**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 September 30, 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
                  filerý
              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
        October 31, 2008, 39,628,994 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
              3Consolidated
                  Balance Sheets – December 31, 2007 and September 30, 2008
                  (Unaudited)
              3Consolidated
                  Statements of Income – Three and nine months ended September 30,
                  2007 and 2008 (Unaudited)
              5Consolidated
                  Statements of Cash Flows – Nine months ended September 30, 2007
                  and 2008 (Unaudited)
              6Notes
                  to Interim Consolidated Financial Statements – September 30,
                  2008 (Unaudited)
              8Item
                  2. Management’s Discussion and Analysis of Financial Condition and Results
                  of Operations
              19Overview
              19Recent
                  Developments
              20Consolidated
                  Results of Operations
              20Three
                  Months Ended September 30, 2008 Compared to the Three Months Ended
                  September 30, 2007
              21Nine
                  Months Ended September 30, 2008 Compared to the Nine Months Ended
                  September 30, 2007
              23Results
                  by Business Segment
              26Liquidity
                  and Capital Resources
              27Forward-Looking
                  Statements and Risk Factors
              29Item
                  3. Quantitative and Qualitative Disclosure about Market
                  Risk
              30Item
                  4. Controls and Procedures
              30Evaluation
                  of Disclosure Controls and Procedures
              30Changes
                  in Internal Control
              31PART
                  II – OTHER INFORMATION
              32Item
                  1. Legal Proceedings
              32Item
                  1A. Risk Factors
              32Item
                  2. Unregistered Sales of Equity Securities and Use of
                  Proceeds
              32Item
                  3. Defaults upon Senior Securities.
              32Item
                  4. Submission of Matters to a Vote of Security Holders
              32Item
                  5. Other Information
              32Item
                  6. Exhibits
              33SIGNATURES
              34EXHIBIT
                  INDEX
              35
  -
            2
            -
 
 **PART
        I – FINANCIAL INFORMATION**
  ***Item
        1. Financial Statements***
  **NESS
        TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**
 **Interim
        Consolidated Balance Sheets**
 **U.S.
            dollars in thousands**
 **December 31,**
                
                **September 30,****2007**
                
                **2008****(Unaudited)**ASSETSCURRENT
                    ASSETS:Cash
                    and cash equivalents
                
                $
                43,097
                
                $
                80,411Restricted
                    cash
                
                
                602
                
                
                857Short-term
                    bank deposits
                
                
                2,361
                
                
                397Trade
                    receivables (net of allowance for doubtful accounts of $3,145
                    and $4,664
                    at December 31, 2007 and September 30, 2008, respectively)
                
                
                182,281
                
                
                182,873Unbilled
                    receivables
                
                
                37,634
                
                
                49,610Other
                    accounts receivable and prepaid expenses
                
                
                31,249
                
                
                29,220Work-in-progress
                
                
                2,563
                
                
                1,736Total
                    current assets
                
                
                299,787
                
                
                345,104LONG-TERM
                    ASSETS:Long-term
                    prepaid expenses and other assets
                
                
                8,578
                
                
                8,998Unbilled
                    receivables
                
                
                8,919
                
                
                10,114Deferred
                    income taxes, net
                
                
                7,806
                
                
                10,089Severance
                    pay fund
                
                
                49,731
                
                
                55,281Property
                    and equipment, net
                
                
                34,072
                
                
                38,144Intangible
                    assets, net
                
                
                17,011
                
                
                13,023Goodwill
                
                
                263,444
                
                
                276,504Total
                    long-term assets
                
                
                389,561
                
                
                412,153Total
                    assets
                
                $
                689,348
                
                $
                757,257
 
 The
        accompanying notes are an integral part of the interim consolidated financial
        statements.
  -
            3
            -
 
 **NESS
        TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**
 **Interim
        Consolidated Balance Sheets**
 **U.S.
            dollars in thousands (except share and par value
            data)**
 **December 31,**
                
                **September 30,****2007**
                
                **2008****(Unaudited)**LIABILITIES
                    AND STOCKHOLDERS’ EQUITYCURRENT
                    LIABILITIES:Short-term
                    bank credit
                
                $
                2,819
                
                $
                17,851Current
                    maturities of long-term debt
                
                
                1,662
                
                
                4,284Trade
                    payables
                
                
                54,536
                
                
                49,780Advances
                    from customers and deferred revenues
                
                
                27,297
                
                
                28,622Other
                    accounts payable and accrued expenses
                
                
                120,113
                
                
                109,277Total
                    current liabilities
                
                
                206,427
                
                
                209,764LONG-TERM
                    LIABILITIES:Long-term
                    debt, net of current maturities
                
                
                47,191
                
                
                66,893Other
                    long-term liabilities
                
                
                4,864
                
                
                5,550Deferred
                    income taxes
                
                
                2,228
                
                
                1,670Accrued
                    severance pay
                
                
                57,465
                
                
                61,292Total
                    long-term liabilities
                
                
                111,748
                
                
                135,405COMMITMENTS
                    AND CONTINGENT LIABILITIESSTOCKHOLDERS’
                    EQUITY:Common
                    stock of $0.01 par value –
                  Authorized:
                    76,500,000 shares at December 31, 2007 and at September 30,
                    2008;Issued and outstanding: 39,196,908 shares at December 31, 2007
                    and
                    39,628,994 shares at September 30, 2008
                
                
                392
                
                
                396Additional
                    paid-in capital
                
                
                322,716
                
                
                329,083Accumulated
                    other comprehensive income
                
                
                24,594
                
                
                28,007Retained
                    earnings
                
                
                23,471
                
                
                54,602Total
                    stockholders’ equity
                
                
                371,173
                
                
                412,088Total
                    liabilities and stockholders’ equity
                
                $
                689,348
                
                $
                757,257
 
 The
        accompanying notes are an integral part of the interim consolidated financial
        statements.
  -
            4
            -
 
 **NESS
        TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**
 **Interim
        Consolidated Statements of Income**
 **U.S.
          dollars in thousands (except per share data)**
 
 **Three months ended**
                **September 30,**
              
              **Nine months ended**
                **September 30,****2007**
              
              **2008**
              
              **2007**
              
              **2008****(Unaudited)**
              
              **(Unaudited)**Revenues
              
              $
              138,687
              
              $
              164,111
              
              $
              390,227
              
              $
              494,429Cost
                  of revenues (*)
              
              
              99,730
              
              
              120,945
              
              
              279,083
              
              
              353,330Gross
                  profit
              
              
              38,957
              
              
              43,166
              
              
              111,144
              
              
              141,099Selling
                  and marketing (*)
              
              
              9,854
              
              
              13,487
              
              
              28,619
              
              
              41,233General
                  and administrative (*)
              
              
              20,140
              
              
              24,986
              
              
              61,421
              
              
              73,908Gain
                  from sale of Israeli SAP sales and distribution division, net (Note
                  4)
              
              
              —
              
              
              (18,366
              )
              
              —
              
              
              (18,366
              )Total
                  operating expenses
              
              
              29,994
              
              
              20,107
              
              
              90,040
              
              
              96,775Operating
                  income
              
              
              8,963
              
              
              23,059
              
              
              21,104
              
              
              44,324Financial
                  income (expenses), net
              
              
              123
              
              
              (1,187
              )
              
              438
              
              
              (3,635
              )Other
                  expenses, net
              
              
              (117
              )
              
              (392
              )
              
              (173
              )
              
              (392
              )Income
                  before taxes on income
              
              
              8,969
              
              
              21,480
              
              
              21,369
              
              
              40,297Taxes
                  on income
              
              
              1,660
              
              
              5,333
              
              
              4,182
              
              
              9,166Net
                  income
              
              $
              7,309
              
              $
              16,147
              
              $
              17,187
              
              $
              31,131Basic
                  net earnings per share
              
              $
              0.19
              
              $
              0.41
              
              $
              0.44
              
              $
              0.79Diluted
                  net earnings per share
              
              $
              0.19
              
              $
              0.41
              
              $
              0.43
              
              $
              0.78
 (*)  Includes
          stock-based compensation, as follows:
  **Three months ended**
                **September 30,**
              
              **Nine months ended**
                **September 30,****2007**
              
              **2008**
              
              **2007**
              
              **2008****(Unaudited)**
              
              **(Unaudited)**Cost
                  of revenues
              
              $
              29
              
              $
              64
              
              $
              114
              
              $
              208Selling
                  and marketing
              
              
              30
              
              
              59
              
              
              69
              
              
              173General
                  and administrative
              
              
              352
              
              
              565
              
              
              832
              
              
              1,846
 
 The
        accompanying notes are an integral part of the interim consolidated financial
        statements.
  -
            5
            -
 
