**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM
        10-Q**





(Mark
      One)




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




**For
      the quarterly period ended March 31, 2008**




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




For
      the
      transition period from ________ to ________





**Commission
      File Number 000-50954**







**NESS
      TECHNOLOGIES, INC.**


(Exact
      name of registrant as specified in its charter)


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


**Ness
      Tower**


**Atidim
      High-Tech Industrial Park**


**Building
      4**


**Tel
      Aviv 61580, Israel**


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


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









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




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




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




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




As
      of
      April 30, 2008, 39,214,164 shares of common stock, $0.01 par value per share,
      were outstanding.












**NESS
      TECHNOLOGIES, INC. AND SUBSIDIARIES**





**INDEX**


PART
                    I – FINANCIAL INFORMATION
                3Item
                    1. Financial Statements
                3Condensed
                    Consolidated Balance Sheets – December 31, 2007 and March 31, 2008
                    (Unaudited)
                3Condensed
                    Consolidated Statements of Income – Three months ended March 31, 2007 and
                    2008 (Unaudited)
                5Condensed
                    Consolidated Statements of Cash Flows – Three months ended March 31, 2007
                    and 2008 (Unaudited)
                6Notes
                    to Interim Condensed Consolidated Financial Statements – March 31, 2008
                    (Unaudited)
                8Item
                    2. Management’s Discussion and Analysis of Financial Condition and Results
                    of Operations
                16Overview
                16Recent
                    Developments
                17Consolidated
                    Results of Operations
                17Three
                    Months Ended March 31, 2008 Compared to the Three Months Ended
                    March 31,
                    2007
                18Results
                    by Business Segment
                20Liquidity
                    and Capital Resources
                21Forward-Looking
                    Statements and Risk Factors
                23Item
                    3. Quantitative and Qualitative Disclosure about Market
                    Risk
                23Item
                    4. Controls and Procedures
                24Evaluation
                    of Disclosure Controls and Procedures
                24Changes
                    in Internal Control
                24PART
                    II – OTHER INFORMATION
                25Item
                    1. Legal Proceedings
                25Item
                    1A. Risk Factors
                25Item
                    2. Unregistered Sales of Equity Securities and Use of
                    Proceeds
                25Item
                    3. Defaults upon Senior Securities.
                25Item
                    4. Submission of Matters to a Vote of Security Holders
                25Item
                    5. Other Information
                25Item
                    6. Exhibits
                25SIGNATURES
                26EXHIBIT
                    INDEX
                27




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          2 -




**PART
      I – FINANCIAL INFORMATION**




***Item
      1. Financial Statements***




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


**Interim
      Condensed Consolidated Balance Sheets**





**U.S.
      dollars in thousands**





**December 31,**
            
            **March
                31,****2007**
            
            **2008****(Unaudited)**ASSETSCURRENT
                ASSETS:Cash
                and cash equivalents
            
            $
            43,097
            
            $
            65,783Restricted
                cash
            
            
            602
            
            
            —Short-term
                bank deposits
            
            
            2,361
            
            
            4,520Trade
                receivables (net of allowance for doubtful accounts of $3,145 and
                $3,185
                at December 31, 2007 and March 31, 2008, respectively)
            
            
            184,074
            
            
            182,055Unbilled
                receivables
            
            
            38,211
            
            
            47,179Other
                accounts receivable and prepaid expenses
            
            
            31,677
            
            
            34,552Work-in-progress
            
            
            2,563
            
            
            2,748Total
                current assets
            
            
            302,585
            
            
            336,837LONG-TERM
                ASSETS:Long-term
                prepaid expenses and other assets
            
            
            8,014
            
            
            8,122Investments
                at cost
            
            
            564
            
            
            616Unbilled
                receivables
            
            
            8,919
            
            
            9,483Deferred
                income taxes, net
            
            
            7,806
            
            
            13,052Severance
                pay fund
            
            
            49,731
            
            
            52,809Property
                and equipment, net
            
            
            34,072
            
            
            36,518Intangible
                assets, net
            
            
            17,011
            
            
            16,677Goodwill
            
            
            263,444
            
            
            272,246Total
                long-term assets
            
            
            389,561
            
            
            409,523Total
                assets
            
            $
            692,146
            
            $
            746,360




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


-
          3 -




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


**Interim
      Condensed Consolidated Balance Sheets**





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





**December 31,**
            
            **March
                31,****2007**
            
            **2008****(Unaudited)**LIABILITIES
                AND STOCKHOLDERS’ EQUITYCURRENT
                LIABILITIES:Short-term
                bank credit
            
            $
            2,819
            
            $
            11,009Current
                maturities of long-term debt
            
            
            1,662
            
            
            2,930Trade
                payables
            
            
            54,964
            
            
            54,891Advances
                from customers and deferred revenues
            
            
            29,119
            
            
            35,355Other
                accounts payable and accrued expenses
            
            
            120,661
            
            
            107,265Total
                current liabilities
            
            
            209,225
            
            
            211,450LONG-TERM
                LIABILITIES:Long-term
                debt, net of current maturities
            
            
            47,191
            
            
            72,203Other
                long-term liabilities
            
            
            4,864
            
            
            5,557Deferred
                income taxes
            
            
            2,228
            
            
            2,053Accrued
                severance pay
            
            
            57,465
            
            
            59,846Total
                long-term liabilities
            
            
            111,748
            
            
            139,659COMMITMENTS
                AND CONTINGENT LIABILITIESSTOCKHOLDERS’
                EQUITY:Common
                Stock of $0.01 par value –
              Authorized:
                76,500,000 shares at December 31, 2007 and at March 31, 2008;Issued and outstanding: 39,196,908 shares at December 31, 2007 and
                39,213,624 shares at March 31, 2008
            
