The following discussion of the financial condition and results of operations of Virtusa Corporation should be read in conjunction with the consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K, which has been filed with the Securities and Exchange Commission, or SEC.

Forward Looking Statements

The statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements (within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended) that involve risks and uncertainties. Such forward-looking statements may be identified by, among other things, the use of forward-looking terminology such as "believes," "expects," "may," "will," "should" or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. These forward-looking statements, such as statements regarding anticipated future revenue, contract percentage completions, capital expenditures, management's plans and objectives and other statements regarding matters that are not historical facts, involve predictions. Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. There are a number of important factors that could cause our results to differ materially from those indicated by such forward-looking statements, including those factors set forth in Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended March 31, 2008. We urge you to consider those risks and uncertainties in evaluating our forward-looking statements. We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. Except as otherwise required by the federal securities laws, we disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein (or elsewhere) to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

Business overview

We are a global information technology services company. We use an offshore delivery model to provide a broad range of IT services, including IT consulting, technology implementation and application outsourcing. Using our enhanced global delivery model, innovative platforming approach and industry expertise, we provide cost-effective services that enable our clients to use IT to enhance business performance, accelerate time-to-market, increase productivity and improve customer service. Headquartered in Massachusetts, we have offices in the United States and the United Kingdom and global delivery centers in Hyderabad and Chennai, India and Colombo, Sri Lanka. At September 30, 2008, we had 4,297 employees, or team members.

In our three months ended September 30, 2008, our revenue increased 9.4% to $44.0 million, compared to $40.3 million in the three months ended September 30, 2007. In our six months ended September 30, 2008, our revenue increased 11.4% to $86.6 million, compared to $77.7 million in the six months ended September 30, 2007. The revenue increase in each period is net of the negative impact related to changes in foreign currency of $1.5 million and $0.9 million, in the three and six months ended September 30, 2008, respectively. The key drivers of our revenue growth in our three and six months ended September 30, 2008 were as follows:

º •
º greater penetration of the North American market, where we experienced revenue growth of 15.6% and 14.3%, respectively, in our three and six months ended September 30, 2008 as compared to the three and six months ended September 30, 2007;

º •
º strong performance of our banking, financial services and insurance, or BFSI industry vertical, which had growth of 22.2% and 26.2%, respectively, in our three and six months ended September 30, 2008 as compared to our three and six months ended September 30, 2007;

º •
º continued but moderate expansion of the market for global delivery of IT services.

High repeat business and client concentration is common in our industry. During our three months ended September 30, 2008, 89% of our revenue was derived from clients who had been using our services for more than one year, as compared to 96% for the three months ended September 30, 2007, respectively. During our six months ended September 30, 2008, 90% of our revenue was derived from clients who had been using our services for more than one year, as compared to 96% for the six months ended September 30, 2007, respectively. Accordingly, our global account management and service delivery teams focus on expanding client relationships and converting new engagements to long-term relationships to generate repeat revenue and expand revenue streams from existing clients. We also have a dedicated business development team focused on generating engagements with new clients to continue to expand our client base, and over time, reduce client concentration.

Our European revenue decreased to $11.4 million, or 25.9% of total revenue, from $12.5 million, or 31.0% of total revenue, for the three months ended September 30, 2008 and 2007, respectively. European revenue for the six months ended September 30, 2008 decreased to $22.9 million, or 26.5% of total revenue, from $23.2 million, or 29.8% of total revenue, for the six months ended September 30, 2008 and 2007, respectively. European revenue was partially impacted by the depreciation of the U.K. pound sterling against the U.S. dollar year-over-year, as well as lower revenue contribution from our largest client, British Telecom.

Our revenue from application outsourcing services has represented a substantial majority of our total revenue. However, IT consulting services and technology implementation services have increased as a percentage of our total revenue in recent years.

We perform our services under both time-and-materials and fixed-price contracts. Revenue from fixed-price contracts represented 26% and 21%, as compared to 25% and 18%, of total revenue for the three months and six months ended September 30, 2008 and 2007, respectively. The increased revenue earned from fixed-price contracts reflects our clients' preferences.

