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UNITED STATES SECURITIES AND
    EXCHANGE COMMISSIONWashington, D.C.
    20549
    Form 10-K
  (Mark One)þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934For Fiscal Year Ended
    July 31, 2008o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934For the Transition Period
    From          to   Commission File
    000-27597
    NaviSite, Inc.
 (Exact name of registrant as
    specified in its charter)
    Delaware

52-2137343(State or other
    jurisdiction

(I.R.S. Employerof incorporation or
    organization)

Identification No.)400 Minuteman Road

01810Andover, Massachusetts

(zip code)(Address of principal executive
    offices)   Registrants telephone number, including area code
 (978) 682-8300
    Securities registered pursuant to Section 12(b) of the
    Act:
  Name of Each ExchangeTitle of Each Class

on Which RegisteredCommon Stock, $0.01 par value

The NASDAQ Stock Market LLC   Securities registered pursuant to Section 12(g) of the
    Act:
 None
    o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. o
    Large accelerated
    filer o

Accelerated
    filer o

Non-accelerated
    filer þ
    (Do not check if a smaller reporting company)

Smaller reporting
    company o   Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE




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##### 





NAVISITE,
    INC.
  2008 ANNUAL REPORT
 ON
    FORM 10-K
  TABLE OF CONTENTS
  PageNumberPART IItem 1.


Business


3Item 1A.


Risk Factors


13Item 1B.


Unresolved Staff Comments


22Item 2.


Properties


22Item 3.


Legal Proceedings


23Item 4.


Submission of Matters to a Vote of Security Holders


24PART IIItem 5.


Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities


25Item 6.


Selected Financial Data


26Item 7.


Managements Discussion and Analysis of
    Financial Condition and Results of Operations


27Item 7A.


Quantitative and Qualitative Disclosures about
    Market Risk


38Item 8.


Financial Statements and Supplementary Data


38Item 9.


Changes in and Disagreements With Accountants on
    Accounting and Financial Disclosure


38Item 9A.


Controls and Procedures


38Item 9B.


Other Information


39PART IIIItem 10.


Directors, Executive Officers and Corporate
    Governance


39Item 11.


Executive Compensation


39Item 12.


Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters


39Item 13.


Certain Relationships and Related Transactions,
    and Director Independence


40Item 14.


Principal Accounting Fees and Services


40PART IVItem 15.


Exhibits, Financial Statement Schedules


40Signatures


41Index to NaviSite, Inc. Consolidated Financial
    Statements


F-1Ex-21 Subsidiaries of the RegistrantEx-23 Consent of KPMG LLPEx-31.1 Section 302 Certification of Chief Executive OfficerEx-31.2 Section 302 Certification of Chief Financial OfficerEx-32.1 Section 906 Certification of Chief Executive OfficerEx-32.2 Section 906 Certification of Chief Financial Officer   2




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PART I
    SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS  This Annual Report on
    Form 10-K
    contains forward-looking statements within the meaning of
    Section 21E of the Securities Exchange Act of 1934, as
    amended, and Section 27A of the Securities Act of 1933, as
    amended, that involve risks and uncertainties. All statements
    other than statements of historical information provided herein
    are forward-looking statements and may contain information about
    financial results, economic conditions, trends and known
    uncertainties. Our actual results could differ materially from
    those discussed in the forward-looking statements as a result of
    a number of factors, which include those discussed in this
    section and elsewhere in this report and the risks discussed in
    our other filings with the Securities and Exchange Commission.
    Readers are cautioned not to place undue reliance on these
    forward-looking statements, which reflect managements
    analysis, judgment, belief or expectation only as of the date
    hereof. Investors are warned that actual results may differ
    materially from managements expectations. We undertake no
    obligation to publicly reissue or update these forward-looking
    statements to reflect events or circumstances that arise after
    the date hereof.
  Item 1.
    Business  Our
    Business
    e-Business
    tm
    Enterprise
    Hosting Services
  
    Platform as a Service  Hardware and software support
    delivered from one of our 16 data centers. Services include
    dedicated and virtualized hosting, business continuity and
    disaster recovery, connectivity, content distribution, database
    administration and performance tuning, hardware management,
    monitoring, network management, security management, server and
    operating system management and storage management. 3




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
    Software as a Service (SaaS)  Enablement
    of SaaS to the ISV community. Services include SaaS starter kits
    and services specific to the needs of ISVs who offer their
    software in an on-demand or subscription model.
    Co-location  Physical space offered in a data center.
    In addition to providing the physical space, NaviSite offers
    environmental support, specified power with
    back-up
    power generation and network connectivity options.  Application
    Services
  
    ERP Application and Messaging Management Services 
    Customer defined services for specific packaged applications.
    Applications include:  
    Oracle
    e-Business
    Suite
    PeopleSoft Enterprise
    Siebel
    JD Edwards
    Hyperion
    Lawson
    Kronos
    Microsoft Dynamics
    Microsoft Exchange
    Lotus Notes    
    ERP Professional Services  Planning, implementation,
    optimization, enhancement and upgrade support for third party
    ERP applications we support.
    Custom Development Services  Planning,
    implementation, optimization and enhancement for custom
    applications that we or our customers have developed.    tm tm tm
    tm tm
 4




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tm
        
    In December 2002, we acquired all of the issued and outstanding
    stock of ClearBlue Technologies Management, Inc., or CBTM, a
    subsidiary of CBT, which previously had acquired assets from the
    bankrupt estate of AppliedTheory Corporation related to
    application management and application hosting services. This
    acquisition added application management and development
    capabilities to our managed application services.
    In February 2003, we acquired Avasta, Inc., a provider of
    application management services, adding automated application
    and device monitoring software capabilities to our managed
    application services.
    In April 2003, we acquired Conxion Corporation, a provider of
    application hosting, content and electronic software
    distribution and security services. This acquisition added
    proprietary content delivery software and related network
    agreements to our managed application services and managed
    infrastructure services.
    In May 2003, we acquired assets of Interliant, Inc. related to
    managed messaging, application hosting and application
    development services. This acquisition added messaging-specific
    services and capabilities and IBM Lotus Domino expertise, and
    formed the core of our managed messaging services.
    In August 2003, we acquired assets of CBT related to
    co-location, bandwidth, security and disaster recovery services,
    enhancing our managed infrastructure services and adding
    physical plant assets. Specifically, we acquired all of the
    outstanding shares of six wholly-owned subsidiaries of CBT with
    data centers located in Chicago, Illinois, Las Vegas, Nevada,
    Los Angeles, California, Milwaukee, Wisconsin, Oakbrook,
    Illinois, and Vienna, Virginia and assumed the revenue and
    expenses of four additional wholly-owned subsidiaries of CBT
    with data centers located in Dallas, Texas, New York, New York,
    San Francisco, California, and Santa Clara,
    California, which four entities we later acquired.
    In June 2004, we completed the acquisition of substantially all
    of the assets and liabilities of Surebridge, Inc., a privately
    held provider of managed application services for mid-market
    companies. This acquisition broadened our managed application
    services, particularly in the areas of financial management,
    supply chain management, human resources management and customer
    relationship management.
    In August 2007, we acquired the assets of Alabanza LLC and
    Hosting Ventures LLC and all of the issued and outstanding stock
    of Jupiter Hosting, Inc.. These acquisitions provided additional
    managed hosting customers, proprietary software for provisioning
    and additional data center space in the Bay Area market. 5




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
    In September 2007, we acquired netASPx, Inc. Based in
    Minneapolis, Minnesota, the acquisition of netASPx, Inc. added
    functional expertise in the Lawson and Kronos ERP applications
    and approximately 18,000 square feet of data center
    capacity.
    In October 2007, we acquired the assets of iCommerce, Inc.  Our
    Industry
      
    Increase business operating efficiencies and reduce costs by
    using best of breed applications;
    Build and enhance customer relationships by providing
    Internet-enabled customer service and technical support;
    Manage vendor and supplier relationships through
    Internet-enabled technologies, such as online training and
    online sales and marketing;
    Communicate and conduct business more rapidly and
    cost-effectively with customers, suppliers and employees
    worldwide; and
    Improve service and lower the cost of software ownership by the
    adoption of new Internet-enabled software delivery models.      
    Developments by major hardware and software vendors that
    facilitate outsourcing;
    Advances in virtualization and high density computing that is
    beyond the skill and cost ability of the typical mid-market
    enterprise;
    The need to improve the reliability, availability and overall
    performance of applications as they increase in importance and
    complexity;
    The need to focus on core business operations; 6




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
    Challenges and costs of hiring, training and retaining
    application engineers and information technology employees with
    the requisite range of information technology expertise; and
    The increasing complexity of managing the operations of
    Internet-enabled applications.    Our
    Strategy
    Provide Excellent Customer Service.
  Innovate and Leverage our Technology
    Platform.
  Expand Our Global Delivery Capabilities.
  Improve Operating Margins Through
    Efficiencies. tm
  Grow Through Disciplined Acquisitions.
  Continue to Broaden Our Service Offerings.
  Our
    Services
   7




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Enterprise
    Hosting Services
    
    Platform as a Service  Support provided for hardware
    and software located in one of our 16 data centers. We also
    provide bundled offerings packaged as content delivery services.
    Specific services include:  
    Dedicated and Virtualized Servers
    Business Continuity and Disaster Recovery
    Connectivity
    Content Distribution
    Database Administration and Performance Tuning
    Desktop Support
    Hardware Management
    Monitoring
    Network Management
    Security
    Server and Operating Management
    Storage Management  
    Software as a Service  Enablement of SaaS to the ISV
    community. Services include SaaS starter kits and services
    specific to the needs of ISVs wanting to offer their software in
    an on-demand or subscription mode.
    Content Delivery  Includes the delivery of software
    electronically using NaviSite technology accelerated content
    distribution.
    Co-location  Physical space offered in a data center.
    In addition to providing the physical space, NaviSite offers
    environmental support, specified power with
    back-up
    power generation and network connectivity options.  Application
    Management
    
    ERP Application management services  Defined services
    provided for specific packaged applications. Services include
    implementation, upgrade assistance, monitoring, diagnostics,
    problem resolution and functional end user support.
    Applications include:  
    Oracle
    e-Business
    Suite 8




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
    PeopleSoft Enterprise
    Siebel
    JD Edwards
    Hyperion
    Lawson
    Kronos
    Microsoft Dynamics
    Microsoft Exchange
    Lotus Notes  
    ERP Professional Services  Planning, implementation,
    optimization, enhancement and upgrades for the supported third
    party ERP application.
    Custom Development Professional Services  Planning,
    implementation, optimization and enhancement for custom
    applications that we or our customers have developed.  tm
  NaviViewtmPlatform
  tm tm tm tm
  Event Detection System 
  Synthetic Transaction Monitoring 
  Automated Remediation  tm
  Component Information Manager 
  Escalation Manager 
  Our
    Infrastructure
   9




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Network Operations Centers 
  Data Centers 
  Virtualization 
  Internet Connectivity 
  Sales and
    Marketing
  Sales
    Automation and Platform Based Sales
 10




