##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, 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, 2006o

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
    of incorporation or organization)

(I.R.S. Employer
    Identification No.)400 Minuteman Road
    Andover, Massachusetts(Address of principal
    executive offices)

01810(zip
    code)   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
  Rule 12b-2
 o o þ
  Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE




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##### 



NAVISITE,
    INC.
    2006 ANNUAL REPORT
    ON
    FORM 10-K
    TABLE OF CONTENTS
  PageNumberPART IItem 1.


Business


3Item 1A.


Risk
    Factors


12Item 1B.


Unresolved Staff
    Comments


20Item 2.


Properties


21Item 3.


Legal
    Proceedings


21Item 4.


Submission of
    Matters to a Vote of Security Holders


23PART IIItem 5.


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


24Item 6.


Selected
    Consolidated Financial Data


25Item 7.


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


26Item 7A.


Quantitative and
    Qualitative Disclosures about Market Risk


34Item 8.


Financial
    Statements and Supplementary Data


34Item 9.


Changes in and
    Disagreements With Accountants on Accounting and Financial
    Disclosure


34Item 9A.


Controls and
    Procedures


34Item 9B.


Other
    Information


35PART IIIItem 10.


Directors and
    Executive Officers of the Registrant


35Item 11.


Executive
    Compensation


35Item 12.


Security Ownership
    of Certain Beneficial Owners and Management


35Item 13.


Certain
    Relationships and Related Transactions


36Item 14.


Principal
    Accounting Fees and Services


36PART IVItem 15.


Exhibits, Financial
    Statement Schedules


36Signatures


37Index to NaviSite,
    Inc. Consolidated Financial Statements


F-1    Ex-21 Subsidiaries of the
    RegistrantEx-23 Consent of KPMG LLPEx-31.1 Section 302
    Certification of CEOEx-31.2 Section 302
    Certification of CFOEx-32.1 Section 906
    Certification of CEOEx-32.2 Section 906
    Certification of CFO  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
    tm
    Application
    Management
  
    Application management services  Defined services
    provided for specific packaged applications that are incremental
    to managed services. Services can include monitoring,
    diagnostics and problem resolution. Frequently sold as a
    follow-on to a professional services project.
    Software as a Service  Enablement of Software as a
    Service to the ISV community.
    Development Services  Services include eBusiness/Web
    solutions, enterprise integration, business intelligence,
    content management and user interface design.
    Custom Services  Services include custom application
    management and remote infrastructure management.  Hosting
    Services
  
    Managed services  Support provided for hardware and
    software located in a data center. Services include business
    continuity and disaster recovery, connectivity, content
    distribution, database administration and performance tuning,
    desktop support, hardware management, monitoring, network
    management, security management, server and operating system
    management and storage management. 3




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
    Content Delivery  Includes the delivery of software
    electronically using NaviSite technology to manage version
    control and accelerated content distribution.
    Colocation  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.  Professional
    Services
  
    For leading enterprise software applications such as Oracle,
    PeopleSoft, JD Edwards and Siebel Systems, NaviSite Professional
    Services helps organizations plan, implement and maintain these
    applications.
    Optimize scalable, business-driven software solutions. Specific
    services include planning, implementation, maintenance,
    optimization and compliance services.    tm tm tm
  tm tm 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. 4




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
    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 colocation,
    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.    Our
    Industry
      
    increase operating efficiencies and reduce costs;
    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; 5




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
    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;
    the need to improve the reliability, availability and overall
    performance of Internet-enabled applications as they increase in
    importance and complexity;
    the need to focus on core business operations;
    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.
  Expand Our Global Delivery Capabilities.
  Improve Operating Margins Through
    Efficiencies. tm
  Grow Through Disciplined Acquisitions.
 6




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Continue to Broaden Our Service Offerings.
  Our
    Services
    Application
    Management Services
  
    Application Management  We provide implementation and operational services for packaged
    applications, including PeopleSoft Enterprise, JDE Enterprise
    One, Oracle
    E-Business
    Suite and Siebel CRM. Application management services are
    available in one of our data centers or via remote management on
    a customers premises. Our messaging services include the
    monitoring and management of messaging applications, such as
    Microsoft Exchange and Lotus Domino, allowing customers to
    outsource their critical messaging applications. Customers can
    host their applications in one of our data centers or keep their
    servers in their own facility, which we monitor and manage
    remotely. In addition, our customers can choose to use dedicated
    servers or shared servers. We provide expert services to assist
    our customers with the migration from legacy or proprietary
    messaging systems to Microsoft Exchange or Lotus Domino. We also
    have expertise to customize messaging and collaborative
    applications. We offer user provisioning, spam filtering, virus
    protection and enhanced monitoring and reporting.  
    Software-as-a-Service  Using our
    NaviViewtm
    collaborative application management platform, we enable
    software vendors to provide their applications in an on-demand
    or subscription model.  
    Custom Services helps organizations plan, develop, and manage
    their complete portfolio of custom and web-based applications.  
    Development Services
    eBusiness/Web Solutions
    Enterprise Integration
    Business Intelligence
    Content Management
    User Interface Design
    Management Services
    Application Management
    Remote Infrastructure Management  Hosting
    Services
   7




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
    Managed Services  We provide fully managed application hosting services. We manage
    data centers, Internet connectivity, servers and networking,
    security (including firewalls, virtual private networks and
    intrusion detection), storage, load balancers, database
    clusters, operating systems, and Web and application servers. We
    also provide bundled offerings packaged as content delivery
    services. Specific services include:  
    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  
    Content Delivery Acceleration
    Colocation  Our data centers provide our colocation customers with a secure
    place to gain rapid access to the Internet, without having to
    build their own physical infrastructure. Our data centers
    include multiple levels of security with camera surveillance,
    redundant uninterruptible power supply, heating, ventilation and
    air conditioning, monitored customer access 24 hours a day,
    seven days a week, and advanced fire suppression. Specific
    services include:  
    Connectivity
    Equipment
    Power
    Remote Hands
    Space
    Security  Professional
    Services
    
    Planning Services  
    Technical Architecture Design  
    Implementation Services  
    Project Health Check and Readiness Assessment
    Mergers, Acquisitions and Spin-Offs 8




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
    Maintenance Services  
    Application Upgrades  
    Optimization Services  
    Application Optimization  
    Compliance/Government  
    Compliance and Governance for Enterprise Applications  tm
  NaviView tm Platform
  tm tm tm tm
  Event Detection System
  Synthetic Transaction Monitoring
  Automated Remediation tm
  Component Information Manager
  Escalation Manager
  Our
    Infrastructure
    Network Operations Centers state-of-the-art
 9




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Data Centers
  Internet Connectivity 
  Sales and
    Marketing
  Direct Sales
  Channel Relationships
  Marketing
  Customers
         10




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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
    
    hosting and related services providers, including Data Return,
    LLC, Globix Corp., SAVVIS (which acquired the Cable &
    Wireless business including the Exodus and Digital Island
    businesses), IBM, AT&T and local and regional hosting
    providers;
    application services providers, such as IBM, Infocrossing, Inc.,
    Electronic Data Systems Corp. and Computer Sciences Corporation;
    content and electronic software distribution providers, such as
    Akamai, Inc., Limelight Networks Inc., Digital River, Inc. and
    Intraware, Inc.;
    colocation providers, including SAVVIS, Equinix and
    Switch & Data Facilities Company, Inc.;
    messaging providers, including Mi8, Critical Path, Inc.,
    Internoded, Inc. and USA.net, Inc., and
    professional services providers, including Oracle Consulting
    Services, Accenture, Ciber, CSC, CedarCrestone, Deloitte
    Consulting, IBM and Rapidigm.  Intellectual
    Property
   11




