S-1/A 1 b64348a5sv1za.htm VIRTUSA CORPORATION sv1za
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As filed with the Securities and Exchange Commission on July 20, 2007
Registration No. 333-141952
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
 
Amendment No. 5
to
FORM S-1
 
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
 
VIRTUSA CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
 
 
 
         
Delaware   7371   04-3512883
(State or Other Jurisdiction of
Incorporation or Organization)
  (Primary Standard Industrial Classification Code Number)   (I.R.S. Employer
Identification Number)
 
 
2000 West Park Drive
Westborough, Massachusetts 01581
(508) 389-7300
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant’s Principal Executive Offices)
 
 
Kris Canekeratne
Chairman and Chief Executive Officer
2000 West Park Drive
Westborough, Massachusetts 01581
(508) 389-7300
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
 
 
 
Copies to:
         
John J. Egan III, Esq.
Edward A. King, Esq.
Goodwin Procter LLP
Exchange Place
Boston, Massachusetts 02109
(617) 570-1000
 
Paul D. Tutun, Esq.
Vice President and General Counsel
2000 West Park Drive
Westborough, Massachusetts 01581
(508) 389-7300
  John A. Burgess, Esq.
James R. Burke, Esq.
Wilmer Cutler Pickering Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
(617) 526-6000
 
 
 
Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.
 
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  o
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
 
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), shall determine.
 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
 
Subject to completion, dated July 20, 2007
 
Prospectus
 
4,400,000 shares
 
(VIRTUSA LOGO)
 
Common stock
 
 
This is an initial public offering of common stock by Virtusa Corporation. No public market currently exists for our common stock. We are selling 4,400,000 shares of common stock. The estimated initial public offering price is between $14.00 and $16.00 per share.
 
We have applied to have our common stock listed on the NASDAQ Global Market under the symbol “VRTU.”
 
         
    Per share   Total
 
         
Initial public offering price
  $                  $               
         
Underwriting discounts and commissions
  $   $
         
Proceeds to Virtusa, before expenses
  $   $
 
 
 
 
We and certain of our existing stockholders have granted the underwriters an option for a period of 30 days to purchase up to 197,205 and 462,795 additional shares, respectively, of our common stock to cover over-allotments. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders.
 
 
Investing in our common stock involves a high degree of risk. See “Risk factors” beginning on page 7.
 
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed on the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
 
 
The underwriters expect to deliver shares on or about          , 2007.
JPMorgan  
  Bear, Stearns & Co. Inc.  
  Cowen and Company  
  William Blair & Company
 
        , 2007


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VIRTUSA CORPORATION IFC


 

 
 
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  F-1
 EX-23.1 Consent of KPMG LLP
 
The names Virtusa and Productization and our logo are trademarks or service marks of Virtusa Corporation. Other trademarks, trade names or service marks in this prospectus are the property of their respective owners.


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Prospectus summary
 
This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, including “Risk factors” on page 7 and our consolidated financial statements and related notes on page F-1, before making an investment decision. Unless the context otherwise requires, we use the terms “Virtusa,” “the company,” “we,” “us” and “our” and similar references in this prospectus to refer to Virtusa Corporation and its subsidiaries.
 
Our company
 
We are a global information technology services company. We use an offshore delivery model to provide a broad range of information technology, or 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. We have experienced compounded annual revenue growth of 50% over the five-year period ended March 31, 2007.
 
Our enhanced global delivery model leverages a highly-efficient onsite-to-offshore service delivery mix and proprietary tools and processes to manage and accelerate delivery, foster innovation and promote continual improvement. Our global service delivery teams work seamlessly at our client locations and at our global delivery centers in India and Sri Lanka to provide value-added services rapidly and cost-effectively. They do this by using our enhanced global delivery model, which we manage to a 20/80 onsite-to-offshore service delivery mix.
 
We apply our innovative platforming approach across all of our services. We help our clients combine common business processes and rules, technology frameworks and data into reusable application platforms that can be leveraged across the enterprise to build, enhance and maintain existing and future applications. Our platforming approach enables our clients to continually enhance their software platforms and applications in response to changing business needs and evolving technologies while also realizing long-term and ongoing cost savings.
 
We provide our IT services primarily to enterprises engaged in the following industries: communications and technology; banking, financial services and insurance; and media and information. Our current clients include leading global enterprises such as Aetna Life Insurance Company, British Telecommunications plc, ING North America Insurance Corporation, International Business Machines Corporation, Iron Mountain Information Management, Inc., JPMorgan Chase Bank, N.A. and Thomson Healthcare Inc., and leading enterprise software developers such as Pegasystems Inc. and Vignette Corporation. We have a high level of repeat business among our clients. For instance, during the fiscal year ended March 31, 2007, 97% of our revenue came from clients to whom we had been providing services for at least one year and 84% came from clients to whom we had been providing services for at least two years. Our top ten clients accounted for approximately 65%, 62% and 72% of our total revenue in the fiscal years ended March 31, 2005, 2006 and 2007, respectively. At March 31, 2007, we had 3,576 employees, or team members, and for the fiscal year ended March 31, 2007, we had revenue of $124.7 million and income from operations of $14.2 million.


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Market opportunity
 
The role of IT in enterprises has grown far beyond operational support to become a source of competitive advantage. Leading enterprises are using IT to accelerate time-to-market, increase productivity and improve customer service. Business and IT leaders recognize that delivering these benefits cost-effectively is vital to the success of their enterprises.
 
Many enterprises increasingly manage their technology costs and resource constraints by outsourcing IT services offshore. According to a 2006 IDC report, 20.8% of U.S. IT services, including application management, custom application development, IT consulting, information systems outsourcing, systems integration and other related activities, will move to offshore players by 2010. A 2005 NASSCOM-McKinsey report estimates that global offshore IT services adoption will grow at a compounded annual growth rate of 24.4%, from $18.4 billion for the 12 months ended March 31, 2005 to $55.0 billion for the 12 months ending March 31, 2010.
 
Engaging offshore IT service providers to improve business performance, beyond reducing costs, can be challenging. The rate of technological change, the impact of mergers and acquisitions and a historical approach to building and managing stand-alone, legacy IT systems and applications have led to fragmented IT environments, which are complex, inefficient and costly to maintain and operate. We believe enterprises seek service providers that can cost-effectively address this range of complex challenges.
 
Our solution
 
Our broad range of IT services, enhanced global delivery model and innovative platforming approach enable us to deliver IT solutions to our clients that enhance business performance, accelerate time-to-market, increase productivity and improve customer service. Our enhanced global delivery model enables us to deliver IT services cost-effectively. We reduce the effort and costs required to maintain and develop IT applications on an ongoing basis by streamlining and consolidating our clients’ applications. We believe that our solution provides our clients with the consultative and high-value services associated with large consulting and systems integration firms, the cost-effectiveness associated with offshore IT outsourcing firms and the ability to streamline and continually improve their software platforms and applications.
 
Our growth strategy
 
Key elements of our growth strategy include:
 
Deepen and grow our client base. We seek to deepen and broaden our existing client relationships and grow our client base. We focus on expanding existing client relationships and converting new engagements to long-term relationships. For example, in March 2007, British Telecommunications plc entered into a five-year IT services agreement with us and also purchased, through a wholly-owned subsidiary, 918,807 shares of our common stock. We also have a dedicated business development team focused on generating engagements with new clients.
 
Expand our service offerings. We seek to create new and innovative service offerings by analyzing emerging technologies and industry trends and changing client needs. Our industry solution teams work closely with our marketing group, industry and technology practice groups and research and development teams to develop new, highly-differentiated services.


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Deepen and expand our industry expertise. We seek to deepen our existing industry expertise and to develop expertise in new industries. We plan to extend our domain expertise beyond those industries that we currently serve to adjacent industries, where we can directly leverage existing in-house skills, experience and client relationships.
 
Strengthen our brand. We seek to enhance our profile and brand equity to help us acquire new clients, enhance our existing client relationships and attract and retain talented team members. We believe our platforming approach to IT services positions us as a thought leader with clients and enables us to attract and retain talented team members.
 
Develop new strategic alliances. We seek to strengthen our existing strategic alliances and build new ones. We intend to leverage our strategic alliances to win new clients, extend our services to existing clients and enter new geographic or industry markets. We believe that some of these alliances with software company clients enable us to compete more effectively for the technology implementation and support services required by our clients’ customers.
 
Risks affecting us
 
Our business is subject to numerous risks, as more fully described under “Risk factors” beginning on page 7, which you should carefully consider prior to deciding whether to invest in our common stock. For example:
 
•  our revenue is highly dependent on a small number of clients and the loss of any one of our major clients could significantly harm our results of operations and financial condition
 
•  the IT services market is highly competitive and our competitors may have advantages that may allow them to compete more effectively than we do to secure client contracts and attract skilled IT professionals
 
•  if we cannot attract and retain highly-skilled IT professionals, our ability to obtain, manage and staff new projects and continue to expand existing projects may result in loss of revenue and an inability to expand our business
 
•  our quarterly financial position, revenue, operating results and profitability are difficult to predict and may vary from quarter to quarter, which could cause our share price to decline significantly
 
Our corporate information
 
We were originally incorporated in Massachusetts in November 1996 as Technology Providers, Inc. We reincorporated in Delaware as eRunway, Inc. in May 2000 and subsequently changed our name to Virtusa Corporation in April 2002. Our principal executive offices are located at 2000 West Park Drive, Westborough, Massachusetts 01581, and our telephone number at this location is (508) 389-7300. Our website address is www.virtusa.com. We have included our website address as an inactive textual reference only. The information on, or that can be accessed through, our website is not part of this prospectus.


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The offering
 
Common stock offered by us 4,400,000 shares
 
Common stock to be outstanding after this offering 22,826,867 shares
 
Use of proceeds We expect to use approximately $30 million of the net proceeds from this offering to fund the construction and build-out of a new facility on our planned campus in Hyderabad, India. The balance of the net proceeds will be used for working capital and other general corporate purposes, including to finance the expansion of our global delivery centers in Chennai, India and Colombo, Sri Lanka, the hiring of additional personnel, sales and marketing activities, capital expenditures, the costs of operating as a public company and possible strategic alliances or acquisitions. See “Use of proceeds.”
 
Over-allotment option The underwriters have an option for a period of up to 30 days to purchase from us and the selling stockholders up to 197,205 additional shares and 462,795 additional shares, respectively, of common stock to cover over-allotments.
 
Risk factors See “Risk factors” and other information in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock.
 
Proposed NASDAQ Global Market symbol VRTU
 
The number of shares of our common stock to be outstanding after this offering is based on 18,426,867 shares outstanding as of March 31, 2007 and excludes:
 
•  3,211,458 shares of common stock issuable upon the exercise of options outstanding as of March 31, 2007, at a weighted average exercise price of $3.53 per share
 
•  196,241 shares of common stock issuable after this offering upon the exercise of stock appreciation rights outstanding as of March 31, 2007, reduced by the weighted average exercise price of $4.04 per stock appreciation right
 
•  700,940 shares of common stock reserved as of March 31, 2007 for future issuance under our incentive plans
 
•  37,342 shares of common stock issuable upon the exercise of warrants that will remain outstanding after this offering, at an exercise price of $4.82 per share
 
Unless otherwise noted, all information in this prospectus reflects and assumes:
 
•  the automatic conversion of all outstanding shares of our preferred stock into 11,425,786 shares of common stock upon the closing of this offering
 
•  a one-for-3.13 reverse stock split of our outstanding common stock that was effected on July 18, 2007
 
•  the filing of our seventh amended and restated certificate of incorporation and the adoption of our amended and restated by-laws in connection with this offering
 
•  no exercise of the outstanding options, stock appreciation rights or warrants described above since March 31, 2007
 
•  no exercise by the underwriters of their option to purchase up to 660,000 additional shares of common stock from us and the selling stockholders to cover over-allotments


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Summary consolidated financial information
 
The table below sets forth summary financial data for the periods indicated. The consolidated statement of operations data have been derived from the audited consolidated financial statements of Virtusa for the three fiscal years ended March 31, 2007, included elsewhere in this prospectus. The consolidated balance sheet data as of March 31, 2007, have been derived from the audited consolidated financial statements of Virtusa included elsewhere in this prospectus. It is important that you read this information together with “Management’s discussion and analysis of financial condition and results of operations” on page 41, and our consolidated financial statements and related notes on page F-1. Our historical results for any prior period are not necessarily indicative of results to be expected in any future period.
 
Consolidated statement of operations data
 
                         
 
    Fiscal year ended March 31,  
(In thousands, except share and per share amounts)   2005     2006     2007  
   
 
Revenue
  $ 60,484     $ 76,935       $124,660  
Costs of revenue
    31,813       43,417       68,031  
     
     
Gross profit
    28,671       33,518       56,629  
Operating expenses
    27,838       32,925       42,478  
     
     
Income from operations
    833       593       14,151  
Other income
    376       1,564       1,209  
     
     
Income before income tax expense
    1,209       2,157       15,360  
Income tax expense (benefit)
    99       176       (3,630 )
     
     
Net income
  $ 1,110     $ 1,981       $ 18,990  
Net income per share of common stock
                       
Basic
  $ 0.07     $ 0.12       $    1.09  
Diluted
  $ 0.06     $ 0.11       $    1.03  
 
 
Pro forma net income per share of common stock(1)
                       
Basic
                    $    1.09  
                         
Diluted
                    $    1.03  
                         
Pro forma weighted average number of common shares outstanding(1)
                       
Basic
                    17,431,405  
                         
Diluted
                    18,351,161  
 
 
 
(1) On a pro forma basis to give effect to the conversion of all of our shares of preferred stock outstanding as of March 31, 2007 into 11,425,786 shares of common stock upon the completion of this offering


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Consolidated balance sheet data
 
                   
    March 31, 2007
            Pro forma
(In thousands)   Actual   Pro forma(1)   as adjusted(2)
 
Cash and cash equivalents
  $ 45,079   $ 45,079   $ 102,259
Working capital
    67,082     67,082     124,262
Total assets
    99,319     99,319     156,499
Redeemable convertible preferred stock
    60,862        
Total stockholders’ equity
    19,259     80,121     137,301
 
 
 
(1) On a pro forma basis to give effect to the conversion of all of our shares of preferred stock outstanding as of March 31, 2007 into 11,425,786 shares of common stock upon the completion of this offering
 
(2) On a pro forma as adjusted basis to give effect to the sale of shares of common stock in this offering at an assumed public offering price of $15.00 per share, the midpoint of the expected price range, after deducting estimated underwriting discounts and commissions and our estimated offering expenses.
 
A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share would increase (decrease) the pro forma as adjusted amount of each of cash and cash equivalents, working capital, total assets and total stockholders’ equity by $4,092,000, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and our estimated offering expenses.


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Risk factors
 
You should carefully consider the risks described below and all other information contained in this prospectus before making an investment decision. If any of the following risks actually occur, our business, financial condition and results of operations could be materially and adversely affected. In that event, the trading price of our shares could decline and you may lose part or all of your investment.
 
Risks relating to our business
 
Our revenue is highly dependent on a small number of clients and the loss of any one of our major clients could significantly harm our results of operations and financial condition.
 
We have historically earned and believe that over the next few years we will continue to earn, a significant portion of our revenue from a limited number of clients. For instance, we generated approximately 45%, 43% and 49% of our revenue in our fiscal years ended March 31, 2005, 2006 and 2007, respectively, from our top five clients during those periods. For the fiscal year ended March 31, 2007, British Telecommunications plc, or BT, our largest client, accounted for 23% of our revenue; no other customer accounted for 10% of our revenue in that year. During the fiscal years ended March 31, 2006 and 2007, 91% and 97% of our revenue, respectively came from clients to whom we had been providing services for at least one year and 68% and 84%, respectively, came from clients to whom we had been providing services for at least two years. The loss of any one of our major clients could reduce our revenue or delay our recognition of revenue, harm our reputation in the industry and reduce our ability to accurately predict cash flow. For example, a major client terminated our service engagements within the fourth quarter of fiscal year 2005, and that termination negatively affected our results of operations for the fourth quarter of fiscal year 2005 and the first quarter of fiscal year 2006. The loss of any one of our major clients could also adversely affect our gross profit and utilization as we seek to redeploy resources previously dedicated to that client. Further, the loss of any one of our major clients has required, and could in the future require, us to initiate involuntary attrition. This could have a material adverse effect on our attrition rate and make it more difficult for us to attract and retain IT professionals in the future. We may not be able to maintain our client relationships and our clients may not renew their agreements with us, in which case, our business, financial condition and results of operations would be adversely affected. In addition, although we have recently entered into a five-year IT services agreement with BT that is premised upon minimum aggregate expenditures by BT of approximately $200 million over the term of the agreement, there can be no assurance that we will realize the full amount of those expenditures or that the agreement will not be terminated prior to the end of its term.
 
In addition, this client concentration may subject us to perceived or actual leverage that our clients may have given their relative size and importance to us. If our clients seek to negotiate their agreements on terms less favorable to us and we accept such unfavorable terms, such unfavorable terms may have a material adverse effect on our business, financial condition and results of operations. Accordingly, unless and until we diversify and expand our client base, our future success will significantly depend upon the timing and volume of business from our largest clients and the financial and operational success of these clients. If we were to lose one of our major clients or have a major client cancel substantial projects or otherwise significantly reduce its volume of business with us, our revenue and profitability would be materially reduced and our business would be seriously harmed.


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The IT services market is highly competitive and our competitors may have advantages that may allow them to compete more effectively than we do to secure client contracts and attract skilled IT professionals.
 
The IT services market in which we operate includes a large number of participants and is highly competitive. Our primary competitors include:
 
•  offshore IT outsourcing firms
 
•  consulting and systems integration firms
 
We also occasionally compete with in-house IT departments, smaller vertically-focused IT service providers and local IT service providers based in the geographic areas where we compete. We expect additional competition from offshore IT outsourcing firms in emerging locations such as Eastern Europe, Latin America and China, as well as offshore IT service providers with facilities in less expensive geographies within India.
 
The IT services industry in which we compete is experiencing rapid changes in its competitive landscape. Some of the large consulting firms and offshore IT service providers that we compete with have significant resources and financial capabilities combined with a greater number of IT professionals. Many of our competitors are significantly larger and some have gained access to public and private capital or have merged or consolidated with better capitalized partners, which has created and may in the future create, larger and better capitalized competitors. These competitors may have superior abilities to compete for market share and for our existing and prospective clients. Our competitors may be better able to use significant economic incentives, such as lower billing rates, to secure contracts with our existing and prospective clients. These competitors may also be better able to compete for and retain skilled professionals by offering them more attractive compensation or other incentives. These factors may allow these competitors to have advantages over us to meet client demands in an engagement for large numbers and varied types of resources with specific experience or skill-sets that we may not have readily available in the short- or long-term. We cannot assure you that we can maintain or enhance our competitive position against current and future competitors. Our failure to compete effectively could have a material adverse effect on our business, financial condition or results of operations.
 
If we cannot attract and retain highly-skilled IT professionals, our ability to obtain, manage and staff new projects and continue to expand existing projects may result in loss of revenue and an inability to expand our business.
 
Our ability to execute and expand existing projects and obtain new clients depends largely on our ability to hire, train and retain highly-skilled IT professionals, particularly project managers, IT engineers and other senior technical personnel. If we cannot hire and retain such additional qualified personnel, our ability to obtain, manage and staff new projects and to expand, manage and staff existing projects, may be impaired. We may then lose revenue and our ability to expand our business may be harmed. There is intense worldwide competition for IT professionals with the skills necessary to perform the services we offer. We and the industry in which we operate generally experience high employee attrition. According to a survey of Indian companies conducted by Hewitt Associates, a human resources consulting firm, the attrition rate in 2006 for respondents was approximately 19.0%. Given our recent significant growth and strong demand for IT professionals from our competitors, we cannot assure you that we will be able to hire or retain the number of technical personnel necessary to satisfy our current and


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future client needs. We also may not be able to hire and retain enough skilled and experienced IT professionals to replace those who leave. Additionally, if we have to replace personnel who have left our company, we will incur increased costs not only in hiring replacements but also in training such replacements until they can become productive and billable to our clients. In addition, we may not be able to redeploy and retrain our IT professionals in anticipation of continuing changes in technology, evolving standards and changing client preferences. Our inability to attract and retain IT professionals could have a material adverse effect on our business, operating results and financial condition.
 
Our quarterly financial position, revenue, operating results and profitability are difficult to predict and may vary from quarter to quarter, which could cause our share price to decline significantly.
 
Our quarterly revenue, operating results and profitability have varied in the past and are likely to vary significantly from quarter to quarter in the future. For example, our quarterly results ranged from an operating loss of $0.6 million for the quarter ended September 30, 2005 to operating income of $1.3 million for the quarter ended December 31, 2005. The factors that are likely to cause these variations include:
 
•  the number, timing, scope and contractual terms of IT projects in which we are engaged
 
•  delays in project commencement or staffing delays due to immigration issues or assignment of appropriately skilled or experienced personnel
 
•  the accuracy of estimates of resources, time and fees required to complete fixed-price projects and costs incurred in the performance of each project
 
•  changes in pricing in response to client demand and competitive pressures
 
•  the mix of onsite and offshore staffing
 
•  the mix of leadership and senior technical resources to junior engineering resources staffed on each project
 
•  our ability to have the client reimburse us for travel and living expenses, especially the airfare and related expenses of our Indian and Sri Lankan offshore personnel traveling and working onsite in the United States or the United Kingdom
 
•  seasonal trends, primarily our hiring cycle and the budget and work cycles of our clients
 
•  the ratio of fixed-price contracts to time-and-materials contracts in process
 
•  employee wage levels and increases in compensation costs, including timing of promotions and annual pay increases, particularly in India and Sri Lanka
 
•  unexpected changes in the utilization rate of our IT professionals
 
•  unanticipated contract or project terminations
 
•  the timing of collection of accounts receivable


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•  the continuing financial stability of our clients
 
•  general economic conditions
 
As a result, our revenue and our operating results for a particular period are difficult to predict and may decline in comparison to corresponding prior periods regardless of the strength of our business. Our future revenue is also difficult to predict because we derive a substantial portion of our revenue from fees for services generated from short-term contracts that may be terminated or delayed by our clients without penalty. In addition, a high percentage of our operating expenses, particularly related to personnel and facilities, are relatively fixed in advance of any particular quarter and are based, in part, on our expectations as to future revenue. If we are unable to predict the timing or amounts of future revenue accurately, we may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall and fail to meet our forecasts. Unexpected revenue shortfalls may also decrease our gross margins and could cause significant changes in our operating results from quarter to quarter. As a result, and in addition to the factors listed above, any of the following factors could have a significant and adverse impact on our operating results, could result in a shortfall of revenue and could result in losses to us:
 
•  a client’s decision not to pursue a new project or proceed to succeeding stages of a current project
 
•  the completion during a quarter of several major client projects could require us to pay underutilized employees in subsequent periods
 
•  adverse business decisions of our clients regarding the use of our services
 
•  our inability to transition employees quickly from completed projects to new engagements
 
•  our inability to manage costs, including personnel, infrastructure, facility and support services costs
 
•  exchange rate fluctuations
 
Due to the foregoing factors, it is possible that in some future periods our revenue and operating results may not meet the expectations of securities analysts or investors. If this occurs, the trading price of our common stock could fall substantially either suddenly or over time and our business, financial condition and results of operations would be adversely affected.
 
The loss of key members of our senior management team may prevent us from executing our business strategy.
 
Our future success depends to a significant extent on the continued service and performance of key members of our senior management team. Our growth and success depends to a significant extent on our ability to retain Kris Canekeratne, our chief executive officer, who is a founder of our company and has led the growth, operation, culture and strategic direction of our business since its inception. The loss of his services or the services of other key members of our senior management could seriously harm our ability to execute our business strategy. Although we have entered into agreements with our executive officers providing for severance and change in control benefits to them, our executive officers or other key employees could terminate their employment with us at any time. We also may have to incur significant costs in identifying, hiring, training and retaining replacements for key employees. The loss of any member of our


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senior management team might significantly delay or prevent the achievement of our business or development objectives and could materially harm our business. We do not maintain key man life insurance on any of our employees other than Kris Canekeratne.
 
We may lose revenue if our clients terminate or delay their contracts with us.
 
Our clients typically retain us on a non-exclusive, engagement-by-engagement basis, rather than under exclusive long-term contracts. Many of our contracts for services have terms of less than 12 months and permit our clients to terminate our engagement on prior written notice of 90 days or less for convenience, and without termination-related penalties. Further, many large client projects typically involve multiple independently defined stages, and clients may choose not to retain us for additional stages of a project or cancel or delay their start dates. These terminations, cancellations or delays could result from factors unrelated to our work product or the progress of the project, including:
 
•  client financial difficulties
 
•  a change in a client’s strategic priorities, resulting in a reduced level of IT spending
 
•  a client’s demand for price reductions
 
•  a change in a client’s outsourcing strategy that shifts work to in-house IT departments or to our competitors
 
•  replacement by our client of existing software to packaged software supported by licensors
 
If our contracts were terminated early or materially delayed, our business and operating results could be materially harmed and the value of our common stock could be impaired. Unexpected terminations, cancellation or delays in our client engagements could also result in increased operating expenses as we transition our employees to other engagements.
 
We may incur liability as a result of our failure to register under the Securities Exchange Act of 1934 between 2003 and 2005 when we had more than 500 option holders.
 
Our historical policy was generally to grant stock options to all of our team members worldwide. Section 12(g) of the Securities Exchange Act of 1934, or the Exchange Act, requires that companies with more than $10 million in assets and 500 or more equity security holders at any fiscal year-end register as a reporting company. During our fiscal year ended March 31, 2003, we experienced significant growth in our team member headcount and, as a result, we had granted stock options to more than 500 persons as of March 31, 2003. Accordingly, we may have been required to file a registration statement on Form 10 by July 29, 2003. We did not discover that we may have been obligated to file a Form 10 under Section 12(g) of the Exchange Act until February 2004 as part of the due diligence activities conducted in connection with our Series D convertible participating preferred stock financing. As a result, we did not register our options on Form 10 by July 29, 2003. In July 2005, after conducting extensive research regarding our potential alternatives, we unilaterally terminated certain of our stock options to reduce the number of our option holders to fewer than 300, which would have permitted us to terminate any Section 12(g) registration. Although we will register as a reporting company under the Exchange Act in connection with this offering, our failure to register under Section 12(g) of the Exchange Act as a result of having 500 or more option holders between 2003 and 2005 could subject us and our officers and directors to an enforcement action brought by the Securities and Exchange Commission and to fines and


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penalties. In addition, the SEC could require us to prepare and file a registration statement on Form 10 and all periodic reports that we would have been required to file as a reporting company had we registered in fiscal 2004. Preparing and filing these reports at this time would be costly and time-consuming and could distract our management from our operations, which could negatively affect our business. It could also cause us to be perceived adversely by the investment community and cause our stock price to decline. In addition, our failure to file required Exchange Act reports could give rise to actions by federal regulators, or to potential claims by current or former option holders and stockholders based on the assertion that such holders were harmed by the absence of such public reports. If any such claim or action is asserted, we could incur expenses and management’s attention would be diverted in defending the claim or action.
 
We may incur liability to certain option holders as a result of our failure to register under the Exchange Act.
 
We may have been required to register as a reporting company under the Exchange Act as a result of having more than 500 option holders as of March 31, 2003, which would have required us to file a registration statement on Form 10 by July 29, 2003. Upon the effectiveness of such Form 10 registration statement, we would have been required to file periodic reports with the Securities and Exchange Commission. We reduced the number of our option holders to fewer than 300 in July 2005, which would have permitted us to terminate any such registration. The exemption from registration under Rule 701 of the Securities Act may not have been available during the intervening period, and grants of certain options under our stock option plan between August 12, 2003 and December 28, 2004 may not have been otherwise exempt from registration or qualification under federal and state securities laws. In particular, grants to 15 newly-hired, U.S.-based employees of stock options for an aggregate of 101,750 shares of common stock with an aggregate exercise price of $462,558 and a weighted average exercise price of $4.55 per share may not have been exempt from registration or qualification under federal and state securities laws. Although we believe that those option grants were made pursuant to valid exemptions from the registration requirements of the Securities Act of 1933, or the Securities Act, the holders of those options could nonetheless assert that they have rescission rights. If we are required, or elect, to make rescission offers to the holders of those options and such offers are accepted, we could be required to make payments to those holders equal to the value of the options plus statutory interest. Moreover, our financial exposure could be higher if so determined by the courts or regulators.
 
We may face damage to our professional reputation if our services do not meet our clients’ expectations.
 
Many of our projects involve technology applications or systems that are critical to the operations of our clients’ businesses and handle very large volumes of transactions. If we fail to perform our services correctly, we may be unable to deliver applications or systems to our clients with the promised functionality or within the promised time frame, or to satisfy the required service levels for support and maintenance. If a client is not satisfied with our services or products, including those of subcontractors we employ, our business may suffer. Moreover, if we fail to meet our contractual obligations, our clients may terminate their contracts and we could face legal liabilities and increased costs, including warranty claims against us. Any failure in a client’s project could result in a claim for substantial damages, non-payment of outstanding invoices, loss of future business with such client and increased costs due to non-billable time of


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our resources dedicated to address any performance or client satisfaction issues, regardless of our responsibility for such failure.
 
We may not be able to continue to maintain or increase our profitability and our recent growth rates may not be indicative of our future growth.
 
We have been consistently profitable only since the quarter ended December 31, 2005. We may not succeed in maintaining our profitability and could incur losses in future periods. We expect to incur additional operating expenses associated with being a public company and we intend to continue to increase our operating expenses, including stock-based compensation, in all areas as we grow our business. If we experience declines in demand or declines in pricing for our services, or if wages in India or Sri Lanka increase at a faster rate than in the United States and the United Kingdom, we will be faced with continued growing costs for our IT professionals, including wage increases. We also expect to continue to make investments in infrastructure, facilities, sales and marketing and other resources as we expand our operations, thus incurring additional costs. If our revenue does not increase to offset these increases in costs or operating expenses, our operating results would be negatively affected. In fact, in future quarters we may not have any revenue growth and our revenue and net income could decline. You should not consider our historic revenue and net income growth rates as indicative of future growth rates. Accordingly, we cannot assure you that we will be able to maintain or increase our profitability in the future.
 
A significant or prolonged economic downturn in the IT services industry may result in our clients reducing or postponing spending on the services we offer.
 
Our revenue is dependent on entering into large contracts for our services with a limited number of clients each year. Because we are not the exclusive IT service provider for our clients, the volume of work that we perform for any specific client is likely to vary from year to year. There are a number of factors, other than our performance, that could affect the size, frequency and renewal rates of our client contracts. For instance, if economic conditions weaken in the IT services industry, our clients may reduce or postpone their IT spending significantly which may, in turn, lower the demand for our services and negatively affect our revenue and profitability. As a way of dealing with a challenging economic environment, clients may change their outsourcing strategy by performing more work in-house or replacing their existing software with packaged software supported by the licensor. The loss of, or any significant decline in business from, one or more of our major clients likely would lead to a significant decline in our revenue and operating margins, particularly if we are unable to make corresponding reductions in our expenses in the event of any such loss or decline. Moreover, a significant change in the liquidity or financial position of any of these clients could have a material adverse effect on the collectability of our accounts receivable, liquidity and future operating results.
 
Restrictions on immigration may affect our ability to compete for and provide services to clients in the United States or the United Kingdom, which could result in lost revenue and delays in client engagements and otherwise adversely affect our ability to meet our growth and revenue projections.
 
The vast majority of our employees are Indian and Sri Lankan nationals. The ability of our IT professionals to work in the United States, the United Kingdom and other countries depends on the ability to obtain the necessary visas and entry permits. In recent years, the United States has


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increased the level of scrutiny in granting H-1B, L-1 and ordinary business visas. In response to terrorist attacks and global unrest, U.S. and U.K. immigration authorities, as well as other countries, have not only increased the level of scrutiny in granting visas, but have also introduced new security procedures, which include extensive background checks, personal interviews and the use of biometrics, as conditions to granting visas and work permits. A number of European countries are considering changes in immigration policies as well. The inability of key project personnel to obtain necessary visas or work permits could delay or prevent our fulfillment of client projects, which could hamper our growth and cause our revenue to decline. These restrictions and additional procedures may delay, or even prevent, the issuance of a visa or work permit to our IT professionals and affect our ability to staff projects in a timely manner. Any delays in staffing a project can result in project postponement, delays or cancellation, which could result in lost revenue and decreased profitability and have a material adverse effect on our business, revenue, profitability and utilization rates.
 