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Channel Relationships 
  Marketing 
  Customers
        Competition
      
    quality of services delivered;
    ability to consistently measure, track and report operational
    metrics;
    application hosting, infrastructure and messaging management
    expertise;
    fast, redundant and reliable Internet connectivity;
    a robust infrastructure providing availability, speed,
    scalability and security;
    comprehensive and diverse service offerings and timely addition
    of value-add services;
    brand recognition;
    strategic relationships;
    competitive pricing; and
    adequate capital to permit continued investment in
    infrastructure, customer service and support, and sales and
    marketing.  tm
 11




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
    hosting and related services providers, including Terremark,
    Inc., Rackspace Hosting, Inc., SAVVIS, IBM, AT&T and other
    local and regional hosting providers;
    application services providers, such as IBM, AT&T,
    Electronic Data Systems Corp., Cedar Crestone, Oracle On Demand
    and Computer Sciences Corporation;
    co-location providers, including SAVVIS, Equinix and
    Switch & Data Facilities Company, Inc.;
    messaging providers, including Apptix Intermedia; and
    professional services providers, including Oracle Consulting
    Services, Accenture, Ciber, CSC, CedarCrestone, Deloitte
    Consulting, IBM and Rapidigm.  Intellectual
    Property
      Government
    Regulation
   12




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Employees
    Available
    Information
  Form 10-K, Form 10-Q, Form 8-K http://www.navisite.com. Form 10-K
  Item 1A.
    Risk
    Factors    We have a history of losses and may never achieve or
    sustain profitability.
  Our financing agreement with a syndicated group of lenders
    includes various covenants and restrictions that may negatively
    affect our liquidity and our ability to operate and manage our
    business.
  
    restricts our ability to create, incur, assume, or permit to
    exist any additional indebtedness, excluding certain limited
    exemptions;
    restricts our ability to create, incur, assume or permit to
    exist any lien on any of our assets, excluding certain limited
    exemptions;
    restricts our ability to make investments, with certain limited
    exemptions;
    requires that we meet financial covenants for leverage, fixed
    charges and capital expenditures;
    restricts our ability to enter into any transaction of merger or
    consolidation, excluding certain limited exemptions;
    restricts our ability to sell assets or purchase or otherwise
    acquire the property of any person, excluding certain limited
    exemptions;
    restricts our ability to authorize, declare or pay dividends,
    excluding certain limited exemptions; 13




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
    restricts our ability to enter into any transaction with any
    affiliate except on terms and conditions that are at least as
    favorable to us as those that could reasonably be obtained in a
    comparable arms-length transaction with a person who is
    not an affiliate; and
    restricts our ability to amend our organizational documents.      Year

Percentage of Term Loan1


1.0
%2


1.0
%3


1.0
%4


1.0
%5


1.0
%6


95.0
%     We may need to obtain additional debt or equity financing
    in order to satisfy any mandatory redemption requirement of our
    Preferred Stock.
  Disruption in financial and currency markets could have a
    negative effect on our business.
 14




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Atlantic Investors, LLC, Unicorn Worldwide Holdings
    Limited and Madison Technology LLC may have interests that
    conflict with the interests of our other stockholders and have
    significant influence over corporate
    decisions.
  Members of our management group also have significant
    interests in Atlantic Investors, LLC, which may create conflicts
    of interest.
  Our common stockholders may suffer dilution in the future
    upon exercise of outstanding convertible securities or the
    issuance of additional securities in potential future
    acquisitions or financings.
      Acquisitions may result in disruptions to our business or
    distractions of our management due to difficulties in
    integrating acquired personnel and operations, and these
    integrations may not proceed as
    planned.
 15




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
    difficulty integrating acquired technologies, products,
    services, operations and personnel with the existing businesses;
    difficulty maintaining relationships with important third
    parties, including those relating to marketing alliances and
    providing preferred partner status and favorable pricing;
    diversion of managements attention in connection with both
    negotiating the acquisitions and integrating the businesses;
    strain on managerial and operational resources as management
    tries to oversee larger operations;
    inability to retain and motivate management and other key
    personnel of the acquired businesses;
    exposure to unforeseen liabilities of acquired companies;
    potential costly and time-consuming litigation, including
    stockholder lawsuits;
    potential issuance of securities in connection with an
    acquisition with rights that are superior to the rights of
    holders of our common stock, or which may have a dilutive effect
    on our common stockholders;
    the need to incur additional debt or use cash; and
    the requirement to record potentially significant additional
    future operating costs for the amortization of intangible assets.    A failure to meet customer specifications or expectations
    could result in lost revenues, increased expenses, negative
    publicity, claims for damages and harm to our reputation and
    cause demand for our services to decline.
  
    delayed or lost revenue;
    requirements to provide additional services to a customer at
    reduced charges or no charge;
    negative publicity about us, which could adversely affect our
    ability to attract or retain customers; and
    claims by customers for substantial damages against us,
    regardless of our responsibility for the failure, which may not
    be covered by insurance policies and which may not be limited by
    contractual terms of our engagement.  Our ability to successfully market our services could be
    substantially impaired if we are unable to deploy new
    infrastructure systems and applications or if new infrastructure
    systems and applications deployed by us prove to be unreliable,
    defective or incompatible.
 16




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Any interruptions in, or degradation of, our private
    transit Internet connections could result in the loss of
    customers or hinder our ability to attract new
    customers.
  If we are unable to maintain existing and develop
    additional relationships with software vendors, the sales and
    marketing of our service offerings may be
    unsuccessful.
  Our network infrastructure could fail which would impair
    our ability to provide guaranteed levels of service and could
    result in significant operating losses.
  
    require us to spend substantial amounts of money to replace
    equipment or facilities;
    entitle customers to claim service credits or seek damages for
    losses under our service level guarantees;
    cause customers to seek alternate providers; or
    impede our ability to attract new customers, retain current
    customers or enter into additional strategic relationships.  Our dependence on third parties increases the risk that we
    will not be able to meet our customers needs for software,
    systems and services on a timely or cost-effective basis, which
    could result in the loss of customers.
 17




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We could be subject to increased operating costs, as well
    as claims, litigation or other potential liability, in
    connection with risks associated with Internet security and the
    security of our systems. e-commerce
  Third-party infringement claims against our technology
    suppliers, customers or us could result in disruptions in
    service, the loss of customers or costly and time-consuming
    litigation.
  We may be subject to legal claims in connection with the
    information disseminated through our network, which could divert
    managements attention and require us to expend significant
    financial resources. e-mails
  Concerns relating to privacy and protection of customer
    and job seeker data on our Americas Job Exchange website
    could damage our reputation and deter current and potential
    customers and job seekers from using our products and
    services.
 18




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and/or
    If we fail to attract or retain key officers, management
    and technical personnel, our ability to successfully execute our
    business strategy or to continue to provide services and
    technical support to our customers could be adversely affected
    and we may not be successful in attracting new
    customers. reductions-in-force
  The unpredictability of our quarterly results may cause
    the trading price of our common stock to fluctuate or
    decline.
  
    a reduction of market demand
    and/or
    acceptance of our services;
    our ability to develop, market and introduce new services on a
    timely basis;
    the length of the sales cycle for our services;
    the timing and size of sales of our services, which depends on
    the budgets of our customers;
    downward price adjustments by our competitors;
    changes in the mix of services provided by our competitors;
    technical difficulties or system downtime affecting the Internet
    or our hosting operations;
    our ability to meet any increased technological demands of our
    customers; and
    the amount and timing of costs related to our marketing efforts
    and service introductions.    If we are unsuccessful in pending and potential litigation
    matters, our financial condition may be adversely
    affected.
 19




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If the markets for outsourced information technology
    infrastructure and applications, Internet commerce and
    communication decline, there may be insufficient demand for our
    services and, as a result, our business strategy and objectives
    may fail.
  If we do not respond to rapid changes in the technology
    sector, we will lose customers.
  The market in which we operate is highly competitive and
    is likely to consolidate, and we may lack the financial and
    other resources, expertise or capability necessary to capture
    increased market share or maintain our market
    share.
    
    develop and expand their network infrastructure and service
    offerings more rapidly;
    adapt to new or emerging technologies and changes in customer
    requirements more quickly;
    take advantage of acquisitions and other opportunities more
    readily; or
    devote greater resources to the marketing and sale of their
    services and adopt more aggressive pricing policies than we can.    Difficulties presented by international economic,
    political, legal, accounting and business factors could harm our
    business in international markets.
  
    unexpected changes in regulatory, tax and political environments;
    longer payment cycles and problems collecting accounts
    receivable;
    geopolitical risks such as political and economic instability
    and the possibility of hostilities among countries or terrorism; 20




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
    reduced protection of intellectual property rights;
    fluctuations in currency exchange rates or imposition of
    restrictive currency controls;
    our ability to secure and maintain the necessary physical and
    telecommunications infrastructure;
    challenges in staffing and managing foreign operations;
    employment laws and practices in foreign countries;
    laws and regulations on content distributed over the Internet
    that are more restrictive than those currently in place in the
    United States; and
    significant changes in immigration policies or difficulties in
    obtaining required immigration approvals.    We may become subject to burdensome government regulation
    and legal uncertainties that could substantially harm our
    business or expose us to unanticipated
    liabilities.
  The price of our common stock has been volatile, and may
    continue to experience wide
    fluctuations.
  Our common stock may be delisted from the Nasdaq Stock
    Market.
 21




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Anti-takeover provisions in our corporate documents may
    discourage or prevent a takeover.
  
    authorize the board to issue preferred stock without stockholder
    approval;
    prohibit cumulative voting in the election of directors;
    limit the persons who may call special meetings of
    stockholders; and
    establish advance notice requirements for nominations for the
    election of directors or for proposing matters that can be acted
    on by stockholders at stockholder meetings.  Item 1B.
    Unresolved
    Staff Comments    Item 2.
    Properties  Facilities
    Square FootageLeasedLocation

Type

(Approximate)


Lease ExpirationSan Jose, CA (1)

Data Center and Office


66,350


November 2016Los Angeles, CA

Data Center


34,711


February 2009San Francisco, CA

Data Center


20,576


January 2010Santa Clara, CA

Data Center


3,655


August 2009Atlanta, GA

Office


4,598


June 2009Chicago, IL (1)

Office


4,453


June 2009Chicago, IL

Data Center


6,800


November 2010Chicago, IL

Office


2,121


April 2012Oak Brook, IL

Data Center


16,780


September 2019Andover, MA

Office


25,817


January 2018Andover, MA

Data Center and Office


86,931


January 2018Minneapolis, MN (1)

Data Center and Office


54,474


June 2010Syracuse, NY

Data Center


21,374


November 2015Syracuse, NY (1)

Office


5,016


May 2009New York, NY

Office


1,500


August 2013New York, NY

Data Center


33,286


May 2018Las Vegas, NV (2)

Data Center


28,560


February 2010Dallas, TX

Data Center


27,370


March 2020Houston, TX (1)

Data Center and Office


29,545


November 2008Herndon, VA (1)(3)

Office


5,515


June 2011Vienna, VA (3)

Data Center and Office


23,715


December 2009Gurgaon, Haryana, India

Office


12,706


Month-to-MonthWatford, England

Data Center


10,008


February 2018London, England

Data Center


4,017


March 2010  22




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(1)
    
    We have idle office space at this facility from which we derive
    no economic benefit.(2)
    