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Government
    Regulation
    Employees
    Available
    Information
  Form 10-K, Form 10-Q, Form 8-K Form 10-K
  Item 1A.
    Risk
    Factors   12




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We have a history of losses and may never achieve or
    sustain profitability.
  Our financing agreement with Silver Point Finance 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 or incur additional indebtedness;
    restricts our ability to create, incur, assume or permit to
    exist any lien or security interest in any of our assets,
    excluding certain limited exemptions;
    restricts our ability to make investments including joint
    ventures, with certain limited exemptions;
    requires that we meet financial covenants for fixed charges,
    leverage, adjusted EBITDA, capital expenditures and minimum
    bookings;
    restricts our ability to enter into any transaction of merger,
    consolidation or liquidation;
    restricts our ability to enter into any transaction with any
    holder of more than 5% of any class of capital stock except in
    the ordinary course of business; and
    restricts our ability to amend our organizational documents.    A significant portion of our revenue comes from one
    customer and, if we lost this customer, it would have a
    significant adverse impact on our business results and cash
    flows.
 13




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Atlantic Investors, LLC may have interests that conflict
    with the interests of our other stockholders and, as our
    majority stockholder, can prevent new and existing investors
    from influencing significant 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.
  
    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; 14




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
    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.
  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.
 15




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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.
  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
 16




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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
  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. quarter-to-quarter period-to-period
 17




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
    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.  quarter-to-quarter period-to-period
  If we are unsuccessful in pending and potential litigation
    matters, our financial condition may be adversely
    affected.
  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 needed to capture
    increased market share or maintain market
    share.
 18




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
    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;
    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.
 19




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The price of our common stock has been volatile, and may
    continue to experience wide
    fluctuations.
  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   20




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Item 2.
    Properties  Facilities
    Square FootageLeasedLocation

Type

(Approximate)


Lease ExpirationSan Jose, CA (1)(3)

Data Center and Office


66,350


November 2016Los Angeles, CA

Data Center


34,711


February 2009San Francisco, CA

Data Center


20,576


January 2010Atlanta, GA

Office


4,598


May 2007Chicago, IL (1)

Office


4,453


June 2009Chicago, IL

Data Center


6,800


January 2009Oak Brook, IL

Data Center


16,780


September 2009Andover, MA

Office


25,817


January 2018Andover, MA

Data Center and Office


86,931


January 2018Syracuse, NY

Data Center


21,246


November 2008Syracuse, NY (1)

Office


44,002


December 2007Syracuse, NY (1)

Office


5,016


May 2009New York, NY

Office


1,500


December 2006New York, NY

Data Center


33,286


May 2008Las Vegas, NV (2)

Data Center


28,560


February 2010Dallas, TX

Data Center


27,370


January 2010Houston, TX (1)

Data Center and Office


29,545


October 2008Vienna, VA

Data Center and Office


23,715


December 2009Milwaukee, WI

Data Center


5,200


March 2010Gurgaon, Haryana, India

Office


12,706


July 2008London, England

Data Center


4,022


March 2010     (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)
    
    In September 2006, after the end of our fiscal year, we extended
    the lease for this facility by ten years until November 2016
    which is reflected above.    Item 3.
    Legal
    Proceedings  IPO
    Securities Litigation
   21




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No. 01-CV-5374 successor-in-interest successor-in-interest Rule 10b-5) and/or
   22




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Item 4.
    Submission
    of Matters to a Vote of Security Holders.   23




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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,
    2006May 1, 2006 through
    July 31, 2006

$
5.59


$
3.24February 1, 2006 through
    April 30, 2006

$
5.00


$
1.35November 1, 2005 through
    January 31, 2006

$
1.83


$
1.01August 1, 2005 through
    October 31, 2005

$
1.90


$
1.07Fiscal Year Ended July 31,
    2005May 1, 2005 through
    July 31, 2005

$
2.40


$
1.16February 1, 2005 through
    April 30, 2005

$
2.29


$
1.23November 1, 2004 through
    January 31, 2005

$
3.30


$
1.94August 1, 2004 through
    October 31, 2004

$
3.64


$
1.32          24




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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 report. Historical results are not
    necessarily indicative of results of any future period.
  Year Ended July 31,2006


2005


2004


2003


2002(In thousands, except per share data)Revenue

$
108,844


$
109,731


$
91,126


$
75,281


$
40,968Revenue, related parties


243



132



46



1,310



18,453Total revenue


109,087



109,863



91,172



76,591



59,421Cost of revenue


75,064



80,227



68,379



70,781



67,000Impairment, restructuring and other






383



917







68,317Total cost of revenue


75,064



80,610



69,296



70,781



135,317Gross profit (loss)


34,023



29,253



21,876



5,810



(75,896
)Operating expenses:Selling and marketing


14,756



12,993



10,642



6,910



14,984General and administrative


21,787



23,600



24,714



20,207



19,272Impairment, restructuring and other


1,373



2,662



5,286



8,882



(2,633
)Total operating expenses


37,916



39,255



40,642



35,999



31,623Loss from operations


(3,893
)


(10,002
)


(18,766
)


(30,189
)


(107,519
)Other income (expense):Interest income


283



61



126



851



1,060Interest expense


(9,585
)


(7,590
)


(3,181
)


(43,403
)


(14,718
)Other income (expense), net


437



2,785



468



(733
)


(516
)Income tax expense


(1,173
)


(1,338
)


(1
)


(153
)


Net loss

$
(13,931
)

$
(16,084
)

$
(21,354
)

$
(73,627
)

$
(121,693
)Per common share:Basic and diluted:Net loss

$
(0.49
)

$
(0.57
)

$
(0.85
)

$
(6.32
)

$
(22.30
)Basic and diluted weighted average
    number of common shares outstanding


28,601



28,202



25,160



11,654



5,457BALANCE SHEET DATA:Working capital (deficit)

$
(9,072
)

$
(77,560
)

$
(36,711
)

$
(16,301
)

$
16,516Total assets

$
102,409


$
101,177


$
123,864


$
69,371


$
53,534Long-term obligations

$
70,817


$
5,515


$
50,224


$
13,577


$
28,073Stockholders equity (deficit)

$
(1,976
)

$
(2,672
)

$
11,082


$
16,879


$
8,544  25




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##### Table of Contents



Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operation  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
        pooling-of-interest
 26




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##### Table of Contents



Results
    of Operations for the Three Years Ended July 31, 2006, 2005
    and 2004
    Year Ended July 31,2006


2005


2004Revenue


99.8
%


99.9
%


99.9
%Revenue, related parties


0.2
%


0.1
%


0.1
%Total revenue


100.0
%


100.0
%


100.0
%Cost of revenue


68.8
%


73.0
%


75.0
%Impairment, restructuring and other


0.0
%


0.4
%


1.0
%Total cost of revenue


68.8
%


73.4
%


76.0
%Gross profit


31.2
%


26.6
%


24.0
%Operating expenses:Selling and marketing


13.5
%


11.8
%


11.7
%General and administrative


20.0
%


21.5
%


27.1
%Impairment, restructuring and other


1.3
%


2.4
%


5.8
%Total operating expenses


34.8
%


35.7
%


44.6
%Loss from operations


(3.6
)%


(9.1
)%


(20.6
)%Other income (expense):Interest income


0.3
%


0.1
%


0.1
%Interest expense


(8.8
)%


(6.9
)%


(3.4
)%Other income (expense), net


0.4
%


2.5
%


(0.5
)%Loss before income tax expense


(11.7
)%


(13.4
)%


(23.4
)%Income tax expense


(1.1
)%


(1.2
)%


(0.0
)%Net loss


(12.8
)%


(14.6
)%


(23.4
)%   Comparison
    of the Years 2006, 2005 and 2004
  Revenue
     27




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##### Table of Contents



Gross
    Profit
        Operating
    Expenses
  Selling and Marketing.
   28




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##### Table of Contents



General and Administrative.
      Operating
    Expenses  Impairment, Restructuring and
    Other
      Interest
    Income
      Interest
    Expense
   29




