**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, 2007**




 ̈
            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 ofincorporation
                or organization)
            (I.R.S.
                EmployerIdentification
                Number)




**Ness
      Tower**


**Atidim
      High-Tech Industrial Park**


**Building
      4**


**Tel
      Aviv 61580, Israel**


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


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








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




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




Large
      accelerated filer  ̈ Accelerated
      filer ý Non-accelerated
      filer  ̈




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




As
      of
      October 31, 2007, 39,193,366 shares of common stock, $0.01 par value per share,
      were outstanding.










**NESS
      TECHNOLOGIES, INC. AND SUBSIDIARIES**





**INDEX**




PART
                  I - FINANCIAL INFORMATION
              3Item
                  1. Financial Statements
              3Condensed
                  Consolidated Balance Sheets - December 31, 2006 and September 30,
                  2007 (Unaudited)
              3Condensed
                  Consolidated Statements of Income - Three and nine months ended
                  September 30, 2006 and 2007 (Unaudited)
              5Condensed
                  Consolidated Statements of Cash Flows - Nine months ended September
                  30, 2006 and 2007 (Unaudited)
              6Notes
                  to Interim Condensed Consolidated Financial Statements - September
                  30,
                  2007 (Unaudited)
              8Item
                  2. Management’s Discussion and Analysis of Financial Condition and Results
                  of Operations
              18Overview
              18Recent
                  Developments
              19Consolidated
                  Results of Operations
              19Three
                  Months Ended September 30, 2007 Compared to the Three Months Ended
                  September 30, 2006
              20Nine Months
                  Ended September 30, 2007 Compared to the Nine Months Ended September
                  30, 2006
              22Results
                  by Business Segment
              24Liquidity
                  and Capital Resources
              25Forward-Looking
                  Statements and Risk Factors
              28Item
                  3. Quantitative and Qualitative Disclosure about Market
                  Risk
              28Item
                  4. Controls and Procedures
              28Evaluation
                  of Disclosure Controls and Procedures
              28Changes
                  in Internal Control
              29PART
                  II - OTHER INFORMATION
              30Item
                  1. Legal Proceedings
              30Item
                  1A. Risk Factors
              30Item
                  2. Unregistered Sales of Equity Securities and Use of
                  Proceeds
              30Item
                  3. Defaults upon Senior Securities.
              30Item
                  4. Submission of Matters to a Vote of Security Holders
              30Item
                  5. Other Information
              30Item
                  6. Exhibits
              31SIGNATURES
              32EXHIBIT
                  INDEX
              33
  -
            2 -


**PART
      I - FINANCIAL INFORMATION**






***Item
      1. Financial Statements***




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


**Interim
      Condensed Consolidated Balance Sheets**





**U.S.
      dollars in thousands**





**December
                31,**
            
            **September
                30,****2006**
            
            **2007****(Unaudited)**ASSETSCURRENT
                ASSETS:Cash
                and cash equivalents
            
            $
            46,675
            
            $
            39,144Restricted
                cash
            
            
            518
            
            
            595Short-term
                bank deposits
            
            
            1,509
            
            
            1,514Trade
                receivables (net of allowance for doubtful accounts of $2,812 and
                $2,669
                at December 31, 2006 and September 30, 2007, respectively)
            
            
            136,934
            
            
            156,613Unbilled
                receivables
            
            
            28,635
            
            
            40,913Other
                accounts receivable and prepaid expenses
            
            
            15,357
            
            
            26,215Inventories
                and work-in-progress
            
            
            411
            
            
            2,522Total
                current assets
            
            
            230,039
            
            
            267,516LONG-TERM
                ASSETS:Long-term
                prepaid expenses and other assets
            
            
            6,480
            
            
            8,295Investments
                at cost
            
            
            1,193
            
            
            1,274Unbilled
                receivables
            
            
            14,985
            
            
            12,130Deferred
                income taxes
            
            
            7,670
            
            
            7,049Severance
                pay fund
            
            
            42,321
            
            
            46,996Total
                long-term assets
            
            
            72,649
            
            
            75,744PROPERTY
                AND EQUIPMENT, NET
            
            
            28,279
            
            
            31,668INTANGIBLE
                ASSETS, NET
            
            
            8,336
            
            
            9,060GOODWILL
            
            
            201,718
            
            
            230,501Total
                assets
            
            $
            541,021
            
            $
            614,489




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




-
          3 -


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


**Interim
      Condensed Consolidated Balance Sheets**





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





**December
                31,**
            
            **September
                30,****2006**
            
            **2007****(Unaudited)**LIABILITIES
                AND STOCKHOLDERS’ EQUITYCURRENT
                LIABILITIES:Short-term
                bank credit
            
            $
            4,477
            
            $
            15,843Current
                maturities of long-term debt
            
            
            4,420
            
            
            1,644Trade
                payables
            
            
            42,524
            
            
            42,330Advances
                from customers and deferred revenues
            
            
            29,942
            
            
            33,166Other
                accounts payable and accrued expenses
            
            
            76,128
            
            
            80,641Total
                current liabilities
            
            
            157,491
            
            
            173,624LONG-TERM
                LIABILITIES:Long-term
                debt and other liabilities, net of current maturities
            
            
            3,703
            
            
            17,068Deferred
                income taxes
            
            
            141
            
            
            1,702Accrued
                severance pay
            
            
            47,031
            
            
            54,233Total
                long-term liabilities
            
            
            50,875
            
            
            73,003COMMITMENTS
                AND CONTINGENT LIABILITIESSTOCKHOLDERS’
                EQUITY:Common
                Stock of $0.01 par value -
              Authorized:
                76,500,000 shares at December 31, 2006 and at September 30,
                2007;Issued and outstanding: 38,638,682 shares at December 31, 2006 and
                39,193,366 shares at September 30, 2007
            
            
            387
            
            
            392Additional
                paid-in capital
            
            
            317,799
            
            
            321,868Accumulated
                other comprehensive income (loss)
            
            
            (415
            )
            
            15,031Retained
                earnings
            
            
            14,884
            
            
            30,571Total
                stockholders’ equity
            
            
            332,655
            
            
            367,862Total
                liabilities and stockholders’ equity
            
            $
            541,021
            
            $
            614,489




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




-
          4 -


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


**Interim
      Condensed Consolidated Statements of Income**





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





**Three
                months ended**
              **September
                30,**
            
            **Nine
                months ended**
              **September
                30,****2006**
            
            **2007**
            
            **2006**
            
            **2007****(Unaudited)**
            
            **(Unaudited)**Revenues
            
            $
            119,135
            
            $
            140,723
            
            $
            342,791
            
            $
            392,263Cost
                of revenues (*)
            
            
            85,095
            
            
            99,730
            
            
            244,792
            
            
            279,083Gross
                profit
            
            
            34,040
            
            
            40,993
            
            
            97,999
            
            
            113,180Operating
                expenses:Selling
                and marketing (*)
            
            
            8,391
            
            
            9,854
            
            
            25,615
            
            
            28,619General
                and administrative (*)
            
            
            15,489
            
            
            22,176
            
            
            46,845
            
            
            63,457Total
                operating expenses
            
            
            23,880
            
            
            32,030
            
            
            72,460
            
            
            92,076Operating
                income
            
            
            10,160
            
            
            8,963
            
            
            25,539
            
            
            21,104Financial
                income (expenses), net
            
            
            (492
            )
            
            123
            
            
            (1,130
            )
            
            438Other
                income (expenses), net
            
            
            (8
            )
            
            (117
            )
            
            436
            
            
            (173
            )Income
                before taxes on income
            
            
            9,660
            
            
            8,969
            
            
            24,845
            
            
            21,369Taxes
                on income
            
            
            1,709
            
            
            1,660
            
            
            4,517
            
            
            4,182Equity
                in net losses of an affiliate
            
            
            (13
            )
            
            —
            
            
            (103
            )
            
