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 for the year ended March 31, 2012 (the "Annual Report"), 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 the Annual Report. 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

Virtusa Corporation (the "Company", "Virtusa", "we", "us" or "our") is a global information technology services company. We use an offshore delivery model to provide a broad range of information technology ("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 experience. Headquartered in Massachusetts, we have offices in the United States, the United Kingdom, the Netherlands, Germany and Singapore and global delivery centers in Hyderabad and Chennai, India, Colombo, Sri Lanka and Budapest, Hungary. At June 30, 2012, we had 5,841 employees, or team members.

In the three months ended June 30, 2012, our revenue increased by 25% to $76.2 million, compared to $61.0 million in the three months ended June 30, 2011.

In the three months ended June 30, 2012, net income increased by 53% to $6.1 million compared to $4.0 million in the three months ended June 30, 2011.

The increase in revenue for the three months ended June 30, 2012, as compared to the three months ended June 30, 2011, primarily resulted from:

† Higher revenue contribution from our clients existing at June 30, 2011, including both our top ten and other clients

† Broad based revenue growth from clients in all of our industry groups, led by growth in our banking, financial services and insurance ("BFSI") industry group

† Revenue from clients obtained in connection with the acquisition of ALaS Consulting LLC ("ALaS") in July 2011

The key drivers of the increase in our net income for the three months ended June 30, 2012, as compared to the three months ended June 30, 2011, were as follows:

† Higher revenue contribution from new and existing clients

† Increase in operating profit due to increased operating efficiencies, partially offset by increased costs related to a higher percentage of our services performed onsite, as well as increased use of subcontractors

High repeat business and client concentration are common in our industry. During our three months ended June 30, 2012, 91% of our revenue was derived from clients who had been using our services for more than one year. 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.

We derive our revenue from two types of service offerings; application outsourcing, which is recurring in nature, and consulting, including technology implementation, which is non-recurring in nature. For the three months ended June 30, 2012, our application outsourcing and consulting revenue represented 58.0% and 42.0%, respectively, of our total revenue as compared to 55.0% and 45.0%, respectively, for the three months ended June 30, 2011.

In the three months ended June 30, 2012, our European revenue increased by 15.0%, or $1.7 million, to $13.4 million, or 17.6% of total revenue, from $11.7 million, or 19.1% of total revenue, in the three months ended June 30, 2011.

Our gross profit increased by $3.5 million to $26.6 million for the three months ended June 30, 2012, as compared to $23.1 million in the three months ended June 30, 2011.The increase in gross profit during the three months ended June 30, 2012, as compared to the three months ended June 30, 2011, was primarily due to higher revenue, partially offset by increased cost of revenue, which includes increases in the number of IT professionals and higher costs related to an increased percentage of onsite work. As a percentage of revenue, gross margin was 34.9% and 37.8% in the three months ended June 30, 2012 and 2011, respectively. This reflects an increase in the number of IT professionals, higher costs related to an increased percentage of onsite work and an increased use of subcontractors.

We perform our services under both time-and-materials and fixed-price contracts. Revenue from fixed-price contracts represented 14% and 22% of total revenue for the three months ended June 30, 2012 and 2011, respectively. The decrease in revenue earned from fixed-price contracts in the three months ended June 30, 2012 primarily reflects our client preferences.

Over the last few fiscal years, we have also supplemented organic revenue growth with acquisitions. These acquisitions have focused on adding domain expertise, expanding our professional services teams and expanding our client base. We expect that for our long-term growth, we will continue to seek evolving market opportunities through a combination of organic growth and acquisitions. We believe we can fund future acquisitions with our internally available cash, cash equivalents and marketable securities, cash generated from operations, debt financing or from the issuance of additional securities, although we cannot assure you that any such additional financing will be available at terms favorable to us, or at all.

As an IT services company, our revenue growth is highly dependent on our ability to attract, develop, motivate and retain skilled IT professionals. We monitor our overall attrition rates and patterns to align our people management strategy with our growth objectives. At June 30, 2012, our attrition rate for the trailing 12 months, which reflects voluntary and involuntary attrition, was 18.9%. Our attrition rate at June 30, 2012 reflects a lower rate of voluntary attrition as compared to the corresponding prior year period and is approaching our long-term goal. Although we remain committed to continuing to improve our attrition levels, there is intense competition for IT professionals with the specific domain skills necessary to provide the type of services we offer. If our attrition rate increases or is sustained at higher levels, our growth may slow and our cost of attracting and retaining IT professionals could increase.