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##### Table of Contents



Other
    Income (Expense), Net
      Income
    Tax Expense
    Liquidity
    and Capital Resources
         30




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##### Table of Contents



Contractual
    Obligations and Commercial Commitments
    Less than








AfterDescription

Total


1 Year


1-3 Years


4-5 Years


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

$
80,103


$
8,115


$
15,134


$
56,854


$
Interest on debt (b)


40,741



8,449



16,761



15,531



Capital leases


3,068



2,302



766







Bandwidth commitments


2,039



1,388



651







Maintenance for hardware/software


631



615



16







Property leases (c)(d)(e)


42,923



9,465



14,688



5,603



13,167$
169,505


$
30,334


$
48,016


$
77,988


$
13,167     (a)
    
    Short/Long-term debt does not tie to the Consolidate Balance
    Sheets due to recorded discounts for warrants and embedded
    derivative(b)
    
    Interest on Term Loan assumes Libor is fixed at 5.51%(c)
    
    Amounts exclude certain common area maintenance and other
    property charges that are not included within the lease payment.(d)
    
    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.(e)
    
    In September 2006, we extended our San Jose data center
    lease for this facility until November 2016. The commitment
    amounts for the new lease not included in commitment schedule
    are $16.9 million.  Off-Balance
    Sheet Financing Arrangements
    Critical
    Accounting Policies
   31




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##### Table of Contents



Revenue Recognition.
    Allowance for Doubtful Accounts.
  Impairment of Long-lived 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; 32




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##### Table of Contents




    significant declines in our stock price for a sustained
    period; and
    our market capitalization relative to net book value.      Recent
    Accounting Pronouncements
      EITF 06-3, EITF 06-3 EITF 06-3 EITF 06-3
     33




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##### Table of Contents



additional-paid-in-capital
  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)
 34




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##### Table of Contents



Changes in Internal Control Over Financial
    Reporting. Rule 13a-15(f)
 Item 9B.  Other
    Information   PART III  Form 10-K Form 10-K,
  Item 10.
    Directors
    and Executive Officers of the Registrant    Code of Ethics.
  Item 11.
    Executive
    Compensation  Regulation S-K
  Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters   35




---



##### Table of Contents



Equity
    Compensation Plan Information as of July 31, 2006
    (c)(a)


(b)


Number of SecuritiesNumber of Securities to


Weighted-average


Available for Future 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


6,590,793


$
2.82



4,700,785Equity compensation plans not
    approved by security holders






N/A



Total


6,590,793







4,700,785   Item 13.
    Certain
    Relationships and Related Transactions    Item 14.
    Principal
    Accounting Fees and Services   PART IV  Item 15.
    Exhibits,
    Financial Statement Schedules             36




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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

October 26, 2006/s/  Arthur
    P. BeckerArthur
    P. Becker

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

October 26, 2006/s/  John
    J.
    Gavin, Jr.John
    J. Gavin, Jr.

Chief Financial Officer
    (Principal Financial and
    Principal Accounting Officer)

October 26, 2006/s/  Gabriel
    RuhanGabriel
    Ruhan

Director

October 26, 2006/s/  James
    H. DennedyJames
    H. Dennedy

Director

October 26, 2006/s/  Larry
    W. SchwartzLarry
    W. Schwartz

Director

October 26, 2006/s/  Thomas
    R. EvansThomas
    R. Evans

Director

October 26, 2006  37




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##### Table of Contents



INDEX TO
    EXHIBITS  Exhibit No.

Description of Exhibit2
.1

Stock Purchase Agreement, dated as
    of December 31, 2002, by and between ClearBlue
    Technologies, Inc. and the Registrant, is incorporated herein by
    reference to Exhibits to the Registrants Current Report on
    Form 8-K
    dated December 31, 2002 (File
    No. 000-27597).2
.2

Agreement and Plan of Merger and
    Reorganization, dated as of January 29, 2003, among Avasta
    Acquisition Corp., Avasta, Inc. and the Registrant, 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).2
.3

Agreement and Plan of Merger,
    dated as of March 26, 2003, by and between the Registrant
    and Conxion Corporation and Union Acquisition, Corp., a
    wholly-owned subsidiary of the Registrant, is incorporated
    herein by reference to Exhibits to the Registrants Current
    Report on
    Form 8-K
    dated April 2, 2003 (File
    No. 000-27597).2
.4

Sale Order pursuant to
    11 U.S.C. Sections 105, 363, and 1146(c) and
    Bankruptcy Rules 2002, 6004 and 6006 approving (i) Asset
    Purchase Agreement, (ii) Sale of Substantially All of
    Debtors Assets Free and Clear of All Liens, Claims,
    Encumbrances and Interests, (iii) Waiver of Stay Provisions
    under Bankruptcy Rule Section 6004 and 6006 and
    (iv) Granting Related Relief entered by the Bankruptcy
    Court for the Southern District of New York (White Plains) on
    May 15, 2003; together with the Asset Purchase Agreement,
    dated as of May 15, 2003, by and among Interliant, Inc. and
    certain of its subsidiaries, and Intrepid Acquisition Corp., a
    Delaware corporation and wholly-owned subsidiary of the
    Registrant, annexed thereto, is incorporated herein by reference
    to Exhibits to the Registrants Current Report on
    Form 8-K
    dated May 16, 2003 (File
    No. 000-27597).2
.5

Stock and Asset Acquisition
    Agreement, dated as of August 8, 2003, by and between the
    Registrant and ClearBlue Technologies, Inc., is incorporated
    herein by reference to the Registrants Current Report on
    Form 8-K
    dated August 8, 2003 (File
    No. 000-27597).2
.6

Amendment to Stock and Asset
    Acquisition Agreement dated as of February 6, 2004 by and
    among the Registrant, ClearBlue Technologies, Inc., ClearBlue
    Technologies/New York, Inc., ClearBlue Technologies/
    Santa Clara, Inc., ClearBlue Technologies/ Dallas, Inc. and
    ClearBlue Technologies/ San Francisco, Inc. is incorporated
    herein by reference to Exhibit 2.1 to the Registrants
    Current Report on
    Form 8-K
    dated February 6, 2004 (File
    No. 000-27597).2
.7

Asset Purchase Agreement, dated as
    of May 6, 2004, by and among the Registrant, Lexington
    Acquisition Corp. and Surebridge, Inc., is incorporated herein
    by reference to Exhibit 2.1 to the Registrants
    Current Report on
    Form 8-K
    dated May 6, 2004 (File
    No. 000-27597).2
.8

First Amendment to Asset Purchase
    Agreement, dated as of June 10, 2004, by and among the
    Registrant, Lexington Acquisition Corp. and Surebridge, Inc. is
    incorporated herein by reference to Exhibit 2.2 to the
    Registrants Current Report on
    Form 8-K
    dated June 10, 2004 (File
    No. 000-27597).2
.9

Asset Purchase Agreement, dated as
    of July 29, 2005, by and among the Registrant, Lexington
    Acquisition Corp. and Navint Consulting, LLC. is incorporated
    herein by reference to Exhibit 99.1 of the
    Registrants Current Report on
    Form 8-K
    filed on August 3, 2005 (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

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).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).