 **NESS
        TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**
 **Interim
        Consolidated Statements of Cash Flows**
 **U.S.
            dollars in thousands**
 **Nine months ended**
                  **September 30,****2007**
                
                **2008****(Unaudited)**Cash
                    flows from operating activities:Net
                    income
                
                $
                17,187
                
                $
                31,131Adjustments
                    required to reconcile net income to net cash provided by operating
                    activities:Stock-based
                    compensation-related expenses
                
                
                1,015
                
                
                2,227Currency
                    fluctuation of long-term debt
                
                
                103
                
                
                68Depreciation
                    and amortization
                
                
                8,948
                
                
                12,571Arbitration
                    settlement
                
                
                —
                
                
                (9,452
                )Loss
                    on sale of property and equipment and investment at cost
                
                
                198
                
                
                501Gain
                    from sale of Israeli SAP sales and distribution division, net
                    (Note
                    4)
                
                
                —
                
                
                (18,366
                )Excess
                    tax benefits related to exercise of options
                
                
                (308
                )
                
                —Decrease
                    (increase) in trade receivables, net
                
                
                (11,373
                )
                
                10,393Increase
                    in unbilled receivables
                
                
                (7,459
                )
                
                (8,525
                )Decrease
                    (increase) in other accounts receivable and prepaid
                    expenses
                
                
                (8,804
                )
                
                626Increase
                    in work-in-progress
                
                
                (1,961
                )
                
                (334
                )Decrease
                    (increase) in long-term prepaid expenses
                
                
                (1,384
                )
                
                426Deferred
                    income taxes, net
                
                
                2,756
                
                
                6,897Increase
                    (decrease) in trade payables
                
                
                3,423
                
                
                (5,845
                )Increase
                    (decrease) in advances from customers and deferred
                    revenues
                
                
                (1,277
                )
                
                2,693Increase
                    in other long-term liabilities
                
                
                —
                
                
                694Increase
                    (decrease) in other accounts payable and accrued expenses
                
                
                316
                
                
                (5,067
                )Decrease
                    in accrued severance pay, net
                
                
                (1,363
                )
                
                (2,253
                )Net
                    cash provided by operating activities
                
                
                17
                
                
                18,385Cash
                    flows from investing activities:Net
                    cash paid for acquisition of consolidated subsidiaries
                
                
                (7,744
                )
                
                —Proceeds
                    from sale of investment at cost
                
                
                1,866
                
                
                219Proceeds
                    from sale of Israeli SAP sales and distribution division, net
                    (Note
                    4)
                
                
                —
                
                
                13,145Additional
                    payments in connection with acquisitions of subsidiaries in prior
                    periods
                
                
                (10,241
                )
                
                (5,973
                )Proceeds
                    from maturity of short-term bank deposits
                
                
                107
                
                
                1,267Proceeds
                    from sale of property and equipment
                
                
                240
                
                
                115Purchase
                    of property and equipment and capitalization of software developed
                    for
                    internal use
                
                
                (7,699
                )
                
                (10,595
                )Net
                    cash used in investing activities
                
                
                (23,471
                )
                
                (1,822
                )
  The
        accompanying notes are an integral part of the interim consolidated financial
        statements.
  -
            6
            -
 
 **NESS
        TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**
 **Interim
        Consolidated Statements of Cash Flows**
 **U.S.
            dollars in thousands**
 
 **Nine months ended**
                **September 30,****2007**
              
              **2008****(Unaudited)**Cash
                  flows from financing activities:Exercise
                  of options
              
              $
              2,920
              
              $
              4,317Dividend
                  to former shareholders of an acquired subsidiary
              
              
              —
              
              
              (10,048
              )Excess
                  tax benefits related to exercise of options
              
              
              308
              
              
              —Short-term
                  bank loans and credit, net
              
              
              987
              
              
              13,737Proceeds
                  from long-term debt
              
              
              12,928
              
              
              25,483Principal
                  payments of long-term debt
              
              
              (3,822
              )
              
              (2,447
              )Net
                  cash provided by financing activities
              
              
              13,321
              
              
              31,042Effect
                  of exchange rate changes on cash and cash equivalents
              
              
              2,602
              
              
              (10,291
              )Increase
                  (decrease) in cash and cash equivalents
              
              
              (7,531
              )
              
              37,314Cash
                  and cash equivalents at the beginning of the period
              
              
              46,675
              
              
              43,097Cash
                  and cash equivalents at the end of the period
              
              $
              39,144
              
              $
              80,411
 
 *Non-cash
                  activity*Mark-to-market
                  of foreign exchange forward contracts and interest rate
                  swap
              
              $
              —
              
              $
              5,138Receivable
                  on account of sale of Israeli SAP sales and distribution division
                  (Note
                  4)
              
              $
              —
              
              $
              1,993
 
 The
        accompanying notes are an integral part of the interim consolidated financial
        statements.
  -
            7
            -
  **NESS
        TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**
 **Notes
        to Interim Consolidated Financial Statements**
 **U.S.
            dollars in thousands (except share and per share data)
            (Unaudited)**
  ***Note
        1: General***
  Ness
        Technologies, Inc. was incorporated under the laws of the State of Delaware
        in
        March 1999. We operate through our subsidiaries in North America, Europe,
        Israel
        and Asia.
  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 consolidated balance sheet as of September 30, 2008, the
        consolidated statements of income for the three and nine months ended September
        30, 2007 and 2008, and the consolidated statements of cash flows for the
        nine
        months ended September 30, 2007 and 2008 are unaudited. These unaudited interim
        consolidated financial statements have been prepared in accordance with U.S.
        generally accepted accounting principles for interim financial information.
        In
        the opinion of management, the unaudited interim consolidated financial
        statements include all adjustments of a normal recurring nature necessary
        for a
        fair presentation of our consolidated financial position as of September
        30,
        2008, our consolidated results of operations for the three and nine months
        ended
        September 30, 2007 and 2008 and our consolidated cash flows for the nine
        months
        ended September 30, 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 and nine months ended September 30, 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.
  -
            8
            -
  **NESS
        TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**
 **Notes
        to Interim Consolidated Financial Statements**
 **U.S.
            dollars in thousands (except share and per share data)
            (Unaudited)**
  d.
              Principles
                  of consolidation
  Our
        consolidated financial statements include the accounts of the company and
        its
        wholly and majority owned subsidiaries, or the group. Inter-company transactions
        and balances, including profit from inter-company sales not yet realized
        outside
        the group, have been eliminated in consolidation.
  e.
              Fair
                  value
  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 which 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
        requires disclosure about how fair value is determined for assets and
        liabilities and establishes a hierarchy into 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.
  f.
              Impact
                  of recently issued accounting
                  pronouncements
  In
        December 2007, the SEC issued Staff Accounting Bulletin No. 110, which expresses
        the views of the SEC staff regarding the use of a “simplified” method, as
        discussed in the previously issued Staff Accounting Bulletin No. 107 (“SAB
        107”), in developing an estimate of the expected term of “plain vanilla” share
        options in accordance with Statement of Financial Accounting Standards (“SFAS”)
        No. 123(R), “Share-Based Payment” (“SFAS 123(R)”). In particular, the SEC staff
        indicated in SAB 107 that it will accept a company’s election to use the
        simplified method, regardless of whether the company has sufficient information
        to make more refined estimates of expected term. At the time SAB 107 was
        issued,
        the SEC staff believed that more detailed external information about employee
        exercise behavior (e.g., employee exercise patterns by industry and/or other
        categories of companies) would, over time, become readily available to
        companies. Therefore, the SEC staff stated in SAB 107 that it would not expect
        a
        company to use the simplified method for share option grants after December
        31,
        2007. The SEC staff understood that such detailed information about employee
        exercise behavior may not be widely available by December 31, 2007. Accordingly,
        the SEC staff will continue to accept, under certain circumstances, the use
        of
        the simplified method beyond December 31, 2007. Upon our adoption of SFAS
        123(R), we elected to use the simplified method to estimate our expected
        term.
        We continue to use the simplified method as we have determined that sufficient
        data is not available to develop an estimate of the expected term based upon
        historical participant behavior.
  In
        May
        2008, the Financial Accounting Standards Board issued SFAS No. 162, “The
        Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). SFAS 162
        identifies the sources of accounting principles and the framework for selecting
        the principles used in the preparation of financial statements of
        nongovernmental entities that are presented in conformity with U.S. generally
        accepted accounting principles. This statement shall be effective 60 days
        following the SEC’s approval of the Public Company Accounting Oversight Board’s
        amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With
        Generally Accepted Accounting Principles.” We do not expect the adoption of SFAS
        162 to have a material impact on our interim unaudited consolidated financial
        statements.
  -
            9
            -
  **NESS
        TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**
 **Notes
        to Interim Consolidated Financial Statements**
 **U.S.
            dollars in thousands (except share and per share data)
            (Unaudited)**
  ***Note
        3: Acquisitions***
  a.
              Goodwill
  In
        the
        nine month period ended September 30, 2008, we recorded additional goodwill
        of
        $13,060 consisting of translation adjustments of $12,556 and adjustments
        with
        respect to prior-year acquisitions of $504. The $504 is primarily related
        to a
        dividend paid to former shareholders of an acquired subsidiary and 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, using the exchange rate prevailing
        on the acquisition date, related to a restructuring plan undertaken by NessPRO
        Italy prior to the acquisition. The restructuring cost consists of severance
        expense. Through September 30, 2008, payments in the aggregate amount of
        $1,326
        were made in connection with the plan. As of September 30, 2008, the remaining
        accruals amounted to $1,409, 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, using the exchange
        rate
        prevailing on the acquisition date. Through September 30, 2008, payments
        in the
        aggregate amount of $3,267 were made in connection with the plan. As of
        September 30, 2008, the remaining accruals amounted to $520, 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.
  -
            10
            -
  **NESS
        TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**
 **Notes
        to Interim Consolidated Financial Statements**
 