We engage in a foreign currency hedging strategy using foreign currency forward contracts designed to hedge fluctuation in the Indian rupee and Sri Lankan rupee against the U.S. dollar and U.K. pound sterling, as well as the U.K. pound sterling against the U.S. dollar, to reduce the effect of change in these foreign currency exchange rate changes on our foreign operations and intercompany balances. There is no assurance that these hedging programs or hedging contracts will be effective. Because these foreign currency forward contracts are designed to reduce volatility in the Indian rupee and U.K. pound sterling exchange rates, they not only reduce the negative impact of a stronger Indian rupee and weaker U.K. pound sterling but also could reduce the positive impact of a weaker Indian rupee and stronger U.K. pound sterling on our Indian rupee expenses and U.K. pound sterling denominated revenue. In addition, to the extent that these hedges do not qualify for hedge accounting, we may have to recognize gains or losses on the aggregate amount of hedges placed earlier and in larger amounts than expected.

Application of critical accounting estimates and risks

The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including the recoverability of tangible assets, 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 the recognition of revenue and profits based on the percentage of completion method of accounting for fixed-price contracts, share-based compensation, income taxes, including reserves for uncertain tax positions, deferred taxes and liabilities and valuation of financial instruments including derivative contracts and investments. 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 the Annual Report.

Results of operations

Three months ended June 30, 2012 compared to the three months ended June 30, 2011

The following table presents an overview of our results of operations for the three months ended June 30, 2012 and 2011.

                                     Three Months Ended
                                          June 30,            $        %
(dollars in thousands)                2012         2011     Change   Change
Revenue                            $    76,217   $ 61,045   15,172     24.9 %
Costs of revenue                        49,594     37,982   11,612     30.6 %
Gross profit                            26,623     23,063    3,560     15.4 %
Operating expenses                      19,754     18,276    1,478      8.1 %
Income from operations                   6,869      4,787    2,082     43.5 %
Other income                             1,240        400      840    210.0 %
Income before income tax expense         8,109      5,187    2,922     56.3 %
Income tax expense                       1,970      1,232      738     59.9 %
Net income                         $     6,139   $  3,955    2,184     55.2 %

Revenue

Revenue increased by 24.9%, or $15.2 million, from $61.0 million during the three months ended June 30, 2011 to $76.2 million in the three months ended June 30, 2012. The increase in revenue was primarily driven by higher revenue contribution from our clients existing as of June 30, 2011 and revenue of $5.7 million from clients obtained in connection with the acquisition of ALaS in July 2011. The increase in revenue was also the result of continued broad based revenue growth from all of our industry groups, led by growth in our BFSI industry group. Revenue from North American clients in the three months ended June 30, 2012 increased by $13.3 million, or 28.5%, as compared to the three months ended June 30, 2011, due to higher revenue contribution from new clients, including those acquired in connection with the ALaS acquisition. Revenue from European clients increased by $1.7 million, or 15.0%, as compared to the three months ended June 30, 2011. We had 91 active clients at June 30, 2012, as compared to 82 active clients at June 30, 2011.

Costs of revenue

Costs of revenue increased from $38.0 million in the three months ended June 30, 2011 to $49.6 million in the three months ended June 30, 2012, an increase of $11.6 million, or 30.6%. The increase in cost of revenue was primarily driven by an increase of $5.6 million in compensation costs for our IT professionals and higher onsite costs related to increased onsite work, including the costs related to the number of employees added as a result of the ALaS acquisition. At June 30, 2012, we had 5,348 IT professionals as compared to 4,924 at June 30, 2011. In addition, we incurred increased subcontractor costs of $3.3 million in the three months ended June 30, 2012, as compared to the three months ended June 30, 2011. There was also a net increase of $1.8 million of hedging expense, consisting of $1.3 million of hedging losses in the three months ended June 30, 2012 compared to $0.5 million of hedging gains in the three months ended June 30, 2011.

As a percentage of revenue, cost of revenue increased from 62.2% for the three months ended June 30, 2011 to 65.1% for three months ended June 30, 2012. This was due primarily to a higher percentage of our services performed onsite partially offset by a higher utilization rate for our IT professionals of 77% for the three months ended June 30, 2012 compared to a utilization rate of 73% for the three months ended June 30, 2011.

Gross profit

Our gross profit increased by $3.5 million, or 15.4%, to $26.6 million for the three months ended June 30, 2012 as compared to $23.1 million for the three months ended June 30, 2011 due to a higher revenue base, partially offset by increased costs related to a

higher percentage of our services performed onsite and increased subcontractor costs. As a percentage of revenue, our gross profit was 34.9% and 37.8% in the three months ended June 30, 2012 and 2011, respectively.