            
            392
            
            
            392Additional
                paid-in capital
            
            
            322,716
            
            
            323,690Accumulated
                other comprehensive income
            
            
            24,594
            
            
            40,804Retained
                earnings
            
            
            23,471
            
            
            30,365Total
                stockholders’ equity
            
            
            371,173
            
            
            395,251Total
                liabilities and stockholders’ equity
            
            $
            692,146
            
            $
            746,360




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


-
          4 -




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


**Interim
      Condensed Consolidated Statements of Income**





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





**Three
                months ended**
              **March
                31,****2007**
            
            **2008****(Unaudited)**Revenues
            
            $
            125,778
            
            $
            159,732Cost
                of revenues (*)
            
            
            89,676
            
            
            114,390Gross
                profit
            
            
            36,102
            
            
            45,342Operating
                expenses:Selling
                and marketing (*)
            
            
            9,472
            
            
            13,208General
                and administrative (*)
            
            
            19,914
            
            
            22,105Total
                operating expenses
            
            
            29,386
            
            
            35,313Operating
                income
            
            
            6,716
            
            
            10,029Financial
                income (expenses), net
            
            
            389
            
            
            (1,416
            )Other
                income, net
            
            
            6
            
            
            —Income
                before taxes on income
            
            
            7,111
            
            
            8,613Taxes
                on income
            
            
            1,396
            
            
            1,719Net
                income
            
            $
            5,715
            
            $
            6,894Basic
                net earnings per share
            
            $
            0.15
            
            $
            0.18Diluted
                net earnings per share
            
            $
            0.15
            
            $
            0.18





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




**Three
                months ended**
              **March
                31,****2007**
            
            **2008****(Unaudited)**Cost
                of revenues.
            
            $
            85
            
            $
            81Selling
                and marketing
            
            
            22
            
            
            56General
                and administrative
            
            
            269
            
            
            754




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


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          5 -




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


**Interim
      Condensed Consolidated Statements of Cash Flows**





**U.S.
      dollars in thousands**





**Three
                months ended**
              **March
                31,****2007**
            
            **2008****(Unaudited)**Cash
                flows from operating activities:Net
                income
            
            $
            5,715
            
            $
            6,894Adjustments
                required to reconcile net income to net cash provided by (used in)
                operating activities:Stock-based
                compensation-related expenses
            
            
            376
            
            
            891Currency
                fluctuation of long-term debt
            
            
            19
            
            
            5Depreciation
                and amortization
            
            
            2,942
            
            
            4,118Arbitration
                settlement
            
            
            —
            
            
            (9,452
            )Loss
                on sale of property and equipment
            
            
            21
            
            
            19Decrease
                in trade receivables, net
            
            
            2,140
            
            
            12,146Increase
                in unbilled receivables
            
            
            (10,799
            )
            
            (5,515
            )Increase
                in other accounts receivable and prepaid expenses
            
            
            (3,601
            )
            
            (1,948
            )Decrease
                (increase) in work-in-progress
            
            
            185
            
            
            (1
            )Decrease
                (increase) in long-term prepaid expenses
            
            
            (974
            )
            
            128Deferred
                income taxes, net
            
            
            621
            
            
            1,667Decrease
                in trade payables
            
            
            (4,988
            )
            
            (3,412
            )Increase
                in advances from customers and deferred revenues
            
            
            7,283
            
            
            3,658Increase
                in other long-term liabilities
            
            
            —
            
            
            428Increase
                (decrease) in other accounts payable and accrued expenses
            
            
            393
            
            
            (6,472
            )Decrease
                in accrued severance pay, net
            
            
            (123
            )
            
            (1,243
            )Net
                cash provided by (used in) operating activities
            
            
            (790
            )
            
            1,911Cash
                flows from investing activities:Proceeds
                from sale of cost investment
            
            
            1,866
            
            
            —Investment
                in short-term bank deposits, net
            
            
            (1,587
            )
            
            (1,626
            )Proceeds
                from sale of property and equipment
            
            
            54
            
            
            47Purchase
                of property and equipment and capitalization of software developed
                for
                internal use
            
            
            (2,564
            )
            
            (3,504
            )Net
                cash used in investing activities
            
            
            (2,231
            )
            
            (5,083
            )




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




-
          6 -


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


**Interim
      Condensed Consolidated Statements of Cash Flows**





**U.S.
      dollars in thousands**





**Three
                months ended**
              **March
                31,****2007**
            
            **2008****(Unaudited)**Cash
                flows from financing activities:Exercise
                of options
            
            $
            1,299
            
            $
            142Dividend
                to former shareholder of an acquired subsidiary
            
            
            —
            
            
            (5,714
            )Short-term
                bank loans and credit, net
            
            
            (1,346
            )
            
            7,196Proceeds
                from long-term debt
            
            
            —
            
            
            24,961Principal
                payments of long-term debt
            
            
            (1,452
            )
            
            (1,457
            )Net
                cash provided by (used in) financing activities
            
            
            (1,499
            )
            
            25,128Effect
                of exchange rate changes on cash and cash equivalents
            
            
            349
            
            
            730Increase
                (decrease) in cash and cash equivalents
            
            
            (4,171
            )
            
            22,686Cash
                and cash equivalents at the beginning of the period
            
            
            46,675
            
            
            43,097Cash
                and cash equivalents at the end of the period
            
            $
            42,504
            
            $
            65,783





*Non-cash
                activity*Mark-to-market
                of foreign exchange forward contracts and interest rate
                swap
            
            $
            —
            
            $
            724





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


-
          7 -




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


**Notes
      to Interim Condensed Consolidated Financial Statements**


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




***Note
      1: General***




Ness
      Technologies, Inc. was incorporated under the laws of the State of Delaware
      in
      March 1999. We operate through our subsidiaries in Israel, North America, 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 consists of software product development, including
      both offshore and near-shore outsourcing; system integration, application
      development and consulting; and software distribution. The primary verticals
      we
      serve include high-tech companies and independent software vendors; financial
      services; defense, homeland security and government; life sciences and
      healthcare; and telecommunications and utilities.




