retail, transportation and others.

5. Other, which comprises operations representing, individually, less than 10% of our consolidated revenues and operating profit. These include our operations in Asia Pacific, the financial services component of Ness IBS division (formerly Innova) as well as the recently acquired NessPRO Spain (formerly Selesta España) and NessPRO Thailand (formerly AIM).

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

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

	Three months ended						Six months ended						Three months ended
	June 30,						June 30,						September 30,			December 31,
	2006		2007				2006		2007				2006			2006
Segment Data:	(unaudited)						(unaudited)						(unaudited)			(unaudited)
Revenues from external customers:
Ness North America	$	26,323		$	26,313		$	47,121		$	52,414		$	22,627		$	23,611
Technologies & Systems Group (TSG)		12,635			13,212			27,419			27,365			14,538			14,434
Ness Europe		23,949			24,350			45,035			47,224			22,015			31,031
Ness Israel		44,255			49,169			88,314			99,769			50,652			51,043
Other		9,452			12,718			15,767			24,768			9,303			11,408
	$	116,614		$	125,762		$	223,656		$	251,540		$	119,135		$	131,527
Operating Income (Loss):
Ness North America	$	3,567		$	2,126		$	6,151		$	4,129		$	2,653		$	2,335
Technologies & Systems Group (TSG)		1,331			1,404			3,192			3,774			2,275			1,462
Ness Europe		2,654			1,737			4,336			3,188			1,364			2,255
Ness Israel		1,401			2,557			4,537			5,646			4,621			4,996
Other		311			815			412			1,408			589			(351	)
Unallocated Expenses		(1,790	)		(3,214	)		(3,249	)		(6,004	)		(1,342	)		(2,625	)
	$	7,474		$	5,425		$	15,379		$	12,141		$	10,160	��	$	8,072

Liquidity and Capital Resources

Overview

As of June 30, 2007, we had cash, cash equivalents, restricted cash and short-term bank deposits of $33.8 million compared to $48.7 million as of December 31, 2006. The funds held at locations outside of the United States are for future operating expenses and capital expenditures, and we have no intention of repatriating those funds. We are not, however, restricted in repatriating those funds back to the United States, if necessary. While we expect that cash generated by our non-U.S. subsidiaries will be reinvested in their respective geographies to support expansion of our business, to the extent that funds were remitted to the United States in the form of dividend payments, those payments may be subject to withholding taxes in their respective countries, and would be subject to tax in the United States.

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Cash Flows

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

	Six months ended June 30,
	2006			2007
Net cash used in operating activities	$	(19,131	)	$	(5,806	)
Net cash used in investing activities		(4,210	)		(14,592	)
Net cash provided by financing activities		24,481			4,347
Effect of exchange rate changes on cash and cash equivalents		(1,898	)		2,100
Decrease in cash and cash equivalents		(758	)		(13,951	)
Cash and cash equivalents at the beginning of the period		33,579			46,675
Cash and cash equivalents at the end of the period	$	32,821		$	32,724

Six months ended June 30, 2007 compared to the six months ended June 30, 2006

Net cash used in operating activities was $5.8 million in the six months ended June 30, 2007, compared to $19.1 million in the six months ended June 30, 2006. The major factor contributing to the change was tax payments in the six months ended June 30, 2006 to the Israeli Tax Authority related to prior periods for which there was no corresponding amount in the six months ended June 30, 2007, representing $10.3 million.

Net cash used in investing activities was $14.6 million in the six months ended June 30, 2007, compared with $4.2 million in the six months ended June 30, 2006. The major factors contributing to the increase were a decrease in proceeds from the maturity of short term bank deposits and the sale of marketable securities from an aggregate amount of $18.9 million in the first six months of 2006 to an aggregate amount of $1.0 million in the first six months of 2007, offset by a decrease in payments in respect of acquisitions and contingent consideration, representing $6.3 million, and receipt of the remaining net proceeds from the sale of our interest in dbMotion, representing $1.9 million.

Net cash provided by financing activities was $4.3 million in the six months ended June 30, 2007, compared with $24.5 million in the six months ended June 30, 2006. The decrease was primarily due to a lower utilization of short-term bank loans and credit, representing $16.4 million, and a decrease in the exercise of options, representing $3.7 million. In the six months ended June 30, 2006 and 2007, cash flows from the exercise of options amounted to $6.0 million and $2.3 million, respectively.