            —Net
                income
            
            $
            7,938
            
            $
            7,309
            
            $
            20,225
            
            $
            17,187Basic
                net earnings per share
            
            $
            0.22
            
            $
            0.19
            
            $
            0.57
            
            $
            0.44Diluted
                net earnings per share
            
            $
            0.22
            
            $
            0.19
            
            $
            0.56
            
            $
            0.43





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




**Three
                months ended**
              **September
                30,**
            
            **Nine
                months ended**
              **September
                30,****2006**
            
            **2007**
            
            **2006**
            
            **2007****(Unaudited)**
            
            **(Unaudited)**Cost
                of revenues
            
            $
            —
            
            $
            29
            
            $
            —
            
            $
            114Selling
                and marketing
            
            
            —
            
            
            30
            
            
            —
            
            
            69General
                and administrative
            
            
            204
            
            
            352
            
            
            522
            
            
            832





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




-
          5 -


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


**Interim
      Condensed Consolidated Statements of Cash Flows**





**U.S.
      dollars in thousands**




**Nine
                months ended**
              **September
                30,****2006**
            
            **2007****(Unaudited)**Cash
                flows from operating activities:Net
                income
            
            $
            20,225
            
            $
            17,187Adjustments
                required to reconcile net income to net cash provided by (used in)
                operating activities:Stock-based
                compensation-related expenses
            
            
            522
            
            
            1,015Equity
                in net losses of an affiliate
            
            
            103
            
            
            —Currency
                fluctuation of long-term debt
            
            
            247
            
            
            103Depreciation
                and amortization
            
            
            8,594
            
            
            8,948Deferred
                income taxes, net
            
            
            1,383
            
            
            2,756Loss
                on sale of property and equipment
            
            
            105
            
            
            198Excess
                tax benefits related to exercise of options
            
            
            (628
            )
            
            (308
            )Decrease
                (increase) in trade receivables, net
            
            
            2,010
            
            
            (4,952
            )Increase
                in unbilled receivables
            
            
            (18,554
            )
            
            (6,134
            )Increase
                in other accounts receivable and prepaid expenses
            
            
            (5,575
            )
            
            (8,918
            )Decrease
                (increase) in inventories and work-in-progress
            
            
            1,824
            
            
            (1,961
            )Increase
                in long-term prepaid expenses and other assets
            
            
            (1,026
            )
            
            (1,384
            )Decrease
                in trade payables
            
            
            (10,049
            )
            
            (4,323
            )Increase
                (decrease) in advances from customers and deferred revenues
            
            
            862
            
            
            (1,084
            )Decrease
                in other accounts payable and accrued expenses
            
            
            (12,016
            )
            
            (1,221
            )Increase
                (decrease) in accrued severance pay, net
            
            
            (103
            )
            
            95Net
                cash provided by (used in) operating activities
            
            
            (12,076
            )
            
            17Cash
                flows from investing activities:Net
                cash paid for acquisition of consolidated subsidiaries
            
            
            (13,683
            )
            
            (7,744
            )Proceeds
                from sale of cost investment, net
            
            
            —
            
            
            1,866Additional
                payments in connection with acquisitions of subsidiaries in prior
                periods
            
            
            (5,162
            )
            
            (10,241
            )Proceeds
                from maturity of short-term bank deposits
            
            
            35,211
            
            
            107Proceeds
                from sale of marketable securities
            
            
            2,779
            
            
            —Proceeds
                from sale of property and equipment
            
            
            597
            
            
            240Purchase
                of property and equipment and capitalization of software development
                costs
                for internal use
            
            
            (9,396
            )
            
            (7,699
            )Capitalization
                of software development costs
            
            
            (255
            )
            
            —Net
                cash provided by (used in) investing activities
            
            
            10,091
            
            
            (23,471
            )





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




-
          6 -


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


**Interim
      Condensed Consolidated Statements of Cash Flows**





**U.S.
      dollars in thousands**




**Nine
                months ended**
              **September
                30,****2006**
            
            **2007****(Unaudited)**Cash
                flows from financing activities:Exercise
                of options
            
            $
            9,376
            
            $
            2,920Excess
                tax benefits related to exercise of options
            
            
            628
            
            
            308Short-term
                bank loans and credit, net
            
            
            1,128
            
            
            987Proceeds
                from long-term debt
            
            
            —
            
            
            12,928Principal
                payments of long-term debt
            
            
            (4,038
            )
            
            (3,822
            )Net
                cash provided by financing activities
            
            
            7,094
            
            
            13,321Effect
                of exchange rate changes on cash and cash equivalents
            
            
            1,498
            
            
            2,602Increase
                (decrease) in cash and cash equivalents
            
            
            6,607
            
            
            (7,531
            )Cash
                and cash equivalents at the beginning of the period
            
            
            33,579
            
            
            46,675Cash
                and cash equivalents at the end of the period
            
            $
            40,186
            
            $
            39,144







*Non-cash
                financing activity*Receivables
                for exercise of options granted to employees
            
            $
            —
            
            $
            4Reclassification
                to equity of redeemable options accrual upon partial exercise of
                options
            
            $
            1,868
            
            $
            —





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




-
          7 -


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


**Notes
      to Interim Condensed Consolidated Financial
      Statements**





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




***Note
      1: General***




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




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




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




a.
            Unaudited
                Interim Financial Information




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




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




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




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




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




b.
            Reclassification




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




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




d.
            Principles
                of consolidation




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




e.
            Acquisition
                of subsidiaries




1.
            NessPRO
                Thailand




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




The
      purchase price was allocated to tangible and intangible assets acquired and
      liabilities assumed based on their respective fair value. As part of the
      allocation, $1,645 was allocated to goodwill and workforce and $766 was
      allocated to amortizable intangible assets, license agreement and customer
      relations, that are being amortized over their estimated useful lives of five
      and six years, respectively. The results of the aforementioned acquisition
      are
      included in our consolidated financial statements for the period subsequent
      to
      the acquisition date. Significant liabilities assumed included accounts payable
      and other accrued expenses in a total amount of approximately $542.




2.
            NessPRO
                Italy




On
      September 5, 2007, we acquired substantially all of the outstanding shares
      of
      Selesta S.p.A., a privately-held IT software distribution and systems
      integration company based in Italy, and its wholly-owned subsidiaries Selesta
      Security Systems S.p.A. and Informatica Corp. s.r.l. (together "Selesta
      Italia"), for a purchase price of approximately €9.0 million, or $12,189, in
      cash and related purchase costs of $261. We funded the acquisition through
      a
      long-term loan from a commercial bank. The loan matures over five years with
      principal payments commencing in the third year, and bears interest at a fixed
      rate paid quarterly. Additional payments totaling €9.0 million may be made in
      2008 and 2009, should Selesta Italia achieve certain business goals by the
      end
      of 2007 and 2008, respectively. Its results of operations have been included
      in
      our consolidated financial statements since the acquisition date. Upon
      completion of the acquisition, Selesta Italia changed its name to NessPRO Italy
      S.p.A.




This
      acquisition was accounted for under the purchase method of accounting and,
      accordingly, the purchase price was allocated to the assets acquired and
      liabilities assumed based on their related fair values, using the exchange
      rate
      prevailing on the date of acquisition, as follows:


-
            9 -
 **NESS
        TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**
 **Notes
        to Interim Condensed Consolidated Financial
        Statements**
 
 **U.S.
        dollars in thousands (except share and per share data)
        (Unaudited)**


Cash
                and cash equivalents
            
            $
            7,201Trade
                receivables
            
            
            7,498Other
                accounts receivable
            
            
            3,892Property
                and equipment
            
            
            315Long-term
                deferred tax asset, net
            
            
            482Intangible
                assets:Customer
                relations
            
            
            984Distribution
                agreements
            
            
            1,248Workforce
            
            
            2,599Goodwill
            
            
            16,109Total
                assets acquired
            
            
            40,328Liabilities
                assumed:Short
                terms bank credit
            
            
            9,659Accounts
                payable
            
            
            1,517Other
                current liabilities
            
            
            14,615Accrued
                severance pay
            
            
            2,087Total
                liabilities assumed
            
            
            27,878Net
                assets acquired
            
            $
            12,450




The
      value
      assigned to the customer-related intangibles amounted to $2,232. The fair value
      of Selesta Italia’s customer-related intangibles was determined using the Income
      Approach.