Operating expenses

Operating expenses increased from $18.3 million in the three months ended June 30, 2011 to $19.8 million in the three months ended June 30, 2012, an increase of $1.5 million, or 8.1%. The increase was primarily due to an increase of $1.0 million in compensation expenses and the costs related to the number of employees added as a result of the ALaS acquisition, a net increase of $1.0 million of hedging expense consisting of $0.7 million of hedging losses in the three months ended June 30, 2012 compared to $0.3 million of hedging gains in the three months ended June 30, 2011 and a $0.3 million increase in facilities costs. These increases in operating expenses were partially offset by a $0.8 million decrease in professional services incurred. As a percentage of revenue, our operating expenses decreased to 25.9% in the three months ended June 30, 2012 as compared to 29.9% in the three months ended June 30, 2011. This decrease was primarily due to increased operating efficiencies leveraged over a larger revenue base.

Income from operations

Income from operations increased by 43.5%, from $4.8 million in the three months ended June 30, 2011 to $6.9 million in the three months ended June 30, 2012. As a percentage of revenue, income from operations increased to 9.0% in the three months ended June 30, 2012 from 7.8% in the three months ended June 30, 2011.

Other income

Other income increased from $0.4 million in the three months ended June 30, 2011 to $1.2 million in the three months ended June 30, 2012. This increase is primarily attributed to foreign currency transaction gains in the three months ended June 30, 2012 of $0.4 million, as compared to $0.2 million in foreign currency transaction losses in the three months ended June 30, 2011.

Income tax expense

Income tax expense increased to $2.0 million in the three months ended June 30, 2012 as compared to $1.2 million in the three months ended June 30, 2011. Our effective tax rate increased from 23.8% for the three months ended June 30, 2011 to 24.3% for the three months ended June 30, 2012. The increase in income tax expense of $0.8 million reflects increased income in the three months ended June 30, 2012 and our geographical mix of profits. These increases were partially offset by higher profits in jurisdictions under tax holiday.

Net income

Net income increased by 55.2%, from $4.0 million in the three months ended June 30, 2011 to $6.1 million in the three months ended June 30, 2012 due primarily to higher operating profits and increases in other income.

Liquidity and capital resources

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

In May 2012, our board of directors authorized a share repurchase program of up to $15.0 million of our common stock over the next 12 months, subject to certain price and other trading restrictions. During the three months ended June 30, 2012, we purchased 97,315 shares of our common stock for an aggregate purchase price of approximately $1,406 (excluding commissions). (See Note 12 of the notes to our financial statements included herein and Part II, Item 2 of this Quarterly Report on Form 10-Q).

On July 1, 2011, we acquired substantially all of the assets of ALaS for the purchase price of approximately $27.8 million in cash, 10% of which was held back by us for a period of 12 months as security for the indemnification obligations of ALaS and its members. In July 2012, we released $2.8 million to ALaS and its members with respect to the holdback plus interest and retained $16,000 to satisfy certain indemnification obligations. This resulted in a decrease to short-term restricted cash of $2.8 million.

On July 30, 2010, we entered into a $3.0 million credit agreement with J.P. Morgan Chase Bank, N.A. ("JPMC") which expires on July 31, 2013. The primary purpose of this credit agreement is to support our foreign currency hedging programs. The credit agreement is secured by a grant of a security interest in our U.S. assets in favor of JPMC as well as other collateral. The agreement contains financial and reporting covenants and limitations. At June 30, 2012, there were no amounts outstanding under this credit agreement and we are in compliance with all covenants.

At June 30, 2012, a significant portion of our cash and short-term investments was held by our foreign subsidiaries. We continually monitor our cash needs and employ tax planning and financing strategies to ensure cash is available in the appropriate jurisdictions to meet operating needs. The cash held by our foreign subsidiaries is considered indefinitely reinvested in local operations. If required, it could be repatriated to the United States however, under current law, would be subject to United States federal income tax less applicable foreign tax credits.

Beginning in fiscal 2009, our U.K. subsidiary entered into an agreement with an unrelated financial institution to sell, without recourse, certain of its Europe-based accounts receivable balances from one client to the financial institution. During the three months ended June 30, 2012, we sold $3.6 million of receivables under the terms of the financing agreement. Fees paid pursuant to this agreement were not material during the three months ended June 30, 2012. No amounts were due under the financing agreement at June 30, 2012, but we may elect to use this program again in future periods. However, we cannot provide any assurances that this or any other financing facilities will be available or utilized in the future.