Our gross profit decreased by $1.5 million, or 8.9% to $15.7 million for the three months ended September 30, 2008 as compared to $17.2 million in the three months ended September 30, 2007, and by $2.9 million, or 8.8%, to $30.2 million for the six months ended September 30, 2008 as compared to $33.1 million in the six months ended September 30, 2007. The principle reason for our decline in gross margin during the three and six months ended September 30, 2008 as compared to the three and six month periods ended September 30, 2007 is due to the impact of foreign currency, increased subcontractor costs, increased travel costs, and a decrease in our utilization rates. In our three months ended September 30, 2008 net income decreased by $3.3 million to $1.3 million, as compared to $4.6 million in the three months ended September 30, 2007, and decreased by $5.1 million to $2.1 million in the six months ended September 30, 2008 from $7.3 million in the six months ended September 30, 2007. The decrease in our net income in the three and six months ended September 30, 2008 as compared to the three and six months ended September 30, 2007 is due to lower gross profit and operating income, which were offset by the current year income tax benefit.

As an IT services company, our revenue growth has been, and will continue to be, highly dependent on our ability to attract, develop, motivate and retain skilled IT professionals. We closely monitor our overall attrition rates and patterns to ensure our people management strategy aligns with our growth objectives. For the last twelve months ended September 30, 2008, our attrition rate was 29%, which reflects both voluntary and involuntary attrition. This attrition rate reflects a higher rate of involuntary attrition compared to prior periods. We remain committed to improving our attrition levels. There is intense

competition for IT professionals with the skills necessary to provide the type of services we offer. If our attrition rate increases and is sustained at higher levels, our growth may slow and our cost of attracting and retaining IT professionals could increase.

In our six months ended September 30, 2008, we experienced pressure on our cost structure due to the continuing wage inflation, primarily in India and Sri Lanka, that we have experienced over the last several years, partially offset by the weaker Indian rupee versus the U.S. dollar net of foreign currency forward contract losses. We continue to engage in a hedging strategy program using foreign currency forward contracts designed to hedge fluctuation in the Indian rupee against the U.S. dollar and U.K. pound sterling. There is no assurance that these hedging programs or hedging contracts will be effective.

Application of critical accounting estimates and risks

The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, in particular those related to revenue recognition, income taxes and share-based compensation. Actual amounts could differ significantly from these estimates. Our management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the amounts of revenue and expenses that are not readily apparent from other sources. Additional information about these critical accounting policies may be found in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2008.

Results of operations

Three months ended September 30, 2008 compared to the three months ended September 30, 2007

The following table presents an overview of our results of operations for the three months ended September 30, 2008 and 2007.

                                           Three Months Ended
                                             September 30,
    (dollars in thousands)                  2008         2007     $ Change    % Change
    Revenue                               $   44,022   $ 40,257    $  3,765         9.4 %
    Costs of revenue                          28,344     23,038       5,306        23.0

      Gross profit                            15,678     17,219      (1,541 )      (8.9 )
    Operating expenses                        14,989     12,510       2,479        19.8

      Income from operations                     689      4,709      (4,020 )     (85.4 )
    Other income (expense)                      (199 )      801      (1,000 )    (124.8 )

      Income before income tax expense           490      5,510      (5,020 )     (91.1 )
    Income tax (benefit) expense                (806 )      943      (1,749 )    (185.5 )

      Net income                          $    1,296   $  4,567    $ (3,271 )     (71.6 )%

Revenue

Revenue increased by 9.4%, or 3.8 million, from $40.3 million during the three months ended September 30, 2007 to $44.0 million in the three months ended September 30, 2008. This increase is primarily attributed to greater demand for our IT services delivered through our global model, net of the

negative impact related to changes in foreign currency of $1.5 million for the three months ended September 30, 2008. Revenue from clients existing as of September 30, 2007 decreased in the three months ended September 30, 2008 by $1.1 million, or 2.8%, and revenue from new clients added since September 30, 2007 was $4.9 million, or 11.1%, of total revenue for the three months ended September 30, 2008. Revenue from North American clients increased by $4.3 million, or 15.6%, as compared to the three months ended September 30, 2007. We had 57 active clients as of September 30, 2008 as compared to 43 active clients as of September 30, 2007. In addition, we experienced strong demand across our BFSI industry vertical for an increasingly broad range of services, experiencing quarterly year-over-year revenue growth of 22.2%.