---



##### Table of Contents



Exhibit No.

Description of Exhibit10
.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).10
.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*

1999 Employee Stock Purchase 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
.9

Letter Agreement, dated
    October 10, 2002, between ClearBlue Technologies, Inc. and
    the Registrant, is incorporated herein by reference to Exhibits
    to the Registrants Annual Report on
    Form 10-K
    for the fiscal year ended July 31, 2002 (File
    No. 000-27597).10
.10*

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
.11

Assignment Agreement dated
    October 11, 2002 by and between the Registrant and Fir Tree
    Recovery Master Fund, LP and Fir Tree Value Partners, LDC is
    incorporated herein by reference to Exhibit 4 to the
    Schedule 13D filed by the Registrant on November 12,
    2002 (File
    No. 005-56549).10
.12

Renunciation Letter dated
    October 11, 2002 from the Registrant to Interliant, Inc. is
    incorporated by reference to Exhibit 4 to the
    Schedule 13D filed by the Registrant on November 12,
    2002 (File
    No. 005-56549).10
.13

Statement of Work, dated as of
    January 1, 2003, describing the services to be provided to
    ClearBlue Technologies, Inc. by the Registrant under the
    Outsourcing Agreement, dated as of January 1, 2003, by and
    between ClearBlue Technologies, Inc. and the Registrant, 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).10
.14

Loan and Security Agreement, dated
    as of January 3, 2003, by and between ClearBlue
    Technologies, Inc. as Lender and the Registrant as Borrower, 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
.15

Loan and Security Agreement, dated
    as of January 3, 2003, by and between ClearBlue
    Technologies, Inc. as Borrower and the Registrant as Lender, 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
.16

First Amendment to Loan and
    Security Agreement, dated June 2, 2003, by and between
    ClearBlue Technologies, Inc. and the Registrant, 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
.17

Loan and Security Agreement, dated
    as of January 29, 2003, by and between Atlantic Investors,
    LLC as Lender and the Registrant as Borrower, 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
.18

Letter, dated as of
    January 16, 2004, from Atlantic Investors, LLC as Lender to
    the Registrant as Borrower is incorporated by reference to
    Exhibits to the Registrants Registration Statement on
    Form S-2
    filed on January 22, 2004 (File
    No. 333-112087).




---



##### Table of Contents



Exhibit No.

Description of Exhibit10
.19

Letter dated as of July 13,
    2004, from Atlantic Investors, LLC, as Lender, to the
    Registrant, as Borrower, is incorporated herein by reference to
    Exhibit 99.2 to the Registrants Current Report on
    Form 8-K
    dated October 12, 2004 (File
    No. 000-27597).10
.20

Letter, dated as of
    October 12, 2004, from Atlantic Investors, LLC as Lender to
    the Registrant as Borrower is incorporated herein by reference
    to Exhibit 99.1 to the Registrants Current Report on
    Form 8-K
    dated October 12, 2004 (File
    No. 000-27597).10
.21

Letter, dated as of
    January 14, 2005, from Atlantic Investors, LLC, as lender,
    to the Registrant, as borrower, is incorporated herein by
    reference to Exhibit 99.1 to the Registrants Current
    Report on
    Form 8-K
    filed on January 19, 2005 (File
    No. 000-27597).10
.22

Letter, dated as of April 30,
    2005, from Atlantic Investors, LLC, as lender, to the
    Registrant, as borrower, is incorporated herein by reference to
    Exhibit 99.1 to the Registrants Current Report on
    Form 8-K
    filed on May 10, 2005 (File
    No. 000-27597).10
.23

Letter, dated as of July 26,
    2005, from Atlantic Investors, LLC, as lender, to the
    Registrant, as borrower, is incorporated herein by reference to
    Exhibit 99.1 to the Registrants Current Report on
    Form 8-K
    filed on July 27, 2005 (File
    No. 000-27597).10
.24

Letter from Atlantic Investors,
    LLC dated as of January 31, 2006 is incorporated herein by
    reference to Exhibit 99.1 to the Registrants Current
    Report on
    Form 8-K
    filed on March 10, 2006 (File
    No. 000-27597).10
.25*

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
.26*

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
.27

Credit and Guaranty Agreement,
    dated as of April 11, 2006, by and among the Registrant,
    certain of its subsidiaries, SilverPoint Finance, LLC, Field
    Point I, Ltd., Field Point III, Ltd. and SPF
    CDO I, LLC 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, 2006 (File
    No. 000-27597).10
.28

Amendment No. 1 to Credit and
    Guaranty Agreement, dated as of June 2, 2006, by and among
    the Registrant, certain of its subsidiaries, Silver Point
    Finance, LLC, Field Point I, Ltd., Field Point III,
    Ltd. and SPF CDO I, LLC 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, 2006 (File
    No. 000-27597).10
.29

Pledge and Security Agreement,
    dated as of April 11, 2006, by and among the Registrant,
    certain of its subsidiaries, SilverPoint Finance, LLC, Field
    Point I, Ltd., Field Point III, Ltd. and SPF
    CDO I, LLC 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, 2006 (File
    No. 000-27597).10
.30

Warrant Purchase Agreement, dated
    as of April 11, 2006, by and among the Registrant, SPCP
    Group, L.L.C. and SPCP Group III LLC 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, 2006 (File
    No. 000-27597).10
.31

Warrant, dated as of
    April 11, 2006, issued by the Registrant to SPCP Group,
    L.L.C. 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, 2006 (File
    No. 000-27597).10
.32

Warrant, dated as of
    April 11, 2006, issued by the Registrant to SPCP
    Group III LLC is incorporated herein by reference to
    Exhibit 10.6 to the Registrants Quarterly Report on
    Form 10-Q
    for the fiscal quarter ended April 30, 2006 (File
    No. 000-27597).10
.33

Amended and Restated Loan
    Agreement, dated as of April 10, 2006, by and between the
    Registrant and Atlantic Investors, LLC is incorporated herein by
    reference to Exhibit 10.7 to the Registrants
    Quarterly Report on
    Form 10-Q
    for the fiscal quarter ended April 30, 2006 (File
    No. 000-27597).10
.34

Loan Agreement, dated as of
    April 10, 2006, by and between the Registrant and Atlantic
    Investors, 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 April 30, 2006 (File
    No. 000-27597).10
.35

Atlantic Fund Guaranty, dated
    as of April 11, 2006, delivered by Unicorn Worldwide
    Holdings Limited in favor of the Registrant is incorporated
    herein by reference to Exhibit 10.9 to the
    Registrants Quarterly Report on
    Form 10-Q
    for the fiscal quarter ended April 30, 2006 (File
    No. 000-27597).




---



##### Table of Contents



Exhibit No.