 **U.S.
          dollars in thousands (except share and per share data)
          (Unaudited)**
 c.
              Pro
                  Forma Financial Information
  The
        following table presents certain combined unaudited statements of income
        data
        for the three and nine months ended September 30, 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**
                **September 30, 2007**
              
              **Nine months ended**
                **September 30, 2007****(unaudited)**
              
              **(unaudited)**Revenues
              
              $
              150,304
              
              $
              429,149Net
                  income
              
              $
              7,032
              
              $
              16,574Earnings
                  per share:Basic
              
              $
              0.18
              
              $
              0.42Diluted
              
              $
              0.18
              
              $
              0.42
  ***Note
        4: Sale of Israeli SAP Sales and Distribution
        Division***
  On
        July
        9, 2008, we signed a definitive agreement to sell our SAP sales and distribution
        division in Israel to SAP AG, and we closed the transaction on August 14,
        2008.
        Under the terms of the agreement, SAP AG acquired from us selected assets
        related to the distribution, support and maintenance of SAP technology and
        solutions. The purchase price for the assets was €19.0 million (approximately
        $29 million), of which €13.0 million (or $20.0 million) was settled at closing
        and up to €6.0 million (approximately $9.0 million) is to be paid over the next
        two years, subject to the satisfaction of certain performance criteria for
        2008
        and 2009. As a result of the transaction, we recognized a gain of $18.4 million,
        net of related expenses. Proceeds from the sale were net of €2.8 million
        (approximately $4.2 million) of deferred income related to maintenance and
        support services transferred to SAP AG and €1.4 million (approximately $2.0
        million) which were placed in escrow.
  ***Note
        5: Accounting for stock-based compensation***
  During
        the nine months ended September 30, 2008, we granted options to purchase
        637,000
        shares of our common stock under our 2007 Stock Incentive Plan at an exercise
        price of $12.15 per share and a weighted average fair value of $2.27 per
        share.
        The options vest over the requisite service period of the award.
  During
        the nine months ended September 30, 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, and was determined based on the simplified method
        in
        accordance with SAB 107. 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:
  -
            11
            -
 **NESS
          TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**
 **Notes
          to Interim Consolidated Financial Statements**
 **U.S.
              dollars in thousands (except share and per share data)
              (Unaudited)**
 **Black-Scholes**
                  
                  **Monte Carlo****Three months**
                    **ended September 30,**
                  
                  **Nine months**
                    **ended September 30,**
                  
                  **Three and nine months**
                    **ended September 30,****2007**
                  
                  **2008**
                  
                  **2007**
                  
                  **2008**
                  
                  **2007****(unaudited)**
                  
                  **(unaudited)**
                  
                  **(unaudited)**Dividend
                      yield
                  
                  
                  0%
                  
                  
                  0%
                  
                  
                  0%
                  
                  
                  0%
                  
                  
                  0%Expected
                      volatility
                  
                  
                  31.84%
                  
                  
                  31.49%
                  
                  
                  31.75%
                  
                  
                  31.39%
                  
                  
                  29
                      – 31%Risk-free
                      interest
                  
                  
                  4.14%
                  
                  
                  2.62%
                  
                  
                  4.29%
                  
                  
                  2.49%
                  
                  
                  4.61
                      – 4.95%Expected
                      life (in years)
                  
                  
                  3.50
                  
                  
                  3.50
                  
                  
                  3.48
                  
                  
                  3.29
                  
                  
                  N/A
  As
          of
          September 30, 2008, options to purchase 4,790,675 shares were outstanding
          with a
          weighted average exercise price of $12.03 per share and options to purchase
          2,836,905 shares were available for future grants.
  As
          of
          September 30, 2008, $4,772 of total unrecognized compensation cost related
          to
          stock-based compensation was expected to be recognized over a period of
          three
          years. The total unrecognized stock-based compensation cost to be recognized
          in
          future periods as of September 30, 2008 does not consider the effect of
          stock
          options that may be issued in subsequent periods.
  ***Note
          6: Derivatives***
  During
          the nine months ended September 30, 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 September 30, 2008, the notional amount of interest rate swap
          we
          entered into was $12,000. The fair value of the interest rate swap at September
          30, 2008 was an asset of $53. There was no ineffectiveness related to this
          derivative for the nine months ended September 30, 2008, with all unrealized
          gains, representing $53, being deferred in accumulated other comprehensive
          income. The asset is presented within other long-term assets on the balance
          sheet at September 30, 2008 as the interest rate swap expires in November
          30,
          2012.
  During
          the nine months ended September 30, 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 September 30, 2008, the
          notional amount of foreign exchange forward contracts we entered into was
          $60,025. The fair value of the foreign exchange forward contracts at September
          30, 2008 was a liability of $5,191. There was no ineffectiveness related
          to
          these foreign exchange forward contracts for the nine months ended September
          30,
          2008, with all unrealized losses, representing $5,191, being deferred in
          accumulated other comprehensive income. The liability is presented within
          other
          accounts payables and accrued expenses on the balance sheet at September
          30,
          2008 as the foreign exchange forward contracts mature through September
          30,
          2009.
  We
          have
          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.
  -
              12
              -
  **NESS
          TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**
 **Notes
          to Interim Consolidated Financial Statements**
 **U.S.
              dollars in thousands (except share and per share data)
              (Unaudited)**
  ***Note
          7: Long-term and Short-term Loans***
  In
          March
          2008, one of our Israeli subsidiaries obtained a long-term loan of 21.0
          million
          New Israeli Shekels (approximately $6.1 million at the exchange rate prevailing
          on September 30, 2008) 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
          (approximately $17.5 million at the exchange rate prevailing on September
          30,
          2008) 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
          substantially similar terms. At September 30, 2008, we had $10.3 million
          of
          on-call borrowings, which we used to finance working capital requirements
          in
          Israel.
  ***Note
          8: 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
          September 30, 2008, is $41,161 and $55,313, 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 subsidiaries’ property and equipment.
          In addition, our Indian subsidiary recorded a fixed charge on deposits
          in the
          amount of $742 related to the mark-to-market of foreign exchange forward
          contracts into which we entered to hedge against the effect of exchange
          rate
          fluctuations on cash flows denominated in Indian Rupee.
  -
              13
              -
 **NESS
            TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**
 **Notes
            to Interim Consolidated Financial Statements**
 **U.S.
                dollars in thousands (except share and per share data)
                (Unaudited)**
  ***Note
            9: Stockholders’ Equity***
  a.
                Total
                    comprehensive income:  **Three months**
                    **ended September 30,**
                  
                  **Nine months**
                    **ended September 30,****2007**
                  
                  **2008**
                  
                  **2007**
                  
                  **2008****(Unaudited)**
                  
                  **(Unaudited)**Net
                      income
                  
                  $
                  7,309
                  
                  $
                  16,147
                  
                  $
                  17,187
                  
                  $
                  31,131Foreign
                      currency translation adjustments, net
                  