We
      recorded a deferred tax liability of $692 for the difference between the
      assigned values and the tax bases of the customer-related intangibles
      acquired.




As
        a
        result of the acquisition of Selesta Italia, we incurred incremental costs
        to
        exit and consolidate activities at Selesta Italia's locations. These expenses
        that are not associated with the generation of future revenue and have no
        future
        economic benefit are assumed liabilities in the allocation of the purchase
        price
        to the net assets acquired. These restructuring costs were recorded in the
        purchase price allocation and amounted to $4,105.


Pro
      forma
      information in accordance with SFAS No. 141 is provided in Note
      2e(3).




3.
            The
                following table presents certain combined unaudited statements of
                income
                data for the three and nine months ended September 30, 2006 as if
                the
                acquisitions of Ness IBS, NessPRO Spain, NessPRO Thailand and NessPRO
                Italy had occurred on January 1, 2006, after giving effect to purchase
                accounting adjustments, including amortization of identifiable intangible
                assets:




**Three
                months ended**
              **September
                30, 2006**
            
            **Nine
                months ended**
              **September
                30, 2006****(unaudited)**
            
            **(unaudited)**Revenues
            
            $
            126,723
            
            $
            371,132Net
                income
            
            $
            6,639
            
            $
            15,905Earnings
                per share:Basic
            
            $
            0.18
            
            $
            0.45Diluted
            
            $
            0.18
            
            $
            0.44




The
      following table presents certain combined unaudited statements of income data
      for the three and nine months ended September 30, 2007 as if the acquisitions
      of
      NessPRO Thailand and NessPRO Italy had occurred on January 1, 2006, after giving
      effect to purchase accounting adjustments, including amortization of
      identifiable intangible assets:


-
            10 -
 **NESS
        TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**
 **Notes
        to Interim Condensed Consolidated Financial
        Statements**
 
 **U.S.
        dollars in thousands (except share and per share data)
        (Unaudited)**


**Three
                months ended**
              **September
                30, 2007**
            
            **Nine
                months ended**
              **September
                30, 2007****(unaudited)**
            
            **(unaudited)**Revenues
            
            $
            143,311
            
            $
            403,648Net
                income
            
            $
            7,410
            
            $
            19,193Earnings
                per share:Basic
            
            $
            0.19
            
            $
            0.49Diluted
            
            $
            0.19
            
            $
            0.49




f.
            Goodwill




On
      January 1, 2007, we made minor adjustments to the components of our operating
      segments (see Note 5). There was no significant effect on the allocation of
      goodwill between the segments.




In
      the
      nine month period ended September 30, 2007, we recorded additional goodwill
      and
      workforce resulting from the acquisitions of NessPRO Thailand and NessPRO Italy
      of, in aggregate, $20,353.




g.
            Accounting
                for stock-based compensation




During
      the nine months ended September 30, 2007, we granted options to purchase
      2,932,200 shares of our Common Stock under our U.S. and Israeli 2003 Stock
      Option Plans and our 2007 Stock Option Plan at a weighted average exercise
      price
      of $12.65 per share and a weighted average fair value of $3.00 per
      share.




Included
      are 666,000 options granted during the first quarter to our senior management.
      These options vest in accordance with certain performance conditions through
      April 1, 2010. From April 1, 2010 to April 30, 2010, the grantees have the
      right
      to redeem the vested unexercised options outstanding on April 1, 2010 at the
      price of $4.50 per each outstanding option. Given the specific characteristics
      of the options, we used a Monte Carlo simulation in order to estimate their
      fair
      value. We believe this valuation technique produces a better estimate of fair
      values than the closed form option pricing model, considering the guidance
      provided in FASB 123(R). We accounted for these options as tandem awards. The
      fair value assigned to the redemption feature will be marked to market in each
      reporting period. During the nine months ended September 30, 2007, $172 of
      stock-based compensation expense related to these options was recorded against
      liability.




The
      remaining options granted in the period vest in accordance with length of
      service.




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


-
            11 -
 **NESS
        TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**
 **Notes
        to Interim Condensed Consolidated Financial
        Statements**
 
 **U.S.
        dollars in thousands (except share and per share data)
        (Unaudited)**
  **Black-Scholes**
                
                **Monte
                    Carlo****Three
                    months ended**
                  **September
                    30,**
                
                **Nine
                    months ended**
                  **September
                    30,**
                
                **Three
                    months ended**
                  **September
                    30, 2007**
                
                **Nine
                    months ended**
                  **September
                    30, 2007****2006**
                
                **2007**
                
                **2006**
                
                **2007****(Unaudited)**
                
                **(Unaudited)**
                
                **(Unaudited)**
                
                **(Unaudited)**
 Dividend
                    yield
                
                0%
                
                0%
                
                0%
                
                0%
                
                0%
                
                0%Expected
                    volatility
                
                31%
                
                32%
                
                31%
                
                31
                    - 32%
                
                29
                    - 31%
                
                29
                    - 31%Risk-free
                    interest
                
                5.15%
                
                4.14%
                
                5.15%
                
                4.14
                    - 5.10%
                
                4.61
                    - 4.95%
                
                4.61
                    - 4.95%Expected
                    life (in years)
                
                0.52%
                
                3.5%
                
                0.52%
                
                2.0
                    - 3.5%
                
                N/A
                
                N/A




As
      of
      September 30, 2007, options to purchase 5,186,398 shares were outstanding with
      a
      weighted average exercise price of $11.91 per share and options to purchase
      876,812 shares were available for future grants.




As
      of
      September 30, 2007, approximately $5,978 of total unrecognized compensation
      cost
      related to stock-based compensation was expected to be recognized over a period
      of 3 years. The total unrecognized stock-based compensation cost to be
      recognized in future periods as of September 30, 2007 does not consider the
      effect of stock options that may be issued in subsequent periods.




***Note
      3: Commitments and Contingent Liabilities***




a.
            Litigation




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




One
      of
      our Israeli subsidiaries is currently in a dispute with one of its clients,
      an
      Israeli insurance company, regarding the terms and conditions of a software
      development contract (the “Contract”). The insurance company claims that we have
      materially breached the Contract by not timely delivering the required software.
      The insurance company issued a contract termination notice on September 21,
      2006, collected autonomous guarantees provided by our subsidiary in the amount
      of approximately $2.2 million on November 23, 2006, and is demanding payment
      of
      amounts it claims to have paid so far of approximately $4.4 million (excluding
      Value Added Tax, or “VAT”), as well as damages of approximately $19.8 million.
      We believe that we have not materially breached the Contract and that the delays
      were caused by the insurance company’s actions. However, we do not contest the
      insurance company’s right to terminate the contract for convenience, subject to
      certain provisions including proper settlement of payments, as per the Contract.
      The Contract provides for mandatory arbitration, which commenced in January
      2007, in which we intend to vigorously defend our position. The insurance
      company and our subsidiary have both issued their respective claims to the
      arbitrator, as well as responses to the other party’s claims. The total scope of
      the project is approximately $9.7 million. With respect to this contract,
      approximately $5.6 million (excluding VAT) is included in our trade receivables
      and other accounts receivable and prepaid expenses. We can give no assurance
      that our liability insurance policy, which has a cap of $5.0 million per claim,
      will cover such exposure. At this stage we cannot estimate the result of the
      arbitration and we expect that the arbitration process may be protracted. If
      the
      outcome of the dispute is not in our favor and not in line with our position
      described above, it may adversely affect our financial position, results of
      operations and cash flows. The arbitration process delayed our ability to
      provide the solution at issue and resulted in cancellation of a purchase by
      another customer not under arbitration. As a result of the cancellation, we
      recorded a charge of $2.1 million to general and administrative expenses in
      the
      quarter ended September 30, 2007. The contract in question and the claims in
      the
      arbitration proceeding are denominated in NIS, and therefore the figures cited
      in this paragraph have been updated according to the NIS-to-dollar exchange
      rate.