Description of Exhibit10
.36

Subordination Agreement, dated as
    of April 11, 2006, by and among the Registrant, certain of
    its subsidiaries, Silver Point Finance, LLC, Atlantic Investors,
    LLC and Unicorn Worldwide Holdings Limited is incorporated
    herein by reference to Exhibit 10.10 to the
    Registrants Quarterly Report on
    Form 10-Q
    for the fiscal quarter ended April 30, 2006 (File
    No. 000-27597).10
.37

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
.38

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
.39

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
.40

Letter Agreement, dated
    December 11, 2002, between ClearBlue Technologies, Inc. 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, 2002 (File
    No. 000-27597).10
.41*

Offer of Employment Letter to
    Kenneth Drake dated July 15, 2003 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).10
.42

Form of Indemnification Agreement,
    as executed by Messrs. Andrew Ruhan, Arthur P. Becker,
    Gabriel Ruhan, James H. Dennedy, Larry W. Schwartz, Thomas R.
    Evans, John J. Gavin, Jr. 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).10
.43

Professional Services Agreement
    between the New York State Department of Labor and AppliedTheory
    Corporation dated November 2, 2000, is incorporated herein
    by reference to Exhibit 10.56 of AppliedTheorys
    Annual Report on
    Form 10-K
    for the fiscal year ended December 31, 2000 (File
    No. 000-25759).10
.44

Amendment No. 1 to
    Professional Services Agreement, dated as of May 2, 2001,
    by and between the New York State Department of Labor and
    AppliedTheory Corporation is incorporated by reference to
    Exhibits to the Registrants Registration Statement on
    Form S-2
    filed on January 22, 2004 (File
    No. 333-112087).10
.45

Amendment No. 2 to
    Professional Services Agreement, dated as of October 5,
    2001, by and between the New York State Department of Labor and
    AppliedTheory Corporation is incorporated by reference to
    Exhibits to the Registrants Registration Statement on
    Form S-2
    filed on January 22, 2004 (File
    No. 333-112087).10
.46

Amendment No. 3 to
    Professional Services Agreement, dated as of July 24, 2002,
    by and between the New York State Department of Labor and
    AppliedTheory Corporation is incorporated by reference to
    Exhibits to the Registrants Registration Statement on
    Form S-2
    filed on January 22, 2004 (File
    No. 333-112087).10
.47

Amendment No. 4 to
    Professional Services Agreement, dated as of November 12,
    2002, by and between the New York State Department of Labor and
    ClearBlue Technologies Management, Inc. (as assignee of
    AppliedTheory Corporation) is incorporated by reference to
    Exhibits to the Registrants Registration Statement on
    Form S-2
    filed on January 22, 2004 (File
    No. 333-112087).10
.48

Amendment No. 5 to
    Professional Services Agreement, dated as of March 25,
    2003, by and between the New York State Department of Labor and
    ClearBlue Technologies Management, Inc. (as assignee of
    AppliedTheory Corporation) is incorporated by reference to
    Exhibits to the Registrants Registration Statement on
    Form S-2
    filed on January 22, 2004 (File
    No. 333-112087).10
.49

Amendment No. 6 to
    Professional Services Agreement, dated as of September 24,
    2003, by and between the New York State Department of Labor and
    ClearBlue Technologies Management, Inc. (as assignee of
    AppliedTheory Corporation) 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).




---



##### Table of Contents



Exhibit No.

Description of Exhibit10
.50

Amendment No. 7 to
    Professional Services Agreement, dated as of January 5,
    2004, by and between the New York State Department of Labor and
    ClearBlue Technologies Management, Inc. (as assignee of
    AppliedTheory Corporation) is incorporated by reference to
    Exhibit 10.6 to the Registrants Quarterly Report on
    Form 10-Q
    for the fiscal quarter ended January 31, 2004 (File
    No. 000-27597).10
.51

Amendment No. 8 to
    Professional Services Agreement, dated as of July 1, 2005,
    by and between the New York State Department of Labor and
    ClearBlue Technologies Management, Inc. (as assignee of
    AppliedTheory Corporation) is incorporated by reference to
    Exhibit 10.1 to the Registrants Quarterly Report on
    Form 10-Q
    for the fiscal quarter ended January 31, 2005 (File
    No. 000-27597).10
.52

Professional Services Agreement,
    dated as of August 16, 2005, by and between the New York
    State Department of Labor and ClearBlue Technologies Management,
    Inc. is incorporated herein by reference to Exhibit 99.1 of
    the Registrants Current Report on
    Form 8-K
    filed on August 18, 2005 (File
    No. 000-27597).10
.53

Negotiable Promissory Note dated
    December 1, 2003 issued by the Registrant to
    U.S. Managers Realty, Inc. is incorporated by reference to
    Exhibits to the Registrants Registration Statement on
    Form S-2
    filed on January 22, 2004 (File
    No. 333-112087).10
.54

Negotiable Promissory Note dated
    December 23, 2003 issued by the Registrant to
    U.S. Managers Realty, Inc. is incorporated by reference to
    Exhibits to the Registrants Registration Statement on
    Form S-2
    filed on January 22, 2004 (File
    No. 333-112087).10
.55

Promissory Note dated
    June 13, 2002 issued by ClearBlue Technologies Management,
    Inc. to AppliedTheory Corporation is incorporated by reference
    to Exhibits to the Registrants Registration Statement on
    Form S-2
    filed on January 22, 2004 (File
    No. 333-112087).10
.56

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
.57*

Offer Letter dated June 9,
    2004 by and between the Registrant and Stephen Pace is
    incorporated by reference to Exhibit 99.1 to the
    Registrants Current Report on
    Form 8-K
    filed on December 15, 2004 (File
    No. 000-27597).10
.58

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
.59*

Employment Agreement, dated as of
    May 6, 2004, by and between the Registrant and John J.
    Gavin, Jr. is incorporated by reference to Exhibits to the
    Registrants Registration Statement on
    Form S-2/
    A filed on June 29, 2004 (File
    No. 333-12087).10
.60*

Separation Agreement, dated as of
    April 6, 2006, by and between the Registrant and John J.
    Gavin Jr. is incorporated herein by reference to
    Exhibit 99.2 to the Registrants Current Report on
    Form 8-K
    dated April 6, 2006 (File
    No. 000-27597).10
.61

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
.62*

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
.63*

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
.64*

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
.65*

Compensation Plan for Senior Vice
    President, Sales and Marketing, Stephen Pace  Fiscal
    Year 2005, is incorporated herein by reference to
    Exhibit 99.2 to the Registrants Current Report on
    Form 8-K
    filed on May 10, 2005 (File
    No. 000-27597).




---



##### Table of Contents



Exhibit No.

Description of Exhibit10
.66*

Amended Compensation Plan for
    Senior Vice President, Sales and Marketing, Stephen
    Pace  April 1, 2005  July 31,
    2005, is incorporated herein by reference to Exhibit 99.3
    to the Registrants Current Report on
    Form 8-K
    filed on May 10, 2005 (File
    No. 000-27597).10
.67

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
.68*

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
.69*

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
.70*

Summary Regarding Director
    Compensation is incorporated herein by reference to
    Exhibit 10.1 to the Registrants Quarterly Report on
    Form 10-Q
    for the fiscal quarter ended October 31, 2005 (File
    No. 000-27597).10
.71*

2007 Bonus Letter, dated
    October 24, 2006, by and between the Registrant and Arthur
    Becker.10
.72*

2007 Bonus Letter, dated
    October 24, 2006, by and between the Registrant and John
    Gavin.10
.73*

2007 Bonus Letter, dated
    October 24, 2006, by and between the Registrant and Monique
    Cormier.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.