The effect of exchange rate changes on cash and cash equivalents was $2.1 million in the six months ended June 30, 2007, compared to ($1.9) million in the six months ended June 30, 2006. The change was primarily due to the effect of translation adjustments on trade and unbilled receivables, representing $4.7 million in aggregate, offset by long-term inter-company balances, representing $0.8 million.

Long-term and Short-term Debt

At June 30, 2007, our Israeli subsidiaries had long-term and short-term bank borrowings of $8.0 million consisting of various long-term notes denominated in NIS (linked to index) aggregating to $4.3 million and on-call borrowings aggregating to $3.7 million. The long-term notes bear interest rates ranging from approximately 6.50% to 7.55% and a weighted average interest rate of approximately 6.96%, with maturities of up to one year and a half. These aggregate bank borrowings included $3.8 million from Israel Discount Bank, with interest rates of approximately 6.96% and maturities of up to one year and a half; and $0.5 million from Mizrahi Bank, with interest rates of approximately 7.0% and maturities of two months. The on-call borrowings bear interest rate of 4.30%.

Our only material indebtedness is amounts owed by Ness A.T. Ltd., one of our subsidiaries, to Israel Discount Bank. The relevant debt instruments contain customary restrictive covenants relating to the borrower, including the following:

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· a negative pledge;

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

· limitations on merging or transferring assets.

As of June 30, 2007, we are in compliance and expect to remain in compliance with all of our covenants. Our failure to comply with these covenants could lead to an event of default under the agreements governing some or all of the indebtedness, permitting the applicable lender to accelerate all borrowings under the applicable agreement, and to foreclose on any collateral.

At June 30, 2007, our non-Israeli subsidiaries had short-term borrowings denominated in dollars and Euros aggregating to $4.2 million with interest rates ranging from approximately 6.50% to 9.75%.

We anticipate funding the global growth of our NessPRO line of business, which sells enterprise software licenses of third-party software vendors to corporate clients along with related implementation, customization and support services, as well as other planned acquisitions, through a credit facility from commercial banks. Funds advanced from the credit facility will convert automatically to long-term loans, with an interest rate of approximately 7% and a term of up to seven years.

Anticipated Needs

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

Critical Accounting Estimates

Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. We believe the most complex and sensitive judgments, because of their significance to our consolidated financial statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Management’s Discussion and Analysis and Note 1 to the consolidated financial statements presented in our 2006 Annual Report on Form 10-K, filed with the SEC on March 14, 2007, describe the significant accounting estimates and policies used in preparation of our consolidated financial statements. Actual results in these areas could differ from management’s estimates. As discussed below and in Note 6 to the condensed consolidated financial statements, we adopted the provisions of FIN 48, “Accounting for Uncertainty in Income Taxes” on January 1, 2007. Other than this change, there have been no significant changes in our critical accounting estimates during the first six months of 2007.

In the ordinary course of business there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances, and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. Where applicable, associated interest has also been recognized.

Contractual Obligations

In our 2006 Annual Report on Form 10-K, filed with the SEC on March 14, 2007, we disclosed contractual obligations. At June 30, 2007, there have been no material changes to our contractual obligations.

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Forward-Looking Statements and Risk Factors

This Quarterly Report on Form 10-Q, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements often are proceeded by words such as “believes,” “expects,” “may,” “anticipates,” “plans,” “intends,” “assumes,” “will” or similar expressions. Forward-looking statements reflect management’s current expectations, as of the date of this report, and involve certain risks and uncertainties. Our actual results could differ materially from those anticipated in these forward looking statements as a result of various factors. Some of the factors that could cause future results to materially differ from the recent results or those projected in forward-looking statements include the “Risk Factors” described in our 2006 Annual Report on Form 10-K filed with the SEC on March 14, 2007. Ness is under no obligation to, and expressly disclaims any obligation to, update or alter its forward-looking statements, whether as a result of such changes, new information, subsequent events or otherwise.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

We do not engage in trading market-risk instruments or purchase hedging or “other than trading” instruments that are likely to expose us to market risk, whether interest rate, commodity price or equity price risk. We have not purchased options or entered into swaps or forward or futures contracts and do not use derivative financial instruments for speculative trading purposes.