Immigration laws in countries in which we seek to obtain visas or work permits may require us to meet certain other legal requirements as conditions to obtaining or maintaining entry visas. These immigration laws are subject to legislative change and varying standards of application and enforcement due to political forces, economic conditions or other events, including terrorist attacks. We cannot predict the political or economic events that could affect immigration laws, or any restrictive impact those events could have on obtaining or monitoring entry visas for our personnel. Our reliance on work visas and work permits for a significant number of our IT professionals makes us particularly vulnerable to such changes and variations, particularly in the United States and the United Kingdom, because these immigration and legislative changes affect our ability to staff projects with IT professionals who are not citizens of the country where the onsite work is to be performed. We may not be able to obtain a sufficient number of visas for our IT professionals or may encounter delays or additional costs in obtaining or maintaining such visas. To the extent we experience delays due to such immigration restrictions, we may encounter client dissatisfaction, project and staffing delays in new and existing engagements, project cancellations, higher project costs and loss of revenue, resulting in decreases in profits and a material adverse effect on our business, results of operations, financial condition and cash flows.
 
Our management has limited experience managing a public company, and regulatory compliance may divert its attention from the day-to-day management of our business.
 
We have never operated as a public company. The individuals who constitute our management team have limited experience managing a publicly traded company and limited experience complying with the increasingly complex laws pertaining to public companies. We may need to hire a number of additional employees with public accounting and disclosure experience in order to meet our ongoing obligations as a public company. Our management team and other personnel will need to devote a substantial amount of time to these new compliance initiatives and we may not successfully or efficiently manage our transition into a public company. In particular, these new obligations will require substantial attention from our senior management and divert its attention away from the day-to-day management of our business, which could materially and adversely affect our business operations.
 
In addition, the Sarbanes-Oxley Act of 2002 requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management and our independent registered public


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accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses. To comply with Section 404, we will incur substantial accounting expense and expend significant management time. Compared to many newly-public companies, the scale of our organization and our significant foreign operations may make it more difficult to comply with Section 404 in a timely manner. We may not be able to successfully complete the procedures and certification and attestation requirements of Section 404 by the time we will be required to do so. If we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identifies deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, we could be subject to sanctions or investigations by the NASDAQ Global Market, the Securities and Exchange Commission or other regulatory authorities, which would require additional financial and management resources. In addition, because effective internal controls are necessary for us to produce reliable financial reports and prevent fraud, our failure to satisfy the requirements of Section 404 could harm investor confidence in the reliability of our financial statements, which could harm our business and the trading price of our common stock.
 
We may be required to spend substantial time and expense before we can recognize revenue, if any, from a client contract.
 
The period between our initial contact with a potential client and the execution of a client contract for our services is lengthy, and can extend over one or more fiscal quarters. To sell our services successfully and obtain an executed client contract, we generally have to educate our potential clients about the use and benefits of our services, which can require significant time, expense and capital without the ability to realize revenue, if any. If our sales cycle unexpectedly lengthens for one or more large projects, it would negatively affect the timing of our revenue, and hinder our revenue growth. Furthermore, a delay in our ability to obtain a signed agreement or other persuasive evidence of an arrangement or to complete certain contract requirements in a particular quarter, could reduce our revenue in that quarter. These delays or failures can cause our gross margin and profitability to fluctuate significantly from quarter to quarter. Overall, any significant failure to generate revenue or delays in recognizing revenue after incurring costs related to our sales or services process could have a material adverse effect on our business, financial condition and results of operations.
 
We are investing substantial cash in new facilities and our profitability could be reduced if our business does not grow proportionately.
 
We currently plan to spend approximately $30 million of the net proceeds of this offering over the next three fiscal years in connection with the construction and build-out of a facility on our planned campus in Hyderabad, India. We also intend to make increased investments to expand our existing global delivery centers or procure additional capacity and facilities in Chennai, India and Colombo, Sri Lanka. We may face cost overruns and project delays in connection with these facilities or other facilities we may construct or seek to lease in the future. Such delays may also cause us to incur additional leasing costs to extend the terms of existing facility leases or to enter into new short-term leases if we cannot move into the new facilities in a timely manner. Such expansion may also significantly increase our fixed costs. If we are unable to expand our business and revenue proportionately, our profitability will be reduced.


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We may not be able to recognize revenue in the period in which our services are performed, which may cause our margins to fluctuate.
 
Our services are performed under both time-and-material and fixed-price arrangements. All revenue is recognized pursuant to applicable accounting standards. These standards require us to recognize revenue once evidence of an arrangement has been obtained, services are delivered, fees are fixed or determinable and collectability is reasonably assured. If we perform our services prior to the time when we are able to recognize the associated revenue, our margins may fluctuate significantly from quarter to quarter.
 
Additionally, payment of our fees on fixed-price contracts are based on our ability to provide deliverables on certain dates or meet certain defined milestones. Our failure to produce the deliverables or meet the project milestones in accordance with agreed upon specifications or timelines, or otherwise meet a client’s expectations, may result in our having to record the cost related to the performance of services in the period that services were rendered, but delay the timing of revenue recognition to a future period in which the milestone is met.
 
Our inability to manage to a desired onsite-to-offshore service delivery mix may negatively affect our gross margins and costs and our ability to offer competitive pricing.
 
We may not succeed in maintaining or increasing our profitability and could incur losses in future periods if we are not able to manage to a desired onsite-to-offshore service delivery mix. To the extent that our engagements involve an increasing number of consulting, production support, software package implementation or other services typically requiring a higher percentage of onsite resources, we may not be able to manage to our desired service delivery mix. Additionally, other factors like client constraint or preferences or our inability to manage engagements effectively with limited resources onsite may result in a higher percentage of onsite resources than our desired service delivery mix. Accordingly, we cannot assure you that we will be able to manage to our desired onsite-to-offshore service delivery mix. If we are unable to manage to our targeted service delivery mix, our gross margins may decline and our profitability may be reduced. Additionally, our costs will increase and we may not be able to offer competitive pricing to our clients.
 
The international nature of our business exposes us to several risks, such as significant currency fluctuations and unexpected changes in the regulatory requirements of multiple jurisdictions.
 
We have operations in India, Sri Lanka and the United Kingdom and we serve clients across Europe, North America and Asia. For the fiscal years ended March 31, 2006 and 2007, revenue generated outside of the United States accounted for 14% and 26% of total revenue, respectively. Our corporate structure also spans multiple jurisdictions, with our parent company incorporated in Delaware and operating subsidiaries organized in India, Sri Lanka and the United Kingdom. As a result, our international revenue and operations are exposed to risks typically associated with conducting business internationally, many of which are beyond our control. These risks include:
 
•  significant currency fluctuations between the U.S. dollar and the U.K. pound sterling (in which our revenue is principally denominated) and the Indian and Sri Lankan rupees (in which a significant portion of our costs are denominated)


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•  legal uncertainty owing to the overlap of different legal regimes and problems in asserting contractual or other rights across international borders, including compliance with local laws of which we may be unaware
 
•  potentially adverse tax consequences, such as scrutiny of transfer pricing arrangements by authorities in the countries in which we operate, potential tariffs and other trade barriers
 
•  difficulties in staffing, managing and supporting operations in multiple countries
 
•  potential fluctuations in foreign economies
 
•  unexpected changes in regulatory requirements
 
•  government currency control and restrictions on repatriation of earnings
 
•  the burden and expense of complying with the laws and regulations of various jurisdictions
 
•  domestic and international economic or political changes, hostilities, terrorist attacks and other acts of violence or war
 
•  earthquakes, tsunamis and other natural disasters in regions where we currently operate or may operate in the future
 
Negative developments in any of these areas in one or more countries could result in a reduction in demand for our services, the cancellation or delay of client contracts, threats to our intellectual property, difficulty in collecting receivables and a higher cost of doing business, any of which could negatively affect our business, financial condition or results of operations.
 
If we fail to manage our rapid growth effectively, we may not be able to obtain, develop or implement new systems, infrastructure, procedures and controls that are required to support our operations, maintain cost controls, market our services and manage our relationships with our clients.
 
We have experienced rapid growth in recent periods. From March 31, 2005 to March 31, 2007, the number of our team members increased from 2,251 to 3,576. We expect that we will continue to grow and our anticipated growth could place a significant strain on our ability to:
 
•  recruit, hire, train, motivate and retain highly-skilled IT services and management personnel
 
•  adequately and timely staff personnel at client locations in the United States and Europe due to increasing immigration and related visa restrictions and intense competition to hire and retain these skilled IT professionals
 
•  adhere to our global delivery process and execution standards
 
•  maintain and manage costs to correspond with timeliness of revenue recognition
 
•  develop and improve our internal administrative infrastructure, including our financial, operational and communication systems, processes and controls
 
•  provide sufficient operational facilities and offshore global delivery centers to accommodate and satisfy the capacity needs of our growing workforce on reasonable commercial terms, or at all, whether by leasing, buying or building suitable real estate


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•  preserve our corporate culture, values and entrepreneurial environment
 
•  maintain high levels of client satisfaction
 
To manage this anticipated future growth effectively, we must continue to maintain and may need to enhance, our IT infrastructure, financial and accounting systems and controls and manage expanded operations in several locations. We also must attract, integrate, train and retain qualified personnel, especially in the areas of accounting, internal audit and financial disclosure. Further, we will need to manage our relationships with various clients, vendors and other third parties. We may not be able to develop and implement, on a timely basis, if at all, the systems, infrastructure procedures and controls required to support our operations. Additionally some factors, like changes in immigration laws or visa processing restrictions that limit our ability to engage offshore resources at client locations in the United States or the United Kingdom, are outside of our control. Our future operating results will also depend on our ability to develop and maintain a successful sales organization despite our rapid growth. If we are unable to manage our growth, our operating results could fluctuate from quarter to quarter and our financial condition could be materially adversely affected.
 
Unexpected costs or delays could make our contracts unprofitable.
 
When making proposals for engagements, we estimate the costs and timing for completion of the projects. These estimates reflect our best judgment regarding the efficiencies of our methodologies, staffing of resources, complexities of the engagement and costs. The profitability of our engagements, and in particular our fixed-price contracts, are adversely affected by increased or unexpected costs or unanticipated delays in connection with the performance of these engagements, including delays caused by factors outside our control, which could make these contracts less profitable or unprofitable. The occurrence of any of these costs or delays could result in an unprofitable engagement or litigation.
 
Currency exchange rate fluctuations may negatively affect our operating results.
 
The exchange rates among the Indian and Sri Lankan rupees and the U.S. dollar and the U.K. pound sterling have changed substantially in recent years and may fluctuate substantially in the future. We expect that a majority of our revenue will continue to be generated in the U.S. dollar and U.K. pound sterling for the foreseeable future and that a significant portion of our expenses, including personnel costs, as well as capital and operating expenditures, will continue to be denominated in Indian and Sri Lankan rupees. Accordingly, any material appreciation of the Indian rupee or the Sri Lankan rupee against the U.S. dollar or U.K. pound sterling could have a material adverse effect on our cost of services, gross margin and net income, which may in turn have a negative impact on our business, operating results and financial condition. In this regard, the exchange rate for the Indian rupee to the U.S. dollar and U.K. pound sterling decreased from 43.4417 and 85.2552 on March 31, 2007 to 40.7350 and 81.6301 on June 30, 2007, respectively. The appreciation of the Indian rupee against the U.S. dollar and U.K. pound sterling since March 31, 2007 has had a negative impact on our earnings and margins, and any continued appreciation is likely to have a negative impact on future earnings and margins.
 
We may face liability if we inappropriately disclose confidential client information.
 
In the course of providing services to our clients, we may have access to confidential client information. We are bound by certain agreements to use and disclose this information in a manner consistent with the privacy standards under regulations applicable to our clients.


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Although these privacy standards may not apply directly to us, if any person, including an employee of ours, misappropriates client confidential information, or if client confidential information is inappropriately disclosed due to a breach of our computer systems, system failures or otherwise, we may have substantial liabilities to our clients or our clients’ customers. In addition, in the event of any breach or alleged breach of our confidentiality agreements with our clients, these clients may terminate their engagements with us or sue us for breach of contract, resulting in the associated loss of revenue and increased costs. We may also be subject to civil or criminal liability if we are deemed to have violated applicable regulations. We cannot assure you that we will adequately address the risks created by the regulations to which we may be contractually obligated to abide.
 
We will incur significant increased costs as a result of being a public company.
 
We will face increased legal, accounting, administrative and other costs and expenses as a public company that we do not incur as a private company. The Sarbanes-Oxley Act, as well as rules subsequently implemented by the Securities and Exchange Commission, the Public Company Accounting Oversight Board and the NASDAQ Stock Market, has imposed various requirements on public companies, including changes in the corporate governance practices of public companies. We expect these rules and regulations to increase our legal and financial compliance costs and to make legal, accounting and administrative activities more time-consuming and costly. We also expect to incur substantially higher costs to obtain directors and officers insurance.
 
Our failure to anticipate rapid changes in technology may negatively affect demand for our services in the marketplace.
 
Our success will depend, in part, on our ability to develop and implement business and technology solutions that anticipate rapid and continuing changes in technology, industry standards and client preferences. We may not be successful in anticipating or responding to these developments on a timely basis, which may negatively affect demand for our solutions in the marketplace. Also, if our competitors respond faster than we do to changes in technology, industry standards and client preferences, we may lose business and our services may become less competitive or obsolete. Any one or a combination of these circumstances could have a material adverse effect on our ability to obtain and successfully complete client engagements.
 
Interruptions or delays in service from our third-party providers could impair our global delivery model, which could result in client dissatisfaction and a reduction of our revenue.
 
We depend upon third parties to provide a high speed network of active voice and data communications 24 hours per day and various satellite and optical links between our global delivery centers and our clients. Consequently, the occurrence of a natural disaster or other unanticipated problems with the equipment or at the facilities of these third-party providers could result in unanticipated interruptions in the delivery of our services. For example, we may not be able to maintain active voice and data communications between our global delivery centers and our clients’ sites at all times due to disruptions in these networks, system failures or virus attacks. Any significant loss in our ability to communicate or any impediments to any IT professional’s ability to provide services to our clients could result in a disruption to our business, which could hinder our performance or our ability to complete client projects in a timely manner. This, in turn, could lead to substantial liability to our clients, client dissatisfaction, loss of revenue and a material adverse effect on our business, our operating results and financial condition. We cannot assure you that our business interruption insurance


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will adequately compensate our clients or us for losses that may occur. Even if covered by insurance, any failure or breach of security of our systems could damage our reputation and cause us to lose clients.
 
Our services may infringe on the intellectual property rights of others, which may subject us to legal liability, harm our reputation, prevent us from offering some services to our clients or distract management.
 
We cannot be sure that our services or the deliverables that we develop and create for our clients do not infringe the intellectual property rights of third parties and infringement claims may be asserted against us or our clients. These claims may harm our reputation, distract management, cost us money and prevent us from offering some services to our clients. Historically, we have generally agreed to indemnify our clients for all expenses and liabilities resulting from infringement of intellectual property rights of third parties based on the services and deliverables that we have performed and provided to our clients. In some instances, the amount of these indemnities may be greater than the revenue we receive from the client. In addition, as a result of intellectual property litigation, we may be required to stop selling, incorporating or using products that use or incorporate the infringed intellectual property. We may be required to obtain a license or pay a royalty to make, sell or use the relevant technology from the owner of the infringed intellectual property. Such licenses or royalties may not be available on commercially reasonable terms, or at all. We may also be required to redesign our services or change our methodologies so as not to use the infringed intellectual property, which may not be technically or commercially feasible and may cause us to expend significant resources. Subject to certain limitations, under our indemnification obligations to our clients, we may also have to provide refunds to our clients to the extent that we must require them to cease using an infringing deliverable if we are unable to provide a work around or acquire a license to permit use of the infringing deliverable that we had provided to them as part of a service engagement. If we are obligated to make any such refunds or dedicate time to provide alternatives or acquire a license to the infringing intellectual property, our business and financial condition could be materially adversely affected.
 
Any claims or litigation involving intellectual property, whether we ultimately win or lose, could be extremely time-consuming, costly and injure our reputation.
 
As the number of patents, copyrights and other intellectual property rights in our industry increases, we believe that companies in our industry will face more frequent infringement claims. Defending against these claims, even if the claims have no merit, may not be covered by or could exceed the protection offered by our insurance and could divert management’s attention and resources from operating our company.
 
Our ability to raise capital in the future may be limited and our failure to raise capital when needed could prevent us from growing.
 
We anticipate that our current cash and cash equivalents, together with the net proceeds of this offering, will be sufficient to meet our current needs for general corporate purposes for the foreseeable future. We may also need additional financing to execute our current or future business strategies, including to:
 
•  add additional global delivery centers
 
•  procure additional capacity and facilities


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•  hire additional personnel
 
•  enhance our operating infrastructure
 
•  acquire businesses or technologies
 
•  otherwise respond to competitive pressures
 
If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could be significantly diluted and these newly issued securities may have rights, preferences or privileges senior to those of existing stockholders. If we incur additional debt financing, a substantial portion of our operating cash flow may be dedicated to the payment of principal and interest on such indebtedness, thus limiting funds available for our business activities. Any such debt financing could require us to comply with restrictive financial and operating covenants, which could have a material adverse impact on our business, results of operations or financial condition. We cannot assure you that additional financing will be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, when we desire them, our ability to fund our operations and growth, take advantage of unanticipated opportunities or otherwise respond to competitive pressures may be significantly limited.
 
Potential future acquisitions, strategic investments, partnerships or alliances could be difficult to identify and integrate, divert the attention of key management personnel, disrupt our business, dilute stockholder value and adversely affect our financial results.
 
We may acquire or make strategic investments in complementary businesses, technologies or services or enter into strategic partnerships or alliances with third parties to enhance our business. If we do identify suitable candidates, we may not be able to complete transactions on terms commercially acceptable to us, if at all. These types of transactions involve numerous risks, including:
 
•  difficulties in integrating operations, technologies, accounting and personnel
 
•  difficulties in supporting and transitioning clients of our acquired companies or strategic partners
 
•  diversion of financial and management resources from existing operations
 
•  risks of entering new markets
 
•  potential loss of key employees
 
•  inability to generate sufficient revenue to offset transaction costs
 
We may finance future transactions through debt financing or the issuance of our equity securities or a combination of the foregoing. Acquisitions financed with the issuance of our equity securities could be dilutive, which could affect the market price of our stock. Acquisitions financed with debt could require us to dedicate a substantial portion of our cash flow to principal and interest payments and could subject us to restrictive covenants. Acquisitions also frequently result in the recording of goodwill and other intangible assets that are subject to potential impairments in the future that could harm our financial results. It is possible that we may not identify suitable acquisition, strategic investment or partnership or alliance candidates. Our inability to identify suitable acquisition targets, strategic investments, partners or alliances,


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or our inability to complete such transactions, may negatively affect our competitiveness and growth prospects. Moreover, if we fail to properly evaluate acquisitions, alliances or investments, we may not achieve the anticipated benefits of any such transaction and we may incur costs in excess of what we anticipate.
 
Our profitability is dependent on our billing and utilization rates, which may be negatively affected by various factors.
 
Our profit margin is largely a function of the rates we are able to charge for our services and the utilization rate of our IT professionals. The rates we are able to charge for our services are affected by a number of factors, including:
 
•  our clients’ perception of our ability to add value through our services
 
•  the introduction of new services or products by us or our competitors
 
•  the pricing policies of our competitors
 
•  general economic conditions
 
A number of factors affect our utilization rate, including:
 
•  our ability to transition employees quickly from completed or terminated projects to new engagements
 
•  our ability to maintain continuity of existing resources on existing projects
 
•  our ability to obtain visas for offshore personnel to commence projects at a client site for new or existing engagements
 
•  the amount of time spent by our employees on non-billable training activities
 
•  our ability to forecast demand for our services and thereby maintain an appropriate number of employees
 
•  our ability to manage employee attrition
 
•  seasonal trends, primarily our hiring cycle, holidays and vacations
 
•  the number of campus hires
 
If we are not able to maintain the rates we charge for our services or maintain an appropriate utilization rate for our IT professionals, our revenue will decline, our costs will increase and we will not be able to sustain our profit margin, any of which will have a material adverse effect on our profitability.
 
We depend on clients primarily located in the United States and the United Kingdom, as well as clients concentrated in specific industries, and are therefore subject to risks relating to developments affecting these clients that may cause them to reduce or postpone their IT spending.
 
For the fiscal year ended March 31, 2007, we derived substantially all of our revenue from clients located in the United States and the United Kingdom, as well as clients concentrated in certain industries. During the fiscal year ended March 31, 2007, we generated 74% of our


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revenue in the United States and 26% of our revenue in the United Kingdom. For the same fiscal year, we derived substantially all of our revenue from three industries: communications and technology; banking, financial services and insurance; and media and information. If economic conditions weaken, particularly in the United States, the United Kingdom or any of these industries, our clients may significantly reduce or postpone their IT spending. Reductions in IT budgets, increased consolidation or decreased competition in these geographic locations or industries could result in an erosion of our client base and a reduction in our target market. Any reductions in the IT spending of companies in any one of these industries may reduce the demand for our services and negatively affect our revenue and profitability.
 
Some of our client contracts contain restrictions or penalty provisions that, if triggered, could result in lower future revenue and decrease our profitability.
 
We have entered in the past, and may in the future enter, into contracts that contain restrictions or penalty provisions that, if triggered, may adversely affect our operating results. For instance, some of our client contracts provide that, during the term of the contract and for a certain period thereafter ranging from six to 12 months, we may not use the same personnel to provide similar services to any of the client’s competitors. This restriction may hamper our ability to compete for and provide services to clients in the same industry. In addition, some contracts contain provisions that would require us to pay penalties to our clients if we do not meet pre-agreed service level requirements. If any of the foregoing were to occur, our future revenue and profitability under these contracts could be materially harmed.
 
Negative public perception in the United States and the United Kingdom regarding offshore IT service providers and proposed legislation may adversely affect demand for our services.
 
We have based our growth strategy on certain assumptions regarding our industry, services and future demand in the market for such services. However, the trend to outsource IT services may not continue and could reverse. Offshore outsourcing is a politically sensitive topic in the United States and the United Kingdom. For example, many organizations and public figures in the United States and the United Kingdom have publicly expressed concern about a perceived association between offshore outsourcing providers and the loss of jobs in their home countries. In addition, there has been recent publicity about the negative experience of certain companies that use offshore outsourcing, particularly in India. Current or prospective clients may elect to perform such services themselves or may be discouraged from transferring these services from onshore to offshore providers to avoid negative perceptions that may be associated with using an offshore provider. Any slowdown or reversal of existing industry trends towards offshore outsourcing would seriously harm our ability to compete effectively with competitors that operate out of facilities located in the United States or the United Kingdom.
 
Legislation in the United States or the United Kingdom may be enacted that is intended to discourage or restrict outsourcing. In the United States, a variety of federal and state legislation has been proposed that, if enacted, could restrict or discourage U.S. companies from outsourcing their services to companies outside the United States. For example, legislation has been proposed that would require offshore providers to identify where they are located. In addition, it is possible that legislation could be adopted that would restrict U.S. private sector companies that have federal or state government contracts from outsourcing their services to offshore service providers. We do not currently have any contracts with U.S. federal or state government entities. However, there can be no assurance that these restrictions will not extend to or be adopted by private companies, including our clients. Recent legislation introduced in


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the United Kingdom has also been introduced to restrict or discourage companies from outsourcing their services, including IT services. Any changes to existing laws or the enactment of new legislation restricting offshore outsourcing in the United States or the United Kingdom may adversely affect our ability to do business in the United States or in the United Kingdom, particularly if these changes are widespread, and could have a material adverse effect on our business, results of operations, financial condition and cash flows.
 
Risks related to our Indian and Sri Lankan operations
 
Political instability or changes in the government in India could result in the change of several policies relating to foreign direct investment and repatriation of capital and dividends. Further, changes in the economic policies could adversely affect economic conditions in India generally and our business in particular.
 
We have a subsidiary in India and a significant portion of our business, fixed assets and human resources are located in India. As a result, our business is affected by foreign exchange rates and controls, interest rates, local regulations, changes in government policy, taxation, social and civil unrest and other political, economic or other developments in or affecting India.
 
Since 1991, successive Indian governments have pursued policies of economic liberalization, including significantly relaxing restrictions on foreign direct investment into India with repatriation benefits. Nevertheless, the roles of the Indian central and state governments in the Indian economy as producers, consumers and regulators have remained significant. The rate of economic liberalization could change and specific laws and policies affecting software companies, foreign investment, currency exchange and other matters affecting investment in our securities could change as well. A significant change in India’s economic liberalization and deregulation policies could adversely affect business and economic conditions in India generally and our business in particular, if new restrictions on the private sector are introduced or if existing restrictions are increased.
 
Changes in the policies of the government of Sri Lanka or political instability could delay the further liberalization of the Sri Lankan economy and adversely affect economic conditions in Sri Lanka, which could adversely affect our business.
 
Our subsidiary in Sri Lanka has been approved as an export computer software developer by the Board of Investment in Sri Lanka, which is a statutory body organized to facilitate foreign investment into Sri Lanka and grant concessions and benefits to entities with which it has entered into agreements. Pursuant to our agreement with the Board of Investment, our subsidiary is entitled to exemptions from taxation on income for a period of 12 years expiring on March 31, 2019. Our subsidiary is also exempt from exchange control regulations which will enable our subsidiary to repatriate dividends abroad. Nevertheless, government policies relating to taxation other than on income would have an impact on the subsidiary, and the political, economic or social factors in Sri Lanka may affect these policies. Historically, past incumbent governments have followed policies of economic liberalization. However, we cannot assure you that the current government or future governments will continue these liberal policies.


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Regional conflicts or terrorist attacks and other acts of violence or war in India, Sri Lanka, the United States or other regions could adversely affect financial markets, resulting in loss of client confidence and our ability to serve our clients which, in turn, could adversely affect our business, results of operations and financial condition.
 
The Asian region has from time to time experienced instances of civil unrest and hostilities among neighboring countries, including between India and Pakistan. Since May 1999, military confrontations between India and Pakistan have occurred in Kashmir. Also, there have been military hostilities and civil unrest in Iraq. Terrorist attacks, such as the ones that occurred in New York and Washington, D.C., on September 11, 2001, New Delhi on December 13, 2001, Bali on October 12, 2002, civil or political unrest in Sri Lanka and other acts of violence or war, including those involving India, Sri Lanka, the United States, the United Kingdom or other countries, may adversely affect U.S., U.K. and worldwide financial markets. Prospective clients may wish to visit several of our facilities, including our global delivery centers in India and Sri Lanka, prior to reaching a decision on vendor selection. Terrorist threats, attacks and international conflicts could make travel more difficult and cause potential clients to delay, postpone or cancel decisions to use our services. In addition, such attacks may have an adverse impact on our ability to operate effectively and interrupt lines of communication and restrict our offshore resources from traveling onsite to client locations, effectively curtailing our ability to deliver our services to our clients. These obstacles may increase our expenses and negatively affect our operating results. In addition, military activity, terrorist attacks, political tensions between India and Pakistan and conflicts within Sri Lanka could create a greater perception that the acquisition of services from companies with significant Indian or Sri Lankan operations involves a higher degree of risk that could adversely affect client confidence in India or Sri Lanka as a software development center, each of which would have a material adverse effect on our business.
 
Our net income may decrease if the governments of the United Kingdom, the United States, India or Sri Lanka adjust the amount of our taxable income by challenging our transfer pricing policies.
 
Our subsidiaries conduct intercompany transactions among themselves and with the U.S. parent company on an arm’s-length basis in accordance with U.S. and local country transfer pricing regulations. The jurisdictions in which we pay income taxes could challenge our determination of arm’s-length profit and issue tax assessments. Although the United States has income tax treaties with all countries in which we have operations, which mitigates the risk of double taxation, the costs to appeal any such tax assessment and potential interest and penalties could decrease our earnings and cash flows.
 
The Indian taxing authorities recently issued an assessment order with respect to their examination of the tax return for the fiscal year ended March 31, 2004 of our Indian subsidiary, Virtusa (India) Private Ltd., or Virtusa India. At issue were several matters, the most significant of which was the re-determination of the arm’s-length profit which should be recorded by Virtusa India on the intercompany transactions with its affiliates. We are contesting the assessment and have filed appeals with both the appropriate Indian tax authorities and the U.S. Competent Authority. During the fiscal year ended March 31, 2007, we recorded a $0.4 million reserve related to this matter. In addition, the Indian tax authorities are conducting an audit of our fiscal year ended March 31, 2005. Although no assessments have been issued to date, we may receive assessments in the future related to our intercompany pricing arrangements. Any failure of our appeals with India or audit assessments from India, Sri Lanka, the United Kingdom or the United States could reduce our earnings and cash flows.


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Our net income may decrease if the governments of India or Sri Lanka reduce or withdraw tax benefits and other incentives provided to us or levy new taxes.
 
Our Indian subsidiary, Virtusa India, is an export-oriented company under the Indian Income Tax Act of 1961 and is entitled to claim tax exemption for each Software Technology Park, or STP, which it operates. Virtusa India currently operates two STPs, in Chennai and in Hyderabad. Substantially all of the earnings of both STPs qualify as tax-exempt export profits. These holidays will be completely phased out by March 2009, and at that time any profits would be fully taxable at the Indian statutory rate, which is currently 34.0%. Although we believe we have complied with and are eligible for the STP holiday, the government of India may deem us ineligible for the STP holiday or make adjustments to the profit level resulting in an overall increase in our effective tax rate. In anticipation of the phase-out of the STP holidays, we intend to locate at least a portion of our Indian operations in areas designated as a Special Economic Zone, or SEZ, under the SEZ Act of 2005. In particular, we intend to build a campus on a 6.3 acre parcel of land in Hyderabad, India that has been designated as an SEZ and we intend to seek SEZ designation in other locations. Although our profits from the SEZ operations would be entitled to certain income tax incentives for a period up to 15 years, there is no guarantee that we will secure SEZ status for any other location in India. Additionally, the government of India may deem us ineligible for an SEZ holiday or make adjustments to the transfer pricing profit levels resulting in an overall increase in our effective tax rate.
 
In addition, our Sri Lankan subsidiary, Virtusa Private Ltd., or Virtusa SL, was approved as an export computer software developer by the Sri Lanka Board of Investment in 1998 and has negotiated multiple extensions of the original holiday period in exchange for further capital investments in Sri Lanka facilities. The most recent 12-year agreement, which is set to expire on March 31, 2019, requires that we meet certain new job creation and investment criteria. Any inability to meet the agreed upon timetable for new job creation and investment would jeopardize the new holiday arrangement.
 
Newly-enacted legislation in India could harm our results of operations and ability to attract, hire and retain qualified personnel.
 
In May 2007, the Parliament of India enacted the Finance Act, 2007, which, among other things, imposes a fringe benefit tax at the applicable Indian tax rate (currently 34.0%) on certain stock compensation and equity awards paid or issued to team members of our Indian subsidiary, Virtusa India. Specifically, the fringe benefit tax, which is payable upon the exercise of such equity awards, is based on the difference between the exercise price of the equity award and the fair market value of the equity award upon vesting. Because our potential tax liability is dependent on the fair market value of our common stock at the time of vesting of such equity awards, which could span over the next several years, and whether the equity awards are ultimately exercised, it is difficult to accurately forecast and could represent a significant liability and expense to us. While we may pursue strategies to reduce the impact of this tax obligation on us, such as passing the cost of the fringe benefit tax on to our Virtusa India team members, such alternatives may not eliminate the negative impact of the tax liability on our statements of operations and could result in significant non-cash compensation expense, which would harm our gross margin, operating profit margin and net income and create volatility in our income from operations from period to period. In addition, if we pass on the cost of the fringe benefit tax to our Virtusa India team members, it could significantly decrease the desirability of these equity awards to these team members, which could harm our ability to attract, hire and retain qualified personnel.


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Wage pressures and increases in government mandated benefits in India and Sri Lanka may reduce our profit margins.
 
Wage costs in India and Sri Lanka have historically been significantly lower than wage costs in the United States and Europe for comparably-skilled professionals. However, wages in India and Sri Lanka are increasing, which will result in increased costs for IT professionals, particularly project managers and other mid-level professionals. We may need to increase the levels of our employee compensation more rapidly than in the past to remain competitive without the ability to make corresponding increases to our billing rates. Compensation increases may reduce our profit margins, make us less competitive in pricing potential projects against those companies with lower cost resources and otherwise harm our business, operating results and financial condition.
 
In addition, we contribute to benefit funds covering our employees in India and Sri Lanka as mandated by the Indian and Sri Lankan governments. Benefits are based on the employee’s years of service and compensation. If the governments of India and/or Sri Lanka were to legislate increases to the benefits required under these plans or mandate additional benefits, our profitability and cash flows would be reduced.
 
Our facilities are at risk of damage by earthquakes, tsunamis and other natural disasters.
 