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


b.
            Guarantees




Guarantees
      are contingent commitments issued by us generally to guarantee our performance
      in different projects to our customers, such as tenders. The term of a guarantee
      generally is equal to the term of the related projects, which can be as short
      as
      30 days or as long as 8 years. The maximum potential amount of future payments
      we could be required to make under our guarantees at December 31, 2006 and
      September 30, 2007, is $37,336 and $40,794, respectively. We do not hold
      collateral to support guarantees except when deemed necessary.




c.
            Liens
                and charges




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




***Note
      4: Stockholders’ Equity***




a.
            Total
                comprehensive income:




**Three
                months ended**
              **September
                30,**
            
            **Nine
                months ended**
              **September
                30,****2006**
            
            **2007**
            
            **2006**
            
            **2007****(Unaudited)**
            
            **(Unaudited)**Net
                income
            
            $
            7,938
            
            $
            7,309
            
            $
            20,225
            
            $
            17,187Foreign
                currency translation adjustments, net
            
            
            4,925
            
            
            12,653
            
            
            8,460
            
            
            15,446Net
                unrealized gains on available-for-sale marketable
                securities
            
            
            43
            
            
            —
            
            
            23
            
            
            —Comprehensive
                income
            
            $
            12,906
            
            $
            19,962
            
            $
            28,708
            
            $
            32,633




b.
            Option
                exercises:




In
      the
      three and nine months ended September 30, 2007, a total of 17,122 and 554,684
      options, respectively, were exercised into common stock for aggregate
      consideration of $194 and $2,924, respectively.




***Note
      5: Segment Reporting***




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




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


-
              13 -
 **NESS
          TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**
 **Notes
          to Interim Condensed Consolidated Financial
          Statements**
 
 **U.S.
          dollars in thousands (except share and per share data)
          (Unaudited)**


Our
      operating segments are:




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




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




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




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




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




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




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




**Three
                months ended September 30, 2006****Ness****NA**
            
            **TSG**
            
            **NessEurope**
            
            **NessIsrael**
            
            **Other**
            
            **Unallocated**
            
            **Total****(Unaudited)**Revenues
                from external customers
            
            $
            22,627
            
            $
            14,538
            
            $
            22,015
            
            $
            50,652
            
            $
            9,303
            
            
            —
            
            $
            119,135Operating
                income (loss)
            
            $
            2,653
            
            $
            2,275
            
            $
            1,364
            
            $
            4,621
            
            $
            589
            
            $
            (1,342
            )
            $
            10,160Financial
                expense, net
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (492
            )Other
                expense, net
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (8
            )Income
                before taxes on income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            9,660


-
              14 -
 **NESS
          TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**
 **Notes
          to Interim Condensed Consolidated Financial
          Statements**
 
 **U.S.
          dollars in thousands (except share and per share data)
          (Unaudited)**




**Three
                months ended September 30, 2007****Ness**
              **NA**
            
            **TSG**
            
            **NessEurope**
            
            **NessIsrael**
            
            **Other**
            
            **Unallocated**
            
            **Total****(Unaudited)**Revenues
                from external customers
            
            $
            26,556
            
            $
            15,912
            
            $
            33,324
            
            $
            47,947
            
            $
            16,984
            
            
            —
            
            $
            140,723Operating
                income (loss)
            
            $
            2,451
            
            $
            1,909
            
            $
            2,769
            
            $
            2,139
            
            $
            1,900
            
            $
            (2,205
            )
            $
            8,963Financial
                income, net
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            123Other
                expense, net
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (117
            )Income
                before taxes on income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            8,969




**Nine
                months ended September 30, 2006****Ness**
              **NA**
            
            **TSG**
            
            **NessEurope**
            
            **NessIsrael**
            
            **Other**
            
            **Unallocated**
            
            **Total****(Unaudited)**Revenues
                from external customers
            
            $
            69,748
            
            $
            41,957
            
            $
            67,050
            
            $
            138,966
            
            $
            25,070
            
            
            —
            
            $
            342,791Operating
                income (loss)
            
            $
            8,804
            
            $
            5,467
            
            $
            5,700
            
            $
            9,158
            
            $
            1,001
            
            $
            (4,591
            )
            $
            25,539Financial
                expense, net
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,130
            )Other
                income, net
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            436Income
                before taxes on income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            24,845




**Nine
                months ended September 30, 2007****Ness**
              **NA**
            
            **TSG**
            
            **NessEurope**
            
            **NessIsrael**
            
            **Other**
            
            **Unallocated**
            
            **Total****(Unaudited)**Revenues
                from external customers
            
            $
            78,970
            
            $
            43,277
            
            $
            80,548
            
            $
            147,716
            
            $
            41,752
            
            
            —
            
            $
            392,263Operating
                income (loss)
            
            $
            6,580
            
            $
            5,683
            
            $
            5,957
            
            $
            7,785
            
            $
            3,309
            
            $
            (8,209
            )
            $
            21,104Financial
                income, net
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            438Other
                expense, net
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (173
            )Income
                before taxes on income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            21,369





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




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




**Three
                months ended**
              **September
                30,**
            
            **Nine
                months ended**
              **September
                30,****2006**
            
            **2007**
            
            **2006**
            
            **2007****(Unaudited)**
            
            **(Unaudited)**Revenues
                from sales to unaffiliated customers:Israel
            
            $
            60,362
            
            $
            59,727
            
            $
            165,864
            
            $
            183,667North
                America
            
            
            29,625
            
            
            33,379
            
            
            92,940
            
            
            97,135Europe
            
            
            24,970
            
            
            40,616
            
            
            70,849
            
            
            93,324Asia
                and the Far East
            
            
            4,178
            
            
            7,001
            
            
            13,138
            
            
            18,137$
            119,135
            
            $
            140,723
            
            $
            342,791
            
            $
            392,263


-
                15 -
 **NESS
            TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**
 **Notes
            to Interim Condensed Consolidated Financial
            Statements**
 
 **U.S.
            dollars in thousands (except share and per share data)
            (Unaudited)**




**December
                31, 2006**
            
            **September
                30, 2007****(Unaudited)**Long-lived
                assets:Israel
            
            $
            111,634
            
            $
            117,008North
                America
            
            
            81,755
            
            
            84,585Europe
            
            
            34,567
            
            
            59,624Asia
                and the Far East
            
            
            10,377
            
            
            10,012$
            238,333
            
            $
            271,229




***Note
      6: Income taxes***




In
      June
      2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
      No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”) - an
      interpretation of FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48
      addresses the determination of whether tax benefits claimed or expected to
      be
      claimed on a tax return should be recorded in the financial statements. Under
      FIN 48, we may recognize the tax benefit from an uncertain tax position only
      if
      it is more likely than not that the tax position will be sustained on
      examination by the taxing authorities, based on the technical merits of the
      position. The tax benefits recognized in the financial statements from such
      a
      position should be measured based on the largest benefit that has a greater
      than
      fifty percent likelihood of being realized upon ultimate settlement. FIN 48
      also
      provides guidance on derecognizing, classification, interest and penalties
      on
      income taxes and accounting in interim periods, and requires increased
      disclosures. As a result of the adoption we recorded $1,500 of reserve as of
      January 1, 2007 for uncertain tax positions which, if recognized, would affect
      the effective tax rate. This amount includes accrued interest expense and
      penalties related to the unrecognized tax benefits. We recognize accrued
      interest related to unrecognized tax benefits in interest expenses. Penalties
      are recognized as a component of income tax expense.




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




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




***Note
      7: Basic and Diluted Net Earnings per Share***




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




The
      total
      weighted average number of shares related to the outstanding options and
      warrants excluded from the calculations of diluted net earnings per share,
      as
      they would have been anti-dilutive for all periods presented, was 2,203,644,
      4,506,359, 2,372,532 and 2,099,756 for the three months ended September 30,
      2006
      and 2007 and the nine months ended September 30, 2006 and 2007,
      respectively.