Costs of revenue

Costs of revenue increased from $23.0 million in the three months ended September 30, 2007 to $28.3 million in the three months ended September 30, 2008, an increase of $5.3 million, or 23.0%. A significant portion of the increase was attributable to an increase in the number of our IT professionals to support revenue growth, from 3,557 as of September 30, 2007 to 4,006 as of September 30, 2008, resulting in additional compensation and benefits costs of $4.4 million. There were also increased travel costs of $0.1 million and losses of $0.8 million recorded on foreign currency forward contracts as part of our hedging program, which offset lower Indian rupee denominated expenses caused by weakening of the Indian rupee against the U.S. dollar, in the three months ended September 30, 2008 as compared to the three months ended September 30, 2007.

Gross profit

Our gross profit decreased by $1.5 million, or 8.9%, from $17.2 million for the three months ended September 30, 2007 as compared to $15.7 million for the three months ended September 30, 2008. As a percentage of revenue, gross margin was 42.8% and 35.6% in the three months ended September 30, 2007 and 2008, respectively. The principal reason for our decline in gross margin during the three months ended September 30, 2008 as compared to the three months ended September 30, 2007, was due to the impact of foreign currency on our UK business and offset by a decrease in our utilization rates.

Operating expenses

Operating expenses increased from $12.5 million in the three months ended September 30, 2007 to $15.0 million in the three months ended September 30, 2008, an increase of $2.5 million, or 19.8%. The increase in our operating expenses is due to an increase of $0.4 million in share-based compensation expense associated with our non-IT professionals, $0.7 million in infrastructure expenses in Asia to accommodate the increase in the number of IT professionals in Asia, $0.5 million in professional services fees and losses of $0.4 million recorded on foreign currency forward contracts as part of our hedging program, which offset lower Indian rupee denominated expenses caused by weakening of the Indian rupee against the U.S. dollar in the period. There were also increased travel costs of $0.3 million during the three months ended September 30, 2008 as compared to the three months ended September 30, 2007. As a percentage of revenue, our operating expenses increased from 31.1% in the three months ended September 30, 2007 to 34.0% in the three months ended September 30, 2008.

Income from operations

Income from operations decreased from $4.7 million in the three months ended September 30, 2007 to $0.7 million in the three months ended September 30, 2008. As a percentage of revenue, income from operations decreased from 11.7% in the three months ended September 30, 2007 to 1.6% in the three months ended September 30, 2008, primarily due to our lower gross margin and higher operating expenses.

Other income (expense)

Other income (expense) decreased from $0.8 million in the three months ended September 30, 2007 to $(0.2) million in the three months ended September 30, 2008. The decrease is primarily attributed to a decrease in interest income of $0.2 million, from $0.9 million in the three months ended September 30, 2007 to $0.7 million in the three months ended September 30, 2008. We also recorded foreign currency transaction losses of $0.1 million during the three months ended September 30, 2007 as compared to losses of $0.9 million during the three months ended September 30, 2008, primarily due to the effects of a weaker U.K pound sterling against the U.S. dollar, Indian rupee, and Sri Lankan rupee.

Income tax (benefit) expense

We had income tax expense of $0.9 million in the three months ended September 30, 2007 compared to an income tax benefit of $(0.8) million in the three months ended September 30, 2008. Our effective tax rate was an income tax (benefit) rate of (164.5)% for the three months ended September 30, 2008, as compared to an effective tax rate of 17.1% for the three months ended September 30, 2007. This reduction is primarily due to a change in the geographic mix of our forecasted profit for the year.