***Note
      2: Significant Accounting Policies***




a.
            Unaudited
                Interim Financial Information




The
      accompanying condensed consolidated balance sheet as of March 31, 2008, the
      condensed consolidated statements of income for the three months ended March
      31,
      2007 and 2008, and the condensed consolidated statements of cash flows for
      the
      three months ended March 31, 2007 and 2008 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 March 31, 2008, our consolidated results of operations and our
      consolidated cash flows for the three months ended March 31, 2007 and
      2008.




The
      balance sheet at December 31, 2007 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, 2007 included in our Annual Report on Form 10-K filed with the
      U.S.
      Securities and Exchange Commission (“SEC”) on March 17, 2008.




Results
      for the three months ended March 31, 2008 are not necessarily indicative of
      results that may be expected for the year ending December 31, 2008.




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 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.




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          8 -
 
  **NESS
          TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**
 **Notes
          to Interim Condensed Consolidated Financial Statements**
 **U.S.
          dollars in thousands (except share and per share data)
          (Unaudited)**


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




Effective
      January 1, 2008, we adopted Statement of Financial Accounting Standard No.
      157,
“Fair Value Measurements” (“SFAS 157”), which establishes a framework for
      measuring fair value and requires enhanced disclosures about fair value
      measurements. SFAS 157 clarifies that fair value is an exit price, representing
      the amount that would be received to sell an asset or paid to transfer a
      liability in an orderly transaction between market participants. SFAS 157 also
      requires disclosure about how fair value is determined for assets and
      liabilities and establishes a hierarchy for which these assets and liabilities
      must be grouped, based on significant levels of inputs, as follows:




Level
              1
            Quoted
                prices in active markets for identical assets or
                liabilities;




Level
              2
            Quoted
                prices in active markets for similar assets and liabilities and inputs
                that are observable for the asset or liability;
                or




Level
              3
            Unobservable
                inputs, such as discounted cash flow models or
                valuations.




***Note
      3: Acquisitions***




a.
            Goodwill




In
      the
      three month period ended March 31, 2008, we recorded additional goodwill of
      $8,802 related to translation adjustments of $13,704, offset by adjustments
      with
      respect to prior-year acquisitions of $4,902 primarily related to deferred
      tax
      assets recorded in connection with net operating losses carried forward from
      periods prior to the acquisitions.




b.
            Restructuring-Related
                Provision




In
      connection with the acquisition of NessPRO Italy in September 2007, we recorded
      restructuring-related provisions of $2,554 related to a restructuring plan
      undertaken by NessPRO Italy prior to the acquisition. The restructuring cost
      consists of severance expense. Through March 31, 2008, payments in the aggregate
      amount of $581 were made in connection with the plan. As of March 31, 2008,
      the
      remaining accruals amount to $2,355, after adjusting for changes in foreign
      exchange rates.




Additionally,
      in December 2007, we initiated a plan to exit certain activities at NessPRO
      Italy’s locations, and to involuntarily terminate certain of NessPRO Italy’s
      employees to improve efficiencies in operations, resulting in restructuring
      costs. These costs were recognized as assumed liabilities in the allocation
      of
      the purchase price and have resulted in an increase to goodwill. The
      restructuring costs consisted of severance expense in the amount of $3,367
      and
      termination of leased facilities in the amount of $170. Through March 31, 2008,
      payments in the aggregate amount of $1,375 were made in connection with the
      plan. As of March 31, 2008, the remaining accruals amount to $2,661, after
      adjusting for changes in foreign exchange rates. The restructuring charges
      recorded are based on a restructuring plan that has been committed to by
      management. The restructuring costs may change as management executes the
      plan.




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          9 -





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


**Notes
        to Interim Condensed Consolidated Financial Statements**
 **U.S.
        dollars in thousands (except share and per share data)
        (Unaudited)**




c.
            Pro
                Forma Financial Information




The
      following table presents certain combined unaudited statements of income data
      for the three months ended March 31, 2007 as if the 2007 acquisitions of NessPRO
      Thailand, NessPRO Italy, MS9 and FMC had occurred on January 1, 2007, after
      giving effect to purchase accounting adjustments, including amortization of
      identifiable intangible assets:




**Three months ended**
              **March 31, 2007****(unaudited)**Revenues
            
            $
            139,646Net
                income
            
            $
            5,462Earnings
                per share:Basic
            
            $
            0.14Diluted
            
            $
            0.14




***Note
      4: Accounting for stock-based compensation***




During
      the three months ended March 31, 2008, we granted options to purchase 300,000
      shares of our Common Stock under our 2007 Stock Option Plan at an exercise
      price
      of $12.00 per share and a fair value of $1.51 per share. The options vest in
      accordance with length of service.




During
      the three months ended March 31, 2008, we extended the term of 170,709 options
      previously granted to our Chairman of the Board to August 31, 2008. Our results
      of operations include expenses of $90 related to this modification.




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 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 weighted average assumptions
      for the Black-Scholes model and the following assumptions for the Monte Carlo
      model:




**Black-Scholes**
            
            **Monte Carlo****Three months ended**
              **March 31,**
            
            **Three months ended**
              **March 31,****2007**
            
            **2008**
            
            **2007**Dividend
                yield
            
            
            0%
            
            
            0%
            
            
            0%Expected
                volatility
            
            
            31%
            
            
            31%
            
            
            29 –
                31%Risk-free
                interest
            
            
            4.63%
            
            
            2.23%
            
            
            4.61
                – 4.95%Expected
                life (in years)
            
            
            2
            
            
            3
            
            
            N/A




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          10 -




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


As
      of
      March 31, 2008, options to purchase 5,365,956 shares were outstanding with
      a
      weighted average exercise price of $11.91 per share and options to purchase
      676,994 shares were available for future grants.