-
                16 -
 **NESS
            TECHNOLOGIES, INC. AND ITS SUBSIDIARIES**
 **Notes
            to Interim Condensed Consolidated Financial
            Statements**
 
 **U.S.
            dollars in thousands (except share and per share data)
            (Unaudited)**


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




**Three
                months ended**
              **September
                30,**
            
            **Nine
                months ended**
              **September
                30,****2006**
            
            **2007**
            
            **2006**
            
            **2007****(Unaudited)**
            
            **(Unaudited)**Numerator:Net
                income, numerator for basic and diluted per share
            
            $
            7,938
            
            $
            7,309
            
            $
            20,225
            
            $
            17,187Denominator:Weighted
                average number of shares of common stock
            
            
            35,910
            
            
            39,130
            
            
            35,471
            
            
            39,035Effect
                of dilutive securities:Employee
                stock options and warrants
            
            
            987
            
            
            209
            
            
            956
            
            
            512Denominator
                for diluted net earnings per share - weighted average assuming exercise
                of
                options
            
            
            36,897
            
            
            39,399
            
            
            36,427
            
            
            39,548




***Note
      8: Subsequent Events***




On
      October 2, 2007, we acquired all of the outstanding ownership interests of
      MS9
      Consulting LLC, a privately-held IT services company based in the United States.
      The purchase price was $11,375, with up to an additional $6,125 to be paid
      in
      the future based on the achievement of certain performance goals in 2008 and
      2009.


-
                17 -


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




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




**Overview**




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




We
      have
      operations in 17 countries across North America, Europe and Asia. We combine
      our
      deep vertical expertise and strong technical capabilities to provide a complete
      range of high quality services on a global scale. By integrating our local
      and
      international personnel in focused business and project teams, this global
      delivery model leverages our corporate knowledge and experience, intellectual
      property and global infrastructure to develop innovative solutions for clients
      across the geographies and verticals we serve. We complement this global
      delivery model with our offshore delivery capabilities to achieve meaningful
      cost reductions or other benefits for our clients.




Our
      revenues increased to $140.7 million and $392.3 million for the three and nine
      months ended September 30, 2007, from $119.1 million and $342.8 million for
      the
      three and nine months ended September 30, 2006, respectively. Net income
      decreased to $7.3 million for the three months ended September 30, 2007, from
      $7.9 million for the three months ended September 30, 2006, primarily due to
      an
      expense linked to our insurance company arbitration process which delayed our
      ability to provide the solution at issue to another client and resulted in
      cancellation of the purchase, representing $2.1 million, and the strength of
      the
      Rupee versus the dollar, representing $1.5 million, partially offset by a strong
      contribution to net income from our NessPRO Global business of $1.5 million
      and
      the change from financial expense to financial income, representing $0.6
      million. Net income decreased to $17.2 million for the nine months ended
      September 30, 2007, from $20.2 million for the nine months ended September
      30,
      2006, primarily as a result of the strength of the Rupee versus the dollar,
      representing $2.7 million, exceptional expenses related to our management
      transitions of $2.6 million, an expense linked to our insurance company
      arbitration process which delayed our ability to provide the solution at issue
      to another client and resulted in cancellation of the purchase, representing
      $2.1 million, and losses from our United Kingdom operations of $1.3 million,
      partially offset by a strong contribution to net income from our NessPRO Global
      business of $2.5 million and the change from financial expense to financial
      income, representing $1.6 million.




Our
      revenue growth is attributable to a number of factors, including acquisitions
      we
      made, increases in the number and size of projects for existing clients, and
      the
      addition of new clients. Our client base is diverse, and we are not dependent
      on
      any single client. In the three and nine months ended September 30, 2007, no
      client accounted for more than 5% of our revenues and our largest twenty clients
      together accounted for approximately 37% and 33% of our revenues, respectively.
      For the three and nine months ended September 30, 2007, the percentage of our
      revenues derived in aggregate from agencies of the government of Israel was
      10%
      for both periods. Existing clients from prior years generated more than 85%
      of
      our revenues in the three and nine months ended September 30, 2007.




-
          18 -


Our
      backlog as of September 30, 2007 was $669 million compared to $548 million
      as of
      September 30, 2006. This $121 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, 2007, the percentage of our revenues
      derived from clients in Israel was 42% and 47%, respectively; in North America,
      24% and 25%, respectively; in Europe, 29% and 24%, respectively; and in Asia
      and
      the Far East, 5% for both periods.




For
      the
      three and nine months ended September 30, 2007, we derived 40% and 42%,
      respectively, of our revenues from outsourcing (including offshore development);
      32% and 31%, respectively, from system integration and application development;
      20% and 18%, respectively, from software and consulting; 6% and 7%,
      respectively, from quality assurance and training; and 2% and 2%, respectively,
      from our other offerings.




As
      of
      September 30, 2007, we had approximately 7,745 employees, including
      approximately 6,715 IT professionals. Of the 7,745 employees, approximately
      3,245 were in Israel, 2,545 were in India, 505 were in North America, 1,020
      were
      in Europe and 430 were in the Asia Pacific region.




**Recent
      Developments**




On
      October 2, 2007, we acquired MS9 Consulting LLC, a privately-held IT services
      company based in the United States. The purchase price was $11.4 million, with
      up to an additional $6.1 million to be paid in the future based on the
      achievement of certain performance goals in 2008 and 2009. For the full year
      2006, MS9 generated revenues of approximately $13.1 million and was profitable.
      The acquisition is expected to enhance our global delivery capabilities and
      accelerate the expansion of our unique offshore service delivery model within
      the healthcare vertical.




**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,****2006**
            
            **2007**
            
            **2006**
            
            **2007**Revenues
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %Cost
                of revenues
            
            
            71.4
            
            
            70.9
            
            
            71.4
            
            
            71.1Gross
                profit
            
            
            28.6
            
            
            29.1
            
            
            28.6
            
            
            28.9Operating
                expenses:Selling
                and marketing
            
            
            7.0
            
            
            7.0
            
            
            7.5
            
            
            7.3General
                and administrative
            
            
            13.0
            
            
            15.8
            
            
            13.7
            
            
            16.2Total
                operating expenses
            
            
            20.0
            
            
            22.8
            
            
            21.1
            
            
            23.5Operating
                income
            
            
            8.5
            
            
            6.4
            
            
            7.5
            
            
            5.4Financial
                income (expenses), net
            
            
            (0.4
            )
            
            0.1
            
            
            (0.3
            )
            
            0.1Other
                income (expenses), net
            
            
            0.0
            
            
            (0.1
            )
            
            0.1
            
            
            0.0Income
                before taxes on income
            
            
            8.1
            
            
            6.4
            
            
            7.2
            
            
            5.4Taxes
                on income
            
            
            1.4
            
            
            1.2
            
            
            1.3
            
            
            1.1Equity
                in net losses of an affiliate
            
            
            0.0
            
            
            —
            
            
            0.0
            
            
            —Net
                income
            
            
            6.7
            
            
            5.2
            
            
            5.9
            
            
            4.4





-
          19 -


**Three
      Months Ended September 30, 2007 Compared to the Three Months Ended September
      30,
      2006**




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




**Three
                months ended**
              **September
                30,**
            
            **Increase****2006**
            
            **2007**
            
            **$**
            
            **%**Revenues
            
            $
            119,135
            
            $
            140,723
            
            
            21,588
            
            
            18.1Cost
                of revenues
            
            
            85,095
            
            
            99,730
            
            
            14,635
            
            
            17.2Gross
                profit
            
            $
            34,040
            
            $
            40,993
            
            
            6,953
            
            
            20.4Gross
                margin
            
            
            28.6
            %
            
            29.1
            %




***Revenues***




Our
      revenues increased from $119.1 million in the three months ended September
      30,
      2006 to $140.7 million in the three months ended September 30, 2007,
      representing an increase of $21.6 million, or 18.1%. Approximately $5.8 million
      of this increase was attributable to acquisitions. Of the $21.6 million increase
      in revenues, $7.9 million represents growth in software and consulting services,
      $6.7 million represents growth in outsourcing and offshore engagements, and
      $7.1
      million represents growth in our other offerings, comprised of system
      integration and application development, and quality assurance and
      training.