                  
                  12,653
                  
                  
                  (16,747
                  )
                  
                  15,446
                  
                  
                  8,551Unrealized
                      losses on foreign exchange forward contracts and interest rate
                      swap
                  
                  
                  —
                  
                  
                  (681
                  )
                  
                  —
                  
                  
                  (5,138
                  )Comprehensive
                      income (loss)
                  
                  $
                  19,962
                  
                  $
                  (1,281
                  )
                  $
                  32,633
                  
                  $
                  34,544
  b.
                Option
                    exercises:  In
            the
            three and nine months ended September 30, 2008, a total of 411,866 and
            432,086
            options, respectively, were exercised into common stock for aggregate
            consideration of $4,152 and $4,317, respectively.
  ***Note
            10: Segment Reporting***
  Our
            segment information has been prepared in accordance with SFAS No. 131,
            “Disclosures about Segments of an Enterprise and Related Information.” Operating
            segments are defined as components of an enterprise engaging in business
            activities about which separate financial information is available that
            is
            evaluated regularly by our chief operating decision-maker in deciding
            how to
            allocate resources and assess performance. Our chief operating decision-maker
            is
            our chief executive officer, who evaluates our performance and allocates
            resources based on segment revenues and operating profit.
  Our
            operating segments are:
  1. **Ness
            North America (Ness NA)** ,
            which
            includes India-based offshore services as well as system integration
            and
            application development and consulting services. Verticals served by
            this
            segment are: 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.
  -
                14
                -
 **NESS
              TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**
 **Notes
              to Interim Consolidated Financial Statements**
 **U.S.
                  dollars in thousands (except share and per share data)
                  (Unaudited)**
  5. **Other** , which
            comprises operations representing, individually, less than 10% of our
            consolidated revenues and operating profit. These include our U.S. financial
            services and healthcare business unit, called Ness IBS; our NessPRO enterprise
            software distribution business in Italy, Spain, Portugal and 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 September 30, 2007****Ness**
                    **NA**
                  
                  **TSG**
                  
                  **Ness**
                    **Europe**
                  
                  **Ness**
                    **Israel**
                  
                  **Other**
                  
                  **Unallocated**
                  
                  **Total****(Unaudited)**Revenues
                      from external customers
                  
                  $
                  26,556
                  
                  $
                  15,912
                  
                  $
                  33,324
                  
                  $
                  45,911
                  
                  $
                  16,984
                  
                  
                  —
                  
                  $
                  138,687Operating
                      income (loss)
                  
                  $
                  2,451
                  
                  $
                  1,909
                  
                  $
                  2,769
                  
                  $
                  2,139
                  
                  $
                  1,900
                  
                  $
                  (2,205
                  )
                  $
                  8,963Financial
                      income, net
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  123Other
                      expenses, net
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (117
                  )Income
                      before taxes on income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  8,969


**Three months ended September 30, 2008****Ness**
                **NA**
              
              **TSG**
              
              **Ness**
                **Europe**
              
              **Ness**
                **Israel**
              
              **Other**
              
              **Unallocated**
              
              **Total****(Unaudited)**Revenues
                  from external customers
              
              $
              31,846
              
              $
              16,281
              
              $
              45,356
              
              $
              45,712
              
              $
              24,916
              
              
              —
              
              $
              164,111Operating
                  income (loss)
              
              $
              3,362
              
              $
              2,310
              
              $
              4,448
              
              $
              16,838
              
              $
              (276
              )
              $
              (3,623
              )
              $
              23,059Financial
                  expenses, net
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,187
              )Other
                  expenses, net
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (392
              )Income
                  before taxes on income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              21,480




**Nine months ended September 30, 2007****Ness**
                **NA**
              
              **TSG**
              
              **Ness**
                **Europe**
              
              **Ness**
                **Israel**
              
              **Other**
              
              **Unallocated**
              
              **Total****(Unaudited)**Revenues
                  from external customers
              
              $
              78,970
              
              $
              43,277
              
              $
              80,548
              
              $
              145,680
              
              $
              41,752
              
              
              —
              
              $
              390,227Operating
                  income (loss)
              
              $
              6,580
              
              $
              5,683
              
              $
              5,957
              
              $
              7,785
              
              $
              3,309
              
              $
              (8,209
              )
              $
              21,104Financial
                  income, net
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              438Other
                  expenses, net
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (173
              )Income
                  before taxes on income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              21,369




-
          15
          -


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


**Nine months ended September 30, 2008****Ness**
                **NA**
              
              **TSG**
              
              **Ness**
                **Europe**
              
              **Ness**
                **Israel**
              
              **Other**
              
              **Unallocated**
              
              **Total****(Unaudited)**Revenues
                  from external customers
              
              $
              89,508
              
              $
              47,096
              
              $
              130,446
              
              $
              149,048
              
              $
              78,331
              
              
              —
              
              $
              494,429Operating
                  income (loss)
              
              $
              6,478
              
              $
              5,419
              
              $
              13,422
              
              $
              26,494
              
              $
              1,696
              
              $
              (9,185
              )
              $
              44,324Financial
                  expenses, net
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (3,635
              )Other
                  expenses, net
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (392
              )Income
                  before taxes on income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              40,297




Our
        total
        revenues are attributed to geographic areas based on the location of the
        end
        customer.
  The
        following tables present total revenues for the three and nine months ended
        September 30, 2007 and 2008, and long-lived assets as of December 31, 2007
        and
        September 30, 2008:
  **Three months ended**
                **September 30,**
              
              **Nine months ended**
                **September 30,****2007**
              
              **2008**
              
              **2007**
              
              **2008****(Unaudited)**
              
              **(Unaudited)**Revenues
                  from sales to unaffiliated customers:Israel
              
              $
              57,691
              
              $
              54,834
              
              $
              181,631
              
              $
              175,336Europe
              
              
              40,616
              
              
              55,092
              
              
              93,324
              
              
              163,691North
                  America
              
              
              33,379
              
              
              46,540
              
              
              97,135
              
              
              133,460Asia
                  and the Far East
              
              
              7,001
              
              
              7,645
              
              
              18,137
              
              
              21,942$
              138,687
              
              $
              164,111
              
              $
              390,227
              
              $
              494,429
  **December**
                **31, 2007**
              
              **September**
                **30, 2008****(Unaudited)**Long-lived
                  assets:Israel
              
              $
              121,833
              
              $
              138,441Europe
              
              
              84,296
              
              
              84,751North
                  America
              
              
              97,669
              
              
              95,981Asia
                  and the Far East
              
              
              10,729
              
              
              8,498$
              314,527
              
              $
              327,671
  ***Note
        11: Income Taxes***
  As
        of
        September 30, 2008 the total amount of unrecognized tax benefits was $2,573,
        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 $376 at September 30, 2008. During the nine
        months
        ended September 30, 2008, we recorded $30 for interest and penalties expenses
        with respect to uncertain tax positions. A reconciliation of the beginning
        and
        ending amounts of unrecognized tax benefits as of September 30, 2008 was
        as
        follows:
  -
            16
            -
 **NESS
          TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**
 **Notes
          to Interim Consolidated Financial Statements**
 
 **U.S.
          dollars in thousands (except share and per share data)
          (Unaudited)**
 Balance
                  as of January 1, 2008
              
              $
              1,906Increases
                  related to prior-year tax positions
              
              
              525Increase
                  related to translation adjustments
              
              
              142Balance
                  as of September 30, 2008
              
              $
              2,573
  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. We are
        no
        longer subject to U.S. federal, state and local, or non-U.S. income tax
        examination for years before 2001.
  The
        effective tax rate used in computing the provision for income taxes is based
        on
        our projected fiscal year income before taxes, including estimated income
        by tax
        jurisdiction. The difference between the effective tax rate and the statutory
        tax rate is due primarily to foreign tax holidays, foreign subsidiaries with
        different tax rates and non-deductible expenses.
  ***Note
        12: Basic and Diluted Net Earnings per Share***
  Basic
        net
        earnings per share are computed based on the weighted average number of shares
        of common stock outstanding during each period. Diluted net earnings per
        share
        are computed based on the weighted average number of shares of common stock
        outstanding during each period, plus dilutive potential shares of common
        stock
        considered outstanding during the period, in accordance with SFAS No. 128,
        “Earnings per Share.”
  The
        following table sets forth the computation of basic and diluted net earnings
        per
        share of common stock (in thousands):
  **Three months ended**
                **September 30,**
              