Net income

Net income decreased from $4.6 million in the three months ended September 30, 2007 to $1.3 million in the three months ended September 30, 2008. This decrease was driven primarily by lower gross profit and operating income during the three months ended September 30, 2008 as compared to the three months ended September 30, 2007.

Six months ended September 30, 2008 compared to the six months ended September 30, 2007

The following table presents an overview of our results of operations for the six months ended September 30, 2008 and 2007.

                                            Six Months Ended
                                             September 30,
     (dollars in thousands)                 2008        2007     $ Change    % Change
     Revenue                               $ 86,565   $ 77,703    $  8,862        11.4 %
     Costs of revenue                        56,412     44,636      11,776        26.4

       Gross profit                          30,153     33,067      (2,914 )      (8.8 )
     Operating expenses                      29,453     25,170       4,283        17.0

       Income from operations                   700      7,897      (7,197 )     (91.1 )
     Other income (expense)                     581        990        (409 )     (41.3 )

       Income before income tax expense       1,281      8,887      (7,606 )     (85.6 )
     Income tax (benefit) expense              (860 )    1,632      (2,492 )    (152.7 )

       Net income                          $  2,141   $  7,255    $ (5,114 )     (70.5 )%

Revenue

Revenue increased by 11.4%, or $8.9 million, from $77.7 million during the six months ended September 30, 2007 to $86.6 million in the six months ended September 30, 2008. This increase is primarily attributed to greater demand for our IT services delivered through our global model, net of the negative impact related to changes in foreign currency of $0.9 million for the six months ended September 30, 2008. Revenue from clients existing as of September 30, 2007 increased by $0.1 million and revenue from new clients added since September 30, 2007 was $8.8 million or 10.2% of total revenue for the six months ended September 30, 2008. Revenue from North American clients increased by $7.8 million, or 14.3%, as compared to the six months ended September 30, 2007. In addition, we experienced strong demand across our BFSI industry vertical for an increasingly broad range of services, experiencing year-over-year revenue growth of 26.2%.

Costs of revenue

Costs of revenue increased from $44.6 million in the six months ended September 30, 2007 to $56.4 million in the six months ended September 30, 2008, an increase of $11.8 million, or 26.4%. A significant portion of the increase was attributable to an increase in the number of our IT professionals to support revenue growth, resulting in additional compensation and benefits costs of $9.1 million. There were also increases in subcontractor costs of $0.7 million, travel costs of $0.8 million and losses of $1.2 million recorded on foreign currency forward contracts as part of our hedging program, which offset lower Indian rupee denominated expenses caused by weakening of the India rupee against the U.S. dollar, in the six months ended September 30, 2008 as compared to the six months ended September 30, 2007.

Gross profit

Our gross profit decreased by $2.9 million, or 8.8%, to $30.2 million for the six months ended September 30, 2008 as compared to $33.1 million in the six months ended September 30, 2007. The principal reason for our decline in gross margin during the six months ended September 30, 2008 as compared to the six months ended September 30, 2007 is that we incurred higher subcontractor costs, increased travel costs, a negative impact from the weakening of the U.K pound sterling against the U.S. dollar, and a decrease in our utilization rates. As a percentage of revenue, gross margin was 34.8% and 42.6% in the six months ended September 30, 2008 and 2007, respectively.

Operating expenses

Operating expenses increased from $25.2 million in the six months ended September 30, 2007 to $29.5 million in the six months ended September 30, 2008, an increase of $4.3 million, or 17.0%. The increase in our operating expenses is also due to an increase of $0.8 million in share-based compensation expense, associated with our non-IT professionals, $1.4 million in infrastructure expenses in Asia to accommodate the increase in the number of IT professionals in Asia, $0.3 million in incremental non-payroll costs associated with being a public company and losses of $0.6 million recorded on foreign currency forward contracts as part of our hedging program, which offset lower Indian rupee denominated expenses caused by weakening of the India rupee against the U.S. dollar in the period. Additionally, operating expenses during the six months ended September 30, 2008 increased by $0.3 million and $0.9 million as compared to the six months ended September 30, 2007 with respect to professional services fees and travel costs. As a percentage of revenue, our operating expenses increased from 32.4% in the six months ended September 30, 2007 to 34.0% in the six months ended September 30, 2008.