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##### Table of Contents



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


F-2Consolidated
    Balance Sheets as of July 31, 2006 and 2005


F-3Consolidated
    Statements of Operations for the years ended July 31, 2006,
    2005 and 2004


F-4Consolidated
    Statements of Changes in Stockholders Equity (Deficit) for
    the years ended July 31, 2006, 2005 and 2004


F-5Consolidated
    Statements of Cash Flows for the years ended July 31, 2006,
    2005 and 2004


F-6Notes to
    Consolidated Financial Statements


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


F-33Financial Statement
    Schedule II  Valuation and Qualifying
    Accounts


F-34  F-1




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##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM           Share-Based Payment.
      F-2




---



##### Table of Contents



NAVISITE,
    INC.
  CONSOLIDATED
    BALANCE SHEETS
  July 31,2006


2005(In thousands, except par value)ASSETSCurrent assets:Cash and cash equivalents

$
3,360


$
6,816Accounts receivable, less allowance
    for doubtful accounts of $1,944 and $2,887 at July 31, 2006
    and 2005, respectively


11,872



10,688Due from related party


30



101Unbilled accounts receivable


430



363Prepaid expenses and other current
    assets


8,804



2,806Total current assets


24,496



20,774Property and equipment, net


14,914



15,199Customer lists, less accumulated
    amortization of $18,104 and $13,228 at July 31, 2006 and
    2005, respectively


11,687



16,563Goodwill


43,159



43,159Other assets


7,214



4,383Restricted cash


939



1,099Total assets

$
102,409


$
101,177LIABILITIES AND
    STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts receivable financing line,
    net

$



$
20,347Notes payable to the AppliedTheory
    Estate


6,000



6,000Notes payable, current portion


2,115



1,145Convertible notes payable to
    Waythere, Inc. (formerly Surebridge)






35,361Note payable to related party






3,000Capital lease obligations, current
    portion


2,081



1,259Accounts payable


5,338



8,122Accrued expenses


11,459



12,865Accrued interest


913



5,494Accrued lease abandonment costs,
    current portion


1,360



2,435Deferred revenue and deferred other
    income


2,632



1,923Customer deposits


1,670



383Total current liabilities


33,568



98,334Capital lease obligations, less
    current portion


741



1,105Accrued lease abandonment costs,
    less current portion


1,628



1,359Deferred tax liabilities


2,512



1,338Other long-term liabilities


3,258



1,304Note payable to related party


3,000



Notes payable, less current portion


59,678



409Total liabilities


104,385



103,849Commitments and contingencies
    (Note 12)Stockholders equity (deficit):Preferred stock, $0.01 par
    value; Authorized 5,000 shares; Issued and outstanding: no
    shares at July 31, 2006 and 2005






Common stock, $0.01 par value;
    Authorized 395,000 shares; Issued and outstanding: 28,959
    and 28,487 at July 31, 2006 and 2005, respectively


290



285Deferred compensation






(633
)Accumulated other comprehensive
    income


203



156Additional paid-in capital


467,400



453,458Accumulated deficit


(469,869
)


(455,938
)Total stockholders equity
    (deficit)


(1,976
)


(2,672
)Total liabilities and
    stockholders equity (deficit)

$
102,409


$
101,177    F-3




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##### Table of Contents



NAVISITE,
    INC.
  CONSOLIDATED
    STATEMENTS OF OPERATIONS
  Years Ended July 31,2006


2005


2004(In thousands, except per share data)Revenue

$
108,844


$
109,731


$
91,126Revenue, related parties


243



132



46Total revenue


109,087



109,863



91,172Cost of revenue (includes
    stock-based compensation expense under SFAS 123R of $1,024,
    $0, $0 for financial years ended July 31, 2006, 2005 and
    2004, respectively.)


75,064



80,227



68,379Impairment, restructuring and
    other, net






383



917Total cost of revenue


75,064



80,610



69,296Gross profit


34,023



29,253



21,876Operating expenses:Selling and marketing (includes
    stock-based compensation expense under SFAS 123R of $346,
    $0, $0 for financial years ended July 31, 2006, 2005 and
    2004, respectively.)


14,756



12,993



10,642General and administrative
    (includes stock-based compensation expense under SFAS 123R
    of $2,988, $0, $0 for financial years ended July 31, 2006,
    2005 and 2004, respectively.)


21,787



23,600



24,714Impairment, restructuring and
    other, net


1,373



2,662



5,286Total operating expenses


37,916



39,255



40,642Loss from operations


(3,893
)


(10,002
)


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


283



61



126Interest expense and amortization
    of debt discount


(9,585
)


(7,590
)


(3,181
)Other income (expense), net


437



2,785



468Loss before income tax expense


(12,758
)


(14,746
)


(21,353
)Income tax expense


(1,173
)


(1,338
)


(1
)Net loss

$
(13,931
)

$
(16,084
)

$
(21,354
)Basic and diluted net loss per
    common share

$
(0.49
)

$
(0.57
)

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


28,601



28,202



25,160    F-4




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##### Table of Contents



NAVISITE,
    INC.
  CONSOLIDATED
    STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
    (DEFICIT)
  AccumulatedOtherComprehensive


Additional





StockholdersCommon Stock


Deferred


Income


Paid-in


Accumulated


EquityShares


Amount


Compensation


(Loss)


Capital


Deficit


(Deficit)(In thousands)Balance at July 31,
    2003


23,412


$
235


$



$
(16
)

$
432,399


$
(415,739
)

$
16,879Exercise of common stock options


159



1











403







404Issuance of deferred stock-based
    compensation










(1,987
)






1,987







Amortization of deferred
    stock-based compensation










473















473Issuance of common
    stock  Avasta earn-out


179



2











741







743Issuance of stock warrants to
    Silicon Valley Bank


















213







213Exercise of Silicon Valley Bank
    stock warrants


74



1











(1
)






Issuance of common
    stock  common control merger with CBT


1,100



10











2,794



(2,761
)


43Issuance of common
    stock  Surebridge acquisition


3,000



30











13,620







13,650Currency translation adjustment














31











31Net loss






















(21,354
)


(21,354
)Balance at July 31,
    2004


27,924



279



(1,514
)


15



452,156



(439,854
)


11,082Exercise of common stock options


35



1











88







89Issuance of common stock related to
    Avasta arbitration settlement


522



5











1,325







1,330Issuance of restricted stock


7















6







6Forfeiture of restricted stock


(1
)






















Forfeiture of deferred stock-based
    compensation










122







(122
)






Stock compensation and amortization
    of deferred stock-based compensation










759







5







764Currency translation adjustment














141











141Net loss






















(16,084
)


(16,084
)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







4,358Currency translation adjustment














47











47Net loss






















(13,931
)


(13,931
)Balance at July 31,
    2006


28,959


$
290


$
0


$
203


$
467,400


$
(469,869
)

$
(1,976
)    F-5




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##### Table of Contents



NAVISITE,
    INC.
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS
  Years Ended July 31,2006


2005


2004(In thousands)Cash flows from operating
    activities:Net loss

$
(13,931
)

$
(16,084
)

$
(21,354
)Adjustments to reconcile net loss
    to net cash provided by (used for) operating activities:Depreciation and amortization


12,791



14,684



12,902Mark to market for interest rate cap


110







Deferred income tax expense


1,174



1,338



Impairment of long-lived assets






1,820



1,145(Gain) loss on disposal of assets


(17
)


(17
)


6Avasta settlement in common stock






490



Gain on settlements


(38
)


(65
)


Gain on sale of MBS practice






(2,499
)


Impairment costs associated with
    abandoned leases


1,373



1,226



5,058Amortization of warrants


657



107



358Non-cash stock compensation


4,358



769



473Provision for bad debts


51



2,288



2,568Changes in operating assets and
    liabilities, net of impact of acquisitions Accounts receivable


(1,235
)


3,364



586Due from related parties


71







(101
)Unbilled accounts receivable


(67
)