As
      of
      March 31, 2008, approximately $5,116 of total unrecognized compensation cost
      related to stock-based compensation was expected to be recognized over a period
      of 2.75 years. The total unrecognized stock-based compensation cost to be
      recognized in future periods as of March 31, 2008 does not consider the effect
      of stock options that may be issued in subsequent periods.




***Note
      5: Derivatives***




During
      the three months ended March 31, 2008 we entered into an interest rate swap
      derivative to convert a certain floating-rate debt to fixed-rate debt, which
      qualifies as a cash flow hedge in accordance with Statement of Financial
      Accounting Standard No. 133, “Accounting for Derivative Instruments and Hedging
      Activities” (“SFAS 133”). Our interest rate swap derivative involves an
      agreement to pay a fixed-rate interest and receive a floating-rate interest,
      at
      specified intervals, calculated on an agreed notional amount that matches the
      amount of the original loan and paid on the same installments and maturity
      dates. At March 31, 2008, the notional amount of interest rate swap we
      entered into was $12,000. The fair value of the interest rate swap at
      March 31, 2008 was a liability of $200. There was no ineffectiveness
      related to this derivative for the three months ended March 31, 2008, with
      all
      unrealized losses, representing $200, being deferred in accumulated other
      comprehensive income. The liability is presented within other long-term
      liabilities on the balance sheet at March 31, 2008 as the interest rate
      swap expires in November 30, 2012.




During
      the three months ended March 31, 2008 we entered into foreign exchange forward
      contracts to hedge against the effect of exchange rate fluctuations on cash
      flows denominated in Indian Rupee. These transactions are designated as cash
      flow hedges, in accordance with SFAS 133. At March 31, 2008, the notional
      amount of foreign exchange forward contracts we entered into was $46,600. The
      fair value of the foreign exchange forward contracts at March 31, 2008 was
      a liability of $524. There was no ineffectiveness related to these foreign
      exchange forward contracts for the three months ended March 31, 2008, with
      all
      unrealized losses, representing $524, being deferred in accumulated other
      comprehensive income.




We
      determined that foreign exchange forward contracts be considered Level 1
      measurements according to SFAS 157, as they are traded in active markets for
      identical assets or liabilities, while interest rate swaps be considered Level
      2. For Level 2 derivatives, we use observable inputs other than quoted prices
      for the asset. The Level 2 derivative positions are primarily valued using
      standard models that use as their bases readily observable market
      parameters.




***Note
      6: Long-term and Short-term Loans***




In
      March
      2008, one of our Israeli subsidiaries obtained a long-term loan of $5.9 million,
      denominated in New Israeli Shekels, from a commercial bank. The loan matures
      over five years and bears interest at a fixed rate. Principal and interest
      are
      paid quarterly. In March 2008, we also obtained a long-term loan in the amount
      of €12.0 million, or $19.0 million, from a commercial bank. The loan matures
      over five years with principal payments commencing in the third year, and bears
      interest at a variable rate, paid quarterly. In addition, in March 2008, we
      obtained a short-term loan in the amount of $5.5 million from a commercial
      bank.
      The loan bore interest at a variable rate and matured on April 30, 2008, and
      interest was paid upon maturity of the loan. The loan was renewed at maturity
      for an additional six months on similar terms.




-
          11 -


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


***Note
      7: 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.




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, 2007 and
      March
      31, 2008, is $41,161 and $46,142, 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.




***Note
      8: Stockholders’ Equity***





a.
            Total
                comprehensive income:




**Three months ended**
              **March 31,****2007**
            
            **2008****(Unaudited)**Net
                income
            
            $
            5,715
            
            $
            6,894Foreign
                currency translation adjustments, net
            
            
            2,852
            
            
            16,934Unrealized
                losses on foreign exchange forward contracts and interest rate
                swap
            
            
            —
            
            
            (724
            )Comprehensive
                income
            
            $
            8,567
            
            $
            23,104




b.
            Option
                exercises:




In
      the
      three months ended March 31, 2008, a total of 16,716 options were exercised
      into
      common stock for aggregate consideration of $142.




***Note
      9: 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.




Our
      operating segments are:




-
          12 -
 
  **NESS
          TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**
 **Notes
          to Interim Condensed Consolidated Financial Statements**
 **U.S.
          dollars in thousands (except share and per share data)
          (Unaudited)**


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: high-tech, 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, public sector 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.




5. **Other** , which
      comprises operations representing, individually, less than 10% of our
      consolidated revenues and operating profit. These include the financial services
      component of Ness IBS; NessPRO Italy, NessPRO Spain and NessPRO Thailand; and
      our operations in Asia Pacific.




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 March 31, 2007****Ness**
                  **NA**
                
                **TSG**
                
                **Ness**
                  **Europe**
                
                **Ness**
                  **Israel**
                
                **Other**
                
                **Unallocated**
                
                **Total****(Unaudited)**Revenues
                    from external customers
                
                $
                26,101
                
                $
                14,153
                
                $
                22,874
                
                $
                50,600
                
                $
                12,050
                
                
                —
                
                $
                125,778Operating
                    income (loss)
                
                $
                2,003
                
                $
                2,370
                
                $
                1,451
                
                $
                3,089
                
                $
                593
                
                $
                (2,790
                )
                $
                6,716Financial
                    income, net
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                389Other
                    income, net
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                6Income
                    before taxes on income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                7,111




-
          13 -




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




**Three
                months ended March 31, 2008****Ness**
              **NA**
            
            **TSG**
            
            **Ness
                Europe**
            
            **Ness
                Israel**
            
            **Other**
            
            **Unallocated**
            
            **Total****(Unaudited)**Revenues
                from external customers
            
            $
            27,067
            
            $
            16,538
            
            $
            40,160
            
            $
            51,302
            
            $
            24,665
            
            
            —
            
            $
            159,732Operating
                income (loss)
            