              **Nine months ended**
                **September 30,****2007**
              
              **2008**
              
              **2007**
              
              **2008****(Unaudited)**
              
              **(Unaudited)**Numerator:Net
                  income, numerator for basic and diluted per share
              
              $
              7,309
              
              $
              16,147
              
              $
              17,187
              
              $
              31,131Denominator:Weighted
                  average number of shares of common stock
              
              
              39,130
              
              
              39,435
              
              
              39,035
              
              
              39,284Effect
                  of dilutive securities:Employee
                  stock options and warrants
              
              
              209
              
              
              396
              
              
              512
              
              
              645Denominator
                  for diluted net earnings per share - weighted average assuming
                  exercise of
                  options
              
              
              39,399
              
              
              39,832
              
              
              39,548
              
              
              39,929
 
  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 4,506,359
        and
        4,348,414 for the three months ended September 30, 2007 and 2008, respectively,
        and 2,099,756 and 4,603,758 for the nine months ended September 30, 2007
        and
        2008, respectively.
  -
            17
            -
 **NESS
          TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**
 **Notes
          to Interim Consolidated Financial Statements**
 
 **U.S.
          dollars in thousands (except share and per share data)
          (Unaudited)**
  ***Note
        13: Subsequent Events***
  On
        July
        30, 2008, we signed a share purchase agreement to acquire 100% of the shares
        of
        Logos a.s., a privately-held, Czech-based leading IT services and consulting
        company, and on October 1, 2008 we closed the transaction. The purchase price
        was 1,030,700,000 Czech Crowns (approximately $59 million). At closing, we
        paid
        502,800,000 Czech Crowns (approximately $29 million), and we will pay up
        to
        527,900,000 Czech Crowns (approximately $30 million) over the next three
        years,
        subject to the satisfaction of certain performance conditions for 2008, 2009
        and
        2010. Logos a.s. will initially operate as Ness Logos a.s. until it is merged
        into Ness Czech s.r.o., one of our operating subsidiaries.
  -
            18
            -




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




*You
      should read the following discussion and analysis together with our unaudited
      consolidated financial statements and the accompanying notes. This discussion
      contains forward-looking statements, within the meaning of Section 27A of
      Securities Act of 1933, as amended, Section 21E of the Securities Exchange
      Act
      of 1934, as amended, 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 $164.1 million and $494.4 million for the three and nine
      months ended September 30, 2008, from $138.7 million and $390.2 million for
      the
      three and nine months ended September 30, 2007, respectively. Net income
      increased to $16.1 million and $31.1 million for the three and nine months
      ended
      September 30, 2008 from $7.3 million and $17.2 million for the three and nine
      months ended September 30, 2007, respectively.




The
      dollar weakened by an average of 17% and 16% against the New Israeli Shekel
      and
      by an average of 8% and 10% against the Euro and other relevant European
      currencies in the three and nine months ended September 30, 2008 compared to
      the
      three and nine months ended September 30, 2007, respectively. We estimate that
      our revenues were $12.7 million and $45.6 million higher in the three and nine
      months ended September 30, 2008, and our operating income was $0.9 million
      and
      $4.8 million lower as a result of changes in foreign currency exchange rates
      versus their average rates for the three and nine months ended September 30,
      2007, respectively, with a corresponding lowering of our operating
      margin.




Our
      revenue growth is attributable to a number of factors, including acquisitions
      we
      make, increases in the number and size of projects for existing clients, and
      the
      addition of new clients. Our client base is diverse, and we are not dependent
      on
      any single client. In the three and nine months ended September 30, 2008, no
      client accounted for more than 4% of our revenues and our largest twenty clients
      together accounted for approximately 32% and 31% of our revenues, respectively.
      For the three and nine months ended September 30, 2008, the percentage of our
      revenues derived in aggregate from agencies of the government of Israel was
      6%.
      Existing clients from prior years generated more than 85% of our revenues in
      the
      three and nine months ended September 30, 2008.


-
          19
          -


Our
      backlog as of September 30, 2008 was $764 million compared to $669 million
      as of
      September 30, 2007. This $95 million increase in our backlog was due primarily
      to new bookings. We achieve backlog through new signings of IT services projects
      and outsourcing contracts, including for new and repeat customers. We recognize
      backlog as revenue when we perform the services related to backlog.




For
      the
      three and nine months ended September 30, 2008, the percentage of our revenues
      derived from clients in Israel was 33% and 35%, respectively; in Europe, 34%
      and
      33%, respectively; in North America, 28% and 27%, respectively; and in Asia
      and
      the Far East, 5% and 4%, respectively.




As
      of
      September 30, 2008, we had approximately 7,965 employees, including
      approximately 6,990 IT professionals. Of the 7,965 employees, approximately
      2,855 were in India, 2,710 were in Israel, 1,445 were in Europe, 600 were in
      North America and 355 were in the Asia Pacific region.




**Recent
      Developments**




On
      July
      30, 2008, we signed a share purchase agreement to acquire 100% of the shares
      of
      Logos a.s., a privately-held, Czech-based leading IT services and consulting
      company, and on October 1, 2008 we closed the transaction. The purchase price
      was 1,030,700,000 Czech Crowns (approximately $59 million). At closing, we
      paid
      502,800,000 Czech Crowns (approximately $29 million), and we will pay up to
      527,900,000 Czech Crowns (approximately $30 million) over the next three years,
      subject to the satisfaction of certain revenue performance conditions for 2008,
      2009 and 2010. For the fiscal year ended March 31, 2008, Logos generated
      revenues of €29.7 million and was profitable. The acquisition strengthens our
      already significant leadership position in Central and Eastern Europe, one
      of
      our fastest growing and most profitable geographies, and complements our strong
      position in the utilities, manufacturing and public sectors with a strong
      presence in the financial and telecom industries.




**Consolidated
      Results of Operations**




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




**Three months ended**
              **September 30,**
            
            **Nine months ended**
              **September 30,****2007**
            
            **2008**
            
            **2007**
            
            **2008**Revenues
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %Cost
                of revenues
            
            
            71.9
            
            
            73.7
            
            
            71.5
            
            
            71.5Gross
                profit
            
            
            28.1
            
            
            26.3
            
            
            28.5
            
            
            28.5Operating
                expenses:Selling
                and marketing
            
            
            7.1
            
            
            8.2
            
            
            7.3
            
            
            8.3General
                and administrative
            
            
            14.5
            
            
            15.2
            
            
            15.7
            
            
            14.9Gain
                from sale of Israeli SAP sales and distribution division
            
            
            —
            
            
            (11.2
            )
            
            —
            
            
            (3.7
            )Total
                operating expenses
            
            
            21.6
            
            
            12.3
            
            
            23.1
            
            
            19.6Operating
                income
            
            
            6.5
            
            
            14.1
            
            
            5.4
            
            
            9.0Financial
                income (expenses), net
            
            
            0.1
            
            
            (0.7
            )
            
            0.1
            
            
            (0.7
            )Other
                expenses, net
            
            
            (0.1
            )
            
            (0.2
            )
            
            (0.0
            )
            
            (0.1
            )Income
                before taxes on income
            
            
            6.5
            
            
            13.1
            
            
            5.5
            
            
            8.2Taxes
                on income
            
            
            1.2
            
            
            3.2
            
            
            1.1
            
            
            1.9Net
                income
            
            
            5.3
            
            
            9.8
            
            
            4.4
            
            
            6.3


-
          20
          -




**Three
      Months Ended September 30, 2008 Compared to the Three Months Ended September
      30,
      2007**




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




**Three months ended**
              **September 30,**
            
            **Increase****2007**
            
            **2008**
            
            **$**
            
            **%**Revenues
            
            $
            138,687
            
            $
            164,111
            
            
            25,424
            
            
            18.3Cost
                of revenues
            
            
            99,730
            
            
            120,945
            
            
            21,215
            
            
            21.3Gross
                profit
            
            $
            38,957
            
            $
            43,166
            
            
            4,209
            
            
            10.8Gross
                margin
            
            
            28.1
            %
            
            26.3
            %




***Revenues***




Our
      revenues increased from $138.7 million in the three months ended September
      30,
      2007 to $164.1 million in the three months ended September 30, 2008,
      representing an increase of $25.4 million, or 18.3%. Approximately $14.3 million
      of the increase was attributable to acquisitions. Of the remaining $11.1
      million, $10.5 million represents growth in our Ness Israel operating segment,
      $5.3 million represents growth in our Ness North America operating segment,
      $4.3
      million represents growth in our Ness Europe operating segment and $1.7 million
      represents growth in our TSG and “Other” operating segments, offset by the
      divestiture in January 2008 of our staff supplementation business in Israel,
      representing $5.5 million, a write-off of trade receivables resulting from
      the
      sale of our Israeli SAP sales and distribution division, representing $3.2
      million, and the sale in August 2008 of our Israeli SAP sales and distribution
      division, representing $2.1 million.