In December 2004, Sri Lanka and India were struck by multiple tsunamis that devastated certain areas of both countries. Our Indian and Sri Lankan facilities are located in regions that are susceptible to tsunamis and other natural disasters, which may increase the risk of disruption of information systems and telephone service for sustained periods. Damage or destruction that interrupts our ability to deliver our services could damage our relationships with our clients and may cause us to incur substantial additional expense to repair or replace damaged equipment or facilities. Our insurance coverage may not be sufficient to cover all such expenses. Furthermore, we may be unable to secure such insurance coverage or to secure such insurance coverage at premiums acceptable to us in the future. Prolonged disruption of our services as a result of natural disasters may cause our clients to terminate their contracts with us and may result in project delays, project cancellations and loss of substantial revenue to us. Prolonged disruptions may also harm our team members or cause them to relocate, which could have a material adverse effect on our business.
 
The laws of India and Sri Lanka do not protect intellectual property rights to the same extent as those of the United States and we may be unsuccessful in protecting our intellectual property rights. Unauthorized use of our intellectual property rights may result in loss of clients and increased competition.
 
Our success depends, in part, upon our ability to protect our proprietary methodologies, trade secrets and other intellectual property. We rely upon a combination of trade secrets, confidentiality policies, non-disclosure agreements, other contractual arrangements and copyright and trademark laws to protect our intellectual property rights. However, existing laws of India and Sri Lanka do not provide protection of intellectual property rights to the same extent as provided in the United States. The steps we take to protect our intellectual property may not be adequate to prevent or deter infringement or other unauthorized use of our intellectual property. Thus, we may not be able to detect unauthorized use or take appropriate and timely steps to enforce our intellectual property rights. Our competitors may be able to imitate or duplicate our services or methodologies. The unauthorized use or duplication of our intellectual property could disrupt our ongoing business, distract our management and


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employees, reduce our revenue and increase our costs and expenses. We may need to litigate to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. Any such litigation could be extremely time-consuming and costly and could materially adversely impact our business.
 
Risks relating to this offering and our stock
 
If you purchase shares of common stock in this offering, you will suffer immediate and substantial dilution of your investment and may experience additional dilution in the future.
 
If you purchase common stock in this offering, you will pay more for your shares than the amounts paid by existing stockholders for their shares. As a result, you will incur immediate and substantial dilution of $8.99 per share, representing the difference between our adjusted net tangible book value per share after giving effect to this offering and an assumed initial public offering price of $15.00 per share. Purchasers of shares of our common stock in this offering will have contributed approximately 45.2% of the aggregate price paid by all purchasers of our common stock, but will own only approximately 19.3% of the shares of our common stock outstanding after this offering. Moreover, we issued options in the past to acquire common stock at prices significantly below the initial public offering price. As of March 31, 2007, there were 37,342 shares of common stock issuable upon the exercise of warrants at an exercise price of $4.82 per share, 3,211,458 shares subject to outstanding options at a weighted average exercise price of $3.53 per share and 196,241 shares of common stock issuable after this offering under stock appreciation rights, or SARs, reduced by the weighted average exercise price of $4.04 per SAR. To the extent that these outstanding warrants, options or SARs are ultimately exercised, you will incur further dilution. In the future, we may also acquire other companies or assets, raise additional needed capital or finance strategic alliances by issuing equity, which may result in additional dilution to you.
 
A significant portion of our total outstanding shares may be sold into the public market in the near future, which could cause the market price of our common stock to drop significantly, even if our business is doing well.
 
Sales of a substantial number of shares of our common stock in the public market could occur at any time after the expiration of the lock-up agreements described in “Underwriting.” These sales, or the market perception that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. After the close of this offering, we will have 22,826,867 shares of common stock outstanding based on the number of shares outstanding as of March 31, 2007. This includes the 4,400,000 shares that we are selling in this offering, which may be resold in the public market immediately. The remaining 18,426,867 shares, or 80.7% of our outstanding shares after this offering, will be able to be sold, subject to any applicable volume limitations under federal securities laws, in the near future as set forth below.
 


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Days after date of prospectus   Shares eligible for resale   Comment
 
Date of prospectus
  0   Freely tradable shares saleable under Rule 144(k) that are not subject to lock-up with J.P. Morgan Securities Inc. or us
90 days
  0   Shares resaleable under Rules 144 and 701 that are not subject to lock-up with J.P. Morgan Securities Inc. or us
180 days
  17,507,449   Lock-ups released; shares saleable under Rules 144, 144(k) and 701
Thereafter
  919,418   Restricted securities held for one year or less
 
 
 
In addition, as of March 31, 2007, there were 37,342 shares subject to outstanding warrants, 3,211,458 shares subject to outstanding options and an additional 417,948 shares reserved for future issuance under our stock option plan that will become eligible for sale in the public market to the extent permitted by any applicable vesting requirements, the lock-up agreements and Rules 144, 144(k) and 701 under the Securities Act. We also maintain a stock appreciation rights plan for the benefit of our non-U.S. employees, which plan, following this offering, will require us to settle all exercises of SARs in shares of our common stock. We have reserved 196,241 shares of common stock for issuance after this offering upon the exercise of SARs outstanding as of March 31, 2007, although this number will be reduced by the exercise price of these SARs. Moreover, after this offering, holders of an aggregate of approximately 17,999,965 shares of our common stock as of March 31, 2007, will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. We also intend to register all shares of common stock that we may issue under our employee incentive plans. Once we register these shares, they can be freely sold in the public market upon issuance, subject to the lock-up agreements and the restrictions imposed on our affiliates under Rule 144.
 
We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.
 
We have never declared or paid any cash dividends on our common stock and do not currently intend to do so for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. In addition, the terms of our credit facility prohibit us from paying cash dividends. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future and the success of an investment in shares of our common stock will depend upon any future appreciation in its value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares.
 
Provisions in our charter documents and under Delaware law may prevent or delay a change of control of us and could also limit the market price of our common stock.
 
Certain provisions of Delaware law and of our certificate of incorporation and by-laws to be effective upon the closing of this offering could have the effect of making it more difficult for a

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third party to acquire, or of discouraging a third party from attempting to acquire, control of us, even if such a change in control would be beneficial to our stockholders or result in a premium for your shares of our common stock. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. These provisions include:
 
•  a classified board of directors
 
•  limitations on the removal of directors
 
•  advance notice requirements for stockholder proposals and nominations
 
•  the inability of stockholders to act by written consent or to call special meetings
 
•  the ability of our board of directors to make, alter or repeal our by-laws
 
The affirmative vote of the holders of at least 75% of our shares of capital stock entitled to vote is necessary to amend or repeal the above provisions that are contained in our certificate of incorporation. In addition, our board of directors has the ability to designate the terms of and issue new series of preferred stock without stockholder approval. Also, absent approval of our board of directors, our by-laws may only be amended or repealed by the affirmative vote of the holders of at least 75% of our shares of capital stock entitled to vote.
 
In addition, upon the closing of this offering, we will be subject to the provisions of Section 203 of the Delaware General Corporation Law, which limits business combination transactions with stockholders of 15% or more of our outstanding voting stock that our board of directors has not approved. These provisions and other similar provisions make it more difficult for stockholders or potential acquirers to acquire us without negotiation. These provisions may apply even if some stockholders may consider the transaction beneficial to them.
 
These provisions could limit the price that investors are willing to pay in the future for shares of our common stock. These provisions might also discourage a potential acquisition proposal or tender offer, even if the acquisition proposal or tender offer is at a premium over the then current market price for our common stock.
 
Because our common stock price is likely to be highly volatile, the market price of our common stock could drop unexpectedly.
 
Prior to this offering, there has been no public market for our common stock. The initial public offering price for our common stock will be determined through negotiations with the underwriters. This initial public offering price may vary from the market price of our common stock after the offering. We cannot guarantee that an active trading market will develop or be sustained or that the market price of our common stock will not decline. Even if an active market for our stock develops and continues, our stock price nevertheless may be volatile. Some of the factors that may cause the market price of our common stock to fluctuate include:
 
•  actual or anticipated variations in our quarterly operating results or the quarterly financial results of companies perceived to be similar to us
 
•  announcements of technological innovations or new services by us or our competitors
 
•  changes in estimates of our financial results or recommendations by market analysts
 
•  announcements by us or our competitors of significant projects, contracts, acquisitions, strategic alliances or joint ventures


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•  changes in our capital structure, such as future issuances of securities or the incurrence of additional debt
 
•  regulatory developments in the United States, the United Kingdom, Sri Lanka, India or other countries in which we operate or have clients
 
•  litigation involving our company, our general industry or both
 
•  additions or departures of key personnel
 
•  investors’ general perception of us
 
•  changes in general economic, industry and market conditions
 
•  changes in the market valuations of other IT service providers
 
Many of these factors are beyond our control. In addition, the stock markets, especially the NASDAQ Global Market, have experienced significant price and volume fluctuations that have affected the market prices of equity securities of many technology companies. These fluctuations have often been unrelated or disproportionate to operating performance. If any of the foregoing occurs, it could cause our stock price to fall and may expose us to securities class action litigation. Any securities class action litigation could result in substantial costs and the diversion of management’s attention and resources.
 
Because we will have broad discretion in using the net proceeds of this offering, the benefits from our use of the proceeds may not meet investors’ expectations.
 
Our management will have broad discretion over the allocation of the net proceeds from this offering as well as over the timing of their expenditure without stockholder approval. Other than the use of approximately $30 million of the net proceeds from this offering during the next three fiscal years to construct and build out a new facility on our planned campus in Hyderabad, India, we have not yet determined the specific amounts of the balance of the net proceeds to be used for working capital and other general corporate purposes, including possible acquisitions of complementary technologies or businesses. As a result, investors will be relying upon management’s judgment with only limited information about our specific intentions for the use of the balance of the net proceeds of this offering. Our failure to apply these proceeds effectively could cause our business to suffer. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.
 
Our existing stockholders and management control a substantial interest in us and thus may influence certain actions requiring stockholder vote.
 
Upon the closing of this offering, our executive officers, directors and stockholders affiliated with our directors will beneficially own, in the aggregate, shares representing approximately 63% of our outstanding capital stock. Although we are not aware of any voting arrangements that will be in place among these stockholders following this offering, if these stockholders were to choose to act together, as a result of their stock ownership, they would be able to control all matters submitted to our stockholders for approval, including the election of directors and approval of any merger, consolidation or sale of all or substantially all of our assets. This concentration of voting power could delay or prevent an acquisition of our company on terms that other stockholders may desire.


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An active trading market for our common stock may not develop and you may not be able to sell your shares of common stock at or above the initial public offering price or at a time that is acceptable to you.
 
Prior to this offering, there has been no public market for our common stock. Although we have applied to have our common stock listed on the NASDAQ Global Market, an active trading market for shares of our common stock may never develop or be sustained following this offering. If no trading market develops, securities analysts may not initiate or maintain research coverage of our company, which could further depress the market for our common stock. As a result, investors may not be able to sell their common stock at or above the initial public offering price or at the time that they would like to sell.
 
If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our common stock, the price of our common stock could decline.
 
The trading market for our common stock will rely in part on the research and reports that equity research analysts publish about us and our business. We do not control these analysts. The price of our stock could decline if one or more equity analysts downgrade our stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.


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Forward-looking statements
 
This prospectus contains forward-looking statements that are based on our current expectations, assumptions, estimates and projections about our company and our industry. The forward-looking statements are subject to various risks and uncertainties. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” “project,” “seek,” “should, ” “may,” “could,” “would,” “plans,” “predicts,” “potential,” and similar expressions (as well as other words or expressions referencing future events, conditions, or circumstances). Those statements include, among other things, the discussions of our business strategy and expectations concerning our market position, future operations, financial position, revenue, costs, prospects, margins, profitability, liquidity and capital resources, as well as management’s plans and objectives. We caution you that reliance on any forward-looking statement involves risks and uncertainties and that although we believe that the assumptions on which our forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and, as a result, the forward-looking statements based on those assumptions could be materially incorrect. These factors include but are not limited to:
 
•  our dependence on a limited number of clients
 
•  our ability to expand our business or effectively manage growth
 
•  restrictions on immigration
 
•  increasing competition in the IT services outsourcing industry
 
•  our ability to hire and retain enough sufficiently trained IT professionals to support our operations
 
•  quarterly fluctuations in our earnings
 
•  our ability to attract and retain clients and meet their expectations
 
•  negative public reaction in the United States or the United Kingdom to offshore IT outsourcing
 
•  our ability to sustain profitability or maintain profitable engagements
 
•  technological innovation
 
•  our ability to effectively manage our facility, infrastructure and capacity needs
 
•  regulatory, legislative and judicial developments in our operations areas
 
•  political or economic instability in India or Sri Lanka
 
•  telecommunications or technology disruptions
 
•  worldwide economic and business conditions
 
•  our ability to successfully consummate strategic acquisitions
 
These and other factors are more fully discussed in “Risk factors,” “Management’s discussion and analysis of financial condition and results of operations” and elsewhere in this prospectus. In light of these and other uncertainties, you should not conclude that we will necessarily achieve any plans, objectives or projected financial results referred to in any of the forward-looking statements. Except as required by law, we do not intend to update any of these forward-looking statements to reflect future events or circumstances.


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Industry data
 
Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market position, market opportunity and market share, is based on information from various sources (including industry publications, surveys and forecasts and our internal research), on assumptions that we have made, which we believe are reasonable, based on those data and other similar sources and on our knowledge of the markets for our services. Our internal research has not been verified by any independent source and we have not independently verified any third-party information. The projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates included in this prospectus.


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Use of proceeds
 
We estimate that our net proceeds from this offering will be approximately $57 million, assuming an initial public offering price of $15.00 per share, which is the midpoint of the range listed on the cover page of this prospectus and after deducting estimated underwriting discounts and commissions and estimated offering expenses that we must pay. A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share would increase (decrease) the net proceeds to us from this offering by approximately $4,092,000, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise their over-allotment option in full, we estimate that our net proceeds from this offering will be approximately $60 million. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders as part of the over-allotment option.
 
If we fund the following solely with our net proceeds from this offering without allocation of funds from other sources, we currently estimate that we will use:
 
•  approximately $30 million of these net proceeds, over the next three fiscal years, to construct and build out a facility on our planned campus in Hyderabad, India
 
•  the remainder of these net proceeds for working capital and other general corporate purposes, including to finance the expansion of our global delivery centers or capacity in Chennai, India and Colombo, Sri Lanka, the hiring of additional personnel, sales and marketing activities, capital expenditures and the costs of operating as a public company
 
We may use a portion of our net proceeds to expand our business into new geographic locations. We may also use a portion of these net proceeds to expand our current business through strategic alliances involving, or acquisitions of, other complementary businesses or technologies. We have no agreements or commitments for any specific acquisitions at this time. Pending use of our net proceeds of this offering, as described above, we plan to invest the net proceeds in a variety of capital preservation investments, including investment-grade, short-term, interest-bearing securities.
 
This expected use of our net proceeds of this offering represents our current intentions based upon our present plans and business condition. The amounts and timing of our actual expenditures will depend upon numerous factors, including cash flows from operations and the anticipated growth of our business. We will retain broad discretion in the allocation and use of our net proceeds.
 
Dividend policy
 
We have never declared or paid cash dividends on our common stock and do not expect to pay dividends in the foreseeable future. We currently intend to retain all of our future earnings to fund the operation, development and expansion of our business. In addition, the terms of our credit facility prohibit us from paying cash dividends. Any future determination to pay dividends will be at the discretion of our board of directors and will depend upon a number of factors, including our results of operations, financial condition, future prospects, contractual restrictions and other factors that our board of directors deems relevant.


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Capitalization
 
The following table sets forth our cash and cash equivalents and capitalization as of March 31, 2007:
•  on an actual basis after giving effect to the one-for-3.13 reverse stock split of our common stock that was effected on July 18, 2007
•  on a pro forma basis to give effect to the conversion of all outstanding shares of our preferred stock into an aggregate of 11,425,786 shares of our common stock and the filing of our seventh amended and restated certificate of incorporation
•  on a pro forma as adjusted basis to give further effect to our sale in this offering of 4,400,000 shares of our common stock at an assumed initial public offering price of $15.00 per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us
You should read this table together with “Management’s discussion and analysis of financial condition and results of operations,” “Description of capital stock,” and our consolidated financial statements and related notes appearing elsewhere in this prospectus.
 
                         
 
March 31, 2007
              Pro forma
 
(In thousands, except share and per share amounts)   Actual     Pro forma     as adjusted  
 
 
Cash and cash equivalents, excluding $1,588 of restricted cash
  $ 45,079     $ 45,079     $ 102,259  
     
     
Redeemable convertible preferred stock, at accreted redemption value:
                       
Series A redeemable convertible preferred stock, par value $0.01 per share; 4,043,582 shares authorized, issued and outstanding (actual); no shares authorized, issued or outstanding (pro forma and pro forma as adjusted)(1)
  $ 13,500     $     $  
Series B redeemable convertible preferred stock, par value $0.01 per share; 8,749,900 shares authorized, 8,647,043 shares issued and outstanding (actual); no shares authorized, issued or outstanding (pro forma and pro forma as adjusted)(2)
    15,132              
Series C redeemable convertible preferred stock, par value $0.01 per share; 12,807,624 shares authorized, issued and outstanding (actual); no shares authorized, issued or outstanding (pro forma and pro forma as adjusted)(3)
    12,230              
Series D convertible preferred stock, par value $0.01 per share; 7,458,494 shares authorized, issued and outstanding (actual); no shares authorized, issued or outstanding (pro forma and pro forma as adjusted)(3)
    20,000              
     
     
Total redeemable convertible preferred stock
    60,862              
Stockholders’ equity:
                       
Undesignated preferred stock, par value $0.01 per share; no shares authorized, issued or outstanding (actual); 5,000,000 shares authorized, no shares issued or outstanding (pro forma and pro forma as adjusted)
                 
Common stock, par value $0.01 per share; 80,000,000 shares authorized, 7,420,646 shares issued, 7,001,081 shares outstanding (actual); 120,000,000 shares authorized, 18,846,432 shares issued, 18,426,867 shares outstanding (pro forma); 120,000,000 shares authorized, 23,246,432 shares issued, 22,826,867 shares outstanding (pro forma as adjusted)
    74       188       232  
Treasury stock, at cost; 419,565 common shares
    (442 )     (442 )     (442 )
Additional paid-in-capital
    19,205       79,953       137,089  
Accumulated earnings
    752       752       752  
Accumulated other comprehensive loss
    (330 )     (330 )     (330 )
     
     
Total stockholders’ equity
    19,259       80,121       137,301  
     
     
Total redeemable convertible preferred stock and stockholders’ equity
  $ 80,121     $ 80,121     $ 137,301  
     
     
 
 
(1) Each share of our series A preferred stock is convertible into 0.448 shares of our common stock upon the closing of this offering.
(2) Each share of our series B preferred stock is convertible into 0.363 shares of our common stock upon the closing of this offering.
(3) Each share of our series C and series D preferred stock is convertible into 0.319 shares of our common stock upon the closing of this offering.


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A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share would increase (decrease) the pro forma as adjusted amount of each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity, total redeemable convertible preferred stock and stockholders’ equity and total capitalization by approximately $4,092,000, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses.
 
The table above does not include:
 
•  3,211,458 shares of common stock issuable upon the exercise of options outstanding as of March 31, 2007, at a weighted average exercise price of $3.53 per share
 
•  196,241 shares of common stock issuable after this offering upon the exercise of SARs outstanding as of March 31, 2007, reduced by the weighted average exercise price of $4.04 per SAR
 
•  700,940 additional shares of common stock reserved as of March 31, 2007, for future issuance under our incentive plans
 
•  37,342 shares of common stock issuable upon the exercise of warrants that will remain outstanding after this offering, at an exercise price of $4.82 per share


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Dilution
 
If you invest in our common stock, your interest will be diluted immediately to the extent of the difference between the assumed initial public offering price of $15.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, and the adjusted net tangible book value per share of our common stock after this offering.
 
At March 31, 2007, the net tangible book value of our common stock, after giving effect to the conversion of our series A, B, C and D preferred stock upon the closing of this offering, was approximately $80.1 million, or approximately $4.35 per share. We calculate our net tangible book value per share as total assets less intangible assets and total liabilities, divided by the number of shares of our common stock outstanding on March 31, 2007.
 
After giving effect to the sale of 4,400,000 shares of our common stock offered by us at the assumed initial public offering price of $15.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts, commissions and offering expenses, our adjusted net tangible book value at March 31, 2007 would have been approximately $137.3 million, or approximately $6.01 per share. This amount represents an immediate increase in net tangible book value of approximately $1.66 per share to our existing stockholders and an immediate dilution in net tangible book value of $8.99 per share to new investors purchasing shares of our common stock in this offering.
 
The following table illustrates this dilution without giving effect to the over-allotment option granted to the underwriters.
 
             
Assumed initial public offering price per share
         $ 15.00
Net tangible book value per share at March 31, 2007
  $ 4.35      
Increase in net tangible book value per share attributable to new
investors
    1.66      
Adjusted net tangible book value per share after this offering
          6.01
             
Dilution in net tangible book value per share to new investors
        $ 8.99
 
 
 
A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share would increase (decrease) the adjusted net tangible book value per share after this offering by approximately $0.18, and dilution in net tangible book value per share to new investors by approximately $0.82, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses.


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The following table sets forth as of March 31, 2007, the differences between the number of shares of common stock purchased from us, the total consideration paid and the average price per share paid by existing stockholders and new investors purchasing shares of our common stock in this offering, before deducting estimated underwriting discounts, commissions and offering expenses payable by us at an assumed initial public offering price of $15.00 per share, the midpoint of the price range set forth on the cover page of this prospectus.
 
                                   
    Shares purchased     Total consideration      
              Amount
        Average price
    Number   Percentage     (in thousands)   Percentage     per share
 
Existing stockholders
    18,426,867     80.7 %   $ 80,121     54.8 %   $ 4.35
New investors
    4,400,000     19.3       66,000     45.2       15.00
           
           
Total
    22,826,867     100.0 %   $ 146,121     100.0 %      
       
       
 
The number of shares of our common stock to be outstanding following this offering is based on 18,426,867 shares of our common stock outstanding as of March 31, 2007 and excludes:
 
•  3,211,458 shares of common stock issuable upon the exercise of options outstanding as of March 31, 2007, at a weighted average exercise price of $3.53 per share
 
•  196,241 shares of common stock issuable after this offering upon the exercise of SARs outstanding as of March 31, 2007, reduced by the weighted average exercise price of $4.04 per SAR
 
•  700,940 additional shares of common stock reserved as of March 31, 2007 for future issuance under our equity incentive plans
 
•  37,342 shares of common stock issuable upon the exercise of warrants that will remain outstanding after this offering, at an exercise price of $4.82 per share
 
To the extent any of these outstanding options, SARs or warrants is exercised, there will be further dilution to new investors. To the extent all of such outstanding options, SARs and warrants had been exercised as of March 31, 2007, the adjusted net tangible book value per share after this offering would be $5.70 and total dilution per share to new investors would be $9.30.
 
If the underwriters exercise their over-allotment option in full:
 
•  the percentage of shares of common stock held by existing stockholders will decrease to approximately 78.0% of the total number of shares of our common stock outstanding after this offering
 
•  the number of shares held by new investors will increase to 5,060,000, or approximately 22.0% of the total number of shares of our common stock outstanding after this offering


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Selected consolidated financial data
 
You should read the following selected consolidated financial data together with our financial statements and the related notes thereto and “Management’s discussion and analysis of financial condition and results of operations” appearing elsewhere in this prospectus. The selected consolidated statement of operations data for the fiscal years ended March 31, 2005, 2006 and 2007 and the selected consolidated balance sheet data as of March 31, 2006 and 2007 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated statement of operations data for the fiscal years ended March 31, 2003 and 2004 and the selected consolidated balance sheet data as of March 31, 2003, 2004 and 2005 are derived from our consolidated financial statements not included in this prospectus. These financial statements have been prepared in accordance with U.S. generally accepted accounting principles. Our historical results may not be indicative of the operating results to be expected in any future periods.
 
Consolidated statement of operations data
 
                                     
 
    Fiscal year ended March 31,  
(In thousands, except share and per share amounts)   2003     2004     2005   2006   2007  
   
 
Revenue
  $ 24,724     $ 42,822     $ 60,484   $ 76,935     $124,660  
Costs of revenue
    13,026       22,648       31,813     43,417     68,031  
     
     
Gross profit
    11,698       20,174       28,671     33,518     56,629  
Operating expenses
    14,123       20,309       27,838     32,925     42,478  
     
     
Income (loss) from operations
    (2,425 )     (135 )     833     593     14,151  
Other income (expense)
    (35 )     73       376     1,564     1,209  
     
     
Income (loss) before income tax expense (benefit)
    (2,460 )     (62 )     1,209     2,157     15,360  
Income tax expense (benefit)
    27       146       99     176     (3,630 )
     
     
Net income (loss)
  $ (2,487 )   $ (208 )   $ 1,110   $ 1,981     $ 18,990  
     
     
Net income (loss) per share of common stock
                                   
Basic
  $ (0.48 )   $ (0.04 )   $ 0.07   $ 0.12     $    1.09  
     
     
Diluted
  $ (0.48 )   $ (0.04 )   $ 0.06   $ 0.11     $    1.03  
     
     
Pro forma net income per share of common stock(1)
                                   
Basic
                                $    1.09  
                                     
Diluted
                                $    1.03  
                                     
Pro forma weighted average number of common shares outstanding(1)
                                   
Basic
                                17,431,405  
                                     
Diluted
                                18,351,161  
 
 
 
(1) The pro forma presentation illustrates the dilutive effect of the automatic conversion of our redeemable convertible preferred stock into 11,425,786 shares of common stock upon the initial public offering.
 
Consolidated balance sheet data
 
                                       
    March 31,
(In thousands)   2003     2004     2005     2006     2007
 
 
Cash and cash equivalents
  $ 12,687     $ 30,361     $ 28,406     $ 30,237     $ 45,079
Working capital
    15,496       33,043       35,436       41,696       67,082
Total assets
    23,276       47,141       50,085       58,719       99,319
Redeemable convertible preferred stock
    40,628       60,701       60,758       60,814       60,862
Total stockholders’ equity (deficit)
    (21,321 )     (20,992 )     (17,899 )     (13,610 )     19,259
 
 


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Management’s discussion and analysis of
financial condition and results of operations
 
You should read the following discussion and analysis together with our consolidated financial statements and the related notes appearing elsewhere in this prospectus. This discussion contains forward-looking statements that 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 this prospectus, particularly under the heading “Risk factors.”
 
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. We have experienced compounded annual revenue growth of 50% over the five-year period ended March 31, 2007. At March 31, 2007, we had 3,576 employees, or team members, and for the fiscal year ended March 31, 2007, we had revenue of $124.7 million and income from operations of $14.2 million.
 
We provide our IT services primarily to enterprises in the following industries: communications and technology, BFSI and media and information. Our current clients include leading global enterprises such as Aetna Life Insurance Company, British Telecommunications plc, or BT, ING North America Insurance Corporation, International Business Machines Corporation, Iron Mountain Information Management, Inc., JPMorgan Chase Bank, N.A. and Thomson Healthcare Inc., and leading enterprise software developers such as Pegasystems Inc. and Vignette Corporation.
 
We have a high level of repeat business among our clients and a significant portion of our revenue comes from a limited number of clients. For instance, during the fiscal years ended March 31, 2006 and 2007, 91% and 97% of our revenue, respectively, came from clients to whom we had been providing services for at least one year, and 68% and 84%, respectively, came from clients to whom we had been providing services for at least two years. Our ten largest clients accounted for 62% and 72% of our revenue for fiscal years ended March 31, 2006 and 2007, respectively. We expect to continue to realize high levels of repeat business. Client concentration is expected to decline as we grow, but will remain high as a percentage of our revenue.
 
High repeat business and client concentration is common in our industry. 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 believe we have been generally successful in increasing revenue per client over the term of most of our client relationships. 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 expanded operations into the United Kingdom to provide revenue diversification and reduce the risks associated with operating in a single country. As a result of this initiative, U. K. revenue


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increased from $10.6 million, or 14% of total revenue, to 31.9 million, or 26% of total revenue, for the fiscal years ended March 31, 2006 and 2007, respectively. While we expect our U.K. business to continue to grow, we do not expect the U.K. revenue, as a percentage of our total revenue, to continue to increase. Other revenue diversification strategies include revenue by industry and revenue by service offering. 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 has been 5%, 5% and 14% for the fiscal years ended March 31, 2005, 2006 and 2007, respectively. The increased revenue earned from fixed-price contracts reflects our clients’ preferences. We strive to manage both fixed-price and time-and-materials engagements to a highly-efficient 20/80 onsite-to-offshore service delivery team mix.
 
As an IT services company, our revenue growth has 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 fiscal year ended March 31, 2007, our attrition rate was 16.1%, which is within our targeted range and compares well with the industry. 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.
 
We expect that a majority of our revenue will continue to be generated in the U.S. dollar and U.K. pound sterling for the foreseeable future and that a significant portion of our expenses, including personnel costs, as well as capital and operating expenditures, will continue to be denominated in Indian and Sri Lankan rupees. The exchange rates among the Indian and Sri Lankan rupees and the U.S. dollar and the U.K. pound sterling have changed substantially in recent years, and such fluctuations are likely to affect our operating results. For instance, the exchange rate for the Indian rupee to the U.S. dollar and U.K. pound sterling decreased from 43.4417 and 85.2552 on March 31, 2007 to 40.7350 and 81.6301 on June 30, 2007, respectively. This appreciation of the Indian rupee against the U.S. dollar and the U.K. pound sterling since March 31, 2007 has had a negative impact on our earnings and margins, and any continued appreciation is likely to have a negative impact on future earnings and margins.
 
We have been profitable for the past six consecutive quarters. We continually monitor and manage a number of operating metrics to ensure quality and reduce volatility in our earnings, including:
 
•  Days sales outstanding, or DSO, is a measure of the number of days our accounts receivable are outstanding based upon the last 90 days of revenue activity, which indicates the timeliness of our cash collection from clients and our overall credit terms to our clients. DSO was 66 and 79 days for our fiscal years ended March 31, 2006 and 2007, respectively. Our DSO has been increasing primarily as a result of longer U.K. credit terms offered to some of our significant clients coupled with the expansion of our U.K. business during the two years ended March 31, 2007. Higher DSO reduces our cash balance because the revenue-to-cash conversion process takes longer
 
•  Realized billing rates, which are the rates we charge our clients for our services, reflect the value our clients place on our services, market competition and the geographic location in which we perform our services. Our realized billing rates have increased in each of our fiscal


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years ended March 31, 2005, 2006 and 2007. The increase in realized billing rates is a result of our ability to successfully preserve or increase our billing rates with existing and new clients
 
•  Average cost per IT professional is the sum of team member salaries and fringe benefits divided by the average number of IT professionals during the period. We experienced increases in our average cost per IT professional of 7.7% from our fiscal year ended March 31, 2005 to our fiscal year ended March 31, 2006, and 1.9% from our fiscal year ended March 31, 2006 to our fiscal year ended March 31, 2007. These increases are primarily driven by wage inflation and increased fringe benefit costs in India and Sri Lanka, which we expect to continue to increase for the foreseeable future
 
•  Utilization rate is the percentage of time billable IT professionals are deployed on client engagements, which indicates the efficiency of our billable IT resources. Our utilization rate is defined as number of billable hours divided by the total number of available hours of our IT professionals in a given period of time, excluding trainees. We track our utilization rates to measure revenue potential and gross profit margins. Management’s targeted range for utilization is between 70% and 75%. Generally, gross margin moves directionally with utilization rate. Utilization is affected by the rate of quarterly sequential revenue growth. In higher growth periods, utilization tends to rise as more resources are deployed to meet rising demand. In addition, the seasonal graduation patterns introduce a higher number of graduates from universities who join us, which may temporarily lower our utilization rate during the period as these new graduates become deployable. When we anticipate periods of high growth, we hire in advance of current demand, which may temporarily lower our utilization rate. In order to facilitate growth and maintain client satisfaction, we seek to maintain a sustainable level of utilization
 
•  Onsite-to-offshore service delivery mix is the ratio of hours billed by our onsite resources in higher cost geographies to hours billed by offshore resources in lower cost geographies, which provides data on revenue and profitability trends of a particular engagement or account. Increases in the percentage of offshore billable time to onsite billable time results in increased profitability on lower revenue, while increases in the percentage of onsite billable time to offshore billable time results in higher revenue, but lower profitability. Our onsite-to-offshore service delivery mix was 17% to 83% for our fiscal years ended March 31, 2006 and 2007
 
•  Attrition rate, which is the ratio of terminated team members during a defined period to the total number of team members at the end of such period, measures team member turnover. Increased attrition rates result in increased hiring, training and boarding costs and productivity losses, which affect our revenue, gross margin and operating profit margin. Our attrition rate was 24.1% and 16.1% for our fiscal years ended March 31, 2006 and 2007, respectively. The improvement in our attrition rate for our fiscal year ended March 31, 2007 was attributable to successful execution of human resource strategies to encourage team member retention
 
•  Operating expense efficiency, which is a measure of operating expenses as a percentage of revenue, provides a metric to manage our revenue growth and our profitability or net income. If we continue to successfully grow our revenue, we anticipate that operating expenses will decrease as a percentage of revenue as such expenses are absorbed across a larger revenue base. In the near term, however, any operating expense efficiency that we realize will be offset by higher costs of operating as a public company, as well as the negative impact on our operating margins resulting from the significant appreciation of the Indian rupee against the U.S. dollar since March 31, 2007. We continually try to increase operating efficiencies and to lower operating expenses as a percentage of revenue.