            $
            1,095
            
            $
            2,215
            
            $
            4,483
            
            $
            4,694
            
            $
            (212
            )
            $
            (2,246
            )
            $
            10,029Financial
                expense, net
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,416
            )Income
                before taxes on income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            8,613





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




The
      following tables present total revenues for the three months ended March 31,
      2007 and 2008, and long-lived assets as of December 31, 2007 and March 31,
      2008:




**Three months ended**
              **March 31,****2007**
            
            **2008****(Unaudited)**Revenues
                from sales to unaffiliated customers:Israel
            
            $
            60,633
            
            $
            60,523North
                America
            
            
            34,388
            
            
            41,914Europe
            
            
            25,301
            
            
            50,231Asia
                and the Far East
            
            
            5,456
            
            
            7,064$
            125,778
            
            $
            159,732




**December 31, 2007**
            
            **March 31,**
              **2008****(Unaudited)**Long-lived
                assets:Israel
            
            $
            121,833
            
            $
            132,330North
                America
            
            
            97,669
            
            
            97,253Europe
            
            
            84,296
            
            
            85,189Asia
                and the Far East
            
            
            10,729
            
            
            10,669$
            314,527
            
            $
            325,441




***Note
      10: Income Taxes***




As
      of
      March 31, 2008 the total amount of unrecognized tax benefits was $2,334, which,
      if recognized, would affect the effective tax rates in future periods. Included
      in that amount are accrued interest and penalties resulting from such
      unrecognized tax benefits of $310 at March 31, 2008. During the three months
      ended March 31, 2008, we recorded $67 for interest and penalties expenses with
      respect to uncertain tax positions. A reconciliation of the beginning and ending
      amounts of unrecognized tax benefits as of March 31, 2008 was as
      follows:




Balance
                as of January 1, 2008
            
            $
            1,906Increases
                related to prior-year tax positions
            
            
            428Balance
                as of March 31, 2008
            
            $
            2,334




-
          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)**




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. We perform
      a comprehensive review of our global tax positions on a quarterly basis and
      accrue 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.




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
      11: 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
      following table sets forth the computation of basic and diluted net earnings
      per
      share of common stock (in thousands):




**Three
                months ended**
              **March
                31,****2007**
            
            **2008****(Unaudited)**Numerator:Net
                income, numerator for basic and diluted per share
            
            $
            5,715
            
            $
            6,894Denominator:Weighted
                average number of shares of common stock
            
            
            38,872
            
            
            39,201Effect
                of dilutive securities:Employee
                stock options and warrants
            
            
            463
            
            
            141Denominator
                for diluted net earnings per share - weighted average assuming exercise
                of
                options
            
            
            39,335
            
            
            39,342




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 710,955 and
      4,792,299 for the three months ended March 31, 2007 and 2008,
      respectively.




-
          15 -




***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 17, 2008, 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 consists of software
      product development, including both offshore and near-shore outsourcing; system
      integration, application development and consulting; and software distribution.
      The primary industries, or verticals, we serve include high-tech companies
      and
      independent software vendors, or ISVs; financial services; defense, homeland
      security and government; life sciences and healthcare; and telecommunications
      and utilities.




We
      have
      operations in 18 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, we leverage
      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 these teams with our global
      delivery model, including both offshore and near-shore delivery capabilities,
      to
      achieve meaningful cost reductions or other benefits for our
      clients.




Our
      revenues increased to $159.7 million for the three months ended March 31, 2008,
      from $125.8 million for the three months ended March 31, 2007. Net income
      increased to $6.9 million for the three months ended March 31, 2008 from $5.7
      million for the three months ended March 31, 2007.




Our
      financial results for the three months ended March 31, 2008 were affected by
      the
      rapid weakening of the U.S. dollar against the New Israeli Shekel, the Euro
      and
      other relevant European currencies. The dollar weakened by an average of
      approximately 8% against the New Israeli Shekel and by an average of
      approximately 3% against the Euro and other European currencies in the three
      months ended March 31, 2008 compared to the three months ended December 31,
      2007. We estimate that our revenues were $5.3 million higher in the three months
      ended March 31, 2008, and our operating income was $0.6 million lower, as a
      result of changes in foreign currency exchange rates versus their average rates
      for the three months ended December 31, 2007, with a corresponding lowering
      of
      our operating margin.




The
      dollar weakened by an average of 14% against the New Israeli Shekel, by an
      average of 10% against the India Rupee and by an average of 13% against the
      Euro
      and other relevant European currencies in the three months ended March 31,
      2008
      compared to the three months ended March 31, 2007. We estimate that our revenues
      were $12.3 million higher in the three months ended March 31, 2008, and our
      operating income was $2.2 million lower, as a result of changes in foreign
      currency exchange rates versus at their average rates in the three months ended
      March 31, 2007, with a corresponding lowering of our operating
      margin.




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 months ended March 31, 2008, no client accounted
      for more than 5% of our revenues and our largest twenty clients together
      accounted for approximately 31% of our revenues. For the three months ended
      March 31, 2008, the percentage of our revenues derived in aggregate from
      agencies of the government of Israel was 8%. Existing clients from prior years
      generated more than 85% of our revenues in the three months ended March 31,
      2008.