    We have entered into a sublease with a third party for this
    facility; however we retain the use of approximately
    2,000 square feet.(3)
    
    We have a subtenant for a portion of this space.    Item 3.
    Legal
    Proceedings  IPO
    Securities Litigation
  successor-in-interest successor-in-interest Rule 10b-5 sub-group
   23




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Other
    litigation
      Item 4.
    Submission
    of Matters to a Vote of Security Holders   24




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PART II  Item 5.
    Market
    for Registrants Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities  Price
    Range of Common Stock
    High


LowFiscal Year Ended July 31, 2008May 1, 2008 through July 31, 2008

$
4.95


$
3.08February 1, 2008 through April 30, 2008

$
4.75


$
2.05November 1, 2007 through January 31, 2008

$
11.29


$
3.53August 1, 2007 through October 31, 2007

$
11.24


$
6.18Fiscal Year Ended July 31, 2007May 1, 2007 through July 31, 2007

$
9.36


$
6.06February 1, 2007 through April 30, 2007

$
7.08


$
5.25November 1, 2006 through January 31, 2007

$
7.22


$
3.44August 1, 2006 through October 31, 2006

$
4.30


$
3.33           payment-in-kind
     25




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Item 6.
    Selected
    Financial Data  The following selected consolidated financial data should be
    read in conjunction with our consolidated financial statements
    and related notes and Managements Discussion and
    Analysis of Financial Condition and Results of Operations
    included elsewhere in this annual report on
    Form 10-K.
    Historical results are not necessarily indicative of results of
    any future period.
  Year Ended July 31,2008


2007


2006


2005


2004(In thousands, except per share data)Revenue, net

$
154,194


$
125,860


$
108,844


$
109,731


$
91,126Revenue, related parties


372



322



243



132



46Total revenue


154,566



126,182



109,087



109,863



91,172Cost of revenue


106,897



85,196



75,064



80,227



68,379Impairment, restructuring and other














383



917Total cost of revenue


106,897



85,196



75,064



80,610



69,296Gross profit


47,669



40,986



34,023



29,253



21,876Operating expenses:Selling and marketing


19,909



16,924



14,756



12,993



10,642General and administrative


22,773



22,043



21,787



23,600



24,714Impairment, restructuring and other






(231
)


1,373



2,662



5,286Total operating expenses


42,682



38,736



37,916



39,255



40,642Income (loss) from operations


4,987



2,250



(3,893
)


(10,002
)


(18,766
)Other income (expense):Interest income


264



337



283



61



126Interest expense


(12,033
)


(12,476
)


(9,585
)


(7,590
)


(3,181
)Loss on debt extinguishment


(1,651
)


(15,712
)










Other income (expense), net


2,295



864



437



2,785



468Loss before income tax expense


(6,138
)


(24,737
)


(12,758
)


(14,746
)


(21,355
)Income tax expense


(1,834
)


(1,173
)


(1,173
)


(1,338
)


(1
)Net loss from continuing operations


(7,972
)


(25,910
)


(13,931
)


(16,084
)


(21,354
)Loss from discontinued operations net of income taxes


(712
)














Net loss


(8,684
)


(25,910
)


(13,931
)


(16,084
)


(21,354
)Accretion of preferred stock dividends


(2,656
)














Net loss attributable to common shareholders

$
(11,340
)

$
(25,910
)

$
(13,931
)

$
(16,084
)

$
(21,354
)Basic and diluted net loss per common shareLoss from continuing operations before discontinued operations
    attributable to common stockholders

$
(0.31
)

$
(0.85
)

$
(0.49
)

$
(0.57
)

$
(0.85
)Loss from discontinued operations, net of income taxes


(0.02
)














Net loss attributable to common stockholders

$
(0.33
)

$
(0.85
)

$
(0.49
)

$
(0.57
)

$
(0.85
)Basic and diluted weighted average number of common shares
    outstanding


34,731



30,512



28,601



28,202



25,160BALANCE SHEET DATA:Working capital (deficit)

$
1,658


$
10,611


$
(9,072
)

$
(77,560
)

$
(36,711
)Total assets

$
175,713


$
116,244


$
102,409


$
101,177


$
123,864Long-term obligations

$
133,158


$
97,072


$
70,817


$
5,515


$
50,224Stockholders equity (deficit)

$
(18,772
)

$
(13,864
)

$
(1,976
)

$
(2,672
)

$
11,082  26




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##### Table of Contents



Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  This Annual Report on
    Form 10-K
    contains forward-looking statements within the meaning of
    Section 21E of the Securities Exchange Act of 1934, as
    amended, and Section 27A of the Securities Act of 1933, as
    amended, that involve risks and uncertainties. All statements
    other than statements of historical information provided herein
    are forward-looking statements and may contain information about
    financial results, economic conditions, trends and known
    uncertainties. Our actual results could differ materially from
    those discussed in the forward-looking statements as a result of
    a number of factors, which include those discussed in this
    section and elsewhere in this report under Item 1A.
    Risk Factors and the risks discussed in our other
    filings with the Securities and Exchange Commission. Readers are
    cautioned not to place undue reliance on these forward-looking
    statements, which reflect managements analysis, judgment,
    belief or expectation only as of the date hereof. We undertake
    no obligation to publicly revise these forward-looking
    statements to reflect events or circumstances that arise after
    the date hereof.
  Overview
         27




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##### Table of Contents



Results
    of Operations for the Three Years Ended July 31, 2008, 2007
    and 2006
    Year Ended July 31,2008


2007


2006Revenue, net


99.8
%


99.7
%


99.8
%Revenue, related parties


0.2
%


0.3
%


0.2
%Total revenue


100.0
%


100.0
%


100.0
%Total Cost of revenue


69.2
%


67.5
%


68.8
%Gross profit


30.8
%


32.5
%


31.2
%Operating expenses:Selling and marketing


12.9
%


13.4
%


13.5
%General and administrative


14.7
%


17.5
%


20.0
%Impairment, restructuring and other



%


(0.2
)%


1.3
%Total operating expenses


27.6
%


30.7
%


34.8
%Income (loss) from operations


3.2
%


1.8
%


(3.6
)%Other income (expense):Interest income


0.2
%


0.3
%


0.3
%Interest expense


(7.8
)%


(9.9
)%


(8.8
)%Loss on debt extinguishment


(1.1
)%


(12.5
)%



%Other income (expense), net


1.5
%


0.7
%


0.4
%Loss from continuing operations before income taxes and
    discontinued operations


(4.0
)%


(19.6
)%


(11.7
)%Income taxes


(1.2
)%


(0.9
)%


(1.1
)%Loss from continuing operations before discontinued operations


(5.2
)%


(20.5
)%


(12.8
)%Discontinued operation, net of income taxes


(0.4
)%






Net loss


(5.6
)%


(20.5
)%


(12.8
)%Accretion of preferred stock dividends


(1.7
)%



%



%Net loss attributable to common shareholders


(7.3
)%


(20.5
)%


(12.8
)%   Comparison
    of the Years 2008, 2007 and 2006
  Revenue
   28




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##### Table of Contents



Cost of
    Revenue and Gross Profit
           29




---



##### Table of Contents



Operating
    Expenses
  Selling and Marketing
      General and Administrative
      Operating
    Expenses  Impairment, Restructuring and
    Other
       30




---



##### Table of Contents



Interest
    Income
      Interest
    Expense
      Loss on
    debt extinguishment
      Other
    Income (Expense), Net
     31




---



##### Table of Contents



Income
    Tax Expense
    Discontinued
    Operations
    Liquidity
    and Capital Resources
         32




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##### Table of Contents



Contractual
    Obligations and Commercial Commitments
    Less than








More thanDescription

Total


1 Year


1-3 Years


3-5 Years


5 Years(In thousands)Short/Long-term debt

$
113,950


$
6,100


$
2,200


$
105,650


$
Interest on debt (a)


43,144



9,051



17,685



16,408



Capital leases


30,840



5,917



7,032



5,571



12,320Bandwidth commitments


4,178



2,321



1,857







Property leases (b)(c)(d)


83,946



12,578



19,442



17,983



33,943Total

$
276,058


$
35,967


$
48,216


$
145,612


$
46,263     (a)
    
    Interest on debt assumes LIBOR is fixed at 3.16%(b)
    
    Amounts exclude certain common area maintenance and other
    property charges that are not included within the lease payment.(c)
    
    On February 9, 2005, the Company entered into an Assignment
    and Assumption Agreement with a Las Vegas-based company, whereby
    this company purchased from us the right to use
    29,000 square feet in our Las Vegas data center, along with
    the infrastructure and equipment associated with this space. In
    exchange, we received an initial payment of $600,000 and were to
    receive $55,682 per month over two years. On May 31, 2006,
    we received full payment of the remaining unpaid balance. This
    agreement shifts the responsibility for management of the data
    center and its employees, along with the maintenance of the
    facilitys infrastructure, to this Las Vegas-based company.
    Pursuant to this agreement, we have subleased back
    2,000 square feet of space, allowing us to continue
    servicing our existing customer base in this market. Commitments
    related to property leases include an amount related to the
    2,000 square feet sublease.(d)
    
    In July 2008, the Company entered into a lease agreement for
    approximately 11,000 square feet of data center space in the
    U.K. The Company has not yet accepted delivery of the data
    center and therefore the future committed property lease amounts
    are not reflected.  Off-Balance
    Sheet Financing Arrangements
    Critical
    Accounting Policies
   33




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##### Table of Contents



Revenue Recognition.
  set-up
    No. 00-21, EITF 00-21,
    Allowance for Doubtful Accounts.
 34




---



##### Table of Contents



Impairment of Long-lived Assets and Goodwill and Other
    Intangible Assets.
  
    significant underperformance relative to expected historical or
    projected future operating results;
    significant changes in the manner of our use of the acquired
    assets or the strategy of our overall business;
    significant negative industry or economic trends;
    significant declines in our stock price for a sustained
    period; and
    our market capitalization relative to net book value.      Impairment costs.
 35




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##### Table of Contents



Stock-Based
    Compensation Plans
            Income Taxes.
 36




---



##### Table of Contents



Recent
    Accounting Pronouncements
    FAS 142-3, FAS 142-3). FAS 142-3 FAS 142-3 FAS 142-3
       37




---



##### Table of Contents



Item 7A.
    Quantitative
    and Qualitative Disclosures About Market Risk    Item 8.
    Financial
    Statements and Supplementary Data  page F-1
  Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure    Item 9A.
    Controls
    and Procedures  Evaluation of Disclosure Controls and
    Procedures. Rules 13a-15(e) 15d-15(e)
  Changes in Internal Control. Rule 13a-15(f)
  Managements
    Report On Internal Control Over Financial Reporting
  Rules 13a-15(f) 15d-15(f)
 38




---



##### Table of Contents



Form 10-K
  Item 9B.
    Other
    Information   PART III  Form 10-K Form 10-K,
  Item 10.
    Directors,
    Executive Officers and Corporate Governance      Code of Ethics.
  Item 11.
    Executive
    Compensation    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters   39




---



##### Table of Contents



Equity
    Compensation Plan Information as of July 31, 2008
    (c)Number of Securities(a)


(b)