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•  Effective tax rate, which is our worldwide tax expense as a percentage of our consolidated net income before tax, measures the impact of income taxes worldwide on our operations and net income. We monitor and assess our effective tax rate to evaluate whether our tax structure is competitive as compared to our industry. Our effective tax rate was 8.1% and (23.6)% for our fiscal years ended March 31, 2006 and 2007, respectively. The significant change in the rate for our fiscal year ended March 31, 2007 was primarily due to the one-time benefit related to the release of a $5.0 million deferred tax asset valuation allowance. We anticipate that our effective tax rate will be significantly higher in future periods assuming we are able to maintain or increase our profitability
 
Sources of revenue
 
We generate revenue by providing IT services to our clients located primarily in the United States and the United Kingdom. We have historically earned and believe that over the next few years we will continue to earn, a significant portion of our revenue from a limited number of clients. For the fiscal year ended March 31, 2007, our five largest and ten largest clients accounted for 49% and 72% of our revenue, respectively. Our largest client, BT, accounted for 23% of our revenue for the same period. Although no other client accounted for 10% or more of our revenue during our fiscal year ended March 31, 2007, the loss of any one of our major clients could reduce our revenue or delay our recognition of revenue, harm our reputation in the industry and reduce our ability to accurately predict cash flow. During the fiscal year ended March 31, 2007, 74% of our revenue was generated in the United States and 26% in the United Kingdom. We provide IT services on either a time-and-materials or a fixed-price basis. For the fiscal year ended March 31, 2007, the percentage of revenue from time-and-materials and fixed-price contracts was 86% and 14%, respectively.
 
Revenue from services provided on a time-and-materials basis is derived from the number of billable hours in a period multiplied by the rates at which we bill our clients. Revenue from services provided on a fixed-price basis is recognized as efforts are expended pursuant to the percentage-of-completion method. Revenue also includes reimbursements of travel and out-of-pocket expenses with equivalent amounts of expense recorded in costs of revenue.
 
Most of our client contracts, including those that are on a fixed-price basis, can be terminated by our clients with or without cause on 30 to 90 days’ prior written notice. All fees for services provided by us through the date of cancellation are generally due and payable under the contract terms.
 
We have found there is a wide range in unit pricing from one client to another and from one engagement to another, driven by business need, delivery timeframes, complexity of the engagement, operating differences (such as onsite/offshore ratio), competitive environment and engagement size (or volume). As a pricing strategy to encourage clients to increase the volume of services that we provide to them, we may, on occasion, offer volume discounts. We manage our business carefully to protect our account margins and our overall profit margins. We have not experienced significant pressure from clients to reduce rates beyond what we consider to be our normal negotiation process. We find that our clients generally purchase on the basis of total value, rather than minimum cost, considering all of the factors listed above.
 
While we are subject to the effects of overall market pricing pressure, we believe that there is a fairly broad range of pricing offered by different competitors for each service we provide. We believe that no one competitor, or set of competitors, sets pricing in our industry. As a result, we do not see strong pricing pressure from competitors in our industry. We find that our unit


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pricing, as a result of our global delivery model, is generally competitive with other firms who operate with a predominately offshore operating model. On average, our unit pricing, for both onsite and offshore resources, has increased in each of the last three fiscal years.
 
In March 2007, we entered into a five-year IT services agreement with BT that is premised upon BT making minimum aggregate expenditures of approximately $200 million over the term of the agreement. In the event that BT fails to meet any of the annual minimum expenditure targets, BT will lose any discounts under the agreement for the applicable annual period. In such event, BT is also obligated to pay an increasing percentage of any expenditure shortfall to us as liquidated damages. BT is entitled to increasing discounts for expenditures above the annual minimum expenditure targets. As part of this IT services agreement, we are now eligible to bid on work across all divisions within BT. In March 2007, BT, through a wholly-owned subsidiary, also made an equity investment in Virtusa and acquired 918,807 shares of our common stock for an aggregate purchase price of approximately $11.3 million.
 
In addition, in December 2004, we entered into a master services agreement with JPMorgan Chase Bank, N.A., or JPMC, pursuant to which we provide, and are able to bid on future, IT services with respect to JPMC and its affiliates. The agreement has a ten-year term, but may be terminated by JPMC for convenience at any time without penalty on 30, 60, or 90 days written notice, depending on the time of termination. The agreement contains negotiated rates but has no minimum expenditure targets or commitments, and generally has other customary terms and conditions of an IT services agreement. JPMC and its affiliates represented 11% and 7% of our revenue for the fiscal years ended March 31, 2006 and 2007, respectively.
 
The proportion of work performed at our offshore facilities and at client locations varies from period-to-period. Effort, in terms of the percentage of hours billed to clients by onsite resources, was 17% of total hours billed in each of the fiscal years ended March 31, 2006 and 2007, respectively, while the revenue from onsite and offshore resources accounted for 40% and 60% and 47% and 53%, during the fiscal years ended March 31, 2006 and 2007, respectively. We charge higher rates and incur higher compensation and other expenses for work performed at client locations in the United States and the United Kingdom than for work performed at our global delivery centers in India and Sri Lanka. Services performed at client locations or at our offices in the United States or the United Kingdom generate higher revenue per-capita at lower gross margins than similar services performed at our global delivery centers in India and Sri Lanka. We manage to a 20/80 onsite-to-offshore service delivery mix and intend to manage to an efficient onsite-to-offshore service delivery ratio for the foreseeable future.
 
Costs of revenue and gross profit
 
Costs of revenue consist principally of payroll and related fringe benefits, reimbursable and non-reimbursable travel costs, immigration-related expenses, fees for subcontractors working on client engagements and share-based compensation expense for IT professionals including account management personnel.
 
Wage costs in India and Sri Lanka have historically been significantly lower than wage costs in the United States and Europe for comparably-skilled IT professionals. However, wages in India and Sri Lanka are increasing, which will result in increased costs for IT professionals, particularly project managers and other mid-level professionals. We may need to increase the levels of our employee compensation more rapidly than in the past to remain competitive without the ability to make corresponding increases to our billing rates. Compensation increases may reduce our profit margins, make us less competitive in pricing potential projects against those companies


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with lower cost resources and otherwise harm our business, operating results and financial condition. We deploy a campus hiring philosophy and encourage internal promotions to minimize the effects of wage inflation pressure and recruiting costs.
 
Our revenue and gross profit are also affected by our ability to efficiently manage and utilize our IT professionals, as well as fluctuations in foreign currency exchange rates. We define utilization rate as the total number of days billed in a given period divided by the total available days of our IT professionals during that same period, excluding trainees. We manage employee utilization by continually monitoring project requirements and timetables to efficiently staff our projects and meet our clients’ needs. The number of IT professionals assigned to a project will vary according to the size, complexity, duration and demands of the project. An unanticipated termination of a significant project could cause us to experience a higher than expected number of unassigned IT professionals, thereby lowering our utilization rate.
 
Operating expenses
 
Operating expenses consist primarily of payroll and related fringe benefits, commissions, share-based compensation and non-reimbursable travel costs, as well as promotion, communications, management, finance, administrative, occupancy, marketing and depreciation and amortization expenses. In the fiscal years ended March 31, 2006 and 2007, we invested in all aspects of our business, including sales, marketing, IT infrastructure, human resources programs and financial operations.
 
Other income (expense)
 
Other income (expense) includes interest income, interest expense, investment gains and losses and foreign currency transaction gains and losses. The functional currencies of our subsidiaries are their local currencies. Foreign currency gains and losses are generated primarily by fluctuations of the Indian rupee, Sri Lankan rupee and U.K. pound sterling against the U.S. dollar on inter-company transactions.
 
In past periods, we have realized investment gains and losses from equity holdings in private and public companies. We have not made any new equity investments in private or public companies in the past five years.
 
Income tax expense (benefit)
 
Our net income is subject to income tax in those countries in which we perform services and have operations, including India, Sri Lanka, the United Kingdom and the United States. In previous years, we accumulated net operating loss carry-forwards which will be available to offset U.S. taxable income into fiscal 2008. We have benefited from long-term income tax holiday arrangements in both India and Sri Lanka that are offered to certain export-oriented IT services firms. As a result of these net operating losses and tax holiday arrangements, our worldwide profit has been subject to a relatively low effective tax rate as compared to the statutory rates in the countries in which we operate. The effect of the income tax holidays increased our net income in the fiscal years ended March 31, 2006 and 2007 by $1.2 million and $2.4 million, respectively.
 
Our effective tax rates were 8.1% and (23.6%) for the fiscal years ended March 31, 2006 and 2007, respectively. At December 31, 2006, we determined that it was more likely than not that our deferred tax assets would be realized based upon our positive cumulative operating results and our assessment of our expected future results. As a result, we released our valuation


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allowance and recognized a discrete income tax benefit of $5.0 million in our statement of operations for the fiscal year ended March 31, 2007. Our effective tax rate in future periods will be affected by the geographic distribution of our earnings, as well as the availability of tax holidays in India and Sri Lanka.
 
Indian tax proposals
 
In May 2007, the Parliament of India enacted the Finance Act, 2007, which makes several changes to the tax regime in India. The changes introduced by the new statute include a service tax on rental property income, minimum alternative income tax and fringe benefit taxes, and increases in the corporate income and dividend distribution tax rates. The most significant change is the imposition of the fringe benefit tax on stock compensation paid to our Indian employees. We are still in the process of evaluating the potential impact of these changes, which may adversely affect our earnings and cash flow.
 
Application of critical accounting estimates and risks
 
Our consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles, or GAAP. Preparation of these financial statements requires us to make estimates and assumptions that affect the reported amount of revenue and expenses, assets and liabilities and the disclosure of contingent assets and liabilities. We consider an accounting estimate to be critical to the preparation of our financial statements when both of the following are present:
 
•  the estimate is complex in nature or requires a high degree of judgment
 
•  the use of different estimates and assumptions could have a material impact on the consolidated financial statements
 
We have discussed the development and selection of our critical accounting estimates and related disclosures with the audit committee of our board of directors. Those estimates critical to the preparation of our consolidated financial statements are listed below.
 
Revenue recognition
 
Our revenue is derived from a variety of IT consulting, technology implementation and application outsourcing services. Our services are performed under both time-and-material and fixed-price arrangements. All revenue is recognized pursuant to GAAP. Revenue is recognized as work is performed and amounts are earned in accordance with the SEC Staff Accounting Bulletin, or SAB, No. 101, Revenue Recognition in Financial Statements, as amended by SAB No. 104, Revenue Recognition. We consider amounts to be earned once evidence of an arrangement has been obtained, services are delivered, fees are fixed or determinable and collectability is reasonably assured. For contracts with fees billed on a time-and-materials basis, we generally recognize revenue over the period of performance.
 
Fixed-price engagements are accounted for under the percentage-of-completion method in accordance with the American Institute of Certified Public Accountants Statement of Position, or SOP, 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. Under the percentage-of-completion method, we estimate the percentage-of-completion by comparing the actual number of work days performed to date to the estimated total number of days required to complete each engagement. The use of the percentage-of-completion method requires significant judgment relative to estimating total


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contract revenue and costs to completion, including assumptions and estimates relative to the length of time to complete the project, the nature and complexity of the work to be performed and anticipated changes in other engagement-related costs. Estimates of total contract revenue and costs to completion are continually monitored during the term of the contract and are subject to revision as the contract progresses. Unforeseen circumstances may arise during an engagement requiring us to revise our original estimates and may cause the estimated profitability to decrease. When revisions in estimated contract revenue and efforts are determined, such adjustments are recorded in the period in which they are first identified. Depending on the specific contractual provisions and nature of the deliverable, revenue may be recognized as milestones are achieved or when final deliverables have been accepted.
 
Income taxes
 
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in multiple jurisdictions. We record liabilities for estimated tax obligations in the United States and other tax jurisdictions. Determining the consolidated provision for income tax expense, tax reserves, deferred tax assets and liabilities and related valuation allowance, if any, involves judgment. We calculate and provide for income taxes in each of the jurisdictions in which we operate, including India, Sri Lanka, the United States and the United Kingdom, and this can involve complex issues which require an extended period of time to resolve. In the year of any such resolution, additional adjustments may need to be recorded that result in increases or decreases to income. Our overall effective tax rate fluctuates due to a variety of factors, including changes in the geographic mix or estimated level of annual pretax income, as well as newly enacted tax legislation in each of the jurisdictions in which we operate.
 
Applicable transfer pricing regulations require that transactions between and among our subsidiaries be conducted at an arm’s-length price. On an ongoing basis we estimate an appropriate arm’s-length price and use such estimate for our intercompany transactions.
 
On an ongoing basis, we evaluate whether a valuation allowance is needed to reduce our deferred tax assets to the amount that is more likely than not to be realized. This evaluation considers the weight of all available evidence, including both future taxable income and ongoing prudent and feasible tax planning strategies. In the event that we determine that we will not be able to realize a recognized deferred tax asset in the future, an adjustment to the valuation allowance would be made resulting in a decrease in income in the period such determination was made. Likewise, should we determine that we will be able to realize all or part of an unrecognized deferred tax asset in the future, an adjustment to the valuation allowance would be made resulting in an increase to income (or equity in the case of excess stock option tax benefits). At December 31, 2006, we determined that it was more likely than not that our deferred tax assets would be realized based upon our positive cumulative operating results and our assessment of our expected future results. As a result, we released our valuation allowance and recognized a discrete income tax benefit of $5.0 million in our statement of operations for the fiscal year ended March 31, 2007.
 
We have benefited from long-term income tax holiday arrangements in both India and Sri Lanka. Our Indian subsidiary is an export-oriented company that is entitled to claim a tax exemption for a period of ten years for each Software Technology Park, or STP, it operates. All STP holidays will be completely phased out by March 2009 and, at that time, any profits could be fully taxable at the Indian statutory rate, which is currently 34.0%. Although we believe we have complied with and are eligible for the STP holiday, it is possible that upon examination the government of India may


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deem us ineligible for the STP holiday or make adjustments to the profit level. In anticipation of the phase-out of the STP holidays, we intend to locate at least a portion of our Indian operations in areas designated as SEZs to secure additional tax exemptions for a period of ten years, which could extend to 15 years if we meet certain reinvestment requirements. Our Sri Lankan subsidiary has been granted an income tax holiday by the Sri Lanka Board of Investment which expires on March 31, 2019. The tax holiday is contingent upon a certain level of job creation during a given timetable. Any inability to meet the agreed upon level or timetable for new job creation would jeopardize this holiday arrangement. Primarily as a result of these tax holiday arrangements, our worldwide profit has been subject to a relatively low effective tax rate, and the loss of any of these arrangements would increase our overall effective tax rate.
 
It is our intent to reinvest all accumulated earnings from India and Sri Lanka back into their respective operations to fund growth. As a component of this strategy, pursuant to Accounting Principles Board Opinion No. 23, Accounting for Income Taxes-Special Areas, we do not accrue incremental U.S. taxes on Indian or Sri Lanka earnings as these earnings are considered to be permanently or indefinitely reinvested outside of the United States. If such earnings were to be repatriated in the future or are no longer deemed to be indefinitely reinvested, we will accrue the applicable amount of taxes associated with such earnings, which would increase our overall effective tax rate.
 
Share-based compensation
 
Prior to April 1, 2005, we accounted for share-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Accordingly, compensation cost for stock options generally was measured as the excess, if any, of the estimated fair market value of our common stock over the amount an employee must pay to acquire the common stock on the date that both the exercise price and the number of shares to be acquired pursuant to the option are fixed. We had adopted the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based Compensation, or SFAS 123, and SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, which was released in December 2002 as an amendment to SFAS 123 and used the Black-Scholes method of valuing stock options as allowed for non-public companies.
 
Effective April 1, 2005, we adopted SFAS No. 123R, Share-Based Payment, or SFAS 123R, using the modified prospective method, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees, certain non-employee consultants and directors based on estimated fair values. Accordingly, the statements of operations for the fiscal years ended March 31, 2006 and 2007 include the expensing of the compensation cost related to newly granted stock option awards, as well as for those issued in prior years that vest after the adoption date. In connection with our adoption of SFAS 123R, we recorded share-based compensation expense for the fiscal year ended March 31, 2006 related to share-based payments granted prior to April 1, 2005 and unvested as of that date of approximately $1.6 million, calculated in accordance with SFAS 123. Under SFAS 123R, we estimate the fair value of stock options and cash-settled stock appreciation rights, or SARs, granted using the Black-Scholes option-pricing model and a single option award approach. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. The fair value of cash-settled SARS are marked-to-market and recorded as a liability on a quarterly basis. This model also utilizes the estimated fair value of our common stock as determined by our board of directors and requires that, at the date of grant, we estimate the expected term of the share-based award, the


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expected volatility of the price of our common stock over the expected term, risk-free interest rates and expected dividend yield of our common stock to determine the estimated fair value.
 
The fair value of our options issued during the fiscal years ended March 31, 2006 and 2007 was determined using the Black-Scholes model with the following range of assumptions:
 
         
Expected dividend yield
    0%  
Risk-free interest rate
    4.16-4.86%  
Expected option term (in years)
    5-10  
Volatility
    50-80%  
 
 
 
The expected term represents the weighted-average period that our stock options are expected to be outstanding. The expected term assumption is based on the simplified or “safe-haven” method outlined in the Securities and Exchange Commission’s Staff Accounting Bulletin, or SAB, No. 107 since we are a privately-held company with share-based compensation plans that are relatively new and, accordingly, we have relatively little experience or history to be able to determine the expected period or term over which our awards will be held before exercise. As we have been operating as a private company since inception with no active market for our stock or traded options, it is not possible to use actual price volatility data. Therefore, we estimated the volatility of our common stock based on a composite six-year, historical volatility of peer group companies which approximates our expected term of option awards as determined using the simplified method as stated in SAB 107. Using an expected volatility based on the average historical volatility of other entities may result in variability when compared to actual historical volatility once we have a public market for our common stock. We base the risk-free interest rate that we use in the option pricing model on U.S. Treasury issues with terms equal to the expected lives of the stock options. We have never and do not anticipate paying any cash dividends in the foreseeable future and therefore use an expected dividend yield of zero in our option pricing model. We determined the amount of share-based compensation expense for the fiscal years ended March 31, 2006 and 2007, based on awards that we ultimately expected to vest, taking into account estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. To properly attribute compensation expense, we are required to estimate pre-vesting forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting forfeitures and record stock-based compensation expense only for those awards that are expected to vest. If the actual forfeiture rate is materially different from the estimate, stock-based compensation expense could be significantly different from what has been recorded. Share-based awards are allocated to expense on a straight-line basis over the requisite service period.
 
We believe there is a high degree of subjectivity involved when using option-pricing models to estimate share-based compensation under SFAS 123R. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions, are fully transferable and do not cause dilution. Because our share-based payments have characteristics different from those of freely traded options and because changes in the subjective input assumptions can materially affect our estimates of fair values (such as attrition), in our opinion, existing valuation models, including Black-Scholes, may not provide reliable measures of the fair values of our share-based compensation. Consequently, there is a risk that our estimates of the fair values of our share-based compensation awards on the grant dates


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may bear little resemblance to the actual values realized upon the exercise, expiration, early termination or forfeiture of those share-based payments in the future. Certain share-based payments, such as employee stock options, may expire worthless or otherwise result in zero intrinsic value as compared to the fair values originally estimated on the grant date and reported in our financial statements. Alternatively, value may be realized from these instruments that are significantly in excess of the fair values originally estimated on the grant date and reported in our financial statements. There is currently no market-based mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models, nor is there a means to compare and adjust the estimates to actual values. Although the fair value of employee share-based awards is determined in accordance with SFAS 123R using an option-pricing model, that value may not be indicative of the fair value observed in a market transaction between a willing buyer and willing seller. If factors change and we employ different assumptions in the application of SFAS 123R in future periods than those currently applied under SFAS 123R and those previously applied under SFAS 123 in determining our pro forma amounts, the compensation expense that we record in the future under SFAS 123R may differ significantly from what we have reported during the fiscal year ended March 31, 2007 and what we have reported as our pro forma expense during the period prior to adoption of SFAS 123R.
 
Because there has been no public market for our common stock, our board of directors determined the fair value of our common stock by considering a number of relevant factors including our operating and financial performance and corporate milestones, the prices at which we sold shares of our redeemable convertible preferred stock in arms-length transactions, the composition of and changes to our management team, the superior rights and preferences of securities senior to our common stock at the time of each grant and the likelihood of achieving a liquidity event for the shares of common stock underlying stock options. Our board of directors also obtained retrospective valuations for stock options granted prior to June 30, 2004, and contemporaneous valuations for those equity awards granted on or after June 30, 2004.
 
With the exception of stock appreciation rights, or SARs, grants made in August and November 2005, all stock options and SARs issued since then have been granted with exercise prices equal to or in excess of the fair value of our common stock as determined by our board of directors. In August 2005, the board of directors granted 69,745 SARs with an exercise price of $1.57 per SAR. At that time, the board of directors had determined that the fair value of our common stock was $2.13 per share. In determining such fair value, the board of directors considered the factors described above and the board of directors’ assessment of the uncertainties regarding our results of operations and financial condition for the then current quarter. In November 2005, the board of directors granted 16,621 SARs with an exercise price of $1.57 per SAR. At that time, the board of directors had determined that the fair value of our common stock was $2.38 per share based on the foregoing factors. Our board of directors also obtained contemporaneous valuations of our common stock in connection with the August 2005 and November 2005 SARs grants. In determining the fair value of our common stock since March 31, 2006, our enterprise value was estimated based on the income approach, which was validated through comparison to the enterprise value estimated using the market approach. The income approach involves applying appropriate discount rates to estimate cash flows that are based on forecasts of revenue and costs. Key assumptions associated with the income approach includes projected revenue, profit and cash flows which reflect management’s best estimates of our future operations; a terminal value, which attributes value to cash flows for the years beyond the projection period; and a discount rate which reflects the illiquid nature of the company and the risks associated with the business.


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The market approach provides an indication of our value by comparison to long-term growth rates, margins and revenue multiples of similar publicly-traded companies and transactions in our industry. Using the resulting enterprise value, the fair value of our common stock was then estimated using the option-pricing method. The option-pricing method involves making estimates of the anticipated timing of a potential liquidity event and estimates of the volatility of our equity securities. The anticipated timing of a liquidity event was based on our plans of an initial public offering and our board of directors’ judgment. Estimating the volatility of the share price of a privately-held company is subjective because there is no readily available market for its shares. We believe that we have used reasonable methodologies, approaches and assumptions consistent with the AICPA’s Practice Aid Valuation of Privately-Held Company Equity Securities Issued as Compensation to determine the fair value of our common stock.
 
On August 7, 2006, December 18, 2006 and February 27, 2007, we granted options to purchase an aggregate of 388,403, 197,669 and 23,960 shares of our common stock at $4.19, $7.39 and $10.08 per share, respectively. The reasons for the difference between the fair value of our common stock on each of these dates and $15.00, which is the midpoint of the initial public offering price range, are as follows:
 
•  In determining the fair value of the common stock on August 7, 2006 of $4.19 per share, our board of directors took into account our operating results, greater visibility into our revenue and net income projections as compared to prior periods and our continuing momentum, offset by the timing and remoteness of any liquidity event in our common stock, such as an initial public offering
 
•  The increase in the fair value of our common stock on December 18, 2006 to $7.39 per share was attributable to increased demand which resulted in increases to our then current 2007 revenue and net income projections of 7% and 22%, respectively. This increase was driven by the expansion of several strategic accounts in communications, technology, insurance and financial services coupled with our ability to successfully execute against our business plan and exceed our prior-period revenue and profitability projections. In addition, the remoteness of a liquidity event diminished as our prospects for an initial public offering increased
 
•  The increase in the fair value of our common stock on February 27, 2007 to $10.08 per share was primarily attributable to our continued ability to successfully execute against our business plan as demonstrated by our ability to exceed six consecutive quarterly financial targets, thereby providing reliability, dependability and predictability to meet future financial performance projections. We also had begun drafting sessions for an initial public offering, which further reduced the remoteness of a potential liquidity event
 
•  On March 29, 2007, we entered into a five-year IT services agreement with BT that was premised on BT making minimum aggregate expenditures of approximately $200 million over the term of the agreement. In connection with the agreement, we also sold 918,807 shares of our common stock to a wholly-owned subsidiary of BT at $12.27 per share
 
•  On April 6, 2007, we filed a registration statement with the Securities and Exchange Commission to sell stock in an initial public offering
 
•  Subsequent to March 29, 2007, our operating results continued to improve and we continued to exceed our quarterly revenue and income estimates
 
The difference between the fair value of our common stock on each of these dates and the midpoint of the initial public offering price range was also attributable to the determination of


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the offering range, in consultation with the managing underwriters of this offering, using updated market conditions, and our improved prospects for liquidity through this offering. Although it is reasonable to expect that the completion of this offering will add value to the shares of our common stock because they will have increased liquidity and marketability, the amount of additional value can be measured with neither precision nor certainty.
 
The values of outstanding vested and unvested options as of March 31, 2007 based on the difference between an assumed initial public offering price of $15.00 per share and the exercise price of the options outstanding are as follows:
 
                   
            Assumed
            initial public
    Options   Fair value   offering fair value
 
 
Unvested
    1,427,010   $ 4,657,748   $ 21,405,150
Vested
    1,784,448   $ 4,595,565   $ 26,766,720
 
 
 
Long-lived assets
 
Our long-lived assets include property and equipment, long-term investments and capitalized software development costs. We evaluate the recoverability of our long-lived assets whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Such circumstances would include a significant decrease in the market price of a long-lived asset, a significant adverse change to the manner in which the asset is being used or its physical condition, or a history of operating or cash flow losses associated with the use of the asset. In addition, changes to the expected useful lives of these long-lived assets may also be an indicator of impairment. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying value of the assets exceeds the fair value of the assets and the resulting losses are included in the statement of operations.
 
Results of operations
 
Fiscal year ended March 31, 2006 compared to fiscal year ended March 31, 2007
 
The following table presents an overview of our results of operations for the fiscal years ended March 31, 2006 and 2007.
 
                               
    Fiscal year ended
           
    March 31,            
(dollars in thousands)   2006   2007     $ Change     % Change
 
 
Revenue
  $ 76,935   $ 124,660     $ 47,725       62 .0%
Costs of revenue
    43,417     68,031       24,614       56 .7
             
             
Gross profit
    33,518     56,629       23,111       69 .0
Operating expenses
    32,925     42,478       9,553       29 .0
             
             
Income from operations
    593     14,151       13,558       2,286 .3
Other income
    1,564     1,209       (355 )     (22 .7)
             
             
Income before income tax expense (benefit)
    2,157     15,360       13,203       612 .1
Income tax expense (benefit)
    176     (3,630 )     (3,806 )     (2,162 .5)
             
             
Net income
  $ 1,981   $ 18,990     $ 17,009       858 .6%
 
 


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Revenue
 
Revenue increased from $76.9 million in the fiscal year ended March 31, 2006 to $124.7 million in the fiscal year ended March 31, 2007, representing an increase of $47.7 million, or 62.0%. Billable time was the primary reason for the revenue growth, accounting for 83.8% of the total revenue increase. Increased average billing rates for IT professionals, reimbursable expenses and the strengthening of the U.K. pound sterling accounted for 6.9%, 3.2% and 6.1% of the total revenue increase, respectively. These increases were supported by strategic initiatives including hiring of key personnel and alignment with client markets. Our top five clients in the fiscal years ended March 31, 2006 and 2007 accounted for 42.6% and 49.0% of our revenue, respectively. Our top ten clients in the fiscal years ended March 31, 2006 and 2007 accounted for 61.8% and 72.0% of our revenue, respectively. U.S. revenue increased 39.9% from $66.0 million in the fiscal year ended March 31, 2006 to $92.4 million in the fiscal year ended March 31, 2007. U.K. revenue increased 200.0% from $10.6 million in the fiscal year ended March 31, 2006 to $31.9 million in the fiscal year ended March 31, 2007, due to growth in revenue from one of our significant clients and we also experienced a $2.9 million increase in revenue attributable to the strengthening of the U.K. pound sterling as compared to the U.S. dollar during the fiscal year ended March 31, 2007. We do not expect our U.K. revenue to continue to grow as a percentage of our total revenue. Revenue from onsite and offshore resources accounted for 40% and 60%, and 47% and 53%, during the fiscal years ended March 31, 2006 and 2007, respectively.
 
Costs of revenue
 
Costs of revenue increased from $43.4 million in the fiscal year ended March 31, 2006 to $68.0 million in the fiscal year ended March 31, 2007, an increase of $24.6 million, or 56.7%. A significant portion of the increase was attributable to an increase in the number of IT professionals to support revenue growth, from 2,113 as of March 31, 2006 to 3,312 as of March 31, 2007, resulting in additional costs of $21.1 million. We also incurred $2.5 million of additional costs related to subcontractors working on client engagements for the fiscal year ended March 31, 2007 as compared to the fiscal year ended March 31, 2006. Salary increases in India and Sri Lanka during the fiscal year ended March 31, 2007 added $0.4 million to our costs of revenue. Share-based compensation expense rose from $0.5 million in the fiscal year ended March 31, 2006 to $1.2 million in the fiscal year ended March 31, 2007. The increases were offset by the effects of a stronger U.S. dollar against the Indian rupee during the fiscal year ended March 31, 2007, decreasing our costs of revenue by approximately $0.3 million. We entered into foreign currency forward contracts which offset the impact of foreign currency exposure by $0.2 million.
 
Gross profit
 
Our gross profit increased from $33.5 million in the fiscal year ended March 31, 2006 to $56.6 million in the fiscal year ended March 31, 2007, an increase of $23.1 million, or 69.0%, due to increases in our revenue. Our gross margin increased from 43.6% in the fiscal year ended March 31, 2006 to 45.4% in the fiscal year ended March 31, 2007. The gross margin improvement resulted primarily from higher utilization of IT professionals in the United Kingdom, due in large part to our efforts to establish our U.K. delivery organization in prior periods in advance of anticipated revenue.
 
Operating expenses
 
Operating expenses increased from $32.9 million in the fiscal year ended March 31, 2006 to $42.5 million in the fiscal year ended March 31, 2007, an increase of $9.6 million, or 29.0%. Of


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the increase, $2.6 million was attributable to facilities expenses to accommodate the increase in the number of team members in India, Sri Lanka and the United Kingdom; $0.7 million was attributable to marketing programs, including branding and business development programs; and $0.6 million was attributable to recruiting and training of additional sales and administrative staff to support our growth. In addition, we invested $3.7 million in professional services and travel expenses to establish a financial shared-services center in India to provide back-office transactional support to our Indian, U.K. and U.S. finance organizations and to formalize our internal control framework in anticipation of meeting the standards set forth by the Sarbanes-Oxley Act of 2002. The increase was also attributable to increased salary and benefit costs of $2.8 million and share-based compensation expense of $0.4 million. There was also an increase in supply costs of $0.2 million. These increases were partially offset by reductions of approximately $1.4 million in other expenses and fees. Effects of foreign currency exchange rates were not material during the fiscal year ended March 31, 2007.
 
In the fiscal years ended March 31, 2006 and 2007, we invested in sales, marketing, IT infrastructure, human resource programs and financial operations. Our investments in our infrastructure, principally in staff and systems, provided us with higher economies of scale and supported our revenue growth. As a result, our operating expenses as a percentage of revenue decreased from 42.8% in the fiscal year ended March 31, 2006 to 34.1% in the fiscal year ended March 31, 2007.
 
Income from operations
 
Income from operations increased from $0.6 million in the fiscal year ended March 31, 2006 to $14.2 million in the fiscal year ended March 31, 2007, an increase of $13.6 million. This improvement resulted from higher gross profit and lower operating expenses as a percentage of revenue. As a percentage of revenue, income from operations increased from 0.8% in the fiscal year ended March 31, 2006 to 11.4% in the fiscal year ended March 31, 2007.
 