Anticipated capital expenditures

We are constructing a facility as part of a planned campus on a 6.3 acre site in Hyderabad, India. We intend to continue the construction and build out of this facility, which, when completed over the next two fiscal years ending March 31, 2014, will be approximately 325,000 square feet, at a total estimated cost of $27.5 million. Of this amount, we have spent $24.5 million as of June 30, 2012 towards the completion of this facility, with approximately $0.1 million spent during the three months ended June 30, 2012. We anticipate spending approximately $1.2 million during the remainder of the fiscal year ending March 31, 2013. Other capital expenditures during the three months ended June 30, 2012 were approximately $3.0 million. We expect other capital expenditures in the normal course of business during the remainder of the fiscal year ending March 31, 2013 to be approximately $8.5 million, primarily for leasehold improvements, capital equipment and purchased software.

Cash flows

The following table summarizes our cash flows for the periods presented:

                                                         Three Months Ended
                                                              June 30,
(in thousands)                                            2012         2011
Net cash provided by (used for) operating activities   $     2,374   $ (2,440 )
Net cash (used for) provided by investing activities        (7,505 )   23,211
Net cash used for financing activities                      (2,294 )   (1,151 )
Effect of exchange rate changes on cash                     (2,501 )       93
Net (decrease) increase in cash and cash equivalents        (9,926 )   19,713
Cash and cash equivalents, beginning of period              58,105     50,218
Cash and cash equivalents, end of period               $    48,179   $ 69,931

Net cash provided by (used for) operating activities

Net cash provided by operating activities was $2.4 million during the three months ended June 30, 2012 as compared to net cash used for operating activities of $2.4 million during the three months ended June 30, 2011. This increase was primarily attributable to the net change in accounts receivable of $5.0 million, primarily due to higher collections during the three months ended June 30, 2012. In addition, the increase was also due to an increase in net income of $2.2 million, partially offset by a decrease in the net change from operating liabilities of $4.1 million due to cash used for these activities during the three months ended June 30, 2012.

Net cash (used for) provided by investing activities

Net cash used for investing activities was $7.5 million during the three months ended June 30, 2012 as compared to net cash provided by investing activities of $23.2 million during the three months ended June 30, 2011. This was driven by the net decrease in sales activity in investment securities of $30.7 million and an increased change in restricted cash of $0.3 million. This was partially offset by a decrease in the purchase of property and equipment in the amount of $0.3 million.

Net cash used for financing activities

Net cash used for financing activities was $2.3 million during the three months ended June 30, 2012, as compared to $1.2 million during the three months ended June 30, 2011. The change is primarily due to the repurchases of our common stock of $1.4 million under the share repurchase program authorized by our board of directors and a decrease in cash provided by stock option exercises of

$1.3 million, partially offset by payment during the three months ended June 30, 2011 for contingent consideration for ConVista of $1.6 million.

Off-balance sheet arrangements

We do not have investments in special purpose entities or undisclosed borrowings or debt.

We have a foreign currency cash flow hedging program designed to mitigate the risks of volatility in the Indian rupee against the U.S. dollar and U.K. pound sterling as described below in "Qualitative and Quantitative Disclosures About Market Risk." The program contemplates a partially hedged position of the Indian rupee for a rolling eight-quarter period. From time to time, we may also purchase multiple foreign currency forward contracts designed to hedge fluctuation in foreign currencies, such as the U.K. pound sterling against the U.S. dollar, and multiple foreign currency hedges designed to hedge foreign currency transaction gains and losses on our intercompany balances. Other than these foreign currency derivative contracts, we have not entered into off-balance sheet transactions, arrangements or other relationships with unconsolidated entities or other persons that are likely to affect liquidity or the availability of or requirements for capital resources.

Recent accounting pronouncements

In May 2011, the FASB issued new guidance to achieve common fair value measurement and disclosure requirements between GAAP and International Financial Reporting Standards. This new guidance amends current fair value measurement and disclosure guidance to include increased transparency around valuation inputs and investment categorization. This new guidance is effective for fiscal years and interim periods beginning after December 15, 2011. The adoption of this guidance did not have a material impact on our disclosure or consolidated financial results.

In June 2011, the FASB amended its guidance on the presentation of comprehensive income in financial statements to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items that are recorded in other comprehensive income. The new accounting guidance requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. The provisions of this new guidance are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this new disclosure requirement did not have a material impact on our disclosure or consolidated financial position, financial results or cash flows.

In September 2011, FASB issued updated guidance on the periodic testing of . . .