We have direct operations in 16 different countries and commercial relationships in many other parts of the world. Our foreign operations contract with clients in their applicable local currencies or dollars. As a result, we are subject to adverse movements in foreign currency exchange rates in those countries where we conduct business. In order to minimize the effect of such movements, we entered into certain forward foreign currency exchange contracts to hedge our exposure against foreign currencies which differ from the local functional currencies. In the future, we may enter into additional forward foreign currency exchange or other derivatives contracts to further hedge our exposure to foreign currency exchange rates.

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

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, our chief executive officer and chief financial officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on their evaluation of our disclosure controls and procedures, our chief executive officer and chief financial officer, with the participation of our management, have concluded that our disclosure controls and procedures are effectively designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and are operating in an effective manner.

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Given these and other inherent limitations of control systems, there is only reasonable assurance that our controls will succeed in achieving their stated goals under all potential future conditions.

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Changes in Internal Control

As of the end of the period covered by this report, there were no significant changes in our internal controls over financial reporting or in other factors that could significantly affect these controls.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

One of our Israeli subsidiaries is currently in a dispute with one of its clients, an Israeli insurance company, regarding the terms and conditions of a software development contract (the “Contract”). The insurance company claims that we have materially breached the Contract by not timely delivering the required software. The insurance company issued a contract termination notice on September 21, 2006, collected autonomous guarantees provided by our subsidiary in the amount of approximately $2.1 million on November 23, 2006, and is demanding payment of amounts it claims to have paid so far of approximately $4.1 million (excluding VAT), as well as damages of approximately $18.7 million. Furthermore, this termination could affect our reputation and impair our relations with another client as well as with additional prospects for the software. We believe that we have not materially breached the Contract and that the delays were caused by the insurance company's actions. However, we do not contest the insurance company’s right to terminate the contract for convenience, subject to certain provisions including proper settlement of payments, as per the Contract. The Contract provides for mandatory arbitration, which commenced in January 2007, in which we intend to vigorously defend our position. The insurance company and our subsidiary have both issued their respective claims to the arbitrator, as well as responses to the other party’s claims. The total scope of the project is approximately $9.2 million. With respect to this contract, approximately $5.3 million (excluding VAT) is included in our trade receivables and other accounts receivable and prepaid expenses. We can give no assurance at the present time of the exposure, if any, for these claims. We can give no assurance that our liability insurance policy, which has a cap of $5.0 million per claim, will cover such exposure. At this stage we can not estimate the result of the arbitration and we expect that the arbitration process may be protracted. If the outcome of the dispute is not in our favor and not in line with our position described above, it may adversely affect our financial position, results of operations and cash flows.

Item 1A. Risk Factors

There are no material changes in the risk factors previously disclosed in our Annual Report on Form 10-K filed with the SEC on March 14, 2007.

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

Not applicable.

Item 3. Defaults upon Senior Securities.

None.

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

The following matters were submitted to a vote of the stockholders at our 2007 Annual Meeting of Stockholders held on June 13, 2007 (the “Annual Meeting”): (1) election of directors, (2) ratification of the appointment of Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, as our independent registered public accounting firm for the year ending December 31, 2006 and (3) approval of the 2007 Stock Option Plan. The number of shares of common stock outstanding and eligible to vote as of the record date of April 19, 2007 was 39,021,540.

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

Nominee	For	Withheld
Aharon Fogel	33,353,801	894,691
Sachi Gerlitz	33,908,335	340,157
Dr. Henry Kressel	33,906,345	342,147
Morris Wolfson	32,453,006	1,795,486
Dr. Satyam C. Cherukuri	33,907,835	340,657
Dan S. Suesskind	33,906,095	342,397
Dr. Kenneth A. Pickar	33,908,335	340,157
Proposal	For	Against	Abstain	Broker Non-Vote
2. Ratification of Auditors	33,482,743	758,574	7,174	0
3. Approval of 2007 Stock Option Plan	20,660,101	5,436,931	47,958	8,103,503

Item 5. Other Information

None.

Item 6. Exhibits

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

Exhibit Number	Description
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

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

NESS TECHNOLOGIES, INC.
(Registrant)
Date:August 8, 2007	By:	/s/ ISSACHAR GERLITZ
		Issachar Gerlitz
		Chief Executive Officer, President, Director
		(Principal executive officer)
Date:    August 8, 2007	By:	/s/ OFER SEGEV
		Ofer Segev
		Executive Vice President and Chief Financial Officer
		(Principal financial and accounting officer)

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EXHIBIT INDEX

Exhibit Number	Description
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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