Other income (expense)
 
Other income decreased from $1.6 million in the fiscal year ended March 31, 2006 to $1.2 million in the fiscal year ended March 31, 2007. The decrease is primarily attributable to the absence of investment gains of $0.9 million, partially offset by an increase in interest income by $0.4 million in the fiscal year ended March 31, 2007 due to a higher average cash balance.
 
Income tax expense (benefit)
 
We had income tax expense of $0.2 million in the fiscal year ended March 31, 2006 compared to an income tax benefit of $3.6 million in the fiscal year ended March 31, 2007. This decrease in tax expense is largely related to the recognition of a discrete income tax benefit of $5.0 million due to the reversal of our deferred tax asset valuation allowance in our statement of operations during the fiscal year ended March 31, 2007. This was partially offset by the provision of $1.4 million in taxes in the fiscal year ended March 31, 2007. Also reflected in the provision are higher U.S. federal and state income taxes due to higher U.S. profit levels. Our effective tax rate was 8.1% for the fiscal year ended March 31, 2006 as compared to an income tax benefit rate of 23.6% for the fiscal year ended March 31, 2007.


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Net income
 
Net income increased from $2.0 million in the fiscal year ended March 31, 2006 to $19.0 million in the fiscal year ended March 31, 2007, an increase of $17.0 million. The increase in revenue, offset by comparatively smaller increases in costs of revenue and operating expenses and the recognition of a discrete income tax benefit of $5.0 million due to the reversal of our deferred tax valuation allowance were the primary contributors to this positive growth in net income.
 
Fiscal year ended March 31, 2005 compared to fiscal year ended March 31, 2006
 
The following table presents an overview of our results of operations for the fiscal years ended March 31, 2005 and 2006.
 
                             
    Fiscal year
         
    ended March 31,          
(dollars in thousands)   2005   2006   $ Change     % Change
 
 
Revenue
  $ 60,484   $ 76,935   $ 16,451       27 .2%
Costs of revenue
    31,813     43,417     11,604       36 .5
             
             
Gross profit
    28,671     33,518     4,847       16 .9
Operating expenses
    27,838     32,925     5,087       18 .3
             
             
Income from operations
    833     593     (240 )     (28 .8)
Other income
    376     1,564     1,188       316 .0
             
             
Income before income tax expense
    1,209     2,157     948       78 .4
Income tax expense
    99     176     77       77 .8
             
             
Net income
  $ 1,110   $ 1,981   $ 871       78 .5%
 
 
 
Revenue
 
Revenue increased from $60.5 million in the fiscal year ended March 31, 2005 to $76.9 million in the fiscal year ended March 31, 2006, representing an increase of $16.5 million, or 27.2%. The increase in billable time and average billing rates represented 108.3% and 1.2% of the total revenue increase, respectively. These revenue increases were partially offset by decreases in reimbursable expenses and the weakening of the U.K. pound sterling, which lowered the total revenue increase by 4.7% and 4.9%, respectively. The loss of a significant consulting engagement during the fourth quarter of the fiscal year ended March 31, 2005 along with delays in the anticipated start of new projects constrained our revenue growth during the fiscal year ended March 31, 2006. Our top five clients accounted for $26.9 million and $32.8 million, or 44.5% and 42.6%, of total revenue for the fiscal years ended March 31, 2005 and 2006, respectively. Our top ten clients accounted for $39.5 million and $47.6 million, or 65.3% and 61.8%, of total revenue for the fiscal years ended March 31, 2005 and 2006, respectively. U.K. revenue grew to $10.6 million in the fiscal year ended March 31, 2006 from $1.9 million in the fiscal year ended March 31, 2005, an increase of over 450% due to growth in revenue from one of our significant clients. Increases in U.K. revenue were offset by $0.8 million as a result of the weakening of the U.K. pound sterling as compared to the U.S. dollar during the fiscal year ended March 31, 2006. Revenue from onsite and offshore resources accounted for 44% and 56% and 40% and 60%, during the fiscal years ended March 31, 2005 and 2006, respectively.


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Costs of revenue
 
Costs of revenue increased from $31.8 million in the fiscal year ended March 31, 2005 to $43.4 million in the fiscal year ended March 31, 2006, an increase of $11.6 million, or 36.5%. As a percentage of revenue, costs of revenue increased from 52.6% to 56.4%. The number of our IT professionals grew from 1,976 as of March 31, 2005 to 2,113 as of March 31, 2006, resulting in additional costs of $6.1 million, while salary increases in India and Sri Lanka in 2006 added $1.4 million to our costs of revenue. We incurred $0.8 million of additional costs related to subcontractors working on client engagements and we incurred share-based compensation expense of $0.5 million as a result of adopting SFAS 123R as of April 1, 2005. We also incurred additional costs of $2.6 million related to the deployment of onsite teams for our U.K.-based clients. Effects of a stronger U.S. dollar against the Indian rupee in the fiscal year ended March 31, 2006 resulted in a decrease of approximately $0.2 million in our costs of revenue. We used foreign currency forward contracts which offset this currency exposure by $0.1 million.
 
Gross profit
 
Our gross profit increased from $28.7 million in the fiscal year ended March 31, 2005 to $33.5 million in the fiscal year ended March 31, 2006, an increase of $4.8 million, or 16.9%, due to increases in our revenue. Our gross margin decreased from 47.4% in the fiscal year ended March 31, 2005 to 43.6% in the fiscal year ended March 31, 2006.
 
The decrease in gross margin resulted from lower utilization of our IT professionals during the first half of the fiscal year ended March 31, 2006 resulting in part from the loss of a significant consulting engagement in the fourth quarter of the fiscal year ended March 31, 2005. As our revenue strengthened during the second, third and fourth quarters of the fiscal year ended March 31, 2006, our utilization rates improved. In addition, we experienced lower gross margins on U.K. revenue than those achieved historically in the United States due primarily to our efforts to build our U.K. delivery organization in advance of anticipated revenue.
 
Operating expenses
 
Operating expenses increased from $27.8 million in the fiscal year ended March 31, 2005 to $32.9 million in the fiscal year ended March 31, 2006, an increase of $5.1 million, or 18.3%. Compensation cost increased $3.4 million resulting from increased salary and benefit costs of $0.8 million, increased bonus and commission expense of $1.3 million and $1.3 million of incremental cost relating to the adoption of SFAS 123R on April 1, 2005. Facilities expense and spending on marketing, branding and business development programs increased by $1.2 million and $0.3 million, respectively, primarily as a result of our efforts to acquire new clients with a focus on supporting our expanding U.K. business. During the fiscal year ended March 31, 2006, we had expense of $0.2 million related to terminated internally-developed software projects. Effects of foreign currency exchange rates were not material during the fiscal year ended March 31, 2006.
 
Our operating expenses as a percentage of revenue decreased from 46.0% in the fiscal year ended March 31, 2005 to 42.8% in the fiscal year ended March 31, 2006. The decrease resulted primarily from our investment in infrastructure, principally staff and systems, which provided us with higher economies of scale and supported our revenue growth.


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Income from operations
 
Income from operations decreased from $0.8 million in the fiscal year ended March 31, 2005 to $0.6 million in the fiscal year ended March 31, 2006, a decrease of $0.2 million. This decrease is due to lower gross margin in the fiscal year ended March 31, 2006, resulting from a lower utilization rate in the first half of the fiscal year ended March 31, 2006 and an increase in operating expenses greater than the increase in gross profit. As a percentage of revenue, income from operations decreased from 1.4% in the fiscal year ended March 31, 2005 to 0.8% in the fiscal year ended March 31, 2006.
 
Other income (expense)
 
Other income increased from $0.4 million in the fiscal year ended March 31, 2005 to $1.6 million in the fiscal year ended March 31, 2006. The increase was primarily attributable to an increase in gain on sale of investments of $0.8 million and an increase in interest income of $0.4 million due to higher average cash balances.
 
Income tax expense (benefit)
 
Our income tax expense increased from $0.1 million in the fiscal year ended March 31, 2005 to $0.2 million in the fiscal year ended March 31, 2006. Our effective tax rates were 8.2% and 8.1% for the fiscal years ended March 31, 2005 and 2006, respectively. Our income tax expense related primarily to U.S. income taxes and foreign income taxes of our foreign subsidiaries.
 
Net income
 
Net income increased from $1.1 million in the fiscal year ended March 31, 2005 to $2.0 million in the fiscal year ended March 31, 2006, an increase of $0.9 million. As a percentage of revenue, net income increased from 1.8% in the fiscal year ended March 31, 2005 to 2.6% in the fiscal year ended March 31, 2006. The growth in net income was primarily due to an increase in revenue offset by comparatively smaller increases in operating expenses.
 
Quarterly results of operations
 
The following tables present our unaudited consolidated statements of operations data in U.S. dollars and as a percentage of revenue for the eight fiscal quarters in the two-year period ended March 31, 2007. You should read the following tables together with the consolidated financial statements and related notes contained elsewhere in this prospectus. We have prepared the unaudited statements of operations data on the same basis as our audited consolidated financial statements. These tables include normal recurring adjustments that we consider necessary for a fair presentation of our operating results for the quarters presented.


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Operating results for any quarter are not necessarily indicative of results for any future quarters or for a full year.
 
                                                       
    Three months ended
   
    June 30,     September 30,     December 31,   March 31,   June 30,   September 30,   December 31,     March 31,
   
(in thousands)   2005     2005     2005   2006   2006   2006   2006     2007
 
Revenue
  $ 15,357     $ 17,285     $ 21,098   $ 23,195   $ 25,625   $ 30,090   $ 33,673     $ 35,272
Costs of revenue
    9,493       10,078       11,444     12,402     14,038     16,231     18,361       19,401
     
     
Gross profit
    5,864       7,207       9,654     10,793     11,587     13,859     15,312       15,871
Operating expenses
    7,731       7,766       8,350     9,078     9,273     10,173     11,243       11,788
     
     
Income (loss) from operations
    (1,867 )     (559 )     1,304     1,715     2,314     3,686     4,069       4,083
Other income (expense)
    101       75       485     903     681     237     288       3
     
     
Income (loss) before income tax expense (benefit)
    (1,766 )     (484 )     1,789     2,618     2,995     3,923     4,357       4,086
Income tax expense (benefit)
    68       57       39     12     107     130     (4,317 )     450
     
     
Net income (loss)
  $ (1,834 )   $ (541 )   $ 1,750   $ 2,606   $ 2,888   $ 3,793   $ 8,674     $ 3,636
 
 
 
                                                                 
 
    Three months ended  
   
 
    June 30,     September 30,     December 31,     March 31,     June 30,     September 30,     December 31,     March 31,  
       
    2005     2005     2005     2006     2006     2006     2006     2007  
   
 
Revenue
    100 %     100 %     100 %     100 %     100 %     100 %     100 %     100 %
Costs of revenue
    62       58       54       53       55       54       55       55  
Gross profit
    38       42       46       47       45       46       45       45  
Operating expenses
    50       45       40       39       36       34       33       33  
Income (loss) from operations
    (12 )     (3 )     6       8       9       12       12       11  
Other income)
    1             2       3       3       1       1        
Income (loss) before income tax expense (benefit)
    (12 )     (3 )     8       11       12       13       13       11  
Income tax expense (benefit)
                                        (13 )     1  
Net income (loss)
    (12 )     (3 )     8       11       12       13       26       10  
 
 
 
We experience some level of seasonality because many of our clients undergo their budget approval process during the first quarter of the calendar year, which corresponds to our fourth quarter ending March 31. This process may delay project approvals and could cause revenue to be deferred from our fourth fiscal quarter to our first fiscal quarter of the following year.
 
Our annual review and promotion cycle and the corresponding pay increases generally become effective as of April 1 at our global delivery centers. This factor generally results in an increase in our costs of revenue and has a negative effect on gross margin during our first fiscal quarter.
 
Liquidity and capital resources
 
We have financed our operations primarily 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 March 31, 2007, we had cash and cash equivalents of $45.1 million, of which $5.5 million was held outside the United States. 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 foreign exchange contracts to be supported by our borrowing base which does not support any foreign currency contracts at March 31, 2007. Advances under our credit facility accrue interest at an annual rate equal to the prime rate minus 0.25%. Our credit facility is secured by the grant of a security interest in all of


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our U.S. assets in favor of the bank and 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. Our credit facility expires on September 30, 2007. We intend to renew this line prior to its expiration. As of March 31, 2007, we had no amounts outstanding under this credit facility.
 
The funds held at locations outside of the United States are for future operating expenses 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. If we decide to remit funds from India to the United States in the form of dividends, they would be subject to Indian dividend distribution tax, which is currently at a rate of approximately 14%, as well as U.S. corporate income tax on the dividends.
 
We believe that our available cash and cash equivalents, cash flows expected to be generated from operations and net proceeds from this offering will be adequate to satisfy our current and planned operations for the foreseeable future. Our ability to expand and grow our business in accordance with current plans and to meet our long-term capital requirements will depend on many factors, including the rate, if any, at which our cash flow increases, our continued intent not to repatriate earnings from India and Sri Lanka and the availability of public and private debt and equity financing. Although we currently have no specific plans to do so, to the extent we decide to pursue one or more significant strategic acquisitions, we may incur debt or sell additional equity to finance those acquisitions.
 
Anticipated capital expenditures
 
We are beginning the work to build a facility as part of a planned campus on a 6.3 acre site in Hyderabad, India. We expect to construct and build out this facility, which will be approximately 340,000 square feet, over the next three fiscal years at a total estimated cost of $30.0 million, of which we anticipate spending between $10.0 million and $12.0 million during the fiscal year ending March 31, 2008. We plan to fund the construction and build-out of this facility with a portion of the net proceeds of this offering. We expect other capital expenditures in the normal course for fiscal 2008 to be approximately $8.0 million, primarily for leasehold improvements, capital equipment and purchased software.


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Cash flows
 
The following table summarizes our cash flows for the periods presented:
 
                         
 
    Fiscal year ended March 31,  
(in thousands)   2005     2006     2007  
   
 
Net cash provided by (used for) operating activities
  $ (296 )   $ 1,892     $ 11,120  
Net cash used for investing activities
    (3,112 )     (865 )     (5,492 )
Net cash provided by financing activities
    1,447       659       8,971  
Effect of exchange rate on cash
    6       145       243  
     
     
Net increase (decrease) in cash and cash equivalents
    (1,955 )     1,831       14,842  
Cash and cash equivalents, beginning of year
    30,361       28,406       30,237  
     
     
Cash and cash equivalents, end of year
  $ 28,406     $ 30,237     $ 45,079  
 
 
 
Net cash provided by (used for) operating activities
 
Net cash of $1.9 million was provided by operations during the fiscal year ended March 31, 2006 as compared to $11.1 million during the fiscal year ended March 31, 2007. This increase was directly attributable to our increase in net income of $17.0 million in the fiscal year ended March 31, 2007 as compared to the fiscal year ended March 31, 2006. Changes in non-cash items impacting net income from the fiscal year ended March 31, 2006 to the fiscal year ended March 31, 2007 were $1.1 million of increased share-based compensation expense and a $0.9 million reduction on the gain on sale of equity investment, offset by a $5.0 million decrease in our deferred tax asset valuation allowance. Working Capital changes from the prior period related to accounts receivable and deferred revenue of $6.1 million and $0.7 million, respectively, reduced cash provided by operations and were offset by an increase in accounts payable of $2.0 million.
 
Net cash of $0.3 million was used for operations during the fiscal year ended March 31, 2005 as compared to net cash of $1.9 million provided from operations during the fiscal year ended March 31, 2006. This increase was directly attributable to our increased revenue during the fiscal year ended March 31, 2006 as compared to the fiscal year ended March 31, 2005 providing an increase in net income for the comparative period of $0.9 million. In addition, cash provided from operations was improved from increases in accrued compensation and expenses of $3.5 million, deferred revenue of $0.8 million and income taxes payable of $0.4 million, partially offset by an increase in our accounts receivable balance of $4.2 million and gain on sale of equity of $0.8 million. There were increases in non-cash charges for share-based compensation expense of $1.5 million in the fiscal year ended March 31, 2006, as compared to the fiscal year ended March 31, 2005.
 
Net cash used for investing activities
 
Net cash used for investing activities was $0.9 million during the fiscal year ended March 31, 2006 as compared to $5.5 million during the fiscal year ended March 31, 2007. During the fiscal year ended March 31, 2007, we invested $4.8 million in facilities and equipment at our global delivery centers in India and Sri Lanka to support our revenue growth. We contained our facilities and equipment spending and made an effort to redeploy existing equipment during


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the fiscal year ended March 31, 2006 due to lower utilization at our global delivery centers in India and Sri Lanka, particularly during the first half of the fiscal year ended March 31, 2006.
 
Net cash used for investing activities was $3.1 million in the fiscal year ended March 31, 2005 as compared to $0.9 million in the fiscal year ended March 31, 2006. Our efforts to contain facilities and equipment spending through redeployment of existing equipment led to a decrease in cash used during the fiscal year ended March 31, 2006. During the fiscal years ended March 31, 2005 and 2006, we received cash from sales of equity investments of $0.4 million and $0.5 million, respectively.
 
Net cash provided by (used for) financing activities
 
Net cash of $0.7 million was provided by financing activities during the fiscal year ended March 31, 2006 as compared to net cash of $9.0 million provided by financing activities during the fiscal year ended March 31, 2007. The increase was due to proceeds of $11.0 million, net of expenses, on the sale of common stock to a wholly-owned subsidiary of BT in addition to $0.5 million in cash provided by other stock sales and option exercises during the fiscal year ended March 31, 2007 as compared to proceeds from sales of common stock and option exercises of $0.9 million in the fiscal year ended March 31, 2006. Restricted cash increased by $0.9 million, year-over-year, and payments on capital leases decreased by $0.2 million in the fiscal year ended March 31, 2007 as compared to the fiscal year ended March 31, 2006 due to our efforts to end these arrangements. In the fiscal year ended March 31, 2007, we incurred $1.8 million of costs attributable to this offering.
 
Net cash of $1.4 million was provided by financing activities during the fiscal year ended March 31, 2005 as compared to $0.7 million during the fiscal year ended March 31, 2006. The decrease was primarily due to proceeds from the sale of common stock of $1.5 million in the fiscal year ended March 31, 2005 as compared to proceeds from sales of common stock of $0.8 million and exercises of employee stock options of $0.1 million in the fiscal year ended March 31, 2006. Capital lease payments were $0.1 million and $0.2 million in the fiscal years ended March 31, 2005 and 2006, respectively.
 
Contractual obligations
 
We have no long-term debt and have various contractual obligations and commercial commitments. The following table sets forth our future contractual obligations and commercial commitments as of March 31, 2007.
 
                               
    Payments due by period
        Less than
  1-3
  3-5
   
(in thousands)   Total   1 year   years   years   5+ years
 
Operating lease obligations(1)
  $ 10,128   $ 3,462   $ 5,113   $ 1,553   $
Defined benefit plan(2)
    2,383     64     232     431     1,656
     
     
Total
  $ 12,511   $ 3,526   $ 5,345   $ 1,984   $ 1,656
 
 
 
(1) Our obligations under our operating leases consist of future payments related to our real estate leases.
 
(2) We accrue and contribute to benefit funds covering our employees in India and Sri Lanka. The amounts in the table represent the expected benefits to be paid out over the next 10 years. We are not able to quantify expected benefit payments beyond 10 years with any certainty.


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Off-balance sheet arrangements
 
We do not have any investments in special purpose entities or undisclosed borrowings or debt. We have cash-secured letters of credit totaling approximately $1.6 million at March 31, 2007.
 
We have entered into derivative foreign currency forward contracts with the objective of limiting our exposure to changes in the Indian rupee described below in “Qualitative and quantitative disclosures about market risk.” The changes in fair value of these derivative instruments of $12,000, $133,000 and $202,000 were taken into account in the statement of operations for the fiscal years ended March 31, 2005, 2006 and 2007, respectively. We use quoted market prices from published sources or brokers to value these contracts.
 
Other than these foreign currency forward 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.
 
Reconciliation of non-GAAP financial measures
 
The following table includes certain non-GAAP financial measures, namely adjusted net income and adjusted net income per share, which exclude the impact of a one-time tax benefit related to the release of our deferred tax asset valuation allowance. This table also includes reconciliations of net income presented in accordance with GAAP to these non-GAAP financial measures. Internally, we use financial statements that exclude the benefit related to the release of our deferred tax asset valuation allowance for the following purposes: financial and operational decision making, evaluating period-to-period comparisons and making comparisons of our operating results to that of our competitors. Further, we believe that the presentation of these non-GAAP financial measures provides useful information to investors because our consolidated statements of operations for the fiscal years ended March 31, 2005 and 2006 do not reflect the impact of a one-time tax benefit, and, therefore, the presentation of the non-GAAP financial measures enhances an investor’s ability to make period-to-period comparisons of our operating results. Although we believe the non-GAAP financial measures presented in this prospectus enhance an investor’s understanding of our performance, these non-GAAP financial measures should not be considered a substitute for GAAP financial measures.
 
                     
 
    Fiscal year ended March 31,  
(in thousands, except per share data)   2005   2006   2007  
   
 
Net income
  $ 1,110   $ 1,981   $ 18,990  
Discrete tax benefit associated with release of deferred tax asset valuation allowance
            (5,040 )
     
     
Adjusted net income
  $ 1,110   $ 1,981   $ 13,950  
     
     
Adjusted net income per share
                   
Basic
  $ 0.07   $ 0.12   $ 0.80  
Diluted
  $ 0.06   $ 0.11   $ 0.76  
GAAP net income per share
                   
Basic
  $ 0.07   $ 0.12   $ 1.09  
Diluted
  $ 0.06   $ 0.11   $ 1.03  
 
 


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Recent accounting pronouncements
 
In July 2005, the Financial Accounting Standards Board, or FASB, issued FASB Staff Position, or FSP, 150-5, Accounting Under SFAS 150 for Freestanding Warrants and Other Similar Instruments on Redeemable Shares. FSP 150-5 clarifies that warrants on shares that are redeemable or puttable immediately upon exercise and warrants on shares that are redeemable or puttable in the future qualify as liabilities under SFAS 150, regardless of the redemption feature or redemption price. FSP 150-5 was effective for the first reporting period beginning after June 30, 2005, with resulting changes to prior period statements reported as a cumulative effect of an accounting change in accordance with the transition provisions of SFAS 150. The adoption of FSP 150-5 did not have a material impact on our financial position or results of operations.
 
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Instruments, or SFAS No. 155, which is an amendment to SFAS No. 133 and SFAS No. 140 and allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis. SFAS No. 155 is effective for an entity’s first fiscal year that begins after September 15, 2006. We do not expect SFAS No. 155 to have a material impact on our financial position or results of operations.
 
In June 2006, the FASB issued Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109, or FIN 48, which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on description, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently in the process of assessing the impact that FIN 48 will have on our financial position or results of operations.
 
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We are currently evaluating the impact that SFAS No. 157 will have on our financial position or results of operations.
 
In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Post-Retirement Plans—an Amendment of FASB Statements No. 87, 88, 106 and 132(R). This standard requires recognition of the funded status of benefit plans in statements of financial position. The standard also requires recognition in other comprehensive income of certain gains and losses that arise during the period but are deferred under pension accounting rules and modifies the timing of reporting and adds certain disclosures. The recognition and disclosure elements of SFAS No. 158 are effective for fiscal years ending after December 15, 2006, and the measurement elements are effective for fiscal years ending after December 15, 2008. We adopted the recognition and disclosure requirements of SFAS No. 158 for the fiscal year ending March 31, 2007. This adoption did not have a material impact on our financial position or results of operations.
 
In February 2007, the FASB released SFAS 159, The Fair Value Option for Financial Assets and Financial Liability. SFAS 159 allows entities to measure many financial instruments and certain


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other items at their fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. We will adopt SFAS 159 in our fiscal year beginning on April 1, 2008. We are currently evaluating the requirements of SFAS 159 and have not yet determined its impact on our financial position or results of operations.
 
Quantitative and qualitative disclosures about market risk
 
Exchange rate risk
 
We are exposed to foreign currency exchange rate risk in the ordinary course of doing business as we transact business in foreign currencies. We have historically entered into, and in the future we may enter into, foreign currency derivative contracts to provide an economic hedge of non-U.S. dollar currency exchange exposures. The purpose of this foreign exchange policy is to protect us from the risk that the eventual cash flows from Indian rupee denominated expenses might be adversely affected by changes in exchange rates. At March 31, 2006, we had outstanding contracts of $10.5 million to offset the exposure of the Indian rupee. These contracts did not qualify for hedge accounting under SFAS 133: Accounting for Derivative Instruments and Hedging Activities, or SFAS 133. We had no outstanding foreign currency derivative contracts at March 31, 2007.
 
We are in the process of evaluating our foreign exchange policy to address foreign exchange exposures on our balance sheet and operating cash flows from U.K. pounds sterling and Indian rupees. We are considering a program to mitigate the effect of the fluctuations of these currencies in relation to our reporting currency.
 
Sensitivity analysis is used as a primary tool in evaluating the effects of changes in foreign currency exchange rates, interest rates and commodity prices on our business operations. The analysis quantifies the impact of potential changes in these rates and prices on our earnings, cash flows and fair values of assets and liabilities during the forecast period, most commonly within a one-year period. The ranges of changes used for the purpose of this analysis reflect our view of changes that are reasonably possible over the forecast period. Fair values are the present value of projected future cash flows based on market rates and chosen prices.
 
Interest rate risk
 
We do not believe we are exposed to material direct risks associated with changes in interest rates. As of March 31, 2007, we had $45.1 million in cash and cash equivalents and short-term investments, the interest income from which is affected by changes in short-term interest rates. We had no debt outstanding as of March 31, 2007.
 
Concentration of credit risk
 
Financial instruments which potentially expose us to concentrations of credit risk primarily consist of cash and cash equivalents, accounts receivable and unbilled accounts receivable. We place our temporary cash in liquid investments at highly-rated financial institutions. We believe that our credit policies reflect normal industry terms and business risk. We do not anticipate non-performance by the counterparties and, accordingly, do not require collateral. Credit losses and write-offs of accounts receivable balances have historically not been material to our financial statements and have not exceeded our expectations.


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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. We have experienced compounded annual revenue growth of 50% over the five-year period ended March 31, 2007.
 
Our enhanced global delivery model leverages a highly-efficient onsite-to-offshore service delivery mix and proprietary tools and processes to manage and accelerate delivery, foster innovation and promote continual improvement. Our global service delivery teams work seamlessly at our client locations and at our global delivery centers in India and Sri Lanka to provide value-added services rapidly and cost-effectively. They do this by using our enhanced global delivery model, which we manage to a 20/80 onsite-to-offshore service delivery mix.
 
We apply our innovative platforming approach across all of our services. We help our clients combine common business processes and rules, technology frameworks and data into reusable application platforms that can be leveraged across the enterprise to build, enhance and maintain existing and future applications. Our platforming approach enables our clients to continually improve their software platforms and applications in response to changing business needs and evolving technologies while also realizing long-term and ongoing cost savings.
 
We provide our IT services primarily to enterprises engaged in the following industries: communications and technology; banking, financial services and insurance; and media and information. Our current clients include leading global enterprises such as Aetna Life Insurance Company, British Telecommunications plc, ING North America Insurance Corporation, International Business Machines Corporation, Iron Mountain Information Management, Inc., JPMorgan Chase Bank, N.A. and Thomson Healthcare Inc., and leading enterprise software developers such as Pegasystems Inc. and Vignette Corporation. We have a high level of repeat business among our clients. For instance, during the fiscal year ended March 31, 2007, 97% of our revenue came from clients to whom we had been providing services for at least one year and 84% came from clients to whom we had been providing services for at least two years. Our top ten clients accounted for approximately 65%, 62% and 72% of our total revenue in the fiscal years ended March 31, 2005, 2006 and 2007, respectively.
 
Industry background
 
The role of IT in enterprises has grown far beyond operational support to become a source of competitive advantage. Enterprises are using Internet-based IT applications to facilitate critical interactions with customers, vendors and partners to compete in a global, real-time environment. At the same time, enterprises are using IT applications and data to address regulatory changes, meet market demands and improve business efficiency. As a result, leading enterprises are using IT to accelerate time-to-market, increase productivity and improve customer service.


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While enterprises expect IT to play a key role in driving business growth and productivity, they are under increasing pressure to control costs. According to an October 2006 Gartner report, annual IT budgets increased less than 3% for the fourth year in a row while a February 2007 Gartner press release forecasts an average growth rate of 3% for 2007. As a result, business and technology leaders are expected to address IT challenges of increasing scope and complexity with limited resources under rigorous time constraints.
 
Many enterprises increasingly manage their technology costs and shortage of locally-available IT professionals by outsourcing IT services offshore. According to a 2006 IDC report, 20.8% of U.S. IT services, including application management, custom application development, IT consulting, information systems outsourcing, systems integration and other related activities, will move to offshore players by 2010. Using a global delivery model, IT service providers employ skilled labor in lower-cost geographies in order to cost-effectively deliver high quality services to their clients. According to IDC, in 2005, the largest markets for these offshore IT services were concentrated in the United States and in Europe, the Middle East and Africa with market shares of 79.6% and 17.4%, respectively.
 
A 2005 NASSCOM-McKinsey report estimates that global offshore IT services adoption will increase at a compounded annual growth rate of 24.4% from $18.4 billion for the 12 months ended March 31, 2005 to $55.0 billion for the 12 months ending March 31, 2010. This exceeds the estimate in IDC’s 2007 Worldwide IT Spending 2006-2010 Forecast Update by Vertical Market of 5.8% compounded annual growth rate for the overall IT services industry from calendar year 2005 to calendar year 2010.
 
Engaging offshore IT service providers to improve business performance, beyond reducing costs, can be challenging. The rate of technological change, the impact of mergers and acquisitions and a historical approach to building and managing stand-alone, legacy IT systems and applications have led to fragmented IT environments. Enterprises often support multiple IT applications that vary in capabilities and cannot interoperate effectively, creating IT application silos. These fragmented IT environments are complex, inefficient and costly to maintain and operate. They limit an enterprise’s ability to leverage valuable corporate IT assets, including business processes and rules, technology frameworks and data. We believe enterprises seek service providers that can cost-effectively address this range of complex challenges.
 
Our solution
 
We deliver a broad range of IT services using an enhanced global delivery model and an innovative platforming approach. We have significant domain expertise in IT-intensive industries, including communications and technology, BFSI and media and information. We enable our clients to leverage IT to improve business performance, use IT assets more effectively and reduce IT costs.
 
Broad range of IT services. We provide a broad range of IT services, either individually or as part of an end-to-end solution, from IT consulting and technology implementation to application outsourcing. Our IT consulting services include strategic activities such as defining technology roadmaps, providing architecture services and assessing application portfolios. Our technology implementation services include application development, systems integration and legacy system conversion and enablement. Our application outsourcing services include application enhancement and maintenance and infrastructure management.


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Enhanced global delivery model. We believe we have an enhanced and integrated global delivery model. Our enhanced global delivery model leverages a highly-efficient onsite-to-offshore service delivery mix and proprietary tools and processes to manage and accelerate delivery, foster innovation and promote continual improvement. We manage to a 20/80 onsite-to-offshore service delivery mix, which allows us to provide value-added services rapidly and cost-effectively. During the past three fiscal years, we performed more than 80% of our total billable hours at our offshore global delivery centers. Our onsite client service teams comprise senior technical and industry experts, who work on an integrated basis with our offshore teams in India and Sri Lanka. We leverage our global delivery model across all of our service offerings.
 
Platforming approach. We apply an innovative platforming approach across our IT consulting, technology implementation and application outsourcing services to reduce costs, increase productivity and improve the efficiency and effectiveness of our clients’ IT application environments. As part of our platforming approach, we assess our clients’ application environments to identify common elements, such as business processes and rules, technology frameworks and data. We incorporate those common elements into one or more application platforms that can be leveraged across the enterprise to build, enhance and maintain existing and future applications. Our platforming approach enables our clients to continually improve their software platforms and applications in response to changing business needs and evolving technologies while also realizing long-term and ongoing cost savings.
 
We enable our clients to use IT to accelerate time-to-market, increase productivity and improve customer service. We are able to reduce costs through our enhanced global delivery model. We also reduce the effort and costs required to maintain and develop IT applications by streamlining and consolidating our clients’ applications on an ongoing basis. We believe that our solution provides our clients with the consultative and high-value services associated with large consulting and systems integration firms, the cost-effectiveness associated with offshore IT outsourcing firms and ongoing benefits of our innovative platforming approach.
 