***Cost
      of revenues***




Our
      cost
      of revenues, including salaries, wages and other direct and indirect costs,
      increased from $85.1 million in the three months ended September 30, 2006 to
      $99.7 million in the three months ended September 30, 2007, representing an
      increase of $14.6 million, or 17.2%. Approximately $2.6 million of this increase
      was attributable to acquisitions, and $12.0 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 $34.0 million in the
      three months ended September 30, 2006 to $41.0 million in the three months
      ended
      September 30, 2007, representing an increase of $7.0 million, or 20.4 %. The
      increase was primarily due to our increase in revenues. Approximately $3.2
      million of the increase was attributable to acquisitions, and $3.8 million
      was
      related to our other revenue growth. Gross margin for the three months ended
      September 30, 2007 was 29.1%, compared to 28.6% in the three months ended
      September 30, 2006. This
      increase in gross margin was not significant.




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




**Three
                months ended**
              **September
                30,**
            
            **Increase**
              **(decrease)****2006**
            
            **2007**
            
            **$**
            
            **%**Selling
                and marketing
            
            $
            8,391
            
            $
            9,854
            
            
            1,463
            
            
            17.4General
                and administrative
            
            
            15,489
            
            
            22,176
            
            
            6,687
            
            
            43.2Total
                operating expenses
            
            
            23,880
            
            
            32,030
            
            
            8,150
            
            
            34.1Operating
                income
            
            $
            10,160
            
            $
            8,963
            
            
            (1,197
            )
            
            (11.8
            )




***Selling
      and marketing***




Selling
      and marketing expenses increased from $8.4 million in the three months ended
      September 30, 2006 to $9.9 million in the three months ended September 30,
      2007,
      representing an increase of $1.5 million, or 17.4%. This increase was due
      primarily to the inclusion of marketing and sales expenses from our
      acquisitions, representing $0.9 million.




-
          20 -


***General
      and administrative***




General
      and administrative expenses increased from $15.5 million in the three months
      ended September 30, 2006 to $22.2 million in the three months ended September
      30, 2007, representing an increase of $6.7 million, or 43.2%. This increase
      was
      due primarily to increases in salary expenses and related benefits, representing
      $2.7 million, an expense linked to our insurance company arbitration process
      which delayed our ability to provide the solution at issue to another client
      and
      resulted in cancellation of the purchase, representing $2.1 million, strategic
      consulting expenses, representing $0.4 million, and acquisitions, representing
      $0.3 million.




***Operating
      Income***




Operating
      income decreased from $10.2 million in the three months ended September 30,
      2006
      to $9.0 million in the three months ended September 30, 2007, representing
      a
      decrease of $1.2 million, or 11.8%. The decrease was mainly attributable to
      the
      increase in our general and administrative expenses.




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




**Three
                months ended**
              **September
                30,**
            
            **Increase**
              **(Decrease)****2006**
            
            **2007**
            
            **$**
            
            **%**Operating
                income
            
            $
            10,160
            
            $
            8,963
            
            
            (1,197
            )
            
            (11.8
            )Financial
                income (expenses), net
            
            
            (492
            )
            
            123
            
            
            615
            
            
            N/AOther
                expenses, net
            
            
            (8
            )
            
            (117
            )
            
            (109
            )
            
            1363Income
                before taxes on income
            
            
            9,660
            
            
            8,969
            
            
            (691
            )
            
            (7.2
            )Taxes
                on income
            
            
            1,709
            
            
            1,660
            
            
            (49
            )
            
            (2.9
            )Equity
                in net losses of an affiliate
            
            
            (13
            )
            
            —
            
            
            13
            
            
            (100.0
            )Net
                income
            
            $
            7,938
            
            $
            7,309
            
            
            (629
            )
            
            (7.9
            )




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




Financial
      income (expenses), net, changed from expenses of $0.5 million in the three
      months ended September 30, 2006 to income of $0.1 million in the three months
      ended September 30, 2007, representing a change of $0.6 million. The change
      was
      primarily due to the increase in our average net cash from $5.6 million to
      $11.3
      million, which allowed us to generate higher interest income, net, representing
      $0.3 million, along with the repayment of relatively expensive loans and
      favorable foreign currency exchange effects, together representing $0.3
      million.




***Other
      expenses, net***




Other
      expenses, net increased from $8,000 in the three months ended September 30,
      2006
      to $0.1 million in the three months ended September 30, 2007. This change was
      not significant.




***Taxes
      on income***




Our
      taxes
      on income decreased from $1.71 million in the three months ended September
      30,
      2006 to $1.66 million in the three months ended September 30, 2007, representing
      a decrease of $49,000, or 2.9%. This decrease
      was not significant.




***Equity
      in net losses of an affiliate***




Equity
      in
      net losses of an affiliate changed from losses of $13,000 in the three months
      ended September 30, 2006 to zero in the three months ended September 30, 2007,
      reflecting the fact that we no longer have the affiliate.




***Net
      Income***




Net
      income decreased from $7.9 million in the three months ended September 30,
      2006
      to $7.3 million in the three months ended September 30, 2007, representing
      a
      decrease of $0.6 million, or 7.9%. The decrease in net income was due primarily
      to our decrease in operating income of $1.2 million, partially offset by the
      change in financial income (expenses), net, of $0.6 million.




-
          21 -


**Nine
      months Ended September 30, 2007 Compared to the Nine months Ended September
      30,
      2006**




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




**Nine
                months ended**
              **September
                30,**
            
            **Increase****2006**
            
            **2007**
            
            **$**
            
            **%**Revenues
            
            $
            342,791
            
            $
            392,263
            
            
            49,472
            
            
            14.4Cost
                of revenues
            
            
            244,792
            
            
            279,083
            
            
            34,291
            
            
            14.0Gross
                profit
            
            $
            97,999
            
            $
            113,180
            
            
            15,181
            
            
            15.5Gross
                margin
            
            
            28.6
            %
            
            28.9
            %




***Revenues***




Our
      revenues increased from $342.8 million in the nine months ended September 30,
      2006 to $392.3 million in the nine months ended September 30, 2007, representing
      an increase of $49.5 million, or 14.4%. Approximately $17.4 million of this
      increase was attributable to acquisitions, a significant portion of which was
      due to post-acquisition growth resulting from synergies with Ness. Of the $49.5
      million increase in revenues, $18.2 million represents growth in software and
      consulting, $14.5 million represent growth in outsourcing and offshore
      engagements and $16.9 million represents growth in our other offerings,
      comprised of system integration and application development and quality
      assurance and training.




***Cost
      of revenues***




Our
      cost
      of revenues, including salaries, wages and other direct and indirect costs,
      increased from $244.8 million in the nine months ended September 30, 2006 to
      $279.1 million in the nine months ended September 30, 2007, representing an
      increase of $34.3 million, or 14.0%. Approximately $9.8 million of this increase
      was attributable to acquisitions, a significant portion of which was due to
      growth in our delivery staff needed to support post-acquisition revenue growth
      resulting from synergies with Ness, and $24.5 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 $98.0 million in the
      nine
      months ended September 30, 2006 to $113.2 million in the nine months ended
      September 30, 2007, representing an increase of $15.2 million, or 15.5%. The
      increase was primarily due to our increase in revenues. Approximately $7.6
      million of the increase was attributable to acquisitions, a significant portion
      of which was due to post-acquisition revenue growth resulting from synergies
      with Ness, and $7.6 million was related to our other revenue growth. Gross
      margin for the nine months ended September 30, 2007 was 28.9%, compared to
      28.6%
      in the nine months ended September 30, 2006. This increase in gross margin
      was
      not significant.




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




**Nine
                months ended**
              **September
                30,**
            
            **Increase**
              **(decrease)****2006**
            
            **2007**
            
            **$**
            
            **%**Selling
                and marketing
            
            $
            25,615
            
            $
            28,619
            
            
            3,004
            
            
            11.7General
                and administrative
            
            
            46,845
            
            
            63,457
            
            
            16,612
            
            
            35.5Total
                operating expenses
            
            
            72,460
            
            
            92,076
            
            
            19,616
            
            
            27.1Operating
                income
            
            $
            25,539
            
            $
            21,104
            
            
            (4,435
            )
            
            (17.4
            )




-
          22 -


***Selling
      and marketing***




Selling
      and marketing expenses increased from $25.6 million in the nine months ended
      September 30, 2006 to $28.6 million in the nine months ended September 30,
      2007,
      representing an increase of $3.0 million, or 11.7%. This increase was due
      primarily to the inclusion of marketing and sales expenses from our
      acquisitions, representing $2.0 million.