Income from operations

Income from operations decreased from $7.9 million in the six months ended September 30, 2007 to $0.7 million in the six months ended September 30, 2008. This decrease in income from operations resulted from lower gross profit. As a percentage of revenue, income from operations decreased from 10.2% in the six months ended September 30, 2007 to 0.8% in the six months ended September 30, 2008, primarily due to our lower gross margin and higher operating expenses.

Other income (expense)

Other income decreased from $1.0 million in the six months ended September 30, 2007 to $0.6 million in the six months ended September 30, 2008. The decrease is attributed to higher foreign currency transactions losses of $0.9 million during the six months ended September 30, 2008 as compared to $0.4 million during the six months ended September 30, 2007, primarily due to the effects of a weaker U.K pound sterling against the U.S. dollar, Indian rupee, and Sri Lankan rupee.

Income tax (benefit) expense

We had an income tax expense of $1.6 million in the six months ended September 30, 2007 compared to an income tax benefit of $(0.9) million in the six months ended September 30, 2008. Our effective tax rate was an income tax (benefit) rate of (67.1)% for the six months ended September 30, 2008, as compared to an effective tax rate of 18.4% for the six months ended September 30, 2007. This reduction is primarily due to the geographic mix of our forecasted profit.

Net income

Net income decreased from $7.3 million in the six months ended September 30, 2007 to $2.1 million in the six months ended September 30, 2008. This decrease was driven primarily by lower gross profit and operating income during the six months ended September 30, 2008 as compared to the six months ended September 30, 2007.

Liquidity and capital resources

We completed an IPO of our common stock on August 8, 2007. In connection with our IPO, we issued and sold 4,400,000 shares of common stock at a public offering price of $14.00 per share. We received net proceeds of $52.8 million after deducting underwriting discounts and commissions of $4.3 million and offering costs of $4.5 million.

We have financed our operations from sales of shares of equity securities, including preferred and common stock, and from cash from operations. We have not borrowed against our existing or preceding credit facilities.

As of September 30, 2008, we had cash and cash equivalents and short-term investments of $70.6 million, of which $7.7 million was held outside the United States. There were foreign currency derivative contracts with a notional amount of $65.5 million outstanding as at September 30, 2008. We have a $3.0 million revolving line of credit with a bank. This facility provides a $1.5 million sub-limit for letters of credit. The revolving line of credit also includes a foreign exchange line of credit requiring 15% of the notional value of our foreign exchange contracts to be supported by our borrowing base. Advances under our credit facility accrue interest at an annual rate equal to the prime rate minus 0.25%. Our credit facility contains financial and reporting covenants and limitations. We are currently in compliance with all covenants contained in our credit facility and believe that our credit facility provides sufficient flexibility so that we will remain in compliance with its terms. As of September 30, 2008, we have no amounts outstanding under this credit facility. This line of credit expires on March 31, 2009.

The funds held at locations outside of the United States are for future operating expenses and expansion of our business, and we have no intention of repatriating those funds. Certain of our foreign subsidiaries are owned by our Netherlands holding company. If we decide to remit funds out of India in the form of dividends, these funds would be subject to Indian dividend distribution tax, which is currently at a rate of approximately 17%, as well as U.S. corporate income tax on the dividends.

As of September 30, 2008, our long-term investments included $7.3 million of auction-rate securities. All of these auction rate securities are AAA or Aaa rated by one or more of the major credit rating agencies. Furthermore, 92% of these auction rate securities are issued by state agencies which issue student loans, of which approximately 97% are guaranteed by the U.S. government under the Federal Family Education Loan Program (FFELP). The remaining 8% of these auction rate securities consists of investments in municipal bonds and preferred shares in a closed end mutual fund. As of September 30, 2008, we experienced . . .