Available for FutureNumber of Securities to


Weighted-Average


Issuancebe Issued Upon Exercise


Exercise Price of


Under Equity Compensationof Outstanding Options,


Outstanding Options,


Plans (Excluding SecuritiesPlan Category

Warrants and Rights


Warrants and Rights


Reflected in Column (a))Equity compensation plans approved by security holders


6,722,165


$
3.94



2,095,412Equity compensation plans not approved by security holders










Total


6,722,165







2,095,412   Item 13.
    Certain
    Relationships and Related Transactions, and Director
    Independence    Item 14.
    Principal
    Accounting Fees and Services   PART IV  Item 15.
    Exhibits,
    Financial Statement Schedules  1.
    Financial Statements.    2.
    Financial Statement Schedule.    3.
    Exhibits.   40




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##### Table of Contents



SIGNATURES    Navisite, Inc.
  By:
    /s/  Arthur
    P. Becker   Chief Executive Officer
     Signatures

Title

Date/s/  Andrew
    RuhanAndrew
    Ruhan

Chairman of the Board

November 6, 2008/s/  Arthur
    P. BeckerArthur
    P. Becker

President, Chief Executive
    Officer and Director
    (Principal Executive Officer)

November 6, 2008/s/  James
    W. PluntzeJames
    W. Pluntze

Chief Financial Officer
    (Principal Financial and
    Principal Accounting Officer)

November 6, 2008/s/  James
    H. DennedyJames
    H. Dennedy

Director

November 6, 2008/s/  Larry
    W. SchwartzLarry
    W. Schwartz

Director

November 6, 2008/s/  Thomas
    R. EvansThomas
    R. Evans

Director

November 6, 2008  41




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##### Table of Contents



INDEX TO
    EXHIBITS
  Exhibit No.

Description of Exhibit2
.10

Asset Purchase Agreement, dated as of August 10, 2007, by
    and among NaviSite, Inc., Navi Acquisition Corp., Alabanza,
    LLC and Hosting Ventures, LLC is incorporated herein by
    reference to Exhibit 10.1 to the Registrants Current
    Report on
    Form 8-K
    filed on August 16, 2007 (File
    No. 000-27597).2
.11

Stock Purchase Agreement, dated August 10, 2007, by and
    among NaviSite, Inc., Jupiter Hosting, Inc. and the stockholders
    of Jupiter Hosting, Inc. is incorporated herein by reference to
    Exhibit 10.2 to the Registrants Current Report on
    Form 8-K
    filed on August 16, 2007 (File
    No. 000-27597).2
.12

Agreement and Plan of Merger, dated as of September 12,
    2007, by and among NaviSite, Inc., NSite Acquisition Corp.,
    netASPx, Inc. and GTCR Fund VI, L.P. is incorporated herein
    by reference to Exhibit 10.3 to the Registrants
    Current Report on
    Form 8-K
    filed on September 18, 2007 (File
    No. 000-27597).3
.1

Amended and Restated Certificate of Incorporation is
    incorporated herein by reference to Exhibits to the
    Registrants Quarterly Report on
    Form 10-Q
    for the fiscal quarter ended October 31, 1999 (File
    No. 000-27597).3
.2

Certificate of Amendment of Amended and Restated Certificate of
    Incorporation, dated as of January 4, 2003, is incorporated
    herein by reference to Exhibits to the Registrants
    Quarterly Report on
    Form 10-Q
    for the fiscal quarter ended January 31, 2003 (File
    No. 000-27597).3
.3

Certificate of Amendment of Amended and Restated Certificate of
    Incorporation, dated as of January 7, 2003, is incorporated
    herein by reference to Exhibits to the Registrants
    Quarterly Report on
    Form 10-Q
    for the fiscal quarter ended January 31, 2003 (File
    No. 000-27597).3
.4

Certificate of Designation of Rights, Preferences, Privileges
    and Restrictions of Series A Convertible Preferred Stock,
    dated as of September 12, 2007 is incorporated herein by
    reference to Exhibit 3.1 to the Registrants Current
    Report on
    Form 8-K
    filed on September 18, 2007 (File
    No. 000-27597).3
.5

Waiver of Certificate of Designation of Rights, Preferences,
    Privileges and Restrictions of Series A Convertible
    Preferred Stock by netASPx Holdings, Inc., dated
    September 25, 2007, is incorporated herein by reference to
    Exhibit 3.1 to the Registrants Quarterly Report on
    Form 10-Q
    for the fiscal quarter ended January 31, 2008 (File
    No. 000-27597).3
.6

Amended and Restated By-Laws is incorporated herein by reference
    to Exhibits to the Registrants Quarterly Report on
    Form 10-Q
    for the fiscal quarter ended October 31, 1999 (File
    No. 000-27597).4
.1

Specimen certificate representing shares of common stock is
    incorporated herein by reference to Exhibits to the
    Registrants Registration Statement on
    Form S-1/
    A (File
    No. 333-83501).4
.2

Specimen Certificate of Series A Convertible Preferred
    Stock of NaviSite, Inc. is incorporated herein by reference to
    Exhibit 4.1 to the Registrants Current Report on
    Form 8-K
    filed on September 18, 2007 (File
    No. 000-27597).10
.1

Lease, dated as of May 14, 1999, by and between 400 River
    Limited Partnership and the Registrant is incorporated herein by
    reference to Exhibits to the Registrants Registration
    Statement on
    Form S-1
    (File
    No. 333-83501).10
.2

Amendment No. 1 to Lease, by and between 400 River Limited
    Partnership and the Registrant is incorporated by reference to
    Exhibits to the Registrants Quarterly Report on
    Form 10-Q
    for the fiscal quarter ended October 31, 2003 (File
    No. 000-27597).10
.3

Amendment No. 2 to Lease, dated December 1, 2003, by
    and between 400 River Limited Partnership and the Registrant is
    incorporated herein by reference to Exhibits to the
    Registrants Registration Statement on
    Form S-2
    filed January 22, 2004 (File
    No. 333-112087).10
.4

Amendment No. 3 to Lease, by and between 400 River Limited
    Partnership and the Registrant, is incorporated herein by
    reference to Exhibit 99.1 to the Registrants Current
    Report on
    Form 8-K
    dated September 21, 2004 (File
    No. 000-27597).10
.5

Lease, made as of April 30, 1999, by and between
    CarrAmerica Realty Corporation and the Registrant is
    incorporated herein by reference to Exhibits to the
    Registrants Registration Statement on
    Form S-1
    (File
    No. 333-83501).10
.6

First Amendment to Lease, dated as of August 9, 2006, by
    and between the Registrant and Carr NP Properties L.L.C. is
    incorporated herein by reference to Exhibit 10.1 to the
    Registrants Current Report on
    Form 8-K
    dated September 11, 2006 (File
    No. 000-27597).




---



##### Table of Contents



Exhibit No.

Description of Exhibit10
.7*

Amended and Restated 1998 Equity Incentive Plan is incorporated
    herein by reference to Exhibits to the Registrants
    Quarterly Report on
    Form 10-Q
    for the fiscal quarter ended October 31, 1999 (File
    No. 000-27597).10
.8*

NaviSite, Inc. Amended and Restated 1999 Employee Stock Purchase
    Plan is incorporated herein by reference to Appendix I to
    the Registrants Definitive Proxy Statement filed
    November 13, 2007 (File
    No. 000-27597).10
.9*

2000 Stock Option Plan is incorporated herein by reference to
    Exhibits to the Registrants Annual Report on
    Form 10-K/
    A for the fiscal year ended July 31, 2002 (File
    No. 000-27597).10
.10*

Employment Agreement, dated as of February 21, 2003, by and
    between Arthur Becker and the Registrant, is incorporated herein
    by reference to Exhibits to the Registrants Quarterly
    Report of
    Form 10-Q
    for the fiscal quarter ended January 31, 2003 (File
    No. 000-27597).10
.11*

Separation Agreement dated as of April 3, 2006, by and
    between the Registrant and Arthur P. Becker is incorporated
    herein by reference to exhibit 99.1 to the
    Registrants Current Report on
    Form 8-K
    dated April 6, 2006 (File
    No. 000-27597).10
.12

Warrant Purchase Agreement, dated as of February 13, 2007,
    by and among the Registrant, SPCP Group, LLC and SPCP Group III,
    LLC is incorporated herein by reference to Exhibit 10.1 of
    the Registrants Current Report on
    Form 8-K
    filed on February 20, 2007 (File
    No. 000-27597).10
.13

Warrant to Purchase Common Stock, dated February 13, 2007,
    issued by the Registrant to SPCP Group, LLC is incorporated
    herein by reference to Exhibit 10.2 of the
    Registrants Current Report on
    Form 8-K
    filed on February 20, 2007 (File
    No. 000-27597).10
.14

Warrant to Purchase Common Stock, dated February 13, 2007,
    issued by the Registrant to SPCP Group III, LLC is incorporated
    herein by reference to Exhibit 10.3 of the
    Registrants Current Report on
    Form 8-K
    filed on February 20, 2007 (File
    No. 000-27597).10
.15

Amendment No. 1 to Warrant, dated as of February 13,
    2007, by and between the Registrant and SPCP Group, LLC is
    incorporated herein by reference to Exhibit 10.8 to the
    Registrants Quarterly Report on
    Form 10-Q
    for the fiscal quarter ended January 31, 2007 (File
    No. 000-27597).10
.16

Credit Agreement, dated as of June 8, 2007, by and among
    NaviSite, Inc., certain of its subsidiaries, Canadian Imperial
    Bank of Commerce, through its New York agency, as issuing bank,
    administrative agent for the Lenders and as collateral agent for
    the Secured Parties and the issuing bank, CIBC World Markets
    Corp., as sole lead arranger, documentation agent and
    bookrunner, CIT Lending Services Corporation, as syndication
    agent and certain affiliated entities is incorporated herein by
    reference to Exhibit 10.1 to the Registrants Current
    Report on
    Form 8-K
    dated as of June 13, 2007 (File
    No. 000-27597).10
.17

Security Agreement, dated as of June 8, 2007, by and among
    NaviSite, Inc., certain of its subsidiaries, and Canadian
    Imperial Bank of Commerce, acting through its New York agency,
    as collateral agent is incorporated herein by reference to
    Exhibit 10.2 to the Registrants Current Report on
    Form 8-K
    dated as of June 13, 2007 (File
    No. 000-27597).10
.18

Form of Term Note, to be made by NaviSite, Inc. is incorporated
    herein by reference to Exhibit 10.3 to the
    Registrants Current Report on
    Form 8-K
    dated as of June 13, 2007 (File
    No. 000-27597).10
.19

Form of Revolving Note to be made by NaviSite, Inc. is
    incorporated herein by reference to Exhibit 10.4 to the
    Registrants Current Report on
    Form 8-K
    dated as of June 13, 2007 (File
    No. 000-27597).10
.20

Amendment, Waiver and Consent Agreement No. 1, dated as of
    August 10, 2007, by and among NaviSite, Inc., certain of
    its subsidiaries, Canadian Imperial Bank of Commerce, through
    its New York agency, as issuing bank, administrative agent for
    the Lenders and as collateral agent for the Secured Parties and
    the issuing bank, CIBC World Markets Corp., as sole lead
    arranger, documentation agent and bookrunner, CIT Lending
    Services Corporation, as syndication agent and certain
    affiliated entities is incorporated herein by reference to
    Exhibit 10.3 to the Registrants Current Report on
    Form 8-K
    dated as of August 16, 2007 (File
    No. 000-27597).