Our growth strategy
 
Key elements of our growth strategy include:
 
Deepen and grow our client base. We seek to deepen and broaden our existing client relationships and grow our client base. Our global account management and service delivery teams focus on expanding existing client relationships and converting new engagements to long-term relationships. We intend to leverage our executive-level relationships and preferred vendor status with many of our clients to extend our service offerings across those enterprises. For example, in March 2007, BT entered into a five-year IT services agreement with us and also purchased, through a wholly-owned subsidiary, 918,807 shares of our common stock. We also have a dedicated business development team focused on generating engagements with new clients. Our software company clients provide an additional channel for establishing new client relationships. We plan to expand our domestic and international presence, either directly or through strategic alliances, to pursue new market opportunities.
 
Expand our service offerings. We seek to create new and innovative service offerings by analyzing emerging technologies and industry trends and changing client needs. Our industry solution teams work closely with our marketing group, industry and technology practice groups and research and development teams to develop new, highly-differentiated services. We then


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test and refine these new services based on feedback from our clients, strategic alliances and industry analysts.
 
Deepen and expand our industry expertise. We seek to deepen our existing industry expertise and develop expertise in new vertically-oriented industries. Our experience in the communications and technology, BFSI and media and information services industries has enabled us to deliver increased value to our clients in these sectors. We also plan to extend our domain expertise to adjacent industries, where we can directly leverage existing in-house skills, experience and client relationships. We also may make acquisitions to deepen or expand our industry expertise.
 
Strengthen our brand. We seek to enhance our profile and brand equity to help us acquire new clients, enhance our existing client relationships and attract and retain talented team members. We believe our platforming approach to IT services positions us as a thought leader with clients and enables us to attract and retain talented team members. We promote our brand through a range of marketing and communications activities.
 
Develop new strategic alliances. We seek to strengthen our existing strategic alliances and build new ones. We intend to leverage our strategic alliances with software companies to win new clients, extend our services to existing clients and enter new geographic or industry markets. Some of these alliances are with software companies who are our clients. We believe these alliances provide us with an opportunity to access new markets and new clients. In addition, our strategic alliances with software companies allow us to share sales leads, develop joint account plans and engage in joint marketing activities. We believe that some of these alliances with software company clients enable us to compete more effectively for the technology implementation and support services required by our clients’ customers.
 
Services
 
We provide a broad range of IT consulting, technology implementation and application outsourcing services to our clients, either individually or as part of an end-to-end solution.
 
IT consulting services
 
We provide IT consulting services to assist our clients with their continually-changing IT environments. Our goal is to help them to continually improve the effectiveness and efficiency of their IT application environments by adopting and evolving towards re-useable software platforms. We help clients analyze business and/or technology problems and identify and design platform-based solutions. We also assist our clients in planning their IT initiatives and transition plans.


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Our IT consulting services include the following assessment and planning, architecture and design and governance-related services:
 
             
Assessment
           
and planning services     Architecture and design services     Governance-related services
     • application inventory and portfolio assessment
     • business/technology alignment analysis
     • IT strategic planning
     • quality assurance process consulting
   
     • enterprise architecture analysis
     • technology roadmaps
     • product evaluation and selection
     • business process analysis and design
   
     • program governance and change management
     • program management office planning
     • IT process/methodology consulting
             
 
During our consulting engagements, we often leverage proprietary frameworks and tools to differentiate our services and to accelerate delivery. Examples of these frameworks and tools include our Strategic Enterprise Information Roadmap framework and our Business Process Visualization tools. We believe that our consulting services are also differentiated in that we are typically able to leverage our global delivery model for our engagements. Our onsite teams work directly with our clients to understand and analyze the current-state problems and to design the conceptual solutions. Our offshore teams work seamlessly with our onsite teams to design and expand the conceptual solution, research alternatives, perform detailed analyses, develop prototypes and proofs-of-concept and produce detailed reports. We believe that this approach reduces cost, allows us to explore more alternatives in the same amount of time and improves the quality of our deliverables.
 
Technology implementation services
 
Our technology implementation services involve building, testing and deploying IT applications, and consolidating and rationalizing our clients’ existing IT applications and IT environments into platforms.
 
Our technology implementation services include the following development, legacy asset management, data warehousing and testing services:
 
                   
      Legacy asset
    Data
     
Development services     management services     warehousing services     Testing services
     • application development
     • package implementation and integration
     • software product engineering
     • Business Process Management implementations
   
     • systems consolidation and rationalization
     • technology migration and porting
     • web-enablement of legacy applications
   
     • data management and transformation
     • business intelligence, reporting and decision support
   
     • testing frameworks
     • automation of test data and cases
     • test cycle execution
                   
 
Our technology implementation services are typically characterized by short delivery cycles, stringent service levels and evolving requirements. We have incorporated rapid, iterative development techniques into our approach, extensively employing prototyping, solution demonstration labs and other collaboration tools that enable us to work closely with our clients to understand and adapt to their changing business needs. As a result, we are able to develop


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and deploy applications quickly, often within solution delivery cycles of less than three months. We provide technology implementation services across Microsoft- and Java-based, client-server and mainframe technologies.
 
Application outsourcing services
 
We provide a broad set of application outsourcing services that enable us to provide comprehensive support for our clients’ software applications and platforms. We endeavor to continually improve the applications under our management and to evolve our clients’ IT applications into leverageable platforms.
 
Our application outsourcing services include the following application and platform management, infrastructure management and quality assurance management services:
 
             
Application and platform
    Infrastructure
    Quality assurance
management services     management services     management services
     • production support
     • maintenance and enhancement of custom-built and package-based applications
     • ongoing software engineering services for software companies
   
     • systems administration
     • database administration
     • monitoring
   
     • outsourcing of quality assurance planning
     • preparation of test cases, scripts and data
     • execution of test cases, scripts and data
             
 
We believe that our application outsourcing services are differentiated because they are based on the principle of migrating installed applications to flexible platforms that can sustain further growth and business change. We do this by:
 
•  developing a roadmap for the evolution of applications into platforms
 
•  establishing an ongoing planning and governance process for managing change
 
•  analyzing applications for common patterns and service
 
•  identifying application components that can be extended or enhanced as core components
 
•  integrating new functions, features and technologies into the target architecture
 
Platforming approach
 
Our platforming approach is embodied in a set of proprietary processes, tools and frameworks that addresses the fundamental challenges confronting IT executives. These challenges include the rising costs of technology ownership and the need to accelerate time-to-market, improve service and enhance productivity. With IT spending increasing at a modest rate, business and technology executives face the challenge of doing more with limited budget increases.
 
Our platforming approach draws from analogs in industries that standardize on platforms composed of common components and assemblies used across multiple product lines. Similarly, we work with our clients to evolve their diverse software assets into unified, rationalized software platforms. Our platforming approach leads to simplified and standardized software components and assemblies that work together harmoniously and readily adapt to support new business applications. For example, a software platform for trading, once developed within an


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investment bank, can be the foundation for the bank’s diverse trading applications in equities, bonds and currencies. Our platforming approach stands in contrast to traditional enterprise application development projects, where different applications remain separate and isolated from each other, replicating business logic, technology frameworks and enterprise data.
 
At the center of our platforming approach is a five-level maturity framework, illustrated below, that allows us to adapt our service offerings to meet our clients’ unique needs. At lower levels of maturity, few assets are created and reused; consequently, agility, total cost of ownership and ability to quickly meet client needs are sub-optimal. As organizations mature along this continuum, substantial intellectual property is created and embodied in software platforms that enable steady gains in agility, reduce overall cost of ownership and accelerate time-to-market.
 
Platforming services
 
(GRAPH)
 
Level 1 represents traditional applications where every line of code is embedded and unique to the application and every application is monolithic. Level 2 applications are less monolithic and more flexible and demonstrate characteristics such as configurability and customizability. Level 3 are advanced applications where the common code components and software assets are leveraged across multiple application families and product lines. Level 4 applications are framework-driven where the core business logic is reused with appropriate custom logic built


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around them. At the highest level of maturity are Level 5 applications, where platforms are greatly leveraged to simplify and accelerate application development and maintenance.
 
Our platforming approach improves software quality and IT productivity. Software assets within platforms are reused across applications, their robustness and quality improves with time and our clients are able to develop software with fewer defects. A library of ready-made building blocks significantly enhances productivity and reduces software development risks compared to traditional methods. This establishes a cycle of continual improvement: the more an enterprise embraces platform-based solutions, the better the quality of its applications and the less the effort required to build, enhance and maintain them.
 
Global delivery model
 
We have developed an enhanced global delivery model that allows us to provide innovative IT services to our clients in a flexible, cost-effective and timely manner. Our model leverages an efficient onsite-to-offshore service delivery mix and our proprietary Global Innovation Process, or GIP, to manage and accelerate delivery, foster innovation and promote continual improvement.
 
Efficient onsite-to-offshore service delivery mix
 
We manage to a highly-efficient 20/80 onsite-to-offshore service delivery mix, which allows us to cost-effectively deliver value-added services and rapidly respond to changes in resources and requirements. During the past three fiscal years, we performed more than 80% of our total billable hours at our offshore global delivery centers. Using our global delivery model, we generally maintain onsite teams at our clients’ locations and offshore teams at one or more of our global delivery centers. Our onsite teams are generally composed of program and project managers, industry experts and senior business and technical consultants. Our offshore teams are generally composed of project managers, technical architects, business analysts and technical consultants. These teams are typically linked together through common processes and collaboration tools and a communications infrastructure that features secure, redundant paths enabling seamless global collaboration. Our global delivery model enables us to provide around-the-clock, world-class execution capabilities that span multiple time zones.
 
Global Innovation Process
 
Our enhanced global delivery model is built around our proprietary Global Innovation Process. GIP is a software lifecycle methodology that combines our decade-long experience building platform-based solutions for global clients with leading industry standards such as Rational Unified Process, eXtreme Programming, Capability Maturity Model and Product Line Engineering. By leveraging GIP templates, tools and artifacts across diverse disciplines such as requirements management, architecture, design, construction, testing, application outsourcing and production support, each team member is able to take advantage of tried and tested software engineering and platforming best practices and extend these benefits to clients.
 
We have adapted and incorporated modern techniques designed to accelerate the speed of development into GIP, including rapid prototyping, agile development and eXtreme Programming. During the initial process-tailoring phase of an engagement, we work with the client to define the specific approach and tools that will be used for the engagement. This process-tailoring takes into consideration the client’s business objectives, technology


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environment and currently-established development approach. We believe our innovative approach to adapting proven techniques into a custom process has been an important differentiator. For example, a large high-tech manufacturer engaged us to use our process-tailoring approach to design a common, standards-based development process for use by its own product development teams.
 
The backbone of GIP is our global delivery operations infrastructure. This infrastructure combines enabling tools and specialized teams that assist our project teams with important enabling services such as workforce planning, knowledge management, integrated process and program management and operational reporting and analysis.
 
Innovation and continual improvement
 
Two important aspects of our global delivery model are innovation and continual improvement. A dedicated process group provides three important functions: they continually monitor, test and incorporate new approaches, techniques, tools and frameworks into GIP; they advise project teams, particularly during the process-tailoring phase; and they monitor and audit projects to ensure compliance. New and innovative ideas and approaches are broadly shared throughout the organization, selectively incorporated into GIP and deployed through training. Clients also contribute to innovation and improvement as their ideas and experiences are incorporated into our body of knowledge. We also seek regular informal and formal client feedback. Our global leadership and executive team regularly interact with client leadership and each client is typically given a formal feedback survey on a quarterly basis. Client feedback is qualitatively and quantitatively analyzed and forms an important component of our teams’ performance assessments and our continual improvement plans.
 
Sales and marketing
 
Our global sales, marketing and business development teams seek to develop strong relationships with managers and executives at prospective and existing clients to establish long-term business relationships that continue to grow in size and strategic value. As of March 31, 2007, we had 59 sales, marketing and business development professionals, including sales managers, sales representatives, account managers, telemarketers, sales support personnel and marketing professionals.
 
The sales cycle for our services often includes initiating contact with a prospective client, understanding the prospective client’s business challenges and opportunities, performing discovery or assessment activities, submitting proposals, providing client case studies and references and developing proofs-of-concept or solution prototypes. We organize our sales teams by business unit with professionals who have specialized industry knowledge. This industry focus enables our sales teams to better understand the prospective client’s business and technology needs and to offer appropriate industry-focused solutions.
 
Sales and sales support. Our sales and sales support teams focus primarily on identifying, targeting and building relationships with prospective clients. These teams are supported in their efforts by industry specialists, technology consultants and solution architects, who work together to design client-specific solution proposals. Our sales and sales support teams are based in offices throughout India, Sri Lanka, the United Kingdom and the United States.
 
Account management. We assign experienced account managers who build and regularly update detailed account development plans for each of our clients. These managers are


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responsible for developing strong working relationships across the client organization, working day-to-day with the client and our service delivery teams to understand and address the client’s needs. Our account managers work closely with our clients to develop a detailed understanding of their business objectives and technology environments. We use this knowledge to identify and target additional consulting engagements and other outsourcing opportunities.
 
Marketing. We maintain a marketing presence in India, Sri Lanka, the United Kingdom and the United States. Our marketing team seeks to build our brand awareness and generate target lists and sales leads through industry events, press releases, thought leadership publications, direct marketing campaigns and referrals from clients, strategic alliances and industry analysts. The marketing team maintains frequent contact with industry analysts and experts to understand market trends and dynamics.
 
Strategic alliances. We have strategic alliances with software companies, some of which are also our clients, to provide services to their customers. We believe these alliances differentiate us from our competition. Our extensive engineering, quality assurance and technology implementation and support services to software companies enable us to compete more effectively for the technology implementation and support services required by their customers. In addition, our strategic alliances with software companies allow us to share sales leads, develop joint account plans and engage in joint marketing activities.
 
Clients and industry expertise
 
We market and provide our services primarily to companies in North America and the United Kingdom. For additional discussion regarding geographic information, see note 15 to our consolidated financial statements. A majority of our revenue for fiscal year ended March 31, 2006 was generated from Forbes Global 2000 firms or their subsidiaries. We believe that our regular, direct interaction with senior executives at these clients, the breadth of our client relationships and our reputation within these clients as a thought leader differentiates us from our competitors. The strength of our relationships has resulted in significant recurring revenue from existing clients. In the fiscal year ended March 31, 2007, 68% of our revenue came from clients who spent more than $5.0 million and 85% came from clients who spent more than $2.0 million.
 
We focus primarily on three industries: communications and technology, BFSI and media and information. We build expertise in these industries through our customer experience and industry alliances, by hiring industry specialists and by training our business analysts and other team members in industry-specific topics. Drawing on this expertise, we strive to develop industry-specific perspectives and services.
 
Communications and technology
 
For our communications clients, we focus on customer service, sales and billing functions and regulatory compliance and help them improve service levels, shorten time-to-market and modernize their IT environments. For our technology clients, which include hardware manufacturers and software companies, we provide a wide range of industry-specific service offerings, including product management services; product architecture, engineering and quality assurance services; and professional services to support product implementation and integration. These clients often employ cutting-edge technology and generally require strong technical skills and a deep understanding of the software product lifecycle. Our communications


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and technology clients include: British Telecommunications plc, Cisco Systems, Inc., International Business Machines Corporation, I-many, Inc., OpenPages, Inc., Oracle USA, Inc. and Siemens Energy and Automation, Inc.
 
Illustrative engagements with communications and technology clients include:
 
•  outsourcing of product catalog, sales, sales support, order management and trouble ticketing applications used to manage large customers, including ongoing support, delivery of new functionality, re-architecting and program management of new releases
 
•  design, development, iterative release and management of a web-based self-service portal through which all services are delivered to competitive service providers
 
•  strategy, planning and validation for the separation of numerous applications under a restructuring program
 
•  development and management of an automated messaging platform that reduces customer service costs and increases responsiveness to the client’s retail customers
 
•  outsourcing of ongoing product development and quality assurance for numerous software product vendors
 
•  development and management of a flexible-capacity solutions center that provides rapid turnaround and global support for IT projects, priced and performed on a utility basis
 
We have worked with BT, one of the world’s leading providers of communications solutions and services, as a client since November 2004, providing IT consulting, implementation and outsourcing services. In March 2007, we entered into a five-year IT services agreement with BT that is premised upon BT making minimum aggregate expenditures over the term of the agreement of approximately $200 million. In the event that BT fails to meet any of the annual minimum expenditure targets, BT will lose any discounts under the agreement for the applicable annual period. In such event, BT is also obligated to pay an increasing percentage of any expenditure shortfall to us as liquidated damages. BT is entitled to increasing discounts for expenditures above the annual minimum expenditure targets. As part of this IT services agreement, we are now eligible to bid on work across all divisions within BT.
 
Banking, financial services and insurance, or BFSI
 
We provide services to clients in the retail, wholesale and investment banking areas; financial transaction processors; and insurance companies encompassing life, property-and-casualty and health insurance. For our BFSI clients, we have developed industry-specific services for each of these sectors, such as an account opening framework for banks, compliance services for financial institutions and customer self-service solutions for insurance companies. The need to rationalize and consolidate legacy applications is pervasive across these industries and we have tailored our platforming approach to address these challenges. Our BFSI clients include: Aetna Life Insurance Company, Bear, Stearns & Co. Inc., Citistreet LLC, ING North America Insurance Corporation, JPMorgan Chase Bank, N.A., Metavante Corporation and Pegasystems Inc.
 
Illustrative engagements with BFSI clients include:
 
•  development of an IT strategy and roadmap for upgrading plan administration engines, including a multi-year roadmap, resource plan and cost-benefit analysis to consolidate numerous redundant interfaces and peripheral applications into a common platform


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•  design and development of an online enrollment platform for retirement services participants
 
•  building and operating a Linux migration “factory” and migrating a suite of brokerage applications
 
•  software quality assurance outsourcing for health insurance sales, rating, quoting and channel management applications
 
•  development and ongoing support for a retail and commercial banking platform used by mid-tier banks in both service bureau and licensed models
 
•  application outsourcing for distributed retirement services applications
 
Media and information
 
For our media and information clients, we focus primarily on solutions involving electronic publishing, online learning, content management, information workflow and mobile content delivery as well as personalization, search technology and digital rights management. Many media and information providers are focused on building common platforms that provide customized content from multiple sources, customized and delivered to many consumers using numerous delivery mechanisms. We believe our platforming approach is ideally suited to these opportunities. Our media and information clients include: Aprimo Incorporated, eCollege.com, Iron Mountain Information Management, Inc., SkillSoft Corporation, Thomson Healthcare Inc., Publishing Technology plc and Vignette Corporation.
 
Illustrative engagements with media and information clients include:
 
•  implementation of an enterprise marketing management information platform at more than 20 companies
 
•  development and support of an e-learning platform used by colleges and universities
 
•  consolidation of a collection of online products that provide patent, literature and business information to the scientific community into a unified product with a common platform, using open-source technologies
 
•  re-platforming of a legacy suite of applications used by publishers to manage customer care, distribution, e-commerce, product information, fulfillment and rights and royalties
 
•  consolidation of five authentication and entitlement subsystems, used by more than 750,000 health care practitioners, into a unified system used to support access to a host of healthcare information services
 
Competition
 
The IT services market in which we operate is highly competitive, rapidly evolving and subject to shifting client needs and expectations. This market includes a large number of participants from a variety of market segments, including:
 
•  offshore IT outsourcing firms, such as Cognizant Technology Solutions Corporation, HCL Technologies Ltd., Infosys Technologies Limited, Patni Computer Systems Limited, Satyam Computer Services Limited, Tata Consultancy Services Limited, Tech Mahindra Limited and Wipro Limited


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•  consulting and systems integration firms, such as Accenture Ltd., BearingPoint, Inc., Cap Gemini S.A., Computer Sciences Corporation, Deloitte Consulting LLP, Electronic Data Systems Corporation, IBM Global Services Consulting and Sapient Corporation
 
We also occasionally compete with in-house IT departments, smaller vertically-focused IT service providers and local IT service providers based in the geographic areas where we compete. We expect additional competition from offshore IT outsourcing firms in emerging locations such as Eastern Europe, Latin America and China, as well as offshore IT service providers with facilities in less expensive geographies within India.
 
We believe that the principal competitive factors in our business include technical expertise and industry knowledge, a breadth of service offerings to provide one-stop solutions to clients, a well-developed recruiting, training and retention model, a responsiveness to clients’ business needs and quality of services. We believe that we compete favorably with respect to these factors. Many of our competitors, however, have significantly greater financial, technical and marketing resources and a greater number of IT professionals than we do. As a result, many of these companies may respond more quickly to changes in client requirements. We cannot assure you that we will continue to compete favorably or that we will be successful in the face of increasing competition.
 
Human resources
 
We seek to maintain a culture of innovation by aligning and empowering our team members at all levels of our organization. Our success depends upon our ability to attract, develop, motivate and retain highly-skilled and multi-dimensional team members. Our people management strategy is based on six key components: recruiting, performance management, training and development, employee engagement and communication, compensation and retention. Although not currently a material component of our people management strategy, we also retain subcontractors at all of our locations on an as-needed basis for specific client engagements.
 
Recruiting. Our global recruiting and hiring process addresses our need for a large number of highly-skilled, talented team members. In all of our recruiting and hiring efforts, we employ a rigorous and efficient interview process. We also employ technical and psychometric tests for our IT professional recruiting efforts in India and Sri Lanka. These tests evaluate basic technical skills, problem-solving capabilities, attitude, leadership potential, desired career path and compatibility with our team-oriented, thought-leadership culture.
 
We recruit from leading technical schools in India and Sri Lanka through dedicated campus hiring programs. We maintain a visible position in these schools through a variety of specialized programs, including IT curriculum development, classroom teaching and award sponsorships. We also recruit and hire laterally from leading IT service companies and use employee referrals as a significant part of our recruitment process.
 
Performance management. We have a sophisticated performance assessment process that evaluates team members and enables us to tailor individual development programs. Through this process, we assess performance levels, along with each team member’s potential. We create and manage development plans, adjust compensation and promote team members based on these assessments.


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Training and development. We devote significant resources to train and integrate all new hires into our global team. We conduct a training program for all lateral hires that teaches them our culture and value system. We provide a comprehensive training program for our campus hires that combines classroom training with on-the-job learning and mentoring. We also engage a leading e-learning company to provide world-class leadership development to all our managers. We strive to continually measure and improve the effectiveness of our training and development programs based on team member feedback.
 
Employee engagement and communication. We believe open communication is essential to our team-oriented culture. We maintain multiple communication forums, such as regular company-wide updates from senior management, complemented by team member sessions at the regional, local and account levels, as well as regular town hall sessions to provide team members a voice with management.
 
Compensation. We consistently benchmark our compensation and benefits with relevant market data and make adjustments based on market trends and individual performance. Our compensation philosophy rewards performance by linking both variable compensation and salary increases to performance.
 
Retention. To attract, retain and motivate our team members, we seek to provide an environment that rewards entrepreneurial initiative, thought leadership and performance. In the fiscal year ended March 31, 2007, we experienced team member attrition at a rate of 16.1%, which included involuntary attrition. We define attrition as the ratio of the number of team members who have left us during a defined period to the total number of team members that were on our payroll at the end of the period. Our human resources team, working with our business units, proactively manages team member attrition by addressing many factors that improve retention, including:
 
•  providing team members with opportunities to handle challenging technical and organizational problems and learn our platforming approach
 
•  providing team members with clear career paths, rotation opportunities across clients and domains and opportunities to advance rapidly
 
•  providing team members opportunities to interact with our clients and help shape their IT strategy and solutioning
 
•  creating a strong peer group work environment that pushes our team members to succeed
 
•  creating a climate where there is a free exchange of ideas cutting across organizational hierarchy
 
•  creating a family-oriented work environment that is fun and engaging
 
•  recognizing team performance through highly-visible team recognition awards
 
As of March 31, 2007, we had 3,576 team members worldwide.
 
Facilities
 
Our principal executive offices are located in Westborough, Massachusetts, where we lease approximately 30,000 square feet. We also have sales and business development offices located in Reading and Watford in the United Kingdom.


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We have global delivery centers located in Hyderabad and Chennai, India and Colombo, Sri Lanka. We lease space at four facilities in Hyderabad, India, totaling approximately 168,500 square feet, and at two facilities in Chennai, India, totaling approximately 103,000 square feet. In Colombo, Sri Lanka, we lease space at four facilities totaling approximately 183,600 square feet. Our leases vary in duration and term, have varying renewable terms and have expiration dates extending from 2007 to 2012. In addition, in March 2007, we entered into a 99-year lease for approximately 6.3 acres of land in Hyderabad, India, for the purpose of building a new campus.
 
We believe that our existing and planned facilities are adequate to support our existing operations and that, as needed, we will be able to obtain suitable additional facilities on commercially reasonable terms.
 
Network and infrastructure
 
Our global IT infrastructure is designed to provide uninterrupted service to our clients. We utilize a secure, high-performance communications network to enable our clients’ systems to connect seamlessly to each of our offshore global delivery centers. We provide flexibility for our clients to operate their engagements from any of our offshore global delivery centers by using mainstream network topologies, including site-to-site Virtual Private Networks, International Private Leased Circuits and MultiProtocol Label Switching. We also provide videoconferencing, voice conferencing and Voice over Internet Protocol, capabilities to our global delivery teams and clients to enable clear and uninterrupted communication in our engagements, be it intra-company or with our clients.
 
We monitor our network performance on a 24x7 basis to ensure high levels of network availability and periodically upgrade our network to enhance and optimize network efficiency across all operating locations. We use leased telecommunication lines to provide redundant data and voice communication with our clients’ facilities and among all of our facilities in Asia, the United States and the United Kingdom. We also maintain multiple sites across our global delivery centers in India and Sri Lanka as back-up centers to provide for continuity of infrastructure and resources in the case of natural disasters or other events that may cause a business interruption.
 
We have also implemented numerous security measures in our network to protect our and our clients’ data, including multiple layers of anti-virus solutions, network intrusion detection, host intrusions detection and information monitoring. We are ISO 27001 certified and believe that we meet all of our clients’ stringent security requirements for ongoing business with them.
 
Intellectual property
 
We believe that our continued success depends in part on the skills of our team members, the ability of our team members to continue to innovate and our intellectual property rights. We rely on a combination of copyright, trademark and design laws, trade secrets, confidentiality procedures and contractual provisions to protect our intellectual property rights and proprietary methodologies. It is our policy to enter into confidentiality agreements with our team members and consultants and we generally control access to and distribution of our proprietary information. These agreements generally provide that any confidential or proprietary information developed by us or on our behalf be kept confidential. We pursue the registration of certain of our trademarks and service marks in the United States and other countries. We


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have registered the mark “Virtusa” in the United States, the European Community and India and have filed for registration of “Virtusa” in Sri Lanka. We also have a registered service mark in the United States, “Productization,” which we use to describe our methodology and approach to delivery services. We have no issued patents.
 
Our business also involves the development of IT applications and other technology deliverables for our clients. Our clients usually own the intellectual property in the software applications we develop for them. We generally implement safeguards designed to protect our clients’ intellectual property in accordance with their needs and specifications. Our means of protecting our and our clients’ proprietary rights, however, may not be adequate. Despite our efforts, we may be unable to prevent or deter infringement or other unauthorized use of our and our clients’ intellectual property. Legal protections afford only limited protection for intellectual property rights and the laws of India and Sri Lanka do not protect intellectual property rights to the same extent as those in the United States and the United Kingdom. Time-consuming and expensive litigation may be necessary in the future to enforce these intellectual property rights.
 
In addition, we cannot assure you that our intellectual property or the intellectual property that we develop for our clients does not infringe the intellectual property rights of others, or will not in the future. If we become liable to third parties for infringing upon their intellectual property rights, we could be required to pay substantial damage awards and be forced to develop non-infringing technology, obtain licenses or cease delivery of the applications that contain the infringing technology.
 
Our corporate information
 
We were originally incorporated in Massachusetts in November 1996 as Technology Providers, Inc. We reincorporated in Delaware as eRunway, Inc. in May 2000 and subsequently changed our name to Virtusa Corporation in April 2002. Our principal executive offices are located at 2000 West Park Drive, Westborough, Massachusetts 01581, and our telephone number at this location is (508) 389-7300. Our website address is www.virtusa.com. We have included our website address as an inactive textual reference only. The information on, or that can be accessed through, our website is not part of this prospectus.
 
Legal proceedings
 
We are not a party to any pending litigation or other legal proceedings that are likely to have a material adverse effect on our business, operations or financial condition.


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Management
 
Executive officers and directors
 
The following table sets forth information regarding our executive officers and directors, including their ages as of March 31, 2007:
 
         
Name   Age   Position
 
Kris Canekeratne
  41   Chairman and Chief Executive Officer
Danford F. Smith
  46   President and Chief Operating Officer
and Director
Thomas R. Holler
  44   Executive Vice President of Finance and
Chief Financial Officer
Roger Keith Modder
  42   Executive Vice President and Managing
Director—Asian Operations
T.N. Hari
  41   Senior Vice President and Global Head of Human Resources
Robert E. Davoli(2)
  58   Director
Andrew P. Goldfarb(2)
  39   Director
Izhar Armony(3)
  43   Director
Ronald T. Maheu(1)(3)
  64   Director
Martin Trust(1)(2)
  72   Director
Rowland T. Moriarty(1)(3)
  60   Director
 
 
 
(1) Member of the audit committee
 
(2) Member of the compensation committee
 
(3) Member of the nominating and corporate governance committee
 
Krishan A. Canekeratne, one of our co-founders, has served as chairman of our board of directors from our inception and chief executive officer from 1996 to 1997 and from 2000 to the present. In 1997, Mr. Canekeratne co-founded eDocs, Inc., a provider of electronic account management and customer care, later acquired by Oracle Corporation. In 1989, Mr. Canekeratne was one of the founding team members of INSCI Corporation, a supplier of digital document repositories and integrated output management products and services and served as its senior vice president from 1992 to 1996. Mr. Canekeratne obtained his B.S. in Computer Science from Syracuse University.
 
Danford F. Smith has served as our president and chief operating officer and a member of our board of directors since joining us in September 2004. Prior to joining us, Mr. Smith worked for Cognizant Technology Solutions Corporation, a consulting services company, where he held roles of increasing responsibility since 1998, most recently as general manager from 2002 to 2004. Mr. Smith was a partner at CSC Consulting from 1990 to 1998. Mr. Smith earned his B.A. in Political Science from Williams College and his M.B.A. from Rutgers University.
 
Thomas R. Holler serves as our executive vice president of finance and chief financial officer and has been responsible for our finance, legal and administration functions since joining us in 2001. Before joining us, from 1996 to 2001, Mr. Holler was chief financial officer and vice president of finance at Cerulean Technology, Inc., a global supplier of wireless mobile applications and


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services, which was later acquired by Aether Systems Inc. Mr. Holler earned his B.S. in Business Administration from Wayne State University and his M.B.A. from Northeastern University.
 
Roger Keith Modder joined us in 2001 and serves as our executive vice president and managing director, Asian operations. Mr. Modder also was a member of our board of directors from April 2004 to October 2004. Prior to joining us, Mr. Modder worked for the John Keells Group where he held managing director positions for two IT solutions companies in the John Keells Group. Mr. Modder is a member of the board of directors of the Lanka Software Foundation and has been a member of the ICT Advisory Committee of the Sri Lanka Export Development Board.
 
Hari Thokalahalli Narasimha (T.N. Hari) joined us in March 2006 and serves as our senior vice president and global head of human resources since March 2006. Prior to joining us, from October 2002 to March 2006, Mr. Hari held various positions at IBM-Daksh, a BPO company in India, including the position vice president strategic human resources from April 2005 to March 2006. Prior to IBM-Daksh, from 1988 to September 2002, Mr. Hari held various positions at Tata Steel, including as head of human resources (new initiatives) from 2000 to September 2002. Mr. Hari has a Bachelor’s Degree in Mechanical Engineering from the Indian Institute of Technology, Chennai, India and a Post Graduate Diploma in Management from the Indian Institute of Management, Kolkata, India.
 
Robert E. Davoli has been a member of our board of directors since 2000. Mr. Davoli has been managing director of Sigma Partners, a venture capital investment firm, since November 1995. From February 1993 to September 1994, Mr. Davoli was president and chief executive officer of Epoch Systems, Inc., a vendor of client-server data management software products. From 1990 to 1992, Mr. Davoli served as an executive officer of Sybase, Inc. (which acquired SQL Solutions). In 1985, Mr. Davoli founded SQL Solutions, a purveyor of services and tools for the relational database market where he was president and chief executive officer from 1985 to 1990. Mr. Davoli holds a B.A. in History from Ricker College and studied Computer Science at Northeastern University for two years.
 