***Cost
      of revenues***




Our
      cost
      of revenues, including salaries, wages and other direct and indirect costs,
      increased from $99.7 million in the three months ended September 30, 2007 to
      $120.9 million in the three months ended September 30, 2008, representing an
      increase of $21.2 million, or 21.3%. Approximately $11.8 million of this
      increase was attributable to acquisitions, and $9.4 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 $39.0 million in the
      three months ended September 30, 2007 to $43.2 million in the three months
      ended
      September 30, 2008, representing an increase of $4.2 million, or 10.8%.
      Approximately $2.5 million of the increase was attributable to acquisitions,
      and
      $1.7 million was related to our other revenue growth. Gross margin for the
      three
      months ended September 30, 2008 was 26.3%, compared to 28.1% in the three months
      ended September 30, 2007. This
      decrease in gross margin was primarily due to a slowdown in our U.S.-based
      financial services business and our NessPRO software product distribution
      business and a write-off of trade receivables resulting from the sale of our
      Israeli SAP sales and distribution division, offset by the divestiture in
      January 2008 of our low-margin staff supplementation business in
      Israel.


-
          21
          -


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




**Three months ended**
              **September 30,**
            
            **Increase**
              **(Decrease)****2007**
            
            **2008**
            
            **$**
            
            **%**Selling and marketing
            
            $
            9,854
            
            $
            13,487
            
            
            3,633
            
            
            36.9General
                and administrative
            
            
            20,140
            
            
            24,986
            
            
            4,846
            
            
            24.1Gain
                from sale of Israeli SAP sales and distribution division,
                net
            
            
            —
            
            
            (18,366
            )
            
            (18,366
            )
            
            N/ATotal
                operating expenses
            
            
            29,994
            
            
            20,107
            
            
            (9,887
            )
            
            (33.0
            )Operating
                income
            
            $
            8,963
            
            $
            23,059
            
            
            14,096
            
            
            157.3




***Selling
      and marketing***




Selling
      and marketing expenses increased from $9.9 million in the three months ended
      September 30, 2007 to $13.5 million in the three months ended September 30,
      2008, representing an increase of $3.6 million, or 36.9%. This increase was
      due
      primarily to the inclusion of marketing and sales expenses from our
      acquisitions, representing $1.9 million.




***General
      and administrative***




General
      and administrative expenses increased from $20.1 million in the three months
      ended September 30, 2007 to $25.0 million in the three months ended September
      30, 2008, representing an increase of $4.8 million, or 24.1%. This increase
      was
      due primarily to additional expenses related to the sale of our Israeli SAP
      sales and distribution division, representing $2.1 million, and acquisitions,
      representing $1.8 million.




***Gain
      from sale of Israeli SAP sales and distribution division,
      net***




In
      the
      three months ended September 30, 2008, we recorded a gain of $18.4 million
      related to the sale to SAP AG of our Israeli SAP sales and distribution
      division, which closed on August 14, 2008. The gain represents the portion
      of
      the purchase price, €13.0 million, or $20.0 million that was settled at closing,
      offset by expenses of $1.6 million related to the sale. There was no
      corresponding gain in the three months ended September 30, 2007.




***Operating
      Income***




Operating
      income increased from $9.0 million in the three months ended September 30,
      2007
      to $23.1 million in the three months ended September 30, 2008, representing
      an
      increase of $14.1 million, or 157.3%. The major factors contributing to this
      increase were the gain from the sale of our Israeli SAP sales and distribution
      division, net of related expenses and other charges, representing $13.1 million,
      growth in operating income of $1.6 million in our Ness Israel operating segment,
      $1.7 million in our Ness Europe operating segment and $1.3 million in our Ness
      North America and TSG operating segments together, offset by a decrease in
      operating income of our “Other” operating segments, representing $2.2 million
      and a increase in unallocated expenses, representing $1.4 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**
              **September 30,**
            
            **Increase**
              **(Decrease)****2007**
            
            **2008**
            
            **$**
            
            **%**Operating
                income
            
            $
            8,963
            
            $
            23,059
            
            
            14,096
            
            
            157.3Financial
                income (expenses), net
            
            
            123
            
            
            (1,187
            )
            
            (1,310
            )
            
            N/AOther
                expenses, net
            
            
            (117
            )
            
            (392
            )
            
            (275
            )
            
            235.0Income
                before taxes on income
            
            
            8,969
            
            
            21,480
            
            
            12,511
            
            
            139.5Taxes
                on income
            
            
            1,660
            
            
            5,333
            
            
            3,673
            
            
            221.3Net
                income
            
            $
            7,309
            
            $
            16,147
            
            
            8,838
            
            
            120.9


-
          22
          -




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




Financial
      income (expenses), net, changed from income of $0.1 million in the three months
      ended September 30, 2007 to expenses of $1.2 million in the three months ended
      September 30, 2008, representing a change of $1.3 million. The change resulted
      primarily from higher interest expense related to new debt obtained for the
      purpose of financing acquisitions, representing $1.1 million, and an unfavorable
      foreign currency exchange effect of $0.3 million, offset by an increase in
      interest income on short-term bank deposits, representing $0.2 million. Our
      average net cash changed from $11.3 million in the three months ended September
      30, 2007 to average net debt of $30.7 million in the three months ended
      September 30, 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
      expenses, net***




Other
      expenses, net increased from $0.1 million in the three months ended September
      30, 2007 to $0.4 million in the three months ended September 30, 2008,
      representing an increase of $0.3 million, or 235%. This increase was due
      primarily to a loss on the sale of an investment at cost, representing $0.3
      million.




***Taxes
      on income***




Our
      taxes
      on income increased from $1.7 million in the three months ended September 30,
      2007 to $5.3 million in the three months ended September 30, 2008, representing
      an increase of $3.7 million, or 221.3%. This increase
      was due primarily to the increase in our taxable income. Of the $3.7 million
      increase in taxes on income, $3.5 million was taxes on the gain from the sale
      of
      our SAP sales and distribution division in Israel, net of related expenses
      and
      other charges, where the corporate tax rate is 27%. Our effective tax rate
      in
      the three months ended September 30, 2008 was 24.8%, compared to 18.5% in the
      three months ended September 30, 2007. If the gain from the sale of our Israeli
      SAP sales and distribution division, net of related expenses and other charges,
      had not been recognized in the three months ended September 30, 2008, our
      effective tax rate for the period would have been approximately
      21.4%.




***Net
      Income***




Net
      income increased from $7.3 million in the three months ended September 30,
      2007
      to $16.1 million in the three months ended September 30, 2008, representing
      an
      increase of $8.8 million, or 120.9%. The increase in net income was due
      primarily to our increase in operating income of $14.1 million, partially offset
      by our increase in taxes, representing $3.7 million, and our change from
      financial income to financial expenses, representing $1.3 million.




**Nine
      Months Ended September 30, 2008 Compared to the Nine Months Ended September
      30,
      2007**




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




**Nine months ended**
              **September 30,**
            
            **Increase****2007**
            
            **2008**
            
            **$**
            
            **%**Revenues
            
            $
            390,227
            
            $
            494,429
            
            
            104,202
            
            
            26.7Cost
                of revenues
            
            
            279,083
            
            
            353,330
            
            
            74,247
            
            
            26.6Gross
                profit
            
            $
            111,144
            
            $
            141,099
            
            
            29,955
            
            
            27.0Gross
                margin
            
            
            28.5
            %
            
            28.5
            %




***Revenues***




Our
      revenues increased from $390.2 million in the nine months ended September 30,
      2007 to $494.4 million in the nine months ended September 30, 2008, representing
      an increase of $104.2 million, or 26.7%. Approximately $51.1 million of the
      increase was attributable to acquisitions. Of the remaining $53.1 million,
      $27.4
      million represents growth in our Ness Europe operating segment, $27.3 million
      represents growth in our Ness Israel operating segment and $22.4 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 $18.7 million, a write-off of trade receivables
      resulting from the sale of our Israeli SAP sales and distribution division,
      representing $3.2 million, and the sale in August 2008 of our Israeli SAP sales
      and distribution division, representing $2.1 million.