1,491



(360
)Prepaid expenses and other current
    assets, net


(2,026
)


1,404



(79
)Long-term assets


(957
)


369



498Accounts payable


(1,949
)


1,399



(814
)Customer deposits


213



(289
)


(1
)Long-term liabilities


1,795



(45
)


(844
)Accrued expenses and deferred
    revenue


(5,783
)


(5,146
)


(4,687
)Net cash provided by (used for)
    operating activities


(3,410
)


6,604



(4,646
)Cash flows from investing
    activities:Net cash acquired in acquisitions










6Purchase of property and equipment


(5,772
)


(4,790
)


(4,269
)Proceeds from the sale of equipment


17



434



95Proceeds from the sale of MBS
    practice






3,449



Net cash used for investing
    activities


(5,755
)


(907
)


(4,168
)Cash flows from financing
    activities:Release of (transfer) to restricted
    cash


(6,370
)


607



1,676Proceeds from exercise of stock
    options


1,121



89



404Proceeds from sale leaseback










120Proceeds from notes payable


70,436



1,003



450Repayment of notes payable


(2,340
)


(1,614
)


(2,055
)Repayment of accounts receivable
    line related to acquisition










(6,874
)Net proceeds from (repayment of)
    modified accounts receivable line


(20,400
)






20,400Payments of notes to affiliates










(30
)Payoff of Surebridge line of credit
    and term note










(3,865
)Payment under note payable to
    Waythere, Inc. (formerly Surebridge)


(34,611
)


(800
)


Payments on capital lease
    obligations


(2,127
)


(1,361
)


(2,079
)Net cash provided by (used for)
    financing activities


5,709



(2,076
)


8,147Net increase (decrease) in cash


(3,456
)


3,621



(667
)Cash and cash equivalents,
    beginning of year


6,816



3,195



3,862Cash and cash equivalents, end of
    year

$
3,360


$
6,816


$
3,195Supplemental disclosure of cash
    flow information:Cash paid for interest

$
11,540


$
3,020


$
1,898    F-6




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
  (1) Description
    of Business
  14 state-of-the-art
  (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 colocation,
    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)
   (b) Principles
    of Consolidation    (c) Use
    of Estimates    (d) Cash
    and Cash Equivalents and Restricted Cash    (e) Revenue
    Recognition   F-8




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (f) Concentration
    of Credit Risk    (g) Comprehensive
    Income (Loss)    (h) Property
    and Equipment      (i) Long-lived
    Assets, Goodwill and Other Intangibles     F-9




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (j) Income
    Taxes    (k) Derivative
    Financial Instruments    (l) Lease
    Expense    (m) Advertising
    Costs    (n) Stock-Based
    Compensation Plans   F-10




---



##### Table of Contents



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


Fiscal2005


2004(In thousands, except


(In thousands, exceptper share data)


per share data)Net Loss, as reported

$
(16,084
)

$
(21,354
)Add: Stock based employee
    compensation expense From the Amended and Restated 2003 Stock
    Incentive Plan included in reported net loss

$
769


$
473Deduct: Total stock based employee
    compensation expense determined under fair value based method
    for all awards

$
(5,651
)

$
(5,702
)Net Loss, as adjusted

$
(20,966
)

$
(26,583
)Net Loss per common share:Basic and diluted  as
    reported

$
(0.57
)

$
(0.85
)Basic and diluted  as
    adjusted

$
(0.74
)

$
(1.06
)     2005


2004Risk-free interest rate


3.19
%


2.68
%Expected volatility


124.95
%


137.34
%Expected life (years)


2.12



2.08Weighted average fair value of
    options granted during the period

$
1.78


$
4.58    F-11




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Fiscal2006Risk-free interest rate


4.55
%Expected volatility


107.04
%Expected life(years)


2.51Weighted average fair value of
    options granted

$
1.27     WeightedWeighted


AverageNumber


Average


Remaining


Aggregateof


Exercise


Contractual


IntrinsicShares


Price


Term


ValueOptions outstanding, beginning of
    year


6,086,655


$
3.26







Granted


2,185,825


$
1.93







Exercised


(471,342
)

$
2.38







Forfeited or Expired


(1,210,345
)

$
3.62







Options Outstanding, July 31,
    2006


6,590,793


$
2.82



8.36



9,608,473Options Exercisable, July 31,
    2006


3,464,160


$
3.33



7.81



4,002,448       Weighted AverageNumber of Shares


Grant-Date Fair ValueNonvested shares as of
    July 31, 2005


3,501,620


$
1.99Granted


2,185,825


$
1.27Vested


(1,856,034
)

$
2.09Forfeited


(704,778
)

$
1.64Nonvested shares as of
    July 31, 2006


3,126,633


$
1.51  F-12




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (o) Historical
    and Unaudited Pro Forma Basic and Diluted Net Loss Per Common
    Share      (p) Segment
    Reporting    (q) Recent
    Accounting Pronouncements      EITF 06-3, EITF 06-3 EITF 06-3 EITF 06-3
     F-13




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      additional-paid-in-capital
  (r) Foreign
    Currency    (s) Reclassifications    (3) Impairment
    of Long-Lived Assets
   F-14




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      (4) Property
    and Equipment
    July 31,2006


2005(In thousands)Office furniture and equipment

$
3,303


$
3,159Computer equipment


45,075



38,690Software licenses


11,216



10,658Leasehold improvements


9,958



9,36969,552



61,876Less: Accumulated depreciation and
    amortization


(54,638
)


(46,677
)Property and equipment, net

$
14,914


$
15,199       July 31,2006


2005(In thousands)Cost

$
8,505


$
6,637Accumulated depreciation and
    amortization


(7,082
)


(6,097
)$
1,423


$
540  F-15




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (5) Intangible
    Assets
    July 31,2006


2005(In thousands)Gross carrying amount

$
29,791


$
29,791Less: Accumulated amortization


(18,104
)


(13,228
)Customer lists, net

$
11,687


$
16,563       Year Ending July 31,

(In thousands)2007

$
3,9322008

$
3,0442009

$
1,8682010

$
1,0052011

$
988   (6) Goodwill
    Fiscal


Fiscal


Fiscal2006


2005


2004(In thousands)Goodwill as of August 1,

$
43,159


$
45,920


$
3,206Goodwill acquired










42,714Adjustments to preliminary
    purchase price allocation






(2,761
)


Goodwill as of July 31,

$
43,159


$
43,159


$
45,920     (7) Acquisition
  Surebridge.
 F-16




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (8) Investment
    in Debt Securities
      (9) Accrued
    Expenses
    July 31,2006


2005(In thousands)Accrued payroll, benefits and
    commissions

$
4,331


$
3,846Accrued legal


412



1,361Accrued accounts payable


2,905



2,896Accrued contract termination fees


634



429Accrued sales/use, property and
    miscellaneous taxes


1,070



1,075Accrued other


2,107



3,258$
11,459


$
12,865  F-17




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (10) Debt
    July 31,2006


2005(In thousands)Accounts receivable financing
    line, net

$



$
20,347The Term Loan, net of discount


61,345



Notes payable to the AppliedTheory
    Estate


6,000



6,000Notes payable to the Atlantic
    Investors


3,000



3,000Notes payable to landlord


319



1,157Convertible notes payable to
    Waythere, Inc. (formerly Surebridge)






35,361Other notes payable


129



397Total


70,793



66,262Less current portion


8,115



65,853Long-term debt

$
62,678


$
409   (a) Term
    Loan and Revolving Credit Facility
     F-18




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        (b) Note Payable
    to Atlantic Investors, LLC
        (c) Revolving
    Credit Facility with Atlantic Investors, LLC
   F-19