***General
      and administrative***




General
      and administrative expenses increased from $46.8 million in the nine months
      ended September 30, 2006 to $63.5 million in the nine months ended September
      30,
      2007, representing an increase of $16.6 million, or 35.5%. This increase was
      due
      primarily to increases in salary expenses and related benefits, representing
      $4.8 million, the effect of exchange rate fluctuations, representing $2.8
      million, exceptional expenses associated with our management transitions,
      representing $2.6 million, an expense linked to our insurance company
      arbitration process which delayed our ability to provide the solution at issue
      to another client and resulted in cancellation of the purchase, representing
      $2.1 million, acquisitions, representing $1.9 million and consulting expenses,
      representing $1.0 million




***Operating
      Income***




Operating
      income decreased from $25.5 million in the nine months ended September 30,
      2006
      to $21.1 million in the nine months ended September 30, 2007, representing
      a
      decrease of $4.4 million, or 17.4%. The decrease was mainly attributable to
      the
      increase in our general and administrative expenses.




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




**Nine
                months ended**
              **September
                30,**
            
            **Increase**
              **(Decrease)****2006**
            
            **2007**
            
            **$**
            
            **%**Operating
                income
            
            $
            25,539
            
            $
            21,104
            
            
            (4,435
            )
            
            (17.4
            )Financial
                income (expenses), net
            
            
            (1,130
            )
            
            438
            
            
            1,568
            
            
            N/AOther
                income (expenses), net
            
            
            436
            
            
            (173
            )
            
            (609
            )
            
            N/AIncome
                before taxes on income
            
            
            24,845
            
            
            21,369
            
            
            (3,476
            )
            
            (14.0
            )Taxes
                on income
            
            
            4,517
            
            
            4,182
            
            
            (335
            )
            
            (7.4
            )Equity
                in net losses of an affiliate
            
            
            (103
            )
            
            —
            
            
            103
            
            
            (100.0
            )Net
                income
            
            $
            20,225
            
            $
            17,187
            
            
            (3,038
            )
            
            (15.0
            )




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




Financial
      income (expenses), net, changed from expenses of $1.1 million in the nine months
      ended September 30, 2006 to income of $0.4 million in the nine months ended
      September 30, 2007, representing a change of $1.6 million. The change was
      primarily due to the increase in our average net cash from $7.9 million to
      $18.0
      million, which allowed us to generate higher interest income, net, representing
      $0.7 million, along with the repayment of relatively expensive loans and
      favorable foreign currency exchange effects, together representing $0.9
      million.




***Other
      income (expenses), net***




Other
      income (expenses), net changed from income of $0.4 million in the nine months
      ended September 30, 2006 to expenses of $0.2 million in the nine months ended
      September 30, 2007. This change was primarily due to consideration received
      for
      a third party transaction, representing $0.4 million, net of expenses, in the
      nine months ended September 30, 2006.




***Taxes
      on income***




Our
      taxes
      on income decreased from $4.5 million in the nine months ended September 30,
      2006 to $4.2 million in the nine months ended September 30, 2007, representing
      a
      decrease of $0.3 million, or 7.4%. This decrease was due to the decrease in
      our
      income before taxes, representing approximately $0.6 million of reduction in
      taxes, partially offset by a higher effective tax rate attributable to the
      utilization of tax loss carry-forwards in the United States and Israel,
      representing approximately $0.3 million.




-
          23 -


***Equity
      in net losses of an affiliate***




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




***Net
      Income***




Net
      income decreased from $20.2 million in the nine months ended September 30,
      2006
      to $17.2 million in the nine months ended September 30, 2007, representing
      a
      decrease of $3.0 million, or 15.0%. The decrease in net income was due primarily
      to our decrease in operating income of $4.4 million, partially offset by the
      change in financial income (expenses), net, of $1.6 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.




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




Our
      operating segments are:




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




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




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




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




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




-
          24 -


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




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




**Three
                  months endedSeptember 30,**
              
              **Nine months
                  endedSeptember 30,****2006**
              
              **2007**
              
              **2006**
              
              **2007****Segment
                  Data:**
              
              **(unaudited)**
              
              **(unaudited)****Revenues
                  from external customers:**Ness
                  North America
              
              $
              22,627
              
              $
              26,556
              
              $
              69,748
              
              $
              78,970Technologies
                  & Systems Group (TSG)
              
              
              14,538
              
              
              15,912
              
              
              41,957
              
              
              43,277Ness
                  Europe
              
              
              22,015
              
              
              33,324
              
              
              67,050
              
              
              80,548Ness
                  Israel
              
              
              50,652
              
              
              47,947
              
              
              138,966
              
              
              147,716Other
              
              
              9,303
              
              
              16,984
              
              
              25,070
              
              
              41,752$
              119,135
              
              $
              140,723
              
              $
              342,791
              
              $
              392,263**Operating
                  Income (Loss):**Ness
                  North America
              
              $
              2,653
              
              $
              2,451
              
              $
              8,804
              
              $
              6,580Technologies
                  & Systems Group (TSG)
              
              
              2,275
              
              
              1,909
              
              
              5,467
              
              
              5,683Ness
                  Europe
              
              
              1,364
              
              
              2,769
              
              
              5,700
              
              
              5,957Ness
                  Israel
              
              
              4,621
              
              
              2,139
              
              
              9,158
              
              
              7,785Other
              
              
              589
              
              
              1,900
              
              
              1,001
              
              
              3,309Unallocated
                  Expenses
              
              
              (1,342
              )
              
              (2,205
              )
              
              (4,591
              )
              
              (8,209
              )$
              10,160
              
              $
              8,963
              
              $
              25,539
              
              $
              21,104




**Liquidity
      and Capital Resources**




***Overview***




As
      of
      September 30, 2007, we had cash, cash equivalents, restricted cash and
      short-term bank deposits of $41.3 million compared to $48.7 million as of
      December 31, 2006. The funds held at locations outside of the United States
      are
      for future operating expenses and capital expenditures, and we have no intention
      of repatriating those funds. We are not, however, restricted in repatriating
      those funds back to the United States, if necessary. While we expect that cash
      generated by our non-U.S. subsidiaries will be reinvested in their respective
      geographies to support expansion of our business, to the extent that funds
      were
      remitted to the United States in the form of dividend payments, those payments
      may be subject to withholding taxes in their respective countries, and would
      be
      subject to tax in the United States.




-
          25 -


***Cash
      Flows***




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




**Nine
                months ended**
              **September
                30,****2006**
            
            **2007**Net
                cash provided by (used in) operating activities
            
            $
            (12,076
            )
            $
            17Net
                cash provided by (used in) investing activities
            
            
            10,091
            
            
            (23,471
            )Net
                cash provided by financing activities
            
            
            7,094
            
            
            13,321Effect
                of exchange rate changes on cash and cash equivalents
            
            
            1,498
            
            
            2,602Increase
                (decrease) in cash and cash equivalents
            
            
            6,607
            
            
            (7,531
            )Cash
                and cash equivalents at the beginning of the period
            
            
            33,579
            
            
            46,675Cash
                and cash equivalents at the end of the period
            
            $
            40,186
            
            $
            39,144




*Nine
      months ended September 30, 2007 compared to the nine months ended September
      30,
      2006*




Net
      cash
      provided by operating activities was $17,000 in the nine months ended September
      30, 2007, compared to net cash used of $12.1 million in the nine months ended
      September 30, 2006. The major factor contributing to the decrease was tax
      payments in the nine months ended September 30, 2006 to the Israeli Tax
      Authority related to prior periods for which there was no corresponding amount
      in the nine months ended September 30, 2007, representing $9.0
      million.




Net
      cash
      used in investing activities was $23.5 million in the nine months ended
      September 30, 2007, compared with net cash provided of $10.1 million in the
      nine
      months ended September 30, 2006. The major factors contributing to the change
      were a decrease in proceeds from the maturity of short term bank deposits and
      the sale of marketable securities from an aggregate amount of $38.0 million
      in
      the first nine months of 2006 to an aggregate amount of $0.1 million in the
      first nine months of 2007, offset by a decrease in payments in respect of
      acquisitions and contingent consideration, representing $0.9 million, a decrease
      in purchase of property and equipment, representing $1.7 million, and receipt
      of
      the remaining net proceeds from the sale of our interest in dbMotion,
      representing $1.9 million.