-
          16 -




Our
      backlog as of March 31, 2008 was $791 million compared to $631 million as of
      March 31, 2007. This $160 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 months ended March 31, 2008, the percentage of our revenues derived
        from
        clients in Israel was 38%; in North America, 26%; in Europe, 31%; and in
        Asia
        and the Far East, 4%.
  As
        of
        March 31, 2008, we had approximately 7,800 employees, including approximately
        6,820 IT professionals. Of the 7,800 employees, approximately 2,760 were
        in
        Israel, 2,725 were in India, 1,330 were in Europe, 595 were in North America
        and
        390 were in the Asia Pacific region.
  **Recent
        Developments**
  None.
  **Consolidated
        Results of Operations**
  The
        following table sets forth the items in our consolidated statements of income
        as
        a percentage of revenues for the periods presented.
  **Three months ended**
                **March 31,****2007**
              
              **2008**Revenues
              
              
              100.0
              %
              
              100.0
              %Cost
                  of revenues
              
              
              71.3
              
              
              71.6Gross
                  profit
              
              
              28.7
              
              
              28.4Operating
                  expenses:Selling
                  and marketing
              
              
              7.5
              
              
              8.3General
                  and administrative
              
              
              15.8
              
              
              13.8Total
                  operating expenses
              
              
              23.4
              
              
              22.1Operating
                  income
              
              
              5.3
              
              
              6.3Financial
                  income (expenses), net
              
              
              0.3
              
              
              (0.9
              )Other
                  income, net
              
              
              0.0
              
              
              —Income
                  before taxes on income
              
              
              5.7
              
              
              5.4Taxes
                  on income
              
              
              1.1
              
              
              1.1Net
                  income
              
              
              4.5
              
              
              4.3
  -
            17 -
 **Three
        Months Ended March 31, 2008 Compared to the Three Months Ended March 31,
        2007**
  The
        following table summarizes certain line items from our consolidated statements
        of income (dollars in thousands):
  **Three months ended**
                **March 31,**
              
              **Increase****2007**
              
              **2008**
              
              **$**
              
              **%**Revenues
              
              $
              125,778
              
              $
              159,732
              
              
              33,954
              
              
              27.0Cost
                  of revenues
              
              
              89,676
              
              
              114,390
              
              
              24,714
              
              
              27.6Gross
                  profit
              
              $
              36,102
              
              $
              45,342
              
              
              9,240
              
              
              25.6Gross
                  margin
              
              
              28.7
              %
              
              28.4
              %
  ***Revenues***
  Our
        revenues increased from $125.8 million in the three months ended March 31,
        2007
        to $159.7 million in the three months ended March 31, 2008, representing
        an
        increase of $34.0 million, or 27.0%. Approximately $15.5 million of the increase
        was attributable to acquisitions. Of the remaining $18.5 million, $10.7 million
        represents growth in our Ness Europe operating segment, $7.5 million represents
        growth in our Ness Israel operating segment and $7.1 million represents growth
        in our Ness North America, TSG and “Other” operating segments, offset by the
        divestiture in January 2008 of our staff supplementation business in Israel,
        representing $6.8 million.
  ***Cost
        of revenues***
  Our
        cost
        of revenues, including salaries, wages and other direct and indirect costs,
        increased from $89.7 million in the three months ended March 31, 2007 to
        $114.4
        million in the three months ended March 31, 2008, representing an increase
        of
        $24.7 million, or 27.6%. Approximately $11.1 million of this increase was
        attributable to acquisitions, and $13.6 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 $36.1 million in the
        three months ended March 31, 2007 to $45.3 million in the three months ended
        March 31, 2008, representing an increase of $9.2 million, or 25.6 %.
        Approximately $4.4 million of the increase was attributable to acquisitions,
        and
        $4.8 million was related to our other revenue growth. Gross margin for the
        three
        months ended March 31, 2008 was 28.4%, compared to 28.7% in the three months
        ended March 31, 2007. This
        decrease in gross margin was not significant.
  The
        following table summarizes certain line items from our consolidated statements
        of income (dollars in thousands):
  **Three months ended**
                **March 31,**
              
              **Increase****2007**
              
              **2008**
              
              **$**
              
              **%**Selling
                  and marketing
              
              $
              9,472
              
              $
              13,208
              
              
              3,736
              
              
              39.4General
                  and administrative
              
              
              19,914
              
              
              22,105
              
              
              2,191
              
              
              11.0Total
                  operating expenses
              
              
              29,386
              
              
              35,313
              
              
              5,927
              
              
              20.2Operating
                  income
              
              $
              6,716
              
              $
              10,029
              
              
              3,313
              
              
              49.3
  ***Selling
        and marketing***
  Selling
        and marketing expenses increased from $9.5 million in the three months ended
        March 31, 2007 to $13.2 million in the three months ended March 31, 2008,
        representing an increase of $3.7 million, or 39.4%. This increase was due
        primarily to the inclusion of marketing and sales expenses from our
        acquisitions, representing $2.4 million.
 ***General
          and administrative***
  General
          and administrative expenses increased from $19.9 million in the three months
          ended March 31, 2007 to $22.1 million in the three months ended March 31,
          2008,
          representing an increase of $2.2 million, or 11.0%. This increase was due
          primarily to acquisitions, representing $2.2 million.
  -
              18 -




***Operating
      Income***




Operating
      income increased from $6.7 million in the three months ended March 31, 2007
      to
      $10.0 million in the three months ended March 31, 2008, representing an increase
      of $3.3 million, or 49.3%. The major factors contributing to this increase
      were
      the growth in operating income of our Ness Europe and Ness Israel operating
      segments, representing $3.0 million and $1.6 million, respectively, and a
      decrease in unallocated expenses, representing $0.5 million, offset by a
      decrease in operating income of our Ness North America, TSG and “Other”
operating segments, together representing $1.9 million. See also “—Results by
      Business Segment.”