Andrew P. Goldfarb has been a member of our board of directors since 2001. Mr. Goldfarb is co-founder and executive managing director of Globespan Capital Partners, a global venture capital firm investing in IT companies since 2003. Prior to Globespan Capital Partners, Mr. Goldfarb was senior managing director of JAFCO Ventures, where he established the Boston office in 1997. Prior to JAFCO, Mr. Goldfarb worked at Kikkoman Corporation in Tokyo. Mr. Goldfarb also sits on the board of several private companies. Mr. Goldfarb received an A.B. in East Asian Studies and Economics, magna cum laude, from Harvard College and received an M.B.A., with distinction, from Harvard Business School.
 
Izhar Armony has been a member of our board of directors since April 2004. Mr. Armony has been a partner at Charles River Ventures, a venture capital investment firm, since 1997. Mr. Armony is also a member of the Advisory Board of the Invention Science Fund. Prior to joining Charles River Ventures, Mr. Armony was with Onyx Interactive, an interactive training company based in Tel Aviv where he served as vice president of marketing and business development. Mr. Armony also served as an officer in the Israeli Army. Mr. Armony received an M.B.A. from the Wharton School of Business and an M.A. in Cognitive Psychology from the University of Tel Aviv in Israel.
 
Ronald T. Maheu has been a member of our board of directors since April 2004. Mr. Maheu retired in July 2002 from PricewaterhouseCoopers LLP. Mr. Maheu was a senior partner at PricewaterhouseCoopers LLP from 1998 to July 2002. Mr. Maheu was a founding member of


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Coopers & Lybrand’s board of partners. Following the merger of Price Waterhouse and Coopers & Lybrand in 1998, Mr. Maheu served on both the United States and global boards of partners and principals of PricewaterhouseCoopers until 2001. Mr. Maheu currently serves as a member of the board of directors of Wright Express Corporation and CRA International, Inc.
 
Martin Trust has been a member of our board of directors since October 2004. Mr. Trust is chief executive officer of Samtex (USA), Inc., a holding company engaged in the production of apparel and textile products, a position he has held since October 2003. Mr. Trust was senior advisor to Limited Brands, a retailer of apparel and personal care products, from 2001 to October 2003. Prior to that, Mr. Trust served as president and chief executive officer of Mast Industries, Inc., a contract manufacturer, importer and wholesaler of women’s apparel and wholly-owned subsidiary of Limited Brands, from 1970 to 2001. Mr. Trust has served in the capacity of cleared advisor to the United States Department of Commerce with regard to textile trade issues. Mr. Trust has been a member of the board of directors of Staples, Inc. since 1987 and currently serves as its lead director.
 
Rowland T. Moriarty has been a member of our board of directors since July 2006. Mr. Moriarty is currently chairman of the board of directors of CRA International, Inc., a worldwide economic and business consulting firm. Mr. Moriarty also serves as a member of the board of directors of Wright Express Corporation and Staples, Inc. Mr. Moriarty has been the president and chief executive officer of Cubex Corporation, a privately-held consulting company, since 1981. From 1981 to 1992, Mr. Moriarty was Professor of Business Administration at Harvard Business School. He received a D.B.A. from Harvard University, an M.B.A. from the Wharton School of Business and a B.A. from Rutgers University.
 
Mr. Canekeratne, our chief executive officer, is married to Tushara Canekeratne, a co-founder and our former executive vice president, technical operations. Ms. Canekeratne resigned from our company in April 2006.
 
Board composition
 
We currently have eight directors, each of whom was elected pursuant to the board composition provisions of our stockholders agreement and our certificate of incorporation. These board composition provisions will terminate upon the closing of this offering. Upon the termination of these provisions, there will be no further contractual obligations regarding the election of our directors. Our directors hold office until their successors have been elected and qualified or until the earliest of their resignation, death or removal.
 
Upon the closing of this offering, our board of directors will be divided into three classes with members of each class of directors serving for staggered three-year terms. Our board of directors will consist of the following:
 
•  two class I directors (Messrs. Davoli and Goldfarb), whose initial terms will expire at the annual meeting of stockholders in 2008
 
•  three class II directors (Messrs. Armony, Trust and Moriarty) whose initial terms will expire at the annual meeting of stockholders in 2009
 
•  three class III directors (Messrs. Canekeratne, Smith and Maheu), whose initial terms will expire at the annual meeting of stockholders held in 2010


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Our classified board of directors could have the effect of making it more difficult for a third party to acquire control of us.
 
Six of our current directors, Messrs. Armony, Davoli, Goldfarb, Maheu, Moriarty and Trust, are independent directors as defined in applicable NASDAQ Stock Market rules. There are no familial relationships among the members of our board of directors or our executive officers.
 
Board committees
 
Our board of directors has established an audit committee, a compensation committee and a nominating and corporate governance committee, each of which operates pursuant to a charter adopted by our board of directors. Upon the closing of this offering, the composition and functioning of all of our committees will comply with all applicable requirements of the Sarbanes-Oxley Act of 2002, the NASDAQ Stock Market and the Securities and Exchange Commission rules and regulations.
 
Audit committee. Messrs. Maheu, Moriarty and Trust currently serve on the audit committee, which is chaired by Mr. Maheu. Each member of the audit committee is “independent” as that term is defined in the rules of the Securities and Exchange Commission and the applicable NASDAQ Stock Market rules. Our board of directors has determined that each audit committee member has sufficient knowledge in financial and auditing matters to serve on the audit committee. Our board of directors has designated Mr. Maheu as an “audit committee financial expert,” as defined under the applicable rules of the Securities and Exchange Commission. The audit committee’s responsibilities include:
 
•  appointing, approving the compensation of, and assessing the independence of our independent registered public accounting firm
 
•  pre-approving auditing and permissible non-audit services, and the terms of such services, to be provided by our independent registered public accounting firm
 
•  reviewing the overall audit plan with the independent registered public accounting firm and members of management responsible for preparing our financial statements
 
•  reviewing and discussing with management and the independent registered public accounting firm our annual and quarterly financial statements and related disclosures as well as critical accounting policies and practices used by us
 
•  coordinating the oversight and reviewing the adequacy of our internal control over financial reporting
 
•  establishing policies and procedures for the receipt and retention of accounting-related complaints and concerns
 
•  recommending based upon the audit committee’s review and discussions with management and the independent registered public accounting firm whether our audited financial statements shall be included in our Annual Report on Form 10-K
 
•  preparing the audit committee report required by Securities and Exchange Commission rules to be included in our annual proxy statement


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•  reviewing all related person transactions for potential conflict of interest situations and approving all such transactions
 
•  reviewing quarterly earnings releases and scripts
 
Compensation committee. Messrs. Davoli, Goldfarb and Trust currently serve on the compensation committee, which is chaired by Mr. Trust. Each member of the compensation committee is “independent” as defined in the applicable NASDAQ Stock Market rules. The compensation committee’s responsibilities include:
 
•  annually reviewing and approving corporate goals and objectives relevant to the compensation of our chief executive officer
 
•  evaluating the performance of our chief executive officer in light of such corporate goals and objectives and determining the compensation of our chief executive officer
 
•  reviewing and approving the compensation of our other executive officers
 
•  reviewing and establishing our overall management compensation, philosophy and policy
 
•  overseeing and administering our compensation, welfare, benefit and pension and similar plans
 
•  reviewing and approving our policies and procedures for the grant of equity-based awards
 
•  reviewing and making recommendations to the board of directors with respect to director compensation
 
•  reviewing and discussing with management the compensation discussion and analysis to be included in our annual proxy statement or Annual Report on Form 10-K
 
Nominating and corporate governance committee. Messrs. Armony, Maheu and Moriarty currently serve on the nominating and corporate governance committee, which is chaired by Mr. Moriarty. Each member of the compensation committee is “independent” as defined in applicable NASDAQ Stock Market rules. The nominating and corporate governance committee’s responsibilities include:
 
•  developing and recommending to the board of directors criteria for board and committee membership
 
•  establishing procedures for identifying and evaluating board of director candidates, including nominees recommended by stockholders
 
•  reviewing the size and composition of the board of directors to ensure that it is composed of members containing the appropriate skills and expertise to advise us
 
•  identifying individuals qualified to become members of the board of directors
 
•  recommending to the board of directors the persons to be nominated for election as directors and to each of the board’s committees
 
•  developing and recommending to the board of directors a code of business conduct and ethics and a set of corporate governance guidelines


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•  developing a mechanism by which violations of the code of business conduct and ethics can be reported in a confidential manner
 
•  overseeing the evaluation of the board of directors and management
 
Compensation committee interlocks and insider participation
 
Mr. Canekeratne was a member of the compensation committee during our fiscal year ended March 31, 2007 and resigned from the compensation committee in May 2006. Mr. Canekeratne’s wife, Tushara Canekeratne, was employed by us as executive vice president, technical operations during the fiscal year ended March 31, 2007. Ms. Canekeratne resigned in April 2006 to pursue other endeavors.
 
None of our executive officers currently serve as a member of the board of directors or compensation committee, or other committee serving an equivalent function, of any other entity that has one or more of its executive officers serving as a member of our board of directors or compensation committee.
 
Corporate governance
 
We have adopted a code of business conduct and ethics that applies to all of our employees, officers and directors, including those officers responsible for financial reporting. Upon the closing of this offering, our code of business conduct and ethics will be available on our website at www.virtusa.com. We intend to disclose any amendments to the code, or any waivers of its requirements, on our website.


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Compensation
 
Compensation discussion and analysis
 
Overview
 
We believe that the compensation of our executive officers should focus executive behavior on the achievement of near-term corporate targets as well as long-term business objectives and strategies. We place significant emphasis on pay-for-performance compensation programs, which reward our executives when we achieve certain financial and business goals and create stockholder value. We use a combination of base salary, annual cash incentive compensation programs, a long-term equity incentive compensation program and a broad based benefits program to create a competitive compensation package for our executive management team. We describe below our compensation philosophy, policies and practices with respect to our chief executive officer, chief financial officer and our other executive officers, who are collectively referred to as our named executive officers.
 
Administration and objectives of our executive compensation program
 
Our compensation committee is responsible for establishing and administering our policies governing the compensation for our executive officers, including executive officer salaries, bonuses and equity incentive compensation. Until May 2006, our chief executive officer served on our compensation committee and played a significant role in the determination of base salary, signing or retention bonuses, variable compensation and other forms of cash and equity-based compensation to be paid to our executive officers (other than his own). We restructured our compensation committee in May 2006 to be composed entirely of independent directors.
 
Our compensation committee has designed our overall executive compensation program to achieve the following objectives:
 
•  attract and retain talented and experienced executives
 
•  motivate and reward executives whose knowledge, skills and performance are critical to our success
 
•  provide a competitive compensation package that aligns the interests of our executive officers and stockholders by including a significant variable component which is weighted heavily toward performance-based rewards, based upon achievement of certain measurable operating results such as revenue and operating profit margin
 
•  ensure fairness among the executive management team by recognizing the contributions each executive makes to our success
 
•  foster a shared commitment among executives by aligning their individual goals with our goals
 
•  compensate our executives to manage our business to meet our near-term and long-term objectives
 
We use a mix of short-term compensation (base salaries and cash incentive bonuses) and long-term compensation (equity incentive compensation) to provide a total compensation structure that is designed to achieve these objectives. We determine the percentage mix of compensation


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structures that we think is appropriate for each of our executive officers. In general, the compensation committee believes that a substantial percentage of the compensation of our executive officers should be performance-based. The compensation committee uses its judgment and experience and the recommendations of the chief executive officer (except for his own compensation) to determine the appropriate mix of compensation for each individual. In addition, beginning in 2007, our compensation committee retained Hewitt Associates, a human resources consulting firm, to assist the committee in developing our overall executive compensation and director compensation program for our 2008 fiscal year. We have engaged Hewitt Associates to develop a competitive peer group analysis for our compensation committee for benchmarking purposes for our 2008 fiscal year. For our fiscal year ended March 31, 2007 and prior periods, however, we did not use a formal peer group or any formal benchmarking in determining our total executive compensation or the primary components thereof. In determining whether to adjust the compensation of any one of our executive officers, including our named executive officers, we annually take into account the changes, if any, in the following:
 
•  market compensation levels
 
•  the contributions made by each executive officer
 
•  the performance of each executive officer
 
•  the increases or decreases in responsibilities and roles of each executive officer
 
•  the business needs for each executive officer
 
•  the relevance of each executive officer’s experience to other potential employers
 
•  the readiness of each executive officer to assume a more significant role within the organization
 
In addition, with respect to new executive officers, we take into account their prior base salary and annual incentive awards, their expected contribution and our business needs. We believe that our executive officers should be fairly compensated each year relative to market pay levels within our industry and that there should also be internal equity among our executive officers.
 
Executive compensation components
 
Our executive compensation program is primarily composed of base salary, annual incentive cash compensation payable on a semi-annual and annual basis and equity compensation. Our compensation committee has not adopted a formal policy for allocating between various forms of compensation. However, we generally strive to provide our named executive officers with a balance of short-term and long-term incentives to encourage consistently strong performance. With respect to various equity-based awards, we typically grant stock options as a means of providing longer-term equity-based incentives to our executives. In addition, we provide our executives with benefits that are generally available to our salaried employees, including medical, dental, vision, group life and accidental death and dismemberment insurance and our 401(k) plan. Prior to April 2007, we had employment agreements with Messrs. Canekeratne, Smith, Modder and Holler which set forth their respective salaries, bonuses and, in certain cases, stock option awards and severance and change in control provisions. These agreements were each terminated in their entirety in April 2007 upon the execution by our executive officers of


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the executive agreements discussed below in the section entitled “Potential payments upon termination or change in control.”
 
Within the context of the overall objectives of our compensation programs, we determined the specific amounts of compensation, including base salary, incentive cash compensation and equity compensation, to be paid to each of our executives for our fiscal year ended March 31, 2007 based on a number of factors, including:
 
•  our understanding based on informal market data and the experiences of our compensation committee and board members of the amount of compensation generally paid by similarly situated companies to their executives with similar roles and responsibilities
 
•  the roles and responsibilities of our executives
 
•  the individual experience and skills of, and expected contributions from, our executives
 
•  the amounts of compensation being paid to our other executives
 
•  our executives’ historical compensation at our company
 
•  the provisions of applicable employment agreements
 
In addition to the criteria above, the actual amount and allocation of total compensation (i.e., base salary, variable incentive cash compensation awards and equity awards) paid or issued to our named executive officers also reflects the timing and circumstances of when the executive joined us, the equity holdings of the executive officer and the geographic location of such executive officer. For instance, our founder, chairman and chief executive officer, Mr. Canekeratne, has a substantial equity interest in us and his current cash and equity compensation partially reflects this situation, while cash and equity compensation of Mr. Smith, who joined us as president and chief operating officer in September 2004, partially reflects a negotiated employment and compensation package based on the then-current market conditions. In addition, the compensation paid to Mr. Modder, who joined us in 2001 and resides in Sri Lanka, and to Mr. Hari, who joined us in 2006 and resides in India, partially reflects the lower-cost geographies of Sri Lanka and India, respectively. Although no formal policy for allocating between various forms of compensation had been adopted prior to this offering, we have retained Hewitt Associates to assist us in developing a peer group of comparable companies for benchmarking purposes for each element of the compensation packages for our executive officers for fiscal year 2008.
 
In our most recent fiscal years, equity compensation has been less significant as an element of compensation. This is due, in part, because our chief executive officer held a significant amount of equity as a founder and had not, until July 2007, been awarded any option awards. Similarly, our president and chief operating officer and our global head of human resources received substantial equity grants when they were hired but have not received any subsequent equity awards. Only our chief financial officer and managing director of Asian operations received equity grants on a periodic basis. Given that our executive officers, as a group, will hold relatively small amounts of unvested equity awards after this offering, we would expect that equity compensation as an element of overall executive compensation will rise on a relative basis as we seek to provide long-term equity incentives to our executive officers. In this regard, our board of directors approved an option grant of 100,000 shares of common stock to Mr. Canekeratne to be awarded upon effectiveness of this offering at an exercise price equal to the initial public offering price.


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We discuss each of the primary elements of our executive compensation in detail below. While we have identified particular compensation objectives that each element of executive compensation serves, our compensation programs complement each other and collectively serve all of our executive compensation objectives described above. Accordingly, whether or not specifically mentioned below, we believe that, as a part of our overall executive compensation, each element to a greater or lesser extent serves each of our objectives.
 
Base salary. Our compensation committee annually reviews salary ranges and individual salaries for our executive officers. We have historically established base salaries for each of our executives based on many factors, including competition in the marketplace to hire and retain executives, experiences of our directors and leadership team with respect to salaries and compensation of executives in similarly situated companies in the IT industry and other similar industries, as well as additional factors which we believe enables us to hire and retain our leadership team in an extremely competitive environment. In March 2007, we also engaged Hewitt Associates to assist the compensation committee in conducting formal peer review analysis and developing our overall executive compensation program and philosophy for fiscal year 2008. Our compensation committee annually reviews salary ranges and individual salaries for our executive officers.
 
For our fiscal year ended March 31, 2007, the compensation committee established annual base salaries for our chief executive officer, our president and chief operating officer, our chief financial officer, our managing director of Asian operations and our senior vice president and global head of human resources of $225,000, $250,000, $190,000, $132,000 and $110,000, respectively. Although we establish the annual base salary amounts in U.S. dollars for our managing director of Asian operations (based in Sri Lanka) and our senior vice president and global head of human resources (based in India), we pay these salaries in Sri Lankan and Indian rupees, respectively. Therefore the amounts we pay our Asia-based executives may vary slightly from the established base salary amount because of fluctuations in foreign exchange rates during the year.
 
The fiscal 2007 annual base salaries represent an average increase of approximately 5.5% over the 2006 fiscal year base salaries for the named executive officers. We believe that the base salaries paid to our executive officers during our fiscal year ended March 31, 2007 achieve our executive compensation objectives and are competitive with those of similarly-situated companies.
 
Variable incentive cash compensation award program. We have designed our variable incentive cash compensation award program, or VCCP, to reward our executive officers upon the achievement of certain annual and semi-annual revenue and operating profit margin goals, as approved in advance by our compensation committee and board of directors. Our VCCP emphasizes pay-for-performance and is intended to closely align executive compensation with achievement of certain operating results and an increase in stockholder value. The compensation committee communicates the bonus criteria to the named executive officers at the beginning of the fiscal year. For our fiscal year ended March 31, 2007 our compensation committee (with board approval) set the revenue target at $107.4 million and annual operating profit margin at 10% (excluding SFAS 123R expense). The performance goals and bonus criteria established by the compensation committee under the VCCP are based on our historical operating results and growth rates as well as our expected future results, and are designed to require significant effort and operational success on the part of our executives and the company. In this regard, our fiscal 2007 revenue and operating profit margin targets


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represented a 40% and 352% increase, respectively, over our actual fiscal 2006 revenue and operating profit margin (excluding SFAS 123R expense). Our actual fiscal 2006 revenue and operating profit margin (excluding SFAS 123R expense) increased 27% and 186%, respectively, over fiscal 2005 results. Although it is reasonable to expect the completion of this offering will add value to the shares because they will have increased liquidity and marketability, the amount of additional value can be measured with neither precision nor certainty. We measure such bonus criteria against actual operating results on both a semi-annual and annual basis.
 
For the semi-annual component of our VCCP, our compensation committee establishes a factor, typically below 50%, against which the annual targeted variable compensation amount is multiplied. If we achieve our revenue and operating profit margin targets for the first two quarters of our fiscal year, with visibility to support achievement of the overall annual performance criteria, we pay our executives their applicable semi-annual bonuses. For the annual variable component of our VCCP, we again measure our actual annual revenue and operating profit margin against the annual bonus criteria. If achieved, we pay our executives their applicable annual bonuses, taking into account the remaining weighted factor for annual bonuses, typically over 50%. For our fiscal year ended March 31, 2007, our compensation committee (with board approval) set the semi-annual factor at 40% and the annual factor at 60%. We believe that the use of this weighting system allows us to compensate for interim performance, while placing a greater emphasis on the full year results. In addition, for both the semi-annual and annual payouts, the VCCP provides for bonus adjustments of up to 110% and down to 75% of the target bonus payout, if, and to the extent, that our actual operating results are above the target bonus criteria or fall short of those criteria. For instance, for our fiscal year ended March 31, 2007, if we achieved revenue of $113 million and operating profit margin of 11% (excluding SFAS 123R expense), we would pay 110% of the targeted bonus. If we achieved $105 million in revenue and operating profit margin of 9.5% (excluding SFAS 123R expense), we would pay the minimum bonus of 75% of the targeted bonus amount. We would pay no bonus under our VCCP if we did not achieve the minimum revenue and operating profit margin targets. Based on our operating results for our fiscal year ended March 31, 2007, actual bonus payouts represented 110% of the fiscal 2007 targeted bonus. Any semi-annual payouts are not subject to forfeiture or offset, regardless of whether the annual bonus criteria are achieved. All payouts under our VCCP, whether on a semi-annual or annual basis, are based on actual results of operations and must be approved by our compensation committee and board of directors.
 
Our VCCP represents a significant percentage of our executive officers’ base salaries and varies depending on the seniority and position of the executive officer, thus aligning our executives’ compensation to our performance and creation of stockholder value. For our fiscal year ended March 31, 2007, the target bonuses under our VCCP for each of our named executive officers, as a percentage of base salary, were 77.8%, 80.0%, 31.6%, 32.6% and 18.2% for our chief executive officer, president and chief operating officer, chief financial officer, managing director of Asian operations and senior vice president and global head of human resources, respectively. As a result of upward bonus adjustments under our VCCP based on our fiscal 2007 operating results, actual bonus payouts for our fiscal year ended March 31, 2007 represented 85.6%, 88.0%, 34.7%, 36.3% and 19.6% of the base salaries for our chief executive officer, president and chief operating officer, chief financial officer, managing director of Asian operations and senior vice president and global head of human resources, respectively.
 
Our compensation committee and board of directors established the fiscal 2007 target bonuses for each individual executive officer based on the historical targets for such executive, the


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seniority and ability of the executive to drive corporate performance, the geographies in which such executive is located, provisions of their respective employment agreements that were negotiated at the time of hire and the experiences of our compensation committee and board members as to what they believed was appropriate. As a result of these factors, the target bonuses for our chief executive officer and our president and chief operating officer represented significantly higher percentages of their respective base salaries as compared to our other executive officers. For fiscal year 2008, we have engaged Hewitt Associates to assist our compensation committee to establish the parameters of our VCCP. Accordingly, target bonuses and bonus criteria for our fiscal year ended March 31, 2007 may not be indicative of the targets established for future years as our revenue growth and operating profit margin goals are likely to be adjusted as we grow and our mix of compensation elements may vary after we become a public company.
 
Equity compensation. We also use stock options and equity-based incentive programs to attract, retain, motivate and reward our executive officers. Through our equity-based grants, we seek to align the interests of our executive officers with our stockholders, reward and motivate both near-term and long-term executive performance and provide an incentive for retention. Our decisions regarding the amount and type of equity incentive compensation, the allocation of equity and relative weighting of these awards within total executive compensation have been based on our understanding and individual experiences of market practices of similarly-situated companies and our negotiations with our executives in connection with their initial employment or promotion. Equity-based incentive awards are intended to be the longer-term components of our overall executive compensation program. While annual incentive cash compensation is designed to encourage shorter-term performance—generally performance over a one-year period, equity-based awards are designed to encourage our named executives’ performance over several years.
 
To date, all grants of equity-based awards to our executive officers have been subject to approval first by the compensation committee and then by the board of directors at regularly scheduled meetings during the year. The date of grant and the fair market value of the award are based upon the date of the board meeting approving such grant. A number of factors are considered in determining the amount of equity incentive awards, if any, to grant to our executives, including:
 
•  the number of shares subject to, and exercise prices of, outstanding options, both vested and unvested, held by our executives
 
•  the vesting schedule of the unvested stock options held by our executives
 
•  the amount and percentage of our total equity on a diluted basis held by our executives
 
Equity compensation awards to our named executive officers primarily consists of stock option awards. Stock option awards provide our executive officers with the right to purchase shares of our common stock at a fixed exercise price typically for a period of up to 10 years, subject to continued employment with our company. Stock options are earned on the basis of continued service to us and generally vest over four years, beginning with 25% vesting one year after the date of grant, then pro-rata vesting quarterly thereafter.
 
In addition to stock option grants, our board of directors, upon approval and recommendation of our compensation committee, has also granted certain named executives immediately exercisable stock options which provide that the underlying shares of common stock will be


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subject to repurchase by us at the exercise price paid by the executive upon any termination event, with respect to the exercised shares which have not yet vested. The vesting of the shares underlying these option grants to our executive officers is the same as the vesting for stock option awards generally. Thus, while the executive is able to exercise the options immediately to take advantage of beneficial tax treatment in certain circumstances, the executive’s ability to retain the shares, and any appreciation of such shares are still dependent upon the executive’s continued service, the continued vesting of the shares so exercised and our growth and operational success. Thus, these grants continue to align the interests of the executive with those of the stockholders. Our compensation committee has authorized these equity awards, in its discretion and on a case by case basis to provide for an additional long-term incentive and to facilitate the long-term tax planning of the executive involved.
 
Although we adopted the 2005 Stock Appreciation Rights Plan in July 2005, we designed this plan principally for our foreign-based non-management employees in our Indian and Sri Lankan subsidiaries and do not grant any stock appreciation rights to any of our executive officers.
 
Except as described below, all historical option grants were made at what our board of directors determined to be the fair market value of our shares of our common stock on the respective grant dates. In May 2003, we granted an option to purchase 39,043 shares of our common stock to Mr. Modder, one of our named executive officers located in Sri Lanka, at an exercise price of $0.31 per share, which was below the fair market value of the common stock at the date of grant. Additionally, in November 2005, our board of directors approved the repricing of Mr. Smith’s stock option award for 798,722 shares from the original $6.89 per share price to $2.38 per share, the fair market value of our common stock at that time. We recognize stock-based compensation expense under SFAS 123R using the fair-value based method for all awards granted on or after the date of our adoption and these values have since been reflected in our consolidated financial statements.
 
On August 7, 2006, our board of directors granted a stock option to each of Messrs. Holler and Modder for the purchase of 23,961 shares of our common stock. On that same date, our board of directors granted Mr. Hari a stock option to purchase 70,287 shares of our common stock in connection with his hiring. We granted all of these stock options at an exercise price of $4.19 per share, the fair market value on the date of grant, as determined by our board of directors.
 
Our board of directors approved a stock option to Mr. Canekeratne for 100,000 shares of our common stock to be awarded upon effectiveness of this offering at an exercise price equal to the initial public offering price. This stock option will vest 100% on July 31, 2011, subject to 50% acceleration on each of March 31, 2009 and 2010 if specified revenue targets are achieved.
 
In April 2007, we adopted an equity award grant policy for 2007, effective as of the date of this prospectus, that formalizes how we grant equity awards to our officers and employees in the future. Under our equity award grant policy, all grants must be approved by the compensation committee. All equity awards will be made at fair market value based on the closing market price of our common stock on the NASDAQ Global Market on the effective date of grant. While our current equity incentive plans may permit the granting of equity awards at any time, our equity award grant policy provides that we will generally only grant incentive awards on a regularly scheduled basis, as follows:
 
•  grants made in connection with the hiring of a new employee or promotion of an existing employee will be made on a regular quarterly basis on the third trading day after we first publicly release our financial results for the quarter


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•  grants made to existing employees, other than in connection with a promotion will be made, if at all, on an annual basis and will generally be made effective on the third trading day after we first publicly release our financial results for the prior quarter or year
 
Other benefits
 
We believe that establishing competitive benefit packages for our employees is an important factor in attracting and retaining highly qualified personnel. Executive officers are eligible to participate in all of our employee benefit plans, such as medical, dental, vision, group life and accidental death and dismemberment insurance and our 401(k) plan, in each case on the same basis as other employees. We do not currently provide a matching contribution under our 401(k) plan. Moreover, with the exception of plans mandated by the governments of India and Sri Lanka, we do not offer retirement benefits. Consistent with our compensation philosophy, we intend to continue to maintain our current benefits and perquisites for our executive officers. The compensation committee in its discretion may revise, amend or add to the officer’s executive benefits and perquisites if it deems it advisable. From time to time historically, our company has made loans to certain members of our management team to assist them in the exercise of stock options and long-term tax planning, although we no longer engage in such practice. In May 2002, pursuant to a promissory note, we loaned Mr. Holler, our chief financial officer, $42,208 so that he could purchase 27,520 shares of our common stock pursuant to a restricted stock agreement and pledge agreement where he used the shares as collateral. The note was due in May 2008 and carried interest at 7.0% per year, compounded annually. In February 2007, Mr. Holler paid in full the principal and accrued interest on the note. In addition, in December 2000, in connection with the hiring of Mr. Modder, our executive vice president and managing director, Asian operations, we also issued Mr. Modder a loan for 2,935,000 Sri Lankan rupees (or approximately $29,000). In March 2007, Mr. Modder paid off the principal amount of the loan in full. In our fiscal year ended March 31, 2007, the only perquisites we provided to any of our named executive officers other than those normally provided to all salaried employees were those made available to Mr. Modder, who resides in Sri Lanka. In addition to the value of the interest on the $29,000 interest-free loan referenced above, we provided Mr. Modder with full company-paid family life insurance, golf and athletic club memberships and the use of company-owned automobiles. Other than the non-interest bearing loan, the perquisites are considered normal and similar to those customarily provided to other Sri Lankan-based executives.
 
Section 162(m) of the Internal Revenue Code places a limit of $1 million on the amount of compensation that public companies may deduct in any one year with respect to its named executive officers. Certain performance-based compensation approved by stockholders is not subject to this deduction limit. Our compensation committee’s strategy in this regard is to be cost and tax effective. Therefore, the compensation committee intends to preserve corporate tax deductions, while maintaining the flexibility in the future to approve arrangements that it deems to be in our best interests and the best interests of our stockholders, even if such arrangements do not always qualify for full tax deductibility.
 
Severance and change in control benefits
 
In March 2007, our compensation committee engaged Hewitt Associates to provide advice, as well as a peer group analysis, for the purpose of the provision of severance and change in control benefits to our executive officers. Our peer group for these purposes consisted of 13 companies that are publicly held, have between $200 million and $800 million in annual revenues, are engaged principally in the IT services or IT consulting industries focused on services or technology and are based or headquartered in the United States. These companies included Analysts International Corporation, Answerthink, Inc., Computer Task Group, Inc., Covansys


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Corporation, iGate Corporation, Infocrossing, Inc., Intelligroup, Inc., Kanbay International Inc., Patni Computer Systems, Inc., Sapient Corporation, Syntel Inc., TechTeam Global Inc. and WNS (Holdings) Limited. The compensation committee reviewed terms of severance programs and arrangements maintained by these peer companies, such as coverage (who amongst the executive officers are covered), benefit triggers (i.e., terminating events, like termination without cause, or resignation for “good reason” both prior to and after a change in control), coverage period (how long after a change in control would the benefits trigger or severance benefits be applicable), cash severance, continuation of health care benefits post termination and acceleration of vesting. Our goal in adopting severance and change in controls benefits was to offer competitive benefits to attract and retain our executive officers. See “—Potential payments upon termination of change in control” for a discussion of the severance and change in control benefits adopted by our compensation committee.
 
Summary compensation table
 
The following table sets forth information regarding compensation earned by our principal executive officer, principal financial officer and three other most highly compensated executive officers for the fiscal year ended as of March 31, 2007. We refer to these individuals as our named executive officers. The compensation in this table does not include certain perquisites and other personal benefits received by the named executive officers that did not exceed $10,000 in the aggregate in fiscal 2007.
 
2007 summary compensation table
 
                                                   
                        Change in
           
                        pension
           
                        value and
           
                        nonqualified
           
                  Non-equity
    deferred
           
            Option
    incentive plan
    compensation
    All other
     
        Salary
  awards
    compensation
    earnings
    compensation
    Total
Name and principal position   Year   ($)   ($)(1)     ($)(2)     ($)     ($)     ($)
 
Kris Canekeratne,
                                                 
Chairman and Chief Executive Officer
    2007     225,000           192,500                   417,500
Thomas R. Holler,
                                                 
Executive Vice President of Finance and Chief Financial Officer
    2007     190,000     37,042       66,000                   293,042
Danford F. Smith,
                                                 
President and Chief Operating Officer
    2007     250,000     1,038,232 (3)     220,000 (3)                 1,508,232
Roger Keith Modder,
                                                 
Executive Vice President and Managing Director—Asian Operations(4)
    2007     128,022     62,416       46,486       1,555 (5)     29,116 (6)     267,595
T.N. Hari,
                                                 
Senior Vice President and Global Head of
Human Resources(7)
    2007     114,959     30,719       22,504       893 (8)           169,075
 
 
 
(1) All stock options were granted at the fair market value on the date of grant under our 2000 Stock Option Plan, except for Mr. Smith’s options, which were granted outside of the 2000 Stock Option Plan. We account for stock option-based compensation under the provisions of SFAS 123R. The value reported above for each named executive officer is the amount of SFAS 123R compensation expense recognized for financial statement reporting purposes for the fiscal year ended March 31, 2007, assuming no option award forfeitures. For a discussion of the assumptions used for SFAS 123R valuations and compensation expense for the fiscal year ended March 31, 2007 see note 2 to our consolidated financial statements included elsewhere in this prospectus.
 