Net
      cash
      provided by financing activities was $13.3 million in the nine months ended
      September 30, 2007, compared with $7.1 million in the nine months ended
      September 30, 2006. The increase was primarily due to proceeds from new
      long-term debt, representing $12.9 million, offset by a decrease in the exercise
      of options, representing $6.5 million. In the nine months ended September 30,
      2006 and 2007, cash flows from the exercise of options amounted to $9.4 million
      and $2.9 million, respectively.




The
      effect of exchange rate changes on cash and cash equivalents was $2.6 million
      in
      the nine months ended September 30, 2007, compared to $1.5 million in the nine
      months ended September 30, 2006. The change was primarily due to the effect
      of
      translation adjustments on long-term inter-company balances, representing $6.9
      million, offset by the effect of translation adjustments on trade receivables,
      property and equipment and other assets, representing $5.5 million.




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




At
      September 30, 2007, one of our Israeli subsidiaries had long-term and short-term
      bank borrowings of $7.1 million consisting of a long-term loan denominated
      in
      NIS (linked to the Israeli Consumer Price Index), of $2.3 million, and on-call
      borrowings aggregating to $4.8 million. The long-term loan, borrowed from a
      commercial bank in December 2003, bears an interest rate of 6.5%, with a
      maturity of one year and three months. The on-call borrowings bear interest
      rates ranging from 4.8% to 4.9%. The long-term loan contains customary restrictive covenants relating to the borrower (Ness A.T. Ltd., one
      of
      our Israeli subsidiaries), including the following: a negative pledge;
      stockholders’ equity must not be less than 30% of its total assets; and
      limitations on merging or transferring assets. As of September 30, 2007, we
      are
      in compliance and expect to remain in compliance with these covenants. Our
      failure to comply with the covenants could lead to an event of default under
      the
      agreements governing some or all of the indebtedness, permitting the applicable
      lender to accelerate all borrowings under the applicable agreement, and to
      foreclose on any collateral.




-
          26 -


In
      September 2007, we obtained a long-term loan from a commercial bank in the
      amount of €9.0 million, or $12.7 million, for the purpose of funding the
      acquisition of NessPRO Italy S.p.A. The loan matures over five years with
      principal payments commencing in the third year, and bears interest at a fixed
      rate paid quarterly. The long-term loan contains customary restrictive covenants
      relating to us, including the following: a negative pledge; the ratio of the
      total financial obligations to the EBITDA of the last four consecutive quarters
      shall not exceed 3.5; stockholders’ equity must not be less than 40% of total
      assets; the aggregate net operating profits for each four consecutive quarters
      shall be higher or equal to zero; and a limitation on merging or transferring
      assets. As of September 30, 2007, we are in compliance and expect to remain
      in
      compliance with these covenants. Our failure to comply with the covenants could
      lead to an event of default under the agreements governing some or all of the
      indebtedness, permitting the applicable lender to accelerate all borrowings
      under the applicable agreement.




At
      September 30, 2007, our non-Israeli subsidiaries had short-term borrowings
      denominated in Euros aggregating to $11.0 million with interest rates ranging
      from approximately 3.0% to 9.0%.




We
      anticipate funding our global growth through financing from commercial banks.
      Funds advanced by the banks will convert automatically to long-term loans,
      with
      a fixed interest rate and a term of up to seven years.




***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 2006 Annual Report on Form 10-K, filed
      with the SEC on March 14, 2007, describe the significant accounting estimates
      and policies used in preparation of our consolidated financial statements.
      Actual results in these areas could differ from management’s estimates. As
      discussed below and in Note 6 to the condensed consolidated financial
      statements, we adopted the provisions of FIN 48, “Accounting for Uncertainty in
      Income Taxes” on January 1, 2007. Other than this change, there have been no
      significant changes in our critical accounting estimates during the first nine
      months of 2007.




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




***Contractual
      Obligations***




In
      our
      2006 Annual Report on Form 10-K, filed with the SEC on March 14, 2007, we
      disclosed contractual obligations. As
      of
      September 30, 2007, except for the long-term loan obtained in connection with
      the acquisition of NessPRO Italy S.p.A. as described in the long-term and
      short-term debt section above, there have been no other material changes to
      our
      contractual obligations.




-
          27 -


**Forward-Looking
      Statements and Risk Factors**




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




***Item
      3. Quantitative and Qualitative Disclosure about Market
      Risk***




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




We
      have
      direct operations in 17 different countries and commercial relationships in
      many
      other parts of the world. Our foreign operations contract with clients in their
      applicable local currencies or dollars. As a result, we are subject to adverse
      movements in foreign currency exchange rates in those countries where we conduct
      business. In order to minimize the effect of such movements, we entered into
      certain forward foreign currency exchange contracts to hedge our exposure
      against foreign currencies which differ from the local functional currencies.
      In
      the future, we may enter into additional forward foreign currency exchange
      or
      other derivatives contracts to further hedge our exposure to foreign currency
      exchange rates.




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




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




**Evaluation
      of Disclosure Controls and Procedures**




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




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




-
          28 -


**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.




-
          29 -


**PART
      II - OTHER INFORMATION**




***Item
      1. Legal Proceedings***




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




One
      of
      our Israeli subsidiaries is currently in a dispute with one of its clients,
      an
      Israeli insurance company, regarding the terms and conditions of a software
      development contract (the “Contract”). The insurance company claims that we have
      materially breached the Contract by not timely delivering the required software.
      The insurance company issued a contract termination notice on September 21,
      2006, collected autonomous guarantees provided by our subsidiary in the amount
      of approximately $2.2 million on November 23, 2006, and is demanding payment
      of
      amounts it claims to have paid so far of approximately $4.4 million (excluding
      Value Added Tax, or “VAT”), as well as damages of approximately $19.8 million.
      We believe that we have not materially breached the Contract and that the delays
      were caused by the insurance company’s actions. However, we do not contest the
      insurance company’s right to terminate the contract for convenience, subject to
      certain provisions including proper settlement of payments, as per the Contract.
      The Contract provides for mandatory arbitration, which commenced in January
      2007, in which we intend to vigorously defend our position. The insurance
      company and our subsidiary have both issued their respective claims to the
      arbitrator, as well as responses to the other party’s claims. The total scope of
      the project is approximately $9.7 million. With respect to this contract,
      approximately $5.6 million (excluding VAT) is included in our trade receivables
      and other accounts receivable and prepaid expenses. We can give no assurance
      that our liability insurance policy, which has a cap of $5.0 million per claim,
      will cover such exposure. At this stage we cannot estimate the result of the
      arbitration and we expect that the arbitration process may be protracted. If
      the
      outcome of the dispute is not in our favor and not in line with our position
      described above, it may adversely affect our financial position, results of
      operations and cash flows. The arbitration process delayed our ability to
      provide the solution at issue and resulted in cancellation of a purchase by
      another customer not under arbitration. As a result of the cancellation, we
      recorded a charge of $2.1 million to general and administrative expenses in
      the
      quarter ended September 30, 2007. The contract in question and the claims in
      the
      arbitration proceeding are denominated in NIS, and therefore the figures cited
      in this paragraph have been updated according to the NIS-to-dollar exchange
      rate.




***Item
      1A. Risk Factors***




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




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




Not
      applicable.




***Item
      3. Defaults upon Senior Securities.***




None.




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




None.




***Item
      5. Other Information***




None.




-
          30 -


***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.





-
          31 -


**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
              8, 2007
            By:
            /s/ ISSACHAR
              GERLITZIssachar
              GerlitzChief
              Executive
              Officer, President, Director(Principal executive
              officer)


Date:November
                8, 2007
              By:
              /s/ OFER
                SEGEVOfer
                SegevExecutive
                Vice
                President and Chief Financial Officer(Principal financial and accounting
                officer)
  -
            32 -


**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.




-
        33 -