---



##### Table of Contents



Exhibit No.

Description of Exhibit10
.21

Amended and Restated Credit Agreement, dated as of
    September 12, 2007, by and among NaviSite, Inc., certain of
    its subsidiaries, Canadian Imperial Bank of Commerce, through
    its New York agency, as issuing bank, administrative agent for
    the Lenders and as collateral agent for the Secured Parties and
    the issuing bank, CIBC World Markets Corp., as sole lead
    arranger, documentation agent and bookrunner, CIT Lending
    Services Corporation, as syndication agent and certain
    affiliated entities is incorporated herein by reference to
    Exhibit 10.1 to the Registrants Current Report on
    Form 8-K
    dated as of September 18, 2007 (File
    No. 000-27597).10
.22

Term Note, dated as of September 12, 2007, issued by
    NaviSite, Inc. to CIBC, Inc. is incorporated herein by reference
    to Exhibit 10.2 to the Registrants Current Report on
    Form 8-K
    dated as of September 18, 2007 (File
    No. 000-27597).10
.23

Waiver No. 2, dated as of November 2, 2007, by and
    among NaviSite, Inc., certain of its subsidiaries, Canadian
    Imperial Bank of Commerce, through its New York agency, as
    issuing bank, administrative agent for the Lenders and as
    collateral agent for the Secured Parties and the issuing bank,
    CIBC World Markets Corp., as sole lead arranger, documentation
    agent and bookrunner, CIT Lending Services Corporation, as
    syndication agent and certain affiliated entities is
    incorporated herein by reference to Exhibit 10.2 to the
    Registrants Quarterly Report on
    Form 10-Q
    for the fiscal quarter ended October 31, 2007 (File
    No. 000-27597).10
.24

Amendment, Waiver and Consent Agreement No. 3, dated as of
    January 31, 2008, by and among NaviSite, Inc., certain of
    its subsidiaries, Canadian Imperial Bank of Commerce, through
    its New York agency, as issuing bank, administrative agent for
    the Lenders and as collateral agent for the Secured Parties and
    the issuing bank, CIBC World Markets Corp., as sole lead
    arranger, documentation agent and bookrunner, CIT Lending
    Services Corporation, as syndication agent and certain
    affiliated entities is incorporated herein by reference to
    Exhibit 10.3 to the Registrants Quarterly Report on
    Form 10-Q
    for the fiscal quarter ended October 31, 2007 (File
    No. 000-27597).10
.25

Amendment and Consent Agreement No. 4, dated as of
    June 20, 2008, by and among NaviSite, Inc., certain of its
    subsidiaries, Canadian Imperial Bank of Commerce, through its
    New York agency, as issuing bank, administrative agent for the
    Lenders and as collateral agent for the Secured Parties and the
    issuing bank, CIBC World Markets Corp., as sole lead arranger,
    documentation agent and bookrunner, CIT Lending Services
    Corporation, as syndication agent and certain affiliated
    entities is incorporated herein by reference to
    Exhibit 10.5 to the Registrants Quarterly Report on
    Form 10-Q
    for the fiscal quarter ended April 30, 2008 (File
    No. 000-27597).10
.26

Amendment, Waiver and Consent Agreement No. 5, dated as of
    October 30, 2008, by and among NaviSite, Inc., certain of
    its subsidiaries, Canadian Imperial Bank of Commerce, through
    its New York agency, as issuing bank, administrative agent for
    the Lenders and as collateral agent for the Secured Parties and
    the issuing bank, CIBC World Markets Corp., as sole lead
    arranger, documentation agent and bookrunner, CIT Lending
    Services Corporation, as syndication agent and certain
    affiliated entities is incorporated herein by reference to
    Exhibit 10.1 to the Registrants Current Report on
    Form 8-K dated as of October 29, 2008 (File
    No. 000-27597).10
.27

Registration Rights Agreement, dated May 27, 2003, by and
    between the Registrant and Silicon Valley Bank, is incorporated
    herein by reference to Exhibits to the Registrants
    Quarterly Report on
    Form 10-Q
    for the fiscal quarter ended April 30, 2003 (File
    No. 000-27597).10
.28

Registration Rights Agreement, dated as of January 30,
    2004, by and between the Registrant and Silicon Valley Bank is
    incorporated herein by reference to Exhibit 10.2 to the
    Registrants Current Report on
    Form 8-K
    dated January 30, 2004 (File
    No. 000-27597).10
.29

Registration Rights Agreement, dated as of September 12,
    2007, by and between NaviSite, Inc. and GTCR Fund VI, L.P.
    is incorporated herein by reference to Exhibit 10.4 to the
    Registrants Current Report on
    Form 8-K
    dated September 18, 2007 (File
    No. 000-27597).10
.30

Warrant to Purchase Stock, dated January 30, 2004, issued
    by the Registrant to Silicon Valley Bank is incorporated herein
    by reference to Exhibit 10.3 to the Registrants
    Current Report on
    Form 8-K
    dated January 30, 2004 (File
    No. 000-27597).10
.31

Form of Indemnification Agreement, as executed by
    Messrs. Andrew Ruhan, Arthur P. Becker, James H.
    Dennedy, Larry W. Schwartz, Thomas R. Evans, James W. Pluntze,
    Mark Clayman, Nasir Cochinwala and Monique Cormier is
    incorporated by reference to Exhibits to the Registrants
    Annual Report on
    Form 10-K
    for the fiscal year ended July 31, 2003 (File
    No. 000-27597).




---



##### Table of Contents



Exhibit No.

Description of Exhibit10
.32

Lease and Services Agreement by and between NaviSite Europe
    Limited and Global Switch (London) Limited is incorporated by
    reference to Exhibits to the Registrants Registration
    Statement on
    Form S-2/A
    filed on March 8, 2004 (File
    No. 333-12087).10
.33

Registration Rights Agreement, dated June 10, 2004, by and
    between the Registrant and Surebridge, Inc. is incorporated
    herein by reference to Exhibit 10.1 to the
    Registrants Current Report on
    Form 8-K
    dated June 10, 2004 (File
    No. 000-27597).10
.34

First Amendment to the Registration Rights Agreement, dated June
    2006, by and between the Registrant and Waythere, Inc. is
    incorporated by reference to Exhibit 10.1 to the
    Registrants Quarterly Report on
    Form 10-Q
    for the fiscal quarter ended October 31, 2006 (File
    No. 000-27597).10
.35

Settlement Agreement and Mutual General Release, dated as of
    January 13, 2005, by and among the Registrant, Atlantic
    Investors, LLC, Arthur P. Becker, Andrew Ruhan, Gabriel Ruhan
    and Convergence Associates, Inc., as agent for substantially all
    of the former Avasta shareholders, is incorporated herein by
    reference to Exhibit 10.1 to the Registrants Current
    Report on
    Form 8-K
    filed on February 10, 2005 (File
    No. 000-27597).10
.36*

NaviSite, Inc. Amended and Restated 2003 Stock Incentive Plan is
    incorporated herein by reference to Appendix II to the
    Registrants Definitive Schedule 14C filed
    January 5, 2005 (File
    No. 000-27597).10
.37*

Amendment No. 1 to the NaviSite, Inc. Amended and Restated
    2003 Stock Incentive Plan is incorporated herein by reference to
    Appendix II to the Registrants Definitive
    Schedule 14C filed January 5, 2005 (File
    No. 000-27597).10
.38*

Amendment No. 2 to the Amended and Restated 2003 Stock
    Incentive Plan is incorporated herein by reference to
    Appendix II to the Registrants Definitive
    Schedule 14C filed March 14, 2006 (File
    No. 000-27597).10
.39

Agreement and Acknowledgement, dated October 19, 2005, by
    and among the Registrant, Waythere, Inc., ClearBlue Technologies
    Management, Inc., Avasta, Inc., Conxion Corporation, Intrepid
    Acquisition Corp. and Lexington Acquisition Corp. is
    incorporated herein by reference to Exhibit 10.63 to the
    Registrants Annual Report on
    Form 10-K
    for the fiscal year ended July 31, 2005 (File
    No. 000-27597).10
.40*

Employment Offer Letter, dated August 12, 2005, between the
    Registrant and Monique Cormier is incorporated herein by
    reference to Exhibit 10.64 to the Registrants Annual
    Report on
    Form 10-K
    for the fiscal year ended July 31, 2005 (File
    No. 000-27597).10
.41*

Separation Agreement, dated as of April 3, 2006, by and
    between the Registrant and Monique Cormier is incorporated
    herein by reference to Exhibit 99.3 to the
    Registrants Current Report on
    Form 8-K
    dated April 6, 2006 (File
    No. 000-27597).10
.42*

Separation Agreement, dated as of July 31, 2007, by and
    between the Registrant and James W. Pluntze is incorporated
    herein by reference to Exhibit 99.1 to the
    Registrants Current Report on
    Form 8-K
    dated August 2, 2007 (File
    No. 000-27597).10
.43*

NaviSite, Inc. Amended and Restated Director Compensation Plan
    is incorporated herein by reference to Exhibit 99.1 to the
    Registrants Current Report on
    Form 8-K
    dated August 16, 2007 (File
    No. 000-27597).10
.44*

2007 Bonus Letter, dated October 24, 2006, by and between
    the Registrant and Arthur Becker is incorporated herein by
    reference to Exhibit 10.71 to the Registrants Annual
    Report on
    Form 10-K
    for the fiscal year ended July 31, 2006 (File
    No. 000-27597).10
.45*

2007 Bonus Letter, dated October 24, 2006, by and between
    the Registrant and Monique Cormier is incorporated herein by
    reference to Exhibit 10.73 to the Registrants Annual
    Report on
    Form 10-K
    for the fiscal year ended July 31, 2006 (File
    No. 000-27597).10
.46*

Offer of Employment, dated as of May 19, 2004, by and
    between the Registrant and Mark Clayman, is incorporated herein
    by reference to Exhibit 10.1 to the Registrants
    Quarterly Report on
    Form 10-Q
    for the fiscal quarter ended April 30, 2008 (File
    No. 000-27597).10
.47*

Separation Agreement, dated as of April 3, 2006, by and
    between the Registrant and Mark Clayman, is incorporated herein
    by reference to Exhibit 10.2 to the Registrants
    Quarterly Report on
    Form 10-Q
    for the fiscal quarter ended April 30, 2008 (File
    No. 000-27597).10
.48*

Offer of Employment, dated as of June 17, 2005, by and
    between the Registrant and Nasir Cochinwala, is incorporated
    herein by reference to Exhibit 10.3 to the
    Registrants Quarterly Report on
    Form 10-Q
    for the fiscal quarter ended April 30, 2008 (File
    No. 000-27597).




---



##### Table of Contents



Exhibit No.