(2) The non-equity incentive plan compensation amounts are the annual payouts under our VCCP award program approved by our compensation committee and the board of directors.
 
(3) In November 2005, our board of directors approved the repricing of Mr. Smith’s stock option award from the original $6.89 per share price to $2.38 per share, the fair market value of our common stock at that time. The cumulative amount of additional compensation to be recognized due to this option repricing over the remaining service period is $501,546, of


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which $181,145 is included in the table above. In connection with this repricing, we amended Mr. Smith’s eligible performance-based bonus to reduce the target of $250,000 per year to $150,000 in fiscal year ended March 31, 2006 and $200,000 in each of the fiscal years ending March 31, 2007 and 2008.
 
(4) All cash amounts are paid and recorded in Sri Lankan rupees and were translated into U.S. dollars using the fiscal year ended March 31, 2007 average exchange rate of $0.00944 per rupee.
 
(5) Represents the year-over-year change in the value of accumulated pension benefits to be paid under the government-mandated Sri Lanka Defined Benefit Gratuity Plan.
 
(6) Includes the value of the following perquisites: imputed interest at 8.5% on a $29,000 non-interest bearing loan ($2,260), company-paid health insurance premium ($5,237), golf and athletic club memberships ($1,350); employee provident fund and employee trust fund contributions ($10,191) and company-owned auto expenses ($10,078). Mr. Modder repaid the loan in full in March 2007.
 
(7) All cash amounts are paid and recorded in Indian rupees and were translated into U.S. dollars using the fiscal year ended March 31, 2007 average exchange rate of $0.02210.
 
(8) Represents the year-over-year change in the value of accumulated pension benefits to be paid under the government-mandated Virtusa (India) Private Limited Employee Gratuity Scheme.
 
2007 grants of plan-based awards
 
The compensation committee approves all of our equity-based and non-equity-based awards to all of our employees, including our executive officers. The expected payout under our VCCP discussed above, is recorded in the fiscal year to which it applies and there are no provisions for future payouts under the VCCP.
 
                                           
                    All other
       
                    option
       
                    awards:
  Exercise
   
        Estimated possible payouts
  number of
  or base
  Grant date
        under non-equity
  securities
  price of
  fair value
        incentive plan awards   underlying
  option
  of option
        Threshold
  Target
  Maximum
  options
  awards
  awards(1)
Name   Grant date   ($)   ($)   ($)   (#)   ($/Share)   ($)
 
Kris Canekeratne
        131,250     175,000     192,500            
Thomas R. Holler
    8/7/06     45,000     60,000     66,000     23,961     4.19     59,108
Danford F. Smith
        150,000     200,000     220,000            
Roger Keith Modder
    8/7/06     32,250     43,000     47,300     23,961     4.19     59,108
T.N. Hari
    8/7/06     15,000     20,000     22,000     70,287     4.19     173,382
 
 
 
(1) The amounts reported in this column reflect the grant date fair value of all options awards computed under SFAS 123R.
 
Discussion of summary compensation and grants of plan-based awards tables
 
Our executive compensation policies and practices, pursuant to which the compensation set forth in the summary compensation table and the 2007 grants of plan-based awards table was paid or awarded, are described above under “Compensation discussion and analysis.” A summary of certain material terms of our compensation plans and arrangements is set forth below.
 
2007 stock option and incentive plan
 
Our 2007 Stock Option and Incentive Plan, or 2007 Option Plan, was adopted by our board of directors and approved by our stockholders in May 2007. The 2007 Option Plan permits us to make grants of incentive stock options, non-qualified stock options, stock appreciation rights, deferred stock awards, restricted stock awards, unrestricted stock awards and dividend equivalent rights. We reserved 830,670 shares of our common stock for the issuance of awards under the 2007 Option Plan. The 2007 Option Plan provides that the number of shares reserved


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and available for issuance under the plan will be automatically increased each April 1, beginning in 2008, by 2.9% of the outstanding number of shares of common stock on the immediately preceding March 31 or such lower number of shares of common stock as determined by the board of directors. This number is subject to adjustment in the event of a stock split, stock dividend or other change in our capitalization. Generally, shares that are forfeited or canceled from awards under the 2007 Option Plan also will be available for future awards. In addition, available shares under our 2000 Stock Option Plan and 2005 Stock Appreciation Rights Plan, including as a result of the forfeiture, expiration, cancellation, termination or net issuances of awards, are automatically made available for issuance under the 2007 Option Plan. As of the date of this filing, no awards had been granted under the 2007 Option Plan.
 
The 2007 Option Plan is administered by either a committee of at least two non-employee directors, or by our full board of directors. The administrator has full power and authority to select the participants to whom awards will be granted, to make any combination of awards to participants, to accelerate the exercisability or vesting of any award and to determine the specific terms and conditions of each award, subject to the provisions of the 2007 Option Plan.
 
All full-time and part-time officers, employees, non-employee directors and other key persons (including consultants and prospective employees) are eligible to participate in the 2007 Option Plan, subject to the discretion of the administrator. There are certain limits on the number of awards that may be granted under the 2007 Option Plan. For example, no more than 958,466 shares of common stock may be granted in the form of stock options or stock appreciation rights to any one individual during any one calendar year period.
 
The exercise price of stock options awarded under the 2007 Option Plan may not be less than the fair market value of our common stock on the date of the option grant and the term of each option may not exceed ten years from the date of grant. The administrator will determine at what time or times each option may be exercised and, subject to the provisions of the 2007 Option Plan, the period of time, if any, after retirement, death, disability or other termination of employment during which options may be exercised.
 
To qualify as incentive stock options, stock options must meet additional federal tax requirements, including a $100,000 limit on the value of shares subject to incentive options which first become exercisable in any one calendar year, and a shorter term and higher minimum exercise price in the case of certain large stockholders.
 
Stock appreciation rights may be granted under our 2007 Option Plan. Stock appreciation rights allow the recipient to receive the appreciation in the fair market value of our common stock between the exercise date and the date of grant. The administrator determines the terms of stock appreciation rights.
 
Restricted stock may be granted under our 2007 Option Plan. Restricted stock awards are shares of our common stock that vest in accordance with terms and conditions established by the administrator. The administrator will determine the number of shares of restricted stock granted to any employee. The administrator may impose whatever conditions to vesting it determines to be appropriate. For example, the administrator may set restrictions based on the achievement of specific performance goals. Shares of restricted stock that do not vest are subject to our right of repurchase or forfeiture.


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Deferred and unrestricted stock awards may be granted under our 2007 Option Plan. Deferred stock awards are units entitling the recipient to receive shares of stock paid out on a deferred basis, and are subject to such restrictions and conditions as the administrator shall determine. Our 2007 Option Plan also gives the administrator discretion to grant stock awards free of any restrictions.
 
Dividend equivalent rights may be granted under our 2007 Option Plan. Dividend equivalent rights are awards entitling the grantee to current or deferred payments equal to dividends on a specified number of shares of stock. Dividend equivalent rights may be settled in cash or shares and are subject to other conditions as the administrator shall determine.
 
Cash-based awards may be granted under our 2007 Option Plan. Each cash-based award shall specify a cash-denominated payment amount, formula or payment ranges as determined by the administrator. Payment, if any, with respect to a cash-based award may be made in cash or in shares of stock, as the administrator determines.
 
Unless the administrator provides otherwise, our 2007 Option Plan does not allow for the transfer of awards and only the recipient of an award may exercise an award during his or her lifetime.
 
In the event of a merger, sale or dissolution, or a similar “sale event,” unless assumed or continued by any successor entity, all stock options and stock appreciation rights granted under the 2007 Option Plan will automatically become fully exercisable, all other awards granted under the 2007 Option Plan will become fully vested and non-forfeitable and awards with conditions and restrictions relating to the attainment of performance goals may become vested and non-forfeitable in connection with a sale event in the administrator’s discretion. In addition, upon the effective time of any such sale event, the 2007 Option Plan and all awards will terminate unless the parties to the transaction, in their discretion, provide for appropriate substitutions or assumptions of outstanding awards.
 
No awards may be granted under the 2007 Option Plan after May 22, 2017. In addition, our board of directors may amend or discontinue the 2007 Option Plan at any time and the administrator may amend or cancel any outstanding award for the purpose of satisfying changes in law or for any other lawful purpose. No such amendment may adversely affect the rights under any outstanding award without the holder’s consent. Other than in the event of a necessary adjustment in connection with a change in the company’s stock or a merger or similar transaction, the administrator may not “reprice” or otherwise reduce the exercise price of outstanding stock options or stock appreciation rights. Further, any material amendments to the 2007 Option Plan will be subject to approval by our stockholders, including any amendment that (i) increases the number of shares available for issuance under the 2007 Option Plan, (ii) expands the types of awards available under, the eligibility to participate in, or the duration of, the plan, (iii) materially changes the method of determining fair market value for purposes of the 2007 Option Plan, (iv) is required by the NASDAQ Global Market rules, or (v) is required by the Internal Revenue Code of 1986, as amended, to ensure that incentive options are tax qualified.
 
Amended and restated 2000 stock option plan
 
Our 2000 Stock Option Plan, or the 2000 Option Plan, was approved on May 5, 2000 and was subsequently amended and restated on April 17, 2002. An aggregate of 3,281,149 shares of common stock has been authorized for issuance under the 2000 Option Plan. As of March 31,


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2007, incentive stock options and non-qualified stock options to purchase an aggregate of 194,810 and 2,147,593 shares of our common stock, respectively, were outstanding under the 2000 Option Plan. As of March 31, 2007, options to purchase 417,948 shares of our common stock remained available for future grant under the terms of the 2000 Option Plan. In the event that any option outstanding under the 2000 Option Plan terminates without being exercised, the number of shares underlying such option becomes available for grant under the 2007 Option Plan. Options granted under this plan generally expire 10 years after the date of grant. Effective upon the adoption of our 2007 Option Plan, our board of directors decided not to grant any further awards under our 2000 Option Plan.
 
Our compensation committee administers the 2000 Option Plan. The compensation committee may select award recipients, determine the size, types and terms of awards, interpret the plan and prescribe, amend and rescind rules and make all other determinations necessary or desirable for the administration of the 2000 Option Plan. Our current practice is to have the full board of directors approve any recommendations for awards and plan changes.
 
The per share exercise price of the incentive stock options awarded under the 2000 Option Plan must be at least equal to the fair market value of a share of our common stock on the date of grant. The per share exercise price of non-statutory stock options or stock awards awarded under the 2000 Option Plan must be equal to the fair market value of a share of our common stock on the date of grant, or such other price that the compensation committee may determine is appropriate. Notwithstanding the foregoing, if an option is granted to an individual who owns or is deemed to own more than 10% of the combined voting power of all classes of our stock, the exercise price can be no less than 110% of the fair market value of a share of our common stock on the date of grant.
 
Options may be exercised only to the extent that they have vested. To exercise an option, an option holder must deliver an exercise notice to us and pay us the aggregate exercise price. In the event of the termination of an option holder’s service relationship with us, all portions of the option holder’s award that remain unvested shall immediately expire and be null and void. If the option holder is terminated with cause, his or her options shall immediately terminate and shall not be exercisable. Otherwise, upon the termination of the option holder for other than cause, options may be exercised for a period of three months following such termination, except in the case of death or disability, in which case the option holder (or the option holder’s estate, or any other person who acquires the stock option by reason of the option holder’s death), may exercise the stock option within a period of 12 months after such death or disability.
 
Under our stock option agreements, for each option grant issued and outstanding, 25% of the total number of shares which are not vested and exercisable as of the date of an acquisition under such option grant immediately become vested and exercisable. For purposes of our option agreements, an acquisition includes any of the following:
 
•  a merger, reorganization or consolidation between us and another entity (other than a holding company or parent or subsidiary of us) as a result of which the holders of our outstanding voting stock immediately prior to the transaction hold less than a majority of the outstanding voting stock of the surviving entity immediately after the transaction
 
•  the sale, transfer, or other disposition of all or substantially all of our assets to one or more persons (other than any wholly-owned subsidiary) in a single transaction or series of related transactions


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•  the direct or indirect sale or exchange in a single or series of related transactions by our stockholders of more than 50% of our common stock to an unrelated person or entity as a result of which the holders of our outstanding voting stock immediately prior to the transaction hold less than a majority of the surviving entity immediately after the transaction
 
Options granted under the 2000 Option Plan are not generally transferable or assignable by the option holder, other than by will or the laws of descent and distribution.
 
Stock appreciation rights plan
 
In July 2005, we adopted the Virtusa Corporation 2005 Stock Appreciation Rights Plan, or the SAR Plan. Under the SAR Plan, we are authorized to grant up to an aggregate of 479,233 stock appreciation rights, or SARs, to our employees and consultants. We generally use our SAR Plan to provide incentives to the non-management employees of our foreign subsidiaries. As of March 31, 2007, 196,241 SARs were outstanding and 282,992 remained available for grant. Effective upon the adoption of our 2007 Option Plan, our board of directors decided not to grant any further awards under our SAR Plan. The SAR Plan is administered by our compensation committee, which may select award recipients, determine the size, types and terms of awards, interpret the plan and prescribe, amend and rescind rules and make all other determinations necessary or desirable for the administration of our SAR Plan. Our SARs expire no later than 10 years from the date of grant.
 
SARs may be exercised only to the extent that they have vested and, upon exercise, entitle the holder to the increase in value of our common stock on the date of exercise over the exercise price of the SARs. If an employee ceases to be an employee for any reason other than death or disability, all unvested SARs will terminate and be forfeited. At any time prior to the closing of an initial public offering of our common stock, the SAR Plan restricts the exercise of the SARs by any employee or consultant holding SARs, except during the 90-day period after the employee or consultant’s service relationship with us is terminated. Prior to an initial public offering, we may settle SARs only in cash. After an initial public offering, we may settle SARs only in shares of our common stock. Upon the closing of our initial public offering, each vested SAR is exercisable thereafter at any time for an amount equal to the product of the fair market value of a share of our common stock on the date of exercise, less the exercise price per SAR, multiplied by the number of SARs exercised. This amount, when divided by the fair market value of the shares of our common stock, provides the number of shares of common stock which are issuable upon exercise of the SARs following the closing of an initial public offering.
 
Under our SAR Plan, SARs that were granted prior to August 4, 2005 are subject to accelerated vesting provisions upon the occurrence of a “Sales Event.” A Sales Event is defined as any of the following:
 
•  a merger, reorganization or consolidation between us and another entity (other than a holding company or parent or subsidiary of us) as a result of which the holders of our outstanding voting stock immediately prior to the transaction hold less than a majority of the outstanding voting stock of the surviving entity immediately after the transaction
 
•  the sale, transfer, or other disposition of all or substantially all of our assets to one or more persons (other than any wholly-owned subsidiary) in a single transaction or series of related transactions


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•  the direct or indirect sale or exchange in a single or series of related transactions by the stockholders of us of more than 50% of all of our common stock to an unrelated person or entity as a result of which the holders of our outstanding voting stock immediately prior to the transaction hold less than a majority of the surviving entity immediately after the transaction
 
SARs granted under our SAR Plan are not generally transferable or assignable by the SAR holder, other than by will or the laws of descent and distribution.
 
401(k) plan
 
We maintain a 401(k) retirement savings plan. All of our employees, other than non-resident alien employees with no income from U.S. sources or employees who are covered by a collective bargaining agreement that does not require admission to the plan, are eligible to participate in the plan on the first day of the calendar month after commencing employment with us. An eligible employee may elect to make pretax salary deferral contributions from one percent to 75% of the employee’s total annual compensation to the plan. Each calendar year, a participant’s pretax contributions cannot exceed the maximum dollar amount permitted under the Internal Revenue Code, which was $15,000 for participants under 50 years of age and $20,000 for participants 50 years of age or older in calendar year 2006.
 
We may make matching contributions on behalf of each participant who makes pretax salary deferral contributions. We determine on a yearly basis whether such contributions will be made and the amount of such contributions. Each year, we may also make a discretionary profit-sharing contribution to the plan on behalf of participants who are employed on the last day of the year. A participant whose employment terminates during a year because of death, disability or retirement after age 65 will also be eligible to receive any profit sharing contributions that we make for that year. Discretionary profit-sharing contributions, if any, are pro rata, based on the compensation of an individual participant in relation to the compensation of all the other participants.
 
All contributions to the plan are allocated to each participant’s individual account and are, at the participant’s election, invested in one, all, or some combination of a number of investment funds. When a participant reaches the normal retirement age (regardless of whether currently employed) or becomes disabled, the participant will be able to receive the vested balance of the participant’s account in a lump sum, in substantially equal monthly, quarterly, semiannual or annual installments, or by electing partial withdrawals of any portion of the participant’s account. A participant may withdraw all or a portion of the participant’s individual elective contributions after attaining the age of 591/2 or at any time on account of financial hardship. Participants can also borrow money from the plan based on the value of their vested individual account balances.


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2007 outstanding equity awards at fiscal year-end
 
The following table sets forth certain information concerning the number of outstanding equity awards, including any unexercised options, held by our named executive officers at March 31, 2007.
 
Option awards
 
                           
    Number of
  Number of
         
    securities
  securities
         
    underlying
  underlying
    Option
   
    unexercised
  unexercised
    exercise
  Option
    options (#)
  options (#)
    price
  expiration
Name   exercisable   unexercisable     ($)   date
 
Kris Canekeratne
                 
Thomas R. Holler
    23,890     1,593 (1)     1.57     5/21/2013
      6,389     19,170 (2)     5.48     4/28/2014
      2,995     20,966 (3)     4.19     8/7/2016
Danford F. Smith
    499,201     299,521 (4)     2.38     9/22/2014
Roger Keith Modder
    47,923           1.57     1/24/2011
      15,974           1.57     8/22/2011
      27,520           1.57     4/17/2012
      36,602     2,441 (1)     0.31     5/21/2013
      14,535     43,611 (2)     5.48     4/28/2014
      2,995     20,966 (3)     4.19     8/7/2016
T.N. Hari
    17,571     52,716 (5)     4.19     8/7/2016
 
 
 
(1) 6.25% of the shares in this grant vested on August 21, 2003, and the remaining shares vest 6.25% every 3 months thereafter through May 21, 2007.
 
(2) 10% of the shares in this grant vested one year from date of grant or April 28, 2005, and the remaining shares vest 15% on the second anniversary date, 20% on the third anniversary date, 25% on the fourth anniversary date, and the remaining 30% on the fifth anniversary date or April 28, 2009.
 
(3) 6.25% of the shares in this grant vested on November 7, 2006, and the remaining shares vest 6.25% every 3 months thereafter through August 7, 2010.
 
(4) 25% of the shares in this grant vested on September 13, 2005, and the remaining shares vest 6.25% every 3 months thereafter through September 13, 2008.
 
(5) 25% of the shares in this grant vested on March 31, 2007 and the remaining shares vest 6.25% every 3 months thereafter through March 31, 2010.


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2007 option exercises and stock vested
 
None our named executive officers acquired shares of our common stock from the exercise of stock options during our fiscal year ended March 31, 2007. The following table sets forth certain information concerning the numbers of shares of restricted stock that vested during the fiscal year ended March 31, 2007.
 
Stock vested during fiscal year-end 2007
 
             
    Stock Awards
    Number of
   
    shares acquired
  Value realized
    on vesting
  on vesting
Name   #   $(1)
 
Kris Canekeratne
       
Thomas R. Holler
    1,719     6,460
Danford F. Smith
       
Roger Keith Modder
       
T.N. Hari
       
 
 
 
(1) Represents the value of the vested shares without regard to the payment of the exercise price of $1.57 per share.
 
Pension benefits
 
Our subsidiaries, Virtusa (India) Private Limited and Virtusa (Sri Lanka) Private Limited, each contribute to a defined benefit plan covering their respective employees in India and Sri Lanka as mandated by the Indian and Sri Lankan governments. Benefits are based on the employee’s years of service and compensation level. Except for Messrs. Modder and Hari, none of our other named executive officers is covered by a pension plan or other similar benefit plan that provides for payments or other benefits at, following, or in connection with retirement. Under the terms of the Virtusa (India) Private Limited Employees Gratuity Scheme, Mr. Hari will not have any vested benefits under the plan until after five years of continuous service.
 
The following table summarizes the defined benefit plan of our subsidiaries as applied to Messrs. Modder and Hari for our fiscal year ended March 31, 2007.
 
2007 Pension benefits
 
                     
            Present value of
     
        Number of years
  accumulated
    Payments during
        credited service
  benefits
    last fiscal year
Name   Plan name   (#)   ($)(1)     ($)
 
Roger Keith Modder
  Sri Lanka Benefit Gratuity Plan   7     19,285 (2)  
T.N. Hari
  Virtusa (India) Private Limited Employees Gratuity Scheme   1     918 (3)  
 
 


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(1) Under the plan, an employee’s pension (gratuity) benefits vest after five years of credited service, and are payable in a lump sum amount upon retirement or separation of employment from the company in an amount equal to one-half of an employee’s basic monthly salary times the number of years of credited service. The amount reflected in the table represents the accumulated benefits payable at the end of fiscal 2007.
 
(2) Amounts are recorded in Sri Lankan rupees and were translated into U.S. dollars using the fiscal year 2007 year end exchange rate of $0.009183 per rupee.
 
(3) Amounts are recorded in Indian rupees and were translated into U.S. dollars using the fiscal year 2007 year end exchange rate of $0.022714 per rupee.
 
Nonqualified deferred compensation
 
None of our named executive officers is covered by a defined contribution or other plan that provides for the deferral of compensation on a basis that is not tax-qualified.
 
Potential payments upon termination or change in control
 
In April 2007, we entered into executive agreements with each of our executive officers that provide for certain severance and change in control payments. The following summaries set forth potential payments payable to our executive officers upon termination of employment by us other than for cause or by the executive for good reason, or a change in control of us under these new executive agreements and our other compensation programs. Cause is defined under these agreements to include willful misconduct or non-performance of duties, certain violations of our policies, the commission of a felony or misdemeanor involving moral turpitude and the failure to cooperate in certain internal or other investigations. Good reason includes a material reduction in the executive’s annual base salary or targeted annual cash compensation, a substantial diminution of the executive’s responsibility or authority or a more than 50 mile relocation of the executive’s primary business location. The compensation committee may in its discretion revise, amend or add to the benefits if it deems advisable.
 
Termination by us other than for cause, or termination by executive for good reason, prior to a change in control. Our executive agreements provide that if we terminate such executive’s employment other than for cause, or if such executive terminates his employment for good reason, the executive is entitled to a lump-sum severance payment (less applicable withholding taxes) equal to:
 
•  100% of Messrs. Canekeratne’s and Smith’s annual base salary and 50% of the annual base salary of each other executive officer
 
•  a prorated share of the annual bonus, if any, which the executive officer would have earned in the year in which the termination of employment occurs
 
In addition, upon any such termination, Messrs. Canekeratne and Smith are entitled to continued health benefits for 12 months and each other executive officer is entitled to six months of continued health benefits. All equity awards granted to Mr. Smith will have their vesting accelerated by 12 months upon a termination of Mr. Smith’s employment other than for cause, or if Mr. Smith terminates his employment for good reason. The foregoing benefits are subject to the execution of a general release by the executive officer.
 
Termination by us for cause or by executive for other than good reason; death or disability. Regardless of any change in control, we are not obligated to make any cash payment or benefit to our executive officers if their employment is terminated by us for cause or by the executive without good reason other than the payment of unpaid salary and accrued and unused


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vacation pay. We do not provide any death or disability benefits for any of our executive officers that are not also available to our employees generally.
 
Termination by us other than for cause or termination by executive for good reason following a change in control. Our executive agreements with each of our executive officers provide that, in the event of a termination of employment other than for cause, or if such executive terminates his employment for good reason, within 24 months following a change in control in the case of Messrs. Canekeratne and Smith and 12 months following a change in control in the case of each other executive officer, the executive is entitled to a lump-sum severance payment (less applicable withholding taxes) equal to:
 
•  200% of Messrs. Canekeratne’s and Smith’s annual base salary and 50% of the annual base salary of each other executive officer
 
•  200% in the case of Messrs. Canekeratne and Smith, and 100% in the case of each other executive officer of the prorated share of the annual bonus, if any, which the executive officer would have earned in the year in which the termination of employment occurs.
 
In addition, upon any such termination, Messrs. Canekeratne and Smith are entitled to continued health benefits for 24 months and each other executive officer is entitled to six months of continued health benefits. All unvested equity awards held by each such executive officer also become fully-vested and immediately exercisable. The foregoing benefits are subject to the execution of a general release by the executive officer.
 
Automatic acceleration of vesting upon a change in control. The terms of our executive agreements with our executive officers provide that the equity awards granted to each of our executive officers will have their vesting accelerated by 12 months upon any change in control, regardless of whether there is a subsequent termination of employment, except for the equity awards granted to Messrs. Holler, Modder and Hari prior to the effective date of their agreements. These awards and all other equity awards granted under our 2000 Option Plan are subject to the provisions of the plan, which provides that 25% of the total number of shares that are not vested and exercisable as of a date of a change of control become vested and exercisable.


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Kris Canekeratne
 
The following table describes the potential payments and benefits upon employment termination or change in control for Kris Canekeratne, our chairman and chief executive officer, as if his employment terminated as of March 30, 2007, the last business day of our last fiscal year.
 
                         
            Termination by the
   
            company for other
   
            than cause or voluntary
   
Executive benefits
  Voluntary
  Termination by
  resignation for good
  Acceleration
and payments upon
  resignation for
  company for other
  reason following
  following change
termination   good reason   than cause   change in control   in control
 
Base salary
  $ 225,000   $ 225,000   $ 450,000   $
Bonus(1)
    192,500     192,500     385,000    
Equity acceleration
               
Continued health benefits
    12,420     12,420     24,840    
   
Total
  $ 429,920   $ 429,920   $ 859,840   $
 
 
 
(1) The bonus amounts reflected are based on the annual payouts under our VCCP for our fiscal year ended March 31, 2007.
 
Thomas R. Holler
 
The following table describes the potential payments and benefits upon employment termination or change in control for Thomas R. Holler, our executive vice president and chief financial officer, as if his employment terminated as of March 30, 2007, the last business day of our last fiscal year.
 
                         
            Termination by the
   
            company for other
   
            than cause or voluntary
   
Executive benefits
  Voluntary
  Termination by
  resignation for good
  Acceleration
and payments upon
  resignation for
  company for other
  reason following
  following change
termination   good reason   than cause   change in control   in control
 
Base salary
  $ 95,000   $ 95,000   $ 95,000   $
Bonus(1)
    66,000     66,000     66,000    
Equity acceleration(2)
            430,535     107,624
Continued health benefits
    5,910     5,910     5,910    
   
Total
  $ 166,910   $ 166,910   $ 597,445   $ 107,624
 
 
 
(1) The bonus amounts reflected are based on the annual payouts under our VCCP for our fiscal year ended March 31, 2007.
 
(2) There was no public market for our common stock at March 30, 2007. Accordingly, the value of accelerated equity awards has been estimated based on an assumed initial public offering price of $15.00 per share, the midpoint of the range set forth on the cover page of this prospectus.


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Danford F. Smith
 
The following table describes the potential payments and benefits upon employment termination or change in control for Danford F. Smith, our president and chief operating officer, as if his employment terminated as of March 30, 2007, the last business day of our last fiscal year.
 
                         
            Termination by the
   
            company for other
   
            than cause or voluntary
   
Executive benefits
  Voluntary
  Termination by
  resignation for good
  Acceleration
and payments upon
  resignation for
  company for other
  reason following
  following change
termination   good reason   than cause   change in control   in control
 
Base salary
  $ 250,000   $ 250,000   $ 500,000   $
Bonus(1)
    220,000     220,000     440,000    
Equity acceleration(2)
            3,779,955     2,519,968
Continued health benefits
    12,420     12,420     24,840    
   
Total
  $ 482,420   $ 482,420   $ 4,744,795   $ 2,519,968
 
 
 
(1) The bonus amounts reflected are based on the annual payouts under our VCCP for our fiscal year ended March 31, 2007.
 
(2) There was no public market for our common stock at March 30, 2007. Accordingly, the value of accelerated equity awards has been estimated based on an assumed initial public offering price of $15.00 per share, the midpoint of the range set forth on the cover page of this prospectus.
 
Roger Keith Modder
 
The following table describes the potential payments and benefits upon employment termination or change in control for Roger Keith Modder, our executive vice president and managing director, Asian operations, as if his employment terminated as of March 30, 2007, the last business day of our last fiscal year. All cash amounts in U.S. dollars in the table below would be paid in Sri Lankan rupees.
 
                         
            Termination by the
   
            company for other
   
            than cause or voluntary
   
Executive benefits
  Voluntary
  Termination by
  resignation for good
  Acceleration
and payments upon
  resignation for
  company for other
  reason following
  following change
termination   good reason   than cause   change in control   in control
 
Base salary
  $ 66,000   $ 66,000   $ 66,000   $
Bonus(1)
    47,300     47,300     47,300    
Equity acceleration(2)
            677,653     169,403
Continued health benefits
    3,182     3,182     3,182    
   
Total
  $ 116,482   $ 116,482   $ 794,135   $ 169,403
 
 
 
(1) The bonus amounts reflected are based on the annual payouts under our VCCP for our fiscal year ended March 31, 2007.
 
(2) There was no public market for our common stock at March 30, 2007. Accordingly, the value of accelerated equity awards has been estimated based on an assumed initial public offering price of $15.00 per share, the midpoint of the range set forth on the cover page of this prospectus.


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T.N. Hari
 
The following table describes the potential payments and benefits upon employment termination or change in control for T.N. Hari, our senior vice president and global head of human resources, as if his employment terminated as of March 30, 2007, the last business day of our last fiscal year. All cash amounts in U.S. dollars in the table below would be paid in Indian rupees.
 
                         
            Termination by the
   
            company for other
   
            than cause or voluntary
   
Executive benefits
  Voluntary
  Termination by
  resignation for good
  Acceleration
and payments upon
  resignation for
  company for other
  reason following
  following change
termination   good reason   than cause   change in control   in control
 
Base salary
  $ 55,000   $ 55,000   $ 55,000   $
Bonus(1)
    22,000     22,000     22,000    
Equity acceleration(2)
            569,860     142,465
Continued health benefits
    58     58     58    
   
Total
  $ 77,058   $ 77,058   $ 646,918   $ 142,465
 
 
 
(1) The bonus amounts reflected are based on the annual payouts under our VCCP for our fiscal year ended March 31, 2007.
 
(2) There was no public market for our common stock at March 30, 2007. Accordingly, the value of accelerated equity awards has been estimated based on an assumed initial public offering price of $15.00 per share, the midpoint of the range set forth on the cover page of this prospectus
 
Director compensation
 
In April 2007, upon recommendation of the compensation committee, our board of directors approved a non-employee director compensation policy that provides for annual compensation of $80,000, of which we will make an annual stock option grant to each non-employee director with an economic value of $48,000 (based on a Black-Scholes valuation on the date of grant) and an annual retainer fee of $32,000. It is currently anticipated that upon effectiveness of this offering, each of Messrs. Armony, Davoli, Goldfarb, Maheu, Moriarty and Trust will receive the foregoing annual stock option grant at an exercise price equal to the initial public offering price. In addition, the chairmen of our audit, compensation and nominating and corporate governance committees will receive an annual fee of $18,000, $11,000 and $7,000, respectively. All cash payments will be on a quarterly basis.
 
In addition, we will make a one-time, initial grant of options to purchase up to 6,389 shares of our common stock to any new non-employee director who joins the board of directors.
 
Each stock option award granted to a non-employee director under the non-employee director compensation policy will be made at the board of directors’ meeting immediately following our annual meeting, and will have a four-year vesting period, with 25% vesting after one year and with the remaining shares vesting in equal installments each three-month period thereafter. The vesting of all of the options granted to our non-employee directors will also accelerate by 12 months in the event of a change in control.
 
We reimburse all non-employee directors for their reasonable out-of-pocket expenses incurred in attending meetings of our board of directors or any committees thereof.


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The following table sets forth a summary of the compensation we paid to our non-employee directors in our fiscal year ended March 31, 2007:
 
2007 Director compensation
 
                                             
                      Change in
       
                      pension value
       
    Fees
            Non-equity
  and nonqualified
       
    earned
            incentive
  deferred
       
    or paid
  Stock
  Option
    plan
  compensation
  All other
   
    in cash