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




**Three
                months ended**
              **March
                31,**
            
            **Increase**
              **(Decrease)****2007**
            
            **2008**
            
            **$**
            ****
            **%**Operating
                income
            
            $
            6,716
            
            $
            10,029
            
            
            3,313
            
            
            49.3Financial
                income (expenses), net
            
            
            389
            
            
            (1,416
            )
            
            (1,805
            )
            
            N/AOther
                income, net
            
            
            6
            
            
            —
            
            
            (6
            )
            
            (100.0
            )Income
                before taxes on income
            
            
            7,111
            
            
            8,613
            
            
            1,502
            
            
            21.1Taxes
                on income
            
            
            1,396
            
            
            1,719
            
            
            323
            
            
            23.1Net
                income
            
            $
            5,715
            
            $
            6,894
            
            
            1,179
            
            
            20.6




***Financial
      income (expenses), net***




Financial
      income (expenses), net, changed from income of $0.4 million in the three months
      ended March 31, 2007 to expenses of $1.4 million in the three months ended
      March
      31, 2008, representing a change of $1.8 million. The change resulted primarily
      from an increase in interest expense related to new debt obtained for the
      purpose of financing acquisitions, representing $0.8 million, unfavorable
      foreign currency exchange effects, representing $0.7 million and a decrease
      in
      interest income resulting from lower interest rates, representing $0.2 million.
      Our average net cash changed from $36.3 million in the three months ended March
      31, 2007 to ($15.6) million in the three months ended March 31, 2008 due to
      long-term loans related to our 2007 acquisitions and long-term loans obtained
      during the three months ended March 31, 2008.




***Other
      income, net***




Other
      income, net decreased from income of $6,000 in the three months ended March
      31,
      2007 to zero in the three months ended March 31, 2008. This change was not
      significant.




***Taxes
      on income***




Our
      taxes
      on income increased from $1.4 million in the three months ended March 31, 2007
      to $1.7 million in the three months ended March 31, 2008, representing an
      increase of $0.3 million, or 23.1%. This increase
      was due primarily to the increase in our taxable income. Our effective tax
      rate
      in the three months ended March 31, 2008 was 20.0%, compared to 19.6% in the
      three months ended March 31, 2007.




***Net
      Income***




Net
      income increased from $5.7 million in the three months ended March 31, 2007
      to
      $6.9 million in the three months ended March 31, 2008, representing an increase
      of $1.2 million, or 20.6%. The increase in net income was due primarily to
      our
      increase in operating income of $3.3 million, partially offset by our change
      from financial income to financial expenses, representing $1.8 million, and
      our
      increase in taxes, representing $0.3 million.




-
          19 -




**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.




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: high-tech, 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, public sector
                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.




5.
            **Other**,
                which comprises operations representing, individually, less than
                10% of
                our consolidated revenues and operating profit. These include the
                financial services component of Ness IBS; NessPRO Italy, NessPRO
                Spain and
                NessPRO Thailand; and our operations in Asia
                Pacific.




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.




-
          20 -




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




**Three months endedMarch 31,****2007**
            
            **2008****Segment
                Data:**
            
            **(unaudited)****Revenues
                from external customers:**Ness
                North America
            
            $
            26,101
            
            $
            27,067Technologies
                & Systems Group (TSG)
            
            
            14,153
            
            
            16,538Ness
                Europe
            
            
            22,874
            
            
            40,160Ness
                Israel
            
            
            50,600
            
            
            51,302Other
            
            
            12,050
            
            
            24,665$
            125,778
            
            $
            159,732**Operating
                Income (Loss):**Ness
                North America
            
            $
            2,003
            
            $
            1,095Technologies
                & Systems Group (TSG)
            
            
            2,370
            
            
            2,215Ness
                Europe
            
            
            1,451
            
            
            4,483Ness
                Israel
            
            
            3,089
            
            
            4,694Other
            
            
            593
            
            
            (212
            )Unallocated
                Expenses
            
            
            (2,790
            )
            
            (2,246
            )$
            6,716
            
            $
            10,029




**Liquidity
      and Capital Resources**




***Overview***




As
      of
      March 31, 2008, we had cash and cash equivalents and short-term bank deposits
      of
      $70.3 million compared to $46.1 million as of December 31, 2007. 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.




***Cash
      Flows***




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




**Three
                months ended**
              **March
                31,****2007**
            
            **2008**Net
                cash provided by (used in) operating activities
            
            $
            (790
            )
            $
            1,911Net
                cash used in investing activities
            
            
            (2,231
            )
            
            (5,083
            )Net
                cash provided by (used in) financing activities
            
            
            (1,499
            )
            
            25,128Effect
                of exchange rate changes on cash and cash equivalents
            
            
            349
            
            
            730Increase
                (decrease) in cash and cash equivalents
            
            
            (4,171
            )
            
            22,686Cash
                and cash equivalents at the beginning of the period
            
            
            46,675
            
            
            43,097Cash
                and cash equivalents at the end of the period
            
            $
            42,504
            
            $
            65,783




-
          21 -




*Three
      months ended March 31, 2008 compared to the three months ended March 31,
      2007*




Net
      cash
      provided by operating activities was $1.9 million in the three months ended
      March 31, 2008, compared to net cash used of $0.8 million in the three months
      ended March 31, 2007. The major factors contributing to the change were an
      improvement in our cash collection efforts, representing $10.0 million, and
      a
      smaller decrease in accounts payable, representing $1.6 million, offset by
      a
      $9.5 million payment made in the three months ended March 31, 2008 in respect
      of
      an arbitration settlement with a former customer provided for in the fourth
      quarter of 2007.




Net
      cash
      used in investing activities was $5.1 million in the three months ended March
      31, 2008, compared with $2.2 million in the three months ended March 31, 2007.
      The major factors contributing to the increase were an increase in purchase
      of
      property and equipment, representing $0.9 million, and receipt of the remaining
      net proceeds from the sale of our interest in dbMotion in the three months
      ended
      March 31, 2007 for which there was no corresponding amount in the three months
      ended March 31, 2008, representing $1.9 million.