Description of Exhibit10
.49*

Separation Agreement, dated as of April 3, 2006, by and
    between the Registrant and Nasir Cochinwala, is incorporated
    herein by reference to Exhibit 10.4 to the
    Registrants Quarterly Report on
    Form 10-Q
    for the fiscal quarter ended April 30, 2008 (File
    No. 000-27597).14


Code of Business Conduct and Ethics is incorporated herein by
    reference to Exhibit 14 to the Registrants Annual
    Report on
    Form 10-K
    for the fiscal year ended July 31, 2005 (File
    No. 000-27597).21


Subsidiaries of the Registrant.23


Consent of KPMG LLP, Independent Registered Public Accounting
    Firm.31
.1

Certification of Chief Executive Officer pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.31
.2

Certification of Chief Financial Officer pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.32
.1

Certification of the Chief Executive Officer pursuant to
    18 U.S.C. Section 1350, as Adopted Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.32
.2

Certification of the Chief Financial Officer pursuant to
    18 U.S.C. Section 1350, as Adopted Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.     (*)
    
    Management contract or compensatory plan or arrangement required
    to be filed as an Exhibit to this Annual Report on
    Form 10-K.




---



##### 



INDEX TO
    NAVISITE, INC. CONSOLIDATED FINANCIAL STATEMENTS   
 PageReport of Independent Registered Public
    Accounting Firm


F-2Consolidated Balance Sheets as of July 31,
    2008 and 2007


F-3Consolidated Statements of Operations for the
    years ended July 31, 2008, 2007 and 2006


F-4Consolidated Statements of Changes in Convertible
    Preferred Stock and Stockholders Deficit and Comprehensive
    Income (Loss) for the years ended July 31, 2008, 2007 and
    2006


F-5Consolidated Statements of Cash Flows for the
    years ended July 31, 2008, 2007 and 2006


F-6Notes to Consolidated Financial Statements


F-7Report of Independent Registered Public
    Accounting Firm on Financial Statement Schedule


F-41Financial Statement Schedule II 
    Valuation and Qualifying Accounts


F-42   F-1




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                F-2




---



##### Table of Contents



NAVISITE,
    INC.
  CONSOLIDATED
    BALANCE SHEETS
  July 31,2008


2007(In thousands, except par value)ASSETSCurrent assets:Cash and cash equivalents

$
3,261


$
11,701Accounts receivable, less allowance for doubtful accounts of
    $897 and $781 at July 31, 2008 and 2007, respectively


18,927



15,051Unbilled accounts receivable


1,711



920Prepaid expenses and other current assets


11,557



15,975Total current assets


35,456



43,647Property and equipment, net


38,141



15,841Intangible assets, net of accumulated amortization


29,290



7,755Goodwill


66,683



43,159Other assets


4,258



4,158Restricted cash


1,885



1,684Total assets

$
175,713


$
116,244LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Notes payable to the AppliedTheory Estate

$



$
6,000Notes payable, current portion


6,100



1,063Capital lease obligations, current portion


3,166



1,829Accounts payable


7,033



3,913Accrued expenses


11,112



12,933Accrued interest


1,367



1,698Accrued lease abandonment costs, current portion


857



863Deferred revenue


3,025



3,720Deferred other income and customer deposits


1,138



1,017Total current liabilities


33,798



33,036Capital lease obligations, less current portion


14,922



1,030Accrued lease abandonment costs, less current portion


428



645Deferred tax liabilities


5,597



3,685Other long-term liabilities


4,361



2,612Notes payable, less current portion


107,850



89,100Total liabilities


166,956



130,108Series A Convertible Preferred stock, $0.01 par value;
    designated 5,000 shares; issued and outstanding: 3,320 at
    July 31, 2008; 0 shares at July 31, 2007


27,529



Commitments and contingencies (Note 13)Stockholders deficit:Common stock, $0.01 par value; Authorized
    395,000 shares; issued and outstanding: 35,232 and 33,506
    at July 31, 2008 and 2007, respectively


352



335Accumulated other comprehensive income


253



381Additional paid-in capital


485,086



481,199Accumulated deficit


(504,463
)


(495,779
)Total stockholders deficit


(18,772
)


(13,864
)Total liabilities and stockholders deficit

$
175,713


$
116,244    F-3




---



##### Table of Contents



NAVISITE,
    INC.
  CONSOLIDATED
    STATEMENTS OF OPERATIONS
  Years Ended July 31,2008


2007


2006(In thousands, except per share data)Revenue, net

$
154,194


$
125,860


$
108,844Revenue, related parties


372



322



243Total revenue


154,566



126,182



109,087Cost of revenue (includes stock-based compensation expense under
    SFAS 123R of $1,794, $1,342, $1,024 for years ended
    July 31, 2008, 2007 and 2006, respectively)


106,897



85,196



75,064Gross profit


47,669



40,986



34,023Operating expenses:Selling and marketing (includes stock-based compensation expense
    under SFAS 123R of $746, $570, $346 for years ended
    July 31, 2008, 2007 and 2006, respectively)


19,909



16,924



14,756General and administrative (includes stock-based compensation
    expense under SFAS 123R of $1,830, $1,784, $2,988 for years
    ended July 31, 2008, 2007 and 2006, respectively)


22,773



22,043



21,787Impairment, restructuring and other, net






(231
)


1,373Total operating expenses


42,682



38,736



37,916Income (loss) from operations


4,987



2,250



(3,893
)Other income (expense):Interest income


264



337



283Interest expense


(12,033
)


(12,476
)


(9,585
)Loss on debt extinguishment


(1,651
)


(15,712
)


Other income, net


2,295



864



437Loss from continuing operations before income taxes and
    discontinued operations


(6,138
)


(24,737
)


(12,758
)Income taxes


(1,834
)


(1,173
)


(1,173
)Loss from continuing operations before discontinued operations


(7,972
)


(25,910
)


(13,931
)Loss from discontinued operations, net of income taxes


(712
)






Net loss


(8,684
)

$
(25,910
)

$
(13,931
)Accretion of preferred stock dividends


(2,656
)






Net loss attributable to common stockholders

$
(11,340
)

$
(25,910
)

$
(13,931
)Basic and diluted net loss per common shareLoss from continuing operations before discontinued operations
    attributable to common stockholders

$
(0.31
)

$
(0.85
)

$
(0.49
)Loss from discontinued operations, net of income taxes


(0.02
)






Net loss attributable to common stockholders

$
(0.33
)

$
(0.85
)

$
(0.49
)Basic and diluted weighted average number of common shares
    outstanding


34,731



30,512



28,601    F-4




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##### Table of Contents



NAVISITE,
    INC.
  CONSOLIDATED
    STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK AND
 STOCKHOLDERS
    DEFICIT AND COMPREHENSIVE INCOME (LOSS)
  AccumulatedOther


Additional





Stockholders


ComprehensivePreferred Stock



Common Stock


Deferred


Comprehensive


Paid-in


Accumulated


Equity


IncomeShares


Amount



Shares


Amount


Compensation


Income


Capital


Deficit


(Deficit)


(Loss)Balance at July 31, 2005





$





28,487


$
285


$
(633
)

$
156


$
453,458


$
(455,938
)

$
(2,672
)Exercise of common stock options











472



5











1,116







1,121Issuance of stock warrants to Silver Point Finance



























9,101







9,101Stock compensation and amortization of deferred stock-based
    compensation



















633







3,725







4,358Net loss































(13,931
)


(13,931
)


(13,931
)Currency translation adjustment























47











47



47Total Comprehensive income (loss)







































(13,884
)Balance at July 31, 2006











28,959



290







203



467,400



(469,869
)


(1,976
)Exercise of common stock options











1,442



14











4,034







4,048Exercise of common stock purchase warrants











1,730



17



















17Conversion of note payable











1,375



14











3,850







3,864Issuance of common stock purchase warrants



























2,219







2,219Stock compensation and amortization of deferred stock-based
    compensation



























3,696







3,696Net loss































(25,910
)


(25,910
)


(25,910
)Currency translation adjustment























178











178



178Total Comprehensive income (loss)







































(25,732
)Balance at July 31, 2007











33,506



335







381



481,199



(495,779
)


(13,864
)Exercise of common stock options and shares issued under
    employee stock purchase plan











664



7











1,947







1,954Issuance of preferred stock


3,125



24,873
























Preferred stock dividend


195



2,656




















(2,656
)






(2,656
)Issuance of common stock related to acquisition











25















226







226Exercise of common stock purchase warrants











1,000



10



















10Vesting of restricted stock and stock-based compensation











37















4,370







4,370Net loss































(8,684
)


(8,684
)


(8,684
)Currency translation adjustment























(128
)










(128
)


(128
)Total comprehensive income (loss)







































(8,812
)Balance at July 31, 2008


3,320


$
27,529




35,232


$
352


$



$
253


$
485,086


$
(504,463
)

$
(18,772
)    F-5




---



##### Table of Contents



NAVISITE,
    INC.
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS
  Years Ended July 31,2008


2007


2006(In thousands)Cash flows from operating activities:Net loss

$
(8,684
)

$
(25,910
)

$
(13,931
)Loss from discontinued operations


712







Loss from continuing operations before discontinued operations


(7,972
)


(25,910
)


(13,931
)Adjustments to reconcile net loss to net cash provided by
    operating activities of continuing operations:Depreciation and amortization


21,108



13,684



12,791Mark to market for interest rate cap


91



106



110Deferred income tax expense


1,834



1,173



1,174(Gain) loss on disposal of assets


17



(11
)


(17
)Gain on settlements


(1,607
)






(38
)Impairment costs (recoveries) associated with abandoned leases






(231
)


1,373Amortization of warrants






1,907



657Non-cash stock compensation


4,370



3,696



4,358Provision for bad debts


581



36



51Loss on debt extinguishment


1,651



15,712



Changes in operating assets and liabilities, net of impact of
    acquisitions Accounts receivable


(500
)


(3,215
)


(1,235
)Due from related parties






30



71Unbilled accounts receivable


(765
)


(490
)


(67
)Prepaid expenses and other current assets, net


(7,409
)


(608
)


902Other assets


100



1,365



945Accounts payable


2,241



(1,710
)


(1,949
)Deferred other income and customer deposits


121



(653
)


956Other long-term liabilities


357



(165
)


1,795Accrued expenses and deferred revenue


(7,644
)


2,198



(6,526
)Net cash provided by operating activities of continuing
    operations


6,574



6,914



1,420Cash flows from investing activities of continuing operations:Purchase of property and equipment


(11,975
)


(7,934
)


(5,772
)Cash used for acquisitions, net of cash acquired


(31,373
)






Proceeds from the sale of equipment


1



11



17Changes in restricted cash position


13,535



(7,986
)


(6,335
)Net cash used for investing activities of continuing operations


(29,812
)


(15,909
)


(12,090
)Cash flows from financing activities of continuing operations:Proceeds from exercise of stock options & employee
    stock purchase plan


1,954



4,048



1,121Proceeds from exercise of warrants


10



17Proceeds from notes payable, net


28,881



95,517



70,436Repayment of notes payable


(10,114
)


(78,074
)


(2,340
)Repayment of modified accounts receivable line










(20,400
)Payment under note payable to Waythere, Inc. (formerly
    Surebridge)










(34,611
)Debt issuance costs


(1,509
)


(1,541
)


(4,865
)Payments on capital lease obligations


(3,827
)


(2,631
)


