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

You should read the following discussion and analysis together with our unaudited consolidated financial statements and the accompanying notes. This discussion contains forward-looking statements, within the meaning of Section 27A of Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, including statements regarding our expected financial position, business and financing plans. These statements involve risks and uncertainties. Our actual results could differ materially from the results described in or implied by these forward-looking statements as a result of various factors, including those discussed below and elsewhere in our Annual Report on Form 10-K filed with the SEC on March 17, 2008, particularly under the headings "Disclosure Statement" and "Risk Factors."

Overview

We are a global provider of information technology, or IT, services and end-to-end business solutions designed to help clients improve their competitiveness and effectiveness. End-to-end business solutions encompass all stages of a client's business process and incorporate all technologies and IT services related to that process. Our portfolio of solutions and services consists of software product development, including both offshore and near-shore outsourcing; system integration, application development and consulting; and software distribution. The primary industries, or verticals, we serve include high-tech companies and independent software vendors, or ISVs; financial services; defense, homeland security and government; life sciences and healthcare; and telecommunications and utilities.

We have operations in 18 countries across North America, Europe and Asia. We combine our deep vertical expertise and strong technical capabilities to provide a complete range of high quality services on a global scale. By integrating our local and international personnel in focused business and project teams, we leverage our corporate knowledge and experience, intellectual property and global infrastructure to develop innovative solutions for clients across the geographies and verticals we serve. We complement these teams with our global delivery model, including both offshore and near-shore delivery capabilities, to achieve meaningful cost reductions or other benefits for our clients.

Our revenues increased to $164.1 million and $494.4 million for the three and nine months ended September 30, 2008, from $138.7 million and $390.2 million for the three and nine months ended September 30, 2007, respectively. Net income increased to $16.1 million and $31.1 million for the three and nine months ended September 30, 2008 from $7.3 million and $17.2 million for the three and nine months ended September 30, 2007, respectively.

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

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

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

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

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

Recent Developments

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