-
          23
          -




***Cost
      of revenues***




Our
      cost
      of revenues, including salaries, wages and other direct and indirect costs,
      increased from $279.1 million in the nine months ended September 30, 2007 to
      $353.3 million in the nine months ended September 30, 2008, representing an
      increase of $74.2 million, or 26.6%. Approximately $33.8 million of this
      increase was attributable to acquisitions, and $40.4 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 $111.1 million in the
      nine months ended September 30, 2007 to $141.1 million in the nine months ended
      September 30, 2008, representing an increase of $30.0 million, or 27.0%.
      Approximately $17.3 million of the increase was attributable to acquisitions,
      and $12.7 million was related to our other revenue growth. Gross margin for
      the
      nine months ended September 30, 2008 was 28.5%, compared to 28.5% in the nine
      months ended September 30, 2007. A decrease in gross margin resulting from
      a
      slowdown in our U.S.-based financial services business and a write-off of trade
      receivables resulting from the sale of our Israeli SAP sales and distribution
      division was offset by an increase in gross margin resulting from the expansion
      of our NessPRO Global software product distribution business and the divestiture
      in January 2008 of our low-margin staff supplementation business in
      Israel.




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




**Nine
                months ended**
              **September
                30,**
            
            **Increase**
              **(Decrease)****2007**
            
            **2008**
            
            **$**
            
            **%**Selling
                and marketing
            
            $
            28,619
            
            $
            41,233
            
            
            12,614
            
            
            44.1General
                and administrative
            
            
            61,421
            
            
            73,908
            
            
            12,487
            
            
            20.3Gain
                from sale of Israeli SAP sales and distribution division,
                net
            
            
            —
            
            
            (18,366
            )
            
            (18,366
            )
            
            N/ATotal
                operating expenses
            
            
            90,040
            
            
            96,775
            
            
            6,735
            
            
            7.5Operating
                income
            
            $
            21,104
            
            $
            44,324
            
            
            23,220
            
            
            110.0




***Selling
      and marketing***




Selling
      and marketing expenses increased from $28.6 million in the nine months ended
      September 30, 2007 to $41.2 million in the nine months ended September 30,
      2008,
      representing an increase of $12.6 million, or 44.1%. This increase was due
      primarily to the inclusion of marketing and sales expenses from our
      acquisitions, representing $7.0 million, and special marketing events and
      campaigns in Israel and Europe, representing $1.0 million.




***General
      and administrative***




General
      and administrative expenses increased from $61.4 million in the nine months
      ended September 30, 2007 to $73.9 million in the nine months ended September
      30,
      2008, representing an increase of $12.5 million, or 20.3%. This increase was
      due
      primarily to acquisitions, representing $7.1 million, and additional expenses
      related to the sale of our Israeli SAP sales and distribution division,
      representing $2.1 million, offset by management transition expenses in the
      nine
      months ended September 30, 2007 for which there was no corresponding expense
      in
      the nine months ended September 30, 2008, representing $2.6 million.


-
          24
          -




***Gain
      from sale of Israeli SAP sales and distribution division,
      net***




In
      the
      nine months ended September 30, 2008, we recorded a gain of $18.4 million
      related to the sale to SAP AG of our Israeli SAP sales and distribution
      division, which closed on August 14, 2008. The gain represents the portion
      of
      the purchase price, €13.0 million, or $20.0 million that was settled at closing,
      offset by expenses of $1.6 million related to the sale. There was no
      corresponding gain in the nine months ended September 30, 2007.




***Operating
      Income***




Operating
      income increased from $21.1 million in the nine months ended September 30,
      2007
      to $44.3 million in the nine months ended September 30, 2008, representing
      an
      increase of $23.2 million, or 110.0%. The major factors contributing to this
      increase were the gain from the sale of our Israeli SAP sales and distribution
      division, net of related expenses and other charges, representing $13.1 million,
      and growth in operating income of our Ness Israel and Ness Europe operating
      segments, representing $5.6 million and $7.5 million, respectively, offset
      by a
      decrease in operating income of our Ness North America, TSG and “Other”
operating segments, together representing $2.0 million and an increase in
      unallocated expenses, representing $1.0 million. See also “—Results by Business
      Segment.”




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




**Nine months ended**
              **September 30,**
            
            **Increase**
              **(Decrease)****2007**
            
            **2008**
            
            **$**
            
            **%**Operating
                income
            
            $
            21,104
            
            $
            44,324
            
            
            23,220
            
            
            110.0Financial
                income (expenses), net
            
            
            438
            
            
            (3,635
            )
            
            (4,073
            )
            
            N/AOther
                expenses, net
            
            
            (173
            )
            
            (392
            )
            
            (219
            )
            
            126.6Income
                before taxes on income
            
            
            21,369
            
            
            40,297
            
            
            18,928
            
            
            88.6Taxes
                on income
            
            
            4,182
            
            
            9,166
            
            
            4,984
            
            
            119.2Net
                income
            
            $
            17,187
            
            $
            31,131
            
            
            13,944
            
            
            81.1




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




Financial
      income (expenses), net, changed from income of $0.4 million in the nine months
      ended September 30, 2007 to expenses of $3.6 million in the nine months ended
      September 30, 2008, representing a change of $4.1 million. The change resulted
      primarily from higher interest expense related to new debt obtained for the
      purpose of financing acquisitions, representing $3.0 million, and an unfavorable
      foreign currency exchange effect of $1.0 million. Our average net cash changed
      from $18.0 million in the nine months ended September 30, 2007 to average net
      debt of $22.9 million in the nine months ended September 30, 2008 due to
      long-term loans related to our 2007 acquisitions and long-term loans obtained
      during the nine months ended September 30, 2008.




***Other
      expenses, net***




Other
      expenses, net increased from $0.2 million in the nine months ended September
      30,
      2007 to $0.4 in the nine months ended September 30, 2008, representing an
      increase of $0.2 million, or 126.6%. This increase was due primarily to a loss
      on the sale of an investment at cost, representing $0.3 million.




***Taxes
      on income***




Our
      taxes
      on income increased from $4.2 million in the nine months ended September 30,
      2007 to $9.2 million in the nine months ended September 30, 2008, representing
      an increase of $5.0 million, or 119.2%. This increase was due primarily to
      the
      increase in our taxable income. Of the $5.0 million increase in taxes on income,
      $3.5 million was taxes on the gain from the sale of our SAP sales and
      distribution division in Israel, net of related expenses and other charges,
      where the corporate tax rate is 27%. Our effective tax rate in the nine months
      ended September 30, 2008 was 22.7%, compared to 19.6% in the nine months ended
      September 30, 2007. If the gain from the sale of our Israeli SAP sales and
      distribution division, net of related expenses and other charges, had not been
      recognized in the nine months ended September 30, 2008, our effective tax rate
      for the period would have been approximately 20.7%.


-
          25
          -




***Net
      Income***




Net
      income increased from $17.2 million in the nine months ended September 30,
      2007
      to $31.1 million in the nine months ended September 30, 2008, representing
      an
      increase of $13.9 million, or 81.1%. The increase in net income was due
      primarily to our increase in operating income of $23.2 million, partially offset
      by our increase in taxes, representing $5.0 million, and our change from
      financial income to financial expenses, representing $4.1 million.




**Results
      by Business Segment**




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




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 our
                U.S.
                financial services and healthcare business unit, called Ness IBS;
                our
                NessPRO enterprise software distribution business in Italy, Spain,
                Portugal and 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.