(2,127
)Net cash provided by financing activities of continuing
    operations


15,395



17,336



7,214Cash used for operating activities of discontinued operations


(597
)






Net (decrease) increase in cash and cash equivalents


(8,440
)


8,341



(3,456
)Cash and cash equivalents, beginning of year


11,701



3,360



6,816Cash and cash equivalents, end of year

$
3,261


$
11,701


$
3,360Supplemental disclosure of cash flow information:Cash paid for interest

$
11,397


$
7,709


$
11,540Supplemental disclosure of non-cash transactions:Equipment purchased under capital leases

$
17,652


$
2,668


$
1,868Conversion of long term debt to common stock

$



$
3,864


$
Issuance of Series A Convertible Preferred Stock in
    connection with netASPx acquisition

$
24,873


$



$
Accretion of Preferred Stock

$
2,656


$



$
    F-6




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##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
  (1)
    Description
    of Business    (2)
    Summary
    of Significant Accounting Policies  (a)
    Basis
    of Presentation and Background    
    In December 2002, we acquired all of the issued and outstanding
    stock of ClearBlue Technologies Management, Inc., or CBTM, a
    subsidiary of CBT, which previously had acquired assets from the
    bankrupt estate of AppliedTheory Corporation related to
    application management and application hosting services. This
    acquisition added application management and development
    capabilities to our managed application services.
    In February 2003, we acquired Avasta, Inc., a provider of
    application management services, adding automated application
    and device monitoring software capabilities to our managed
    application services.
    In April 2003, we acquired Conxion Corporation, a provider of
    application hosting, content and electronic software
    distribution and security services. This acquisition added
    proprietary content delivery software and related network
    agreements to our managed application services and managed
    infrastructure services.
    In May 2003, we acquired assets of Interliant, Inc. related to
    managed messaging, application hosting and application
    development services. This acquisition added messaging-specific
    services and capabilities and IBM Lotus Domino expertise, and
    formed the core of our managed messaging services.
    In August 2003, we acquired assets of CBT related to
    co-location, bandwidth, security and disaster recovery services,
    enhancing our managed infrastructure services and adding
    physical plant assets. Specifically, we acquired all of the
    outstanding shares of six wholly-owned subsidiaries of CBT with
    data centers located in Chicago, Illinois; Las Vegas, Nevada;
    Los Angeles, California; Milwaukee, Wisconsin; Oakbrook,
    Illinois; and Vienna, Virginia and assumed the revenue and
    expenses of four additional wholly-owned subsidiaries of CBT
    with data centers located in Dallas, Texas; New York, New York;
    San Francisco, California; and Santa Clara,
    California, which four entities we later acquired.
    In June 2004, we completed the acquisition of substantially all
    of the assets and liabilities of Surebridge, Inc., a privately
    held provider of managed application services for mid-market
    companies. This acquisition broadened our managed application
    services, particularly in the areas of financial management,
    supply chain management, human resources management and customer
    relationship management. F-7




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   
    In August 2007 we acquired the outstanding capital stock of
    Jupiter Hosting, Inc., a privately held company based in
    Santa Clara, CA that provides managed hosting services. We
    also acquired the assets and assumed certain liabilities of
    Alabanza, LLC and Hosting Ventures, LLC (collectively
    Alabanza). Alabanza was a provider of dedicated and
    shared managed hosting services.
    In September 2007 we acquired the outstanding capital stock of
    netASPx, Inc., an application management service provider. In
    October 2007, we acquired the assets of iCommerce, Inc., a
    reseller of dedicated hosting services.  (b)
    Principles
    of Consolidation    (c)
    Use of
    Estimates    (d)
    Cash
    and Cash Equivalents and Restricted Cash      (e)
    Revenue
    Recognition  co-location
   F-8




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    No. 00-21, EITF 00-21,
  (f)
    Concentration
    of Credit Risk    (g)
    Comprehensive
    Income (Loss)    (h)
    Property
    and Equipment     F-9




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (i)
    Long-lived
    Assets, Goodwill and Other Intangibles  Accounting for the Impairment or Disposal of Long-Lived
    Assets
  Goodwill and Other Intangible
    Assets.
  (j)
    Advertising
    Costs    (k)
    Income
    Taxes  Accounting for Income Taxes.
      (l)
    Derivative
    Financial Instruments   F-10




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (m)
    Lease
    Expense  Accounting
    for Leases
  (n)
    Stock-Based
    Compensation Plans  Share-Based Payment, an amendment of FASB Statements
    Nos. 123 and 95,
      Stock
    Options
    Years Ended July 31,2008


2007


2006(In thousands)Cost of revenue

$
1,724


$
1,342


$
1,024Selling and marketing


710



570



346General and administrative


903



1,784



2,988$
3,337


$
3,696


$
4,358  F-11




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  lock-up
      Years Ended July 31,2008


2007


2006Risk-free interest rate


3.40
%


4.62
%


4.55
%Expected volatility


82.65
%


99.03
%


107.04
%Expected life (years)


2.50



3.00



2.51Weighted average fair value of options granted

$
3.21


$
3.19


$
1.27       WeightedAverageWeighted


RemainingNumber


Average


Contractual


Aggregateof


Exercise


Term


IntrinsicShares


Price


(Years)


Value(Thousands)Options outstanding, beginning of year


6,655,920


$
3.62Granted


2,002,500


$
6.27Exercised


(597,732
)

$
2.91Forfeited or Expired


(1,338,523
)

$
6.28Options outstanding, July 31, 2008


6,722,165


$
3.94



7.36


$
3,956Options exercisable, July 31, 2008


4,758,115


$
3.51



6.70


$
3,680  F-12




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Non-vested
    Shares
      Years Ended July 31,2008


2007


2006(In thousands)Cost of revenue

$
3


$



$
Selling and marketing


2







General and administrative


898







$
903


$



$
     Employee
    Stock Purchase Plan
        Years Ended July 31,2008


2007


2006(In thousands)Cost of revenue

$
67


$



$
Selling and marketing


34







General and administrative


29







$
130


$



$
    F-13




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (o)
    Basic
    and Diluted Net Loss Per Common Share      Years Ended July 31,2008


2007


2006Common stock options


1,943,861



1,984,040



307,324Common stock warrants


1,197,992



1,428,209



1,742,916Nonvested stock


151,604







Series A convertible preferred stock


3,356,202







ESPP


28,119







Total


6,677,778



3,412,249



2,050,240   (p)
    Segment
    Reporting    (q)
    Recent
    Accounting Pronouncements    FAS 142-3, FAS 142-3). FAS 142-3 FAS 142-3 FAS 142-3
     F-14




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
          (r)
    Foreign
    Currency    (s)
    Reclassifications    (3)
    Impairment
    of Long-Lived Assets     F-15




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (4)
    Property
    and Equipment    July 31,2008


2007(In thousands)Office furniture and equipment

$
4,522


$
3,416Computer equipment


68,968



53,393Software licenses


15,270



12,868Leasehold improvements


26,981



10,824115,741



80,501Less: Accumulated depreciation and amortization


(77,600
)


(64,660
)Property and equipment, net

$
38,141


$
15,841         July 31,2008


2007(In thousands)Cost

$
30,242


$
11,173Accumulated depreciation and amortization


(11,777
)


(8,458
)$
18,465


$
2,715    F-16




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (5)
    Intangible
    Assets    July 31, 2008Gross Carrying


Accumulated


Net CarryingAmount


Amortization


Amount(In thousands)Customer lists

$
39,670


$
(23,400
)

$
16,270Customer contract backlog


14,600



(4,845
)


9,755Developed technology


3,140



(966
)


2,174Vendor contracts


700



(314
)


386Trademarks


670



(105
)


565Non-compete agreements


206



(66
)


140Total

$
58,986


$
(29,696
)

$
29,290   July 31, 2007Gross Carrying


Accumulated


Net CarryingAmount


Amortization


Amount(In thousands)Customer lists

$
25,951


$
(19,388
)

$
6,563Customer contract backlog


3,400



(2,208
)


1,192Developed technology


440



(440
)


Total

$
29,791


$
(22,036
)

$
7,755       Year Ending July 31,

(In thousands)2009

$
7,1982010

$
6,0682011

$
5,9212012

$
5,7762013

$
2,307   (6)
    Goodwill    2008


2007


2006(In thousands)Goodwill as of August 1

$
43,159


$
43,159


$
43,159Goodwill acquired


23,524







Goodwill as of July 31

$
66,683


$
43,159


$
43,159  F-17




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (7)
    Acquisition  (a)
    Acquisition
    of Jupiter Hosting, Inc.      August 10, 2007(In thousands)Current assets

$
1,260Property and equipment


1,530Other assets


127Intangible assets


4,980Goodwill


3,542Total assets


11,439Current liabilities


(1,908
)Long-term liabilities


(677
)Total liabilities


(2,585
)Net assets acquired

$
8,854      F-18




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (b)
    Acquisition
    of Alabanza, LLC and Hosting Ventures, LLC      August 10, 2007(In thousands)Current assets

$
362Property and equipment


776Intangible assets


4,676Goodwill


2,267Total assets


8,081Current liabilities


(903
)Long-term liabilities


(84
)Total liabilities


(987
)Net assets acquired

$
7,094     (c) Acquisition
    of netASPx, Inc.
   F-19




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      September 12, 2007(In thousands)Current assets

$
4,999Property and equipment


3,750Other assets


51Intangible assets


19,200Goodwill


17,656Total assets


45,656Current liabilities


(4,086
)Long-term liabilities


(535
)Total liabilities


(4,621
)Net assets acquired

$
41,035     (d)
    Acquisition
    of iCommerce, Inc.   F-20




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (e)
    Unaudited
    Pro Forma Information    Fiscal Years Ending July 31,2008


2007(In thousands)Unaudited


UnauditedTotal revenue

$
156,230


$
167,333Loss from continuing operations before discontinued operations

$
(8,400
)

$
(29,435
)Net loss attributable to common stockholders

$
(12,103
)

$
(32,427
)Net loss per share attributable to common stockholders

$
(0.35
)

$
(1.06
)       (8)
    Discontinued
    Operations    Fiscal YearEnded July 31,2008Revenue

$
313Cost of revenues


703Depreciation and amortization


115Total cost of revenues


818Gross profit (loss)


(505
)Operating expenses:Selling and marketing


207Loss from discontinued operations before income taxes


(712
)Income taxes


Loss from discontinued operations, as reported

$
(712
)  F-21




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (9)
    Investment
    in Debt Securities      (10)
    Accrued
    Expenses    July 31,2008


2007(In thousands)Accrued payroll, benefits and commissions

$
4,561


$
6,311Accrued legal


229



220Accrued accounts payable


3,256



3,633Accrued sales/use, property and miscellaneous taxes


599



889Accrued other


2,467



1,880$
11,112


$
12,933   (11)
    Debt    July 31,


July 31,2008


2007(In thousands)Term Loan, net

$
113,950


$
90,000Notes payable to the AppliedTheory Estate






6,000Other notes payable






163Total


113,950



96,163Less current portion


6,100



7,063Long-term debt

$
107,850


$
89,100  F-22




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (a)
    Senior
    Secured Credit Facility             F-23