Net
      cash
      provided by financing activities was $25.1 million in the three months ended
      March 31, 2008, compared with net cash used of $1.5 million in the three months
      ended March 31, 2007. The change was primarily due to proceeds from new
      long-term bank loans, representing $25.0 million, and net proceeds from
      short-term bank credit in the three months ended March 31, 2008 compared to
      net
      repayment of short-term bank credit in the three months ended March 31, 2007,
      representing $8.5 million, partially offset by a dividend paid to former
      shareholders of an acquired subsidiary, representing $5.7 million, and a
      reduction in proceeds from the exercise of options, representing $1.2
      million.




The
      effect of exchange rate changes on cash and cash equivalents was $0.7 million
      in
      the three months ended March 31, 2008, compared to $0.3 million in the three
      months ended March 31, 2007. The change was primarily due to the effect of
      translation adjustments on cash and cash equivalent held by our European
      subsidiaries.




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




In
      March
      2008, one of our Israeli subsidiaries obtained a long-term loan of $5.9 million,
      denominated in New Israeli Shekels, from a commercial bank. The loan matures
      over five years and bears interest at a fixed rate. Principal and interest
      are
      paid quarterly. Long-term loans obtained by this Israeli subsidiary contain
      covenants, which, among other things, require a minimum stockholders’ equity of
      this Israeli subsidiary; and which place limitations on merging or transferring
      assets. Our failure to comply with the covenants could lead to an event of
      default under the agreements governing some or all of the indebtedness,
      permitting the applicable lender to accelerate all borrowings under the
      applicable agreement, and to foreclose on any collateral. As of March 31, 2008,
      we were in compliance with these covenants.




In
      March
      2008, we obtained a long-term loan in the amount of €12.0 million, or $19.0
      million, from a commercial bank. The loan matures over five years with principal
      payments commencing in the third year, and bears interest at a variable rate
      paid quarterly. In addition, in March 2008, we obtained a short-term loan in
      the
      amount of $5.5 million from a commercial bank. The loan bore interest at a
      variable rate and matured on April 30, 2008, and interest was paid upon maturity
      of the loan. The loan was renewed at maturity for an additional six months
      on
      similar terms. The long-term loan and prior long-term loans contain covenants,
      which, among other things, require a certain ratio of total financial
      obligations to consolidated EBITDA and a minimum consolidated stockholders’
equity; and which place limitations on merging or transferring assets. As of
      March 31, 2008, we were in compliance and expect to remain in compliance with
      these covenants. Our failure to comply with the covenants could lead to an
      event
      of default under the agreements governing some or all of the indebtedness,
      permitting the applicable lender to accelerate all borrowings under the
      applicable agreement.




At
      March
      31, 2008, our non-Israeli subsidiaries had short-term borrowings denominated
      in
      Euros aggregating to $5.5 million with a weighted average interest rate of
      7.83%.




-
          22 -




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 1 to the consolidated
      financial statements presented in our 2007 Annual Report on Form 10-K, filed
      with the SEC on March 17, 2008, 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
      first three months of 2008.




***Contractual
      Obligations***




As
      of
      March 31, 2008, except for the short-term and long-term loans obtained in March
      2008 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
      2007
      Annual Report on Form 10-K, filed with the SEC on March 17, 2008.




**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 2007 Annual Report on Form 10-K filed with the
      SEC on March 17, 2008. 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
      have
      direct operations in 18 different countries and commercial relationships in
      many
      other parts of the world. Our foreign operations contract with clients in their
      applicable local currencies, Euros or dollars. As a result, we are subject
      to adverse movements in foreign currency exchange rates in those countries
      where
      we conduct business. Our earnings are predominantly affected by fluctuations
      in
      the value of the U.S. dollar as compared to the Indian Rupee and the New Israeli
      Shekel.




An
      increase of 10% in the value of the Indian Rupee relative to the U.S. dollar
      in
      the first quarter of 2008 would have resulted in a decrease in the U.S. dollar
      reporting value of our operating income in the first quarter of 2008 by $1.6
      million, while a decrease of 10% in the value of the Indian Rupee relative
      to
      the U.S. dollar in the first quarter of 2008 would have resulted in an increase
      in the U.S. dollar reporting value of our operating income in the first quarter
      of 2008 by $1.5 million. An increase of 10% in the value of the New Israeli
      Shekel relative to the U.S. dollar in the first quarter of 2008 would have
      resulted in a decrease in the U.S. dollar reporting value of our operating
      income in the first quarter of 2008 by $0.7 million, while a decrease of 10%
      in
      the value of the New Israeli Shekel relative to the U.S. dollar in the first
      quarter of 2008 would have resulted in an increase in the U.S. dollar reporting
      value of our operating income in the first quarter of 2008 by $0.6
      million.




-
          23 -




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




During
      the three months ended March 31, 2008 we entered into an interest rate swap
      derivative to convert a certain floating-rate debt to fixed-rate debt. Our
      interest rate swap derivative involves an agreement to pay a fixed-rate interest
      and receive a floating-rate interest, at specified intervals, calculated on
      an
      agreed notional amount that matches the amount of the original loan and paid
      on
      the same installments and maturity dates.




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




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




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




**Evaluation
      of Disclosure Controls and Procedures**




As
      of the
      end of the period covered by this report, our chief executive officer and chief
      financial officer evaluated the effectiveness of our disclosure controls and
      procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the 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 effective 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.




**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.




-
          24 -


**PART
      II – OTHER
      INFORMATION**




***Item
      1. Legal Proceedings***




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.




***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 17, 2008.




***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***




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 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.




-
          25 -


**SIGNATURES**




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




NESS
      TECHNOLOGIES, INC.


(Registrant)




Date:    
                May 12, 2008
            By:
            /s/
                ISSACHAR
                GERLITZIssachar
                GerlitzChief
                Executive Officer, President, Director(Principal
                executive officer)Date:    
                May 12, 2008
            By:
            /s/
                OFER
                SEGEVOfer
                SegevExecutive
                Vice President and Chief Financial Officer(Principal
                financial and accounting
                officer)




-
          26 -


**EXHIBIT
      INDEX**




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




-
          27 -