-
          26
          -


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




**Three months ended**
              **September 30,**
            
            **Nine months ended**
              **September 30,****2007**
            
            **2008**
            
            **2007**
            
            **2008****Segment
                Data:**
            
            **(unaudited)**
            
            **(unaudited)****Revenues
                from external customers:**Ness
                North America
            
            $
            26,556
            
            $
            31,846
            
            $
            78,970
            
            $
            89,508Technologies
                & Systems Group (TSG)
            
            
            15,912
            
            
            16,281
            
            
            43,277
            
            
            47,096Ness
                Europe
            
            
            33,324
            
            
            45,356
            
            
            80,548
            
            
            130,446Ness
                Israel
            
            
            45,911
            
            
            45,712
            
            
            145,680
            
            
            149,048Other
            
            
            16,984
            
            
            24,916
            
            
            41,752
            
            
            78,331$
            138,687
            
            $
            164,111
            
            $
            390,227
            
            $
            494,429**Operating
                Income (Loss):**Ness
                North America
            
            $
            2,451
            
            $
            3,362
            
            $
            6,580
            
            $
            6,478Technologies
                & Systems Group (TSG)
            
            
            1,909
            
            
            2,310
            
            
            5,683
            
            
            5,419Ness
                Europe
            
            
            2,769
            
            
            4,448
            
            
            5,957
            
            
            13,422Ness
                Israel
            
            
            2,139
            
            
            16,838
            
            
            7,785
            
            
            26,494Other
            
            
            1,900
            
            
            (276
            )
            
            3,309
            
            
            1,696Unallocated
                Expenses
            
            
            (2,205
            )
            
            (3,623
            )
            
            (8,209
            )
            
            (9,185
            )$
            8,963
            
            $
            23,059
            
            $
            21,104
            
            $
            44,324




**Liquidity
      and Capital Resources**




***Overview***




As
      of
      September 30, 2008, we had cash and cash equivalents, restricted cash and
      short-term bank deposits of $81.7 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):




**Nine months ended**
              **September 30,****2007**
            
            **2008**Net
                cash provided by operating activities
            
            $
            17
            
            $
            18,385Net
                cash used in investing activities
            
            
            (23,471
            )
            
            (1,822
            )Net
                cash provided by financing activities
            
            
            13,321
            
            
            31,042Effect
                of exchange rate changes on cash and cash equivalents
            
            
            2,602
            
            
            (10,291
            )Increase
                (decrease) in cash and cash equivalents
            
            
            (7,531
            )
            
            37,314Cash
                and cash equivalents at the beginning of the period
            
            
            46,675
            
            
            43,097Cash
                and cash equivalents at the end of the period
            
            $
            39,144
            
            $
            80,411


-
          27
          -


*Nine
      months ended September 30, 2008 compared to the nine months ended September
      30,
      2007*




Net
      cash
      provided by operating activities was $18.4 million in the nine months ended
      September 30, 2008, compared to $17,000 in the nine months ended September
      30,
      2007. The major factors contributing to the increase were an improvement in
      our
      cash collection efforts reflected in a reduction in our total trade receivables,
      representing $21.8 million, higher net income, representing $13.9 million,
      and
      an increase in advances from customers and deferred revenues, representing
      $4.0
      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 and an increase in trade payables in the
      nine
      months ended September 30, 2007 compared to a decrease in trade payables in
      the
      nine months ended September 30, 2008, representing $9.3 million.




Net
      cash
      used in investing activities was $1.8 million in the nine months ended September
      30, 2008, compared with $23.5 million in the nine months ended September 30,
      2007. The major factors contributing to the decrease were the proceeds from
      the
      sale of our Israeli SAP sales and distribution division, representing $13.1
      million, net cash paid for the acquisition of consolidated subsidiaries in
      the
      nine months ended September 30, 2007 for which there was no corresponding amount
      in the nine months ended September 30, 2008, representing $7.7 million, and
      lower payments in connection with acquisitions of subsidiaries in prior periods,
      representing $4.3 million, offset by an increase in purchase of property and
      equipment, representing $3.0 million, and receipt of the remaining net proceeds
      from the sale of our interest in dbMotion in the nine months ended September
      30,
      2007 for which there was no corresponding amount in the nine months ended
      September 30, 2008, representing $1.9 million.




Net
      cash
      provided by financing activities was $31.0 million in the nine months ended
      September 30, 2008, compared with $13.3 million in the nine months ended
      September 30, 2007. The major factors contributing to the increase were proceeds
      from new long-term bank loans, representing $12.6 million, and net proceeds
      from
      short-term bank credit, representing $12.8 million, offset by a dividend paid
      to
      former shareholders of an acquired subsidiary in the nine months ended September
      30, 2008 for which there was no corresponding amount in the nine months ended
      September 30, 2007, representing $10.0 million.




The
      effect of exchange rate changes on cash and cash equivalents was ($10.3) million
      in the nine months ended September 30, 2008, compared to $2.6 million in the
      nine months ended September 30, 2007. The change was primarily due to the effect
      of translation adjustments on our net current assets.




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




In
      March
      2008, one of our Israeli subsidiaries obtained a long-term loan of 21.0 million
      New Israeli Shekels (approximately $6.1 million at the exchange rate prevailing
      on September 30, 2008), from a commercial bank. The loan matures over five
      years
      and bears interest at a fixed rate. Principal and interest are paid quarterly.
      In addition, at September 30, 2008, our Israeli subsidiary had $10.3 million
      of
      on-call borrowings, with a weighted average interest rate of 5.17%, which we
      used to finance working capital requirements in Israel. The long-term loans
      and
      on-call borrowings obtained by this Israeli subsidiary contain covenants, which,
      among other things, require a minimum stockholders’ equity of this Israeli
      subsidiary; and which place limitations on merging, transferring or pledging
      assets. 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 September 30,
      2008, we were in compliance and expect to remain in compliance with these
      covenants.




In
      March
      2008, we obtained a long-term loan in the amount of €12.0 million (approximately
      $17.5 million at the exchange rate prevailing on September 30, 2008) 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
      substantially similar terms. The long-term loan, the short-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,
      transferring or pledging 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. As of September 30, 2008, we were in compliance
      and expect to remain in compliance with these covenants. In connection with
      the
      above-mentioned covenants, we received the consent of the commercial banks
      during the nine months ended September 30, 2008, to record a fixed charge on
      deposits in the amount of $742 held by our Indian subsidiary related to the
      mark-to-market of foreign exchange forward contracts into which we entered
      to
      hedge against the effect of exchange rate fluctuations on cash flows denominated
      in Indian Rupee.


-
          28
          -


At
      September 30, 2008, one of our non-U.S. subsidiaries had short-term borrowings
      denominated in Euros aggregating to $3.0 million with a weighted average
      interest rate of 10.87%.




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
      nine
      months ended September 30, 2008.




***Contractual
      Obligations***




As
      of
      September 30, 2008, except for the short-term and long-term loans obtained
      through September 30, 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.





-
            29
            -




**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 New Israeli Shekel and to some
      extent by fluctuations in intra-European currency rates.




An
      increase of 10% in the value of the New Israeli Shekel relative to the U.S.
      dollar in the first nine months of 2008 would have resulted in a decrease in
      the
      U.S. dollar reporting value of our operating income of $1.9 million for that
      period, while a decrease of 10% in the value of the New Israeli Shekel relative
      to the U.S. dollar in the first nine months of 2008 would have resulted in
      an
      increase in the U.S. dollar reporting value of our operating income of $1.7
      million for that period.




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 SEC’s rules and forms and
      are operating in an effective manner.


-
          30
          -


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.


-
          31
          -


**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, except as set forth
      below.




**The
      declining value of stocks, bonds and other investments during the current world
      economic downturn could require us to write-down the value of our severance
      pay
      fund or our goodwill, which could have a material adverse effect on our results
      of operations.**




Under
      Israeli law, we must provide severance for all our employees in Israel. We
      fund
      the severance through monthly deposits in externally managed funds, invested
      mostly in conservative investments such as government and corporate bonds.
      In
      the current capital markets downturn, the value of these investments has
      declined, and they may lose additional value in the future. The magnitude of
      the
      future potential loss is unpredictable, because it is based on the market value
      of investments at a future date. The severance pay fund is recorded at fair
      value on our balance sheet, and if the value of the investments falls, we will
      be required to write down the value of the severance pay fund asset on our
      balance sheet. If the write-down is significant, it would result in a
      significant non-cash expense on our income statement, materially adversely
      affecting our results of operations.




Our
      balance sheet contains a significant amount of goodwill in long-term assets.
      In
      the current capital markets downturn, our stock price, and consequently our
      market capitalization, have declined, and may decline further in the future.
      The
      magnitude of the future potential decline is unpredictable, because it is based
      on the market value of our stock at a future date. If the value of our market
      capitalization falls below the value of our stockholders’ equity, it might
      indicate that a write-down of goodwill is required. A write-down is
      required if the fair value of the reporting unit exceeds its carrying
      value. Such
      a
      write-down could result in a significant non-cash expense on our income
      statement, materially adversely affecting our results of
      operations.




***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.


-
          32
          -




**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.


-
          33
          -




**SIGNATURES**




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





**NESS
                TECHNOLOGIES, INC.**(Registrant)Date:
                November 6, 2008
            By:
            /s/
                Issachar GerlitzIssachar
                GerlitzChief
                Executive Officer, President, Director(Principal
                executive officer)Date:
                November 6, 2008
            By:
            /s/
                Ofer SegevOfer
                SegevExecutive
                Vice President and Chief Financial Officer(Principal
                financial and accounting
                officer)


-
          34
          -


**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.


-
          35
          -