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    EITF 96-19
          (b)
    Term
    Loans and Revolving Credit Facilities   F-24




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
              Warrant Issue Date:April 2006


February 2007Expected life (in years)


10



10Expected volatility


101.21
%


105.96
%Expected dividend rate


0.00
%


0.00
%Risk-free interest rate


4.44
%


4.58
%      F-25




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      (c)
    Note
    Payable to Atlantic Investors, LLC        (d) Revolving
    Credit Facility with Atlantic Investors, LLC
      (e)
    Notes
    Payable to the AppliedTheory Estate   F-26




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (f)
    Notes
    Payable to Landlord      (12)
    Derivative
    Instruments       F-27




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (13)
    Commitments
    and Contingencies  (a)
    Leases  Abandoned Leased Facilities.
           F-28




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
              PurchaseAccounting


Payments, LessLease Abandonment

Balance at





and Other


Accretion of


Balance atCosts for:

July 31, 2007


Expense


Adjustments


Interest


July 31, 2008Andover, MA

$
406


$



$



$
(144
)

$
262Chicago, IL


409











(159
)


250Houston, TX


481











(368
)


113Syracuse, NY


166











(166
)


Syracuse, NY


46











(25
)


21Santa Clara, CA










165



(88
)


77Santa Clara, CA










5



(5
)


Herndon, VA










167



(111
)


56Minneapolis, MN










762



(256
)


506$
1,508


$



$
1,099


$
(1,322
)

$
1,285  F-29




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Less than














AfterDescription

Total


1 Year


Year 2


Year 3


Year 4


Year 5


Year 5(In thousands)Short/Long-term debt

$
113,950


$
6,100


$
1,100


$
1,100


$
1,100


$
104,550



Interest on debt (a)


43,144



9,051



8,888



8,797



8,709



7,699



Capital leases


30,840



5,917



4,076



2,956



2,801



2,770



12,320Bandwidth commitments


4,178



2,321



1,473



384











Property leases (b)(c)(d)


83,946



12,578



10,603



8,839



8,913



9,070



33,943$
276,058


$
35,967


$
26,140


$
22,076


$
21,523


$
124,089


$
46,263     (a)
    
    Interest on debt assumes Libor is fixed at 3.16%.(b)
    
    Amounts exclude certain common area maintenance and other
    property charges that are not included within the lease payment.(c)
    
    On February 9, 2005, the Company entered into an Assignment
    and Assumption Agreement with a Las Vegas-based company, whereby
    this company purchased from us the right to use
    29,000 square feet in our Las Vegas data center, along with
    the infrastructure and equipment associated with this space. In
    exchange, we received an initial payment of $600,000 and were to
    receive $55,682 per month over two years. On May 31, 2006,
    we received full payment for the remaining unpaid balance. This
    agreement shifts the responsibility for management of the data
    center and its employees, along with the maintenance of the
    facilitys infrastructure, to this Las Vegas-based company.
    Pursuant to this agreement, we have subleased back
    2,000 square feet of space, allowing us to continue
    servicing our existing customer base in this market. Commitments
    related to property leases include an amount related to the
    2,000 square feet sublease.(d)
    
    In July 2008, the Company entered into a lease agreement for
    approximately 11,000 square feet of data center space in the
    U.K. (see Note 17). The Company has not yet accepted delivery of
    the data center and therefore the future committed property
    lease amounts are not reflected as of July 31, 2008.        (b)
    Legal
    Matters  IPO
    Securities Litigation
   F-30




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  successor-in-interest successor-in-interest Rule 10b-5 sub-group
     F-31




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Other
    litigation
      (14)
    Income
    Taxes    July 31, 2008


July 31, 2007


July 31, 2006Current


Deferred


Total


Current


Deferred


Total


Current


Deferred


Total(In thousands)Federal

$



$
1,461


$
1,461


$



$
868


$
868


$



$
868


$
868Foreign






(78
)


(78
)






















State






451



451







305



305







305



305$



$
1,834


$
1,834


$



$
1,173


$
1,173


$
1


$
1,173



1,173     July 31,


July 31,


July 31,2008


2007


2006(In thousands)Computed expected tax expense (benefit)

$
(2,087
)

$
(8,411
)

$
(4,338
)State taxes, net of federal income tax benefit


298



201



201Losses not benefited


3,623



9,383



5,310Total

$
1,834


$
1,173


$
1173  F-32




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    July 31,


July 31,2008


2007(In thousands)Deferred tax assets:Accruals and reserves

$
12,407


$
8,604Loss carryforwards


71,259



53,186Depreciation and amortization


11,818



23,491Total deferred tax assets

$
95,484


$
85,281Less: Valuation allowance


(95,484
)


(85,281
)Deferred tax liabilities:Amortization of tax goodwill

$
(5,597
)

$
(3,685
)Net deferred assets/(liabilities)

$
(5,597
)

$
(3,685
)                F-33




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      (15)
    Stockholders
    Equity  Issuance
    of Common Stock
          Issuance
    of Preferred Stock
   F-34




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  payment-in-kind
  (16)
    Stock
    Option Plans and Nonvested Stock Awards  (a)
    NaviSite
    1998 Equity Incentive Plan      2008


2007


2006Weighted





Weighted





WeightedNumber


Average


Number


Average


Number


Averageof


Exercise


of


Exercise


of


ExerciseShares


Price


Shares


Price


Shares


PriceOptions outstanding, beginning of year


120,066


$
2.55



134,998


$
2.69



201,158


$
5.76Granted





$







$







$
Exercised





$




(13,670
)

$
3.83



(8,167
)

$
3.80Cancelled


(66
)

$
3.30



(1,262
)

$
3.88



(57,993
)

$
13.17Options outstanding, end of year


120,000


$
2.55



120,066


$
2.55



134,998


$
2.69Options exercisable, end of year


120,000


$
2.55



120,066


$
2.55



134,919


$
2.69Options available for grant, end of year


















   F-35




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Options OutstandingWeighted





Options ExercisableAverage


Weighted





WeightedRemaining


Average





AverageNumber


Contractual


Exercise


Number


ExerciseRange of Exercise Prices

Outstanding


Life


Price


Outstanding


Price$ 0.01 - 2.55


120,000



4.94


$
2.55



120,000


$
2.55120,000











120,000   (b)
    NaviSite
    2003 Stock Incentive Plan         F-36




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    2008


2007


2006Weighted





Weighted





WeightedNumber


Average


Number


Average


Number


Averageof


Exercise


of


Exercise


of


ExerciseShares


Price


Shares


Price


Shares


PriceOptions outstanding, beginning of year


6,533,189


$
3.59



6,453,130


$
2.77



5,880,270


$
3.06Granted


2,002,500


$
6.27



2,335,210


$
5.19



2,185,825


$
1.93Exercised


(597,732
)

$
2.91



(1,427,881
)

$
2.80



(463,175
)

$
2.35Cancelled


(1,338,457
)

$
6.28



(827,270
)

$
3.08



(1,149,790
)

$
2.86Options outstanding, end of year


6,599,500


$
3.92



6,533,189


$
3.59



6,453,130


$
2.77Options exercisable, end of year


4,635,450


$
3.46



3,796,340


$
3.05



3,326,576


$
3.25Options available for grant, end of year


2,095,412







3,192,845







4,700,785   Options OutstandingWeighted





Options ExercisableAverage


Weighted





WeightedRemaining


Average





AverageNumber


Contractual


Exercise


Number


ExerciseRange of Exercise Prices

Outstanding


Life


Price


Outstanding


Price$0.01 - 1.48


657,747



7.41


$
1.40



596,702


$
1.40$1.49 - 1.58


925,938



6.69


$
1.58



912,144


$
1.58$1.59 - 2.55


1,032,108



6.03


$
2.26



952,835


$
2.29$2.56 - 3.90


680,465



8.83


$
3.43



191,884


$
3.38$3.91 - 4.39


766,256



7.84


$
4.13



415,402


$
4.19$4.40 - 5.28


227,334



8.38


$
4.75



134,068


$
4.76$5.29 - 5.41


800,000



5.50


$
5.41



800,000


$
5.41$5.42 - 6.44


663,837



8.62


$
5.73



304,245


$
5.73$6.45 - 8.26


661,815



8.96


$
7.00



257,825


$
6.98$8.27 - 10.81


184,000



8.81


$
9.73



70,345


$
9.456,599,500











4,635,450   Non-vested
    shares issued under the 2003 Plan
    Weighted AverageNumber


Grant Dateof Shares


Fair ValueNon-vested stock outstanding, beginning of year





$
Granted


433,390


$
6.14Vested


(36,736
)

$
5.50Forfeited


(29,250
)

$
7.93Non-vested stock outstanding, July 31, 2008


367,404


$
6.06  F-37




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        (c)
    Other
    Stock Option Grants    (d)
    1999
    Employee Stock Purchase Plan        (17)
    Related
    Party Transactions   F-38




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
            (18)
    Subsequent
    Events  payment-in-kind
 F-39




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (19)
    Selected
    Quarterly Financial Data (Unaudited)    Fiscal Year Ended July 31, 2008Q1


Q2


Q3


Q4(In thousands)Revenue

$
36,107


$
38,903


$
39,322


$
40,234Gross profit


11,062



11,953



12,029



12,625Net loss attributable to common stockholders


(4,754
)


(2,875
)


(2,474
)


(1,237
)Net loss per common share (a)

$
(0.14
)

$
(0.08
)

$
(0.07
)

$
(0.04
)   Fiscal Year Ended July 31, 2007Q1


Q2


Q3


Q4(In thousands)Revenue

$
28,540


$
30,197


$
32,748


$
34,697Gross profit


9,297



9,651



10,834



11,204Net loss


(2,643
)


(3,816
)


(2,359
)


(17,092
)Net loss per common share (a)

$
(0.09
)

$
(0.13
)

$
(0.08
)

$
(0.53
)   Fiscal Year Ended July 31, 2006Q1


Q2


Q3


Q4(In thousands)Revenue

$
25,440


$
26,305


$
27,923


$
29,419Gross profit


7,763



7,612



8,798



9,850Net loss


(3,470
)


(3,968
)


(3,448
)


(3,045
)Net loss per common share (a)

$
(0.12
)

$
(0.14
)

$
(0.12
)

$
(0.11
)     (a)
    
    Net loss per common share is computed independently for each of
    the quarters based on the weighted average number of shares
    outstanding during the quarter. Therefore, the aggregate per
    share amount for the quarters may not equal the amount
    calculated for the full year. F-40




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##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM     Form 10-K. Form 10-K.
     F-41




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##### Table of Contents



NAVISITE,
    INC.



VALUATION
    AND QUALIFYING ACCOUNTS  Years Ended July 31, 2008, 2007, and 2006Balance at


Additions





Deductions


Balance atBeginning


Charged to





from


End ofof Year


Expense


Other


Reserve


Year(In thousands)Year ended July 31, 2006:Allowance for doubtful accounts

$
2,887


$
51


$



$
(994
)

$
1,944Year ended July 31, 2007:Allowance for doubtful accounts

$
1,944


$
36


$



$
(1,199
)

$
781Year ended July 31, 2008:Allowance for doubtful accounts

$
781


$
581


$



$
(465
)

$
897  F-42