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      (d) Notes Payable
    to the AppliedTheory Estate
    (e) Notes Payable
    to Landlord
      (11) Derivative
    Instruments
     F-20




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (12) Commitments
    and Contingencies
  (a) Leases  Abandoned Leased Facilities.
         F-21




---



##### Table of Contents



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


Payments, LessLease Abandonment

Balance at





Other


Accretion of


Balance atCosts for:

July 31, 2005


Expense


Adjustments


Interest


July 31, 2006Andover, MA

$
796


$



$



$
(209
)

$
587Chicago, IL


866



116



7



(203
)


786Houston, TX


699



611







(430
)


880Syracuse, NY


254



497







(333
)


418Syracuse, NY


37



70







(32
)


75San Jose, CA


582



240







(611
)


211Atlanta, GA


124







15



(108
)


31Atlanta, GA


66







(9
)


(57
)


Lexington, MA


370



(161
)


134



(343
)


$
3,794


$
1,373


$
147


$
(2,326
)

$
2,988  F-22




---



##### 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 (a)

$
80,103


$
8,115


$
5,934


$
9,200


$
11,900


$
44,954


$
Interest on debt (b)


40,741



8,449



8,803



7,958



6,763



8,768



Capital leases


3,068



2,302



751



15











Bandwidth commitments


2,039



1,388



635



16











Maintenance for hardware/software


631



615



15



1











Property leases (c)(d)(e)


42,923



9,465



8,485



6,203



3,618



1,985



13,167$
169,505


$
30,334


$
24,623


$
23,393


$
22,281


$
55,707


$
13,167     (a)
    
    Short/Long-term debt does not tie to the Consolidate Balance
    Sheets due to recorded discounts for warrants and embedded
    derivative(b)
    
    Interest on Term Loan assumes Libor is fixed at 5.51%(c)
    
    Amounts exclude certain common area maintenance and other
    property charges that are not included within the lease payment.(d)
    
    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.(e)
    
    In September 2006, we extended our San Jose data center
    lease for this facility until November 2016. The commitment
    amounts for the new lease not included in commitment schedule
    are $16.9 million.      (b) Legal
    Matters  IPO
    Securities Litigation
   F-23




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      No. 01-CV-5374 successor-in-interest successor-in-interest Rule 10b-5) and/or
   F-24




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        (13) Income
    Taxes
    July 31, 2006


July 31, 2005


July 31, 2004Current


Deferred


Total


Current


Deferred


Total


Current


Deferred


Total(In thousands)Federal

$



$
972


$
972


$



$
1,109


$
1,109


$



$



$
Foreign


























1







1State






201



201







229



229











$



$
1,173


$
1,173


$



$
1,338


$
1,338


$
1


$



$
1  F-25




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    July 31,2006


2005


2004(In thousands)Computed expected tax
    expense (benefit)

$
(4,338
)

$
(5,014
)

$
(7,260
)State taxes, net of federal income
    tax benefit


201



229



Losses not benefited


5,310



6,123



7,261Total

$
1,173


$
1,338


$
1     July 31,


July 31,2006


2005(In thousands)Deferred tax assets:Accruals and reserves

$
7,745


$
6,526Loss carryforwards


44,732



39,919Depreciation and amortization


24,327



25,395Total deferred tax assets

$
76,804


$
71,840Less: Valuation allowance


(76,804
)


(71,840
)Deferred tax liabilities:Amortization of tax goodwill

$
(2,511
)

$
(1,338
)Net deferred assets/(liabilities)

$
(2,511
)

$
(1,338
)          F-26




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        (14) Stockholders
    Equity
  Issuance
    of Common Stock
         F-27




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
            (15) Stock
    Option Plans
  (a) NaviSite
    1998 Equity Incentive Plan   F-28




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      2006


2005


2004Weighted





Weighted





WeightedNumber


Average


Number


Average


Number


Averageof


Exercise


of


Exercise


of


ExerciseShares


Price


Shares


Price


Shares


PriceOptions outstanding, beginning of
    year


201,158


$
5.76



232,053


$
52.59



265,969


$
66.14Granted


















40,000


$
3.53Exercised


(8,167
)


3.80











(11,006
)

$
2.44Cancelled


(57,993
)

$
13.17



(30,895
)

$
357.49



(62,910
)

$
87.61Options outstanding, end of year


134,998


$
2.69



201,158


$
5.76



232,053


$
52.59Options exercisable, end of year


134,919


$
2.69



200,720


$
5.76



224,005


$
54.02Options available for grant, end
    of year


















   Options Outstanding


Options ExercisableWeightedAverage


Weighted





WeightedRemaining


Average





AverageNumber


Contractual


Exercise


Number


ExerciseRange of Exercise Prices

Outstanding


Life (Years)


Price


Outstanding


Price$0.01 - 3.30


120,681



6.91


$
2.55



120,602


$
2.553.31 - 3.90


14,317



0.64


$
3.90



14,317


$
3.90134,998











134,919   (b) 1999
    Employee Stock Purchase Plan      (c) NaviSite
    2000 Stock Option Plan   F-29




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      2006


2005


2004Weighted





Weighted





WeightedNumber


Average


Number


Average


Number


Averageof


Exercise


of


Exercise


of


ExerciseShares


Price


Shares


Price


Shares


PriceOptions outstanding, beginning of
    year


2,562


$
128.44



3,708


$
128.44



4,872


$
128.44Granted






















Exercised






















Cancelled


(2,562
)


128.44



(1,146
)


128.44



(1,164
)


128.44Options outstanding, end of year










2,562



128.44



3,708



128.44Options exercisable, end of year










2,562



128.44



3,708



128.44Options available for grant, end
    of year


















   (d) NaviSite
    2003 Stock Incentive Plan        th
 F-30




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  th
    2006


2005


2004Weighted





Weighted





WeightedAverage





Average





AverageNumber of


Exercise


Number of


Exercise


Number of


ExerciseShares


Price


Shares


Price


Shares


PriceOptions outstanding, beginning of
    year


5,880,270


$
3.06



3,492,287


$
3.85



2,189,000


$
2.55Granted


2,185,825


$
1.93



4,898,275


$
2.70



1,967,375


$
4.92Exercised


(463,175
)

$
2.35



(34,831
)

$
2.55



(148,079
)

$
2.55Cancelled


(1,149,790
)

$
2.86



(2,475,461
)

$
3.47



(516,009
)

$
2.75Options outstanding, end of year


6,453,130


$
2.77



5,880,270


$
3.06



3,492,287


$
3.85Options exercisable, end of year


3,326,576


$
3.25



2,379,088


$
3.68



1,340,969


$
3.58Options available for grant, end
    of year


4,700,785







736,820







159,634   Options Outstanding


Options ExercisableWeightedAverage


Weighted





WeightedRemaining


Average





AverageNumber


Contractual


Exercise


Number


ExerciseRange of Exercise Prices

Outstanding


Life (Years)


Price


Outstanding


Price$0.01 - 1.28


295,657



9.32


$
1.25



95,792


$
1.251.29 - 1.38


271,813



9.12


$
1.34



84,532


$
1.341.39 - 1.44


156,000



9.52


$
1.44



3,520


$
1.421.45 - 1.46


317,417



9.46


$
1.45



59,914


$
1.451.47 - 1.50


203,625



9.53


$
1.48



7,937


$
1.471.51 - 1.56


138,054



9.11


$
1.55



43,820


$
1.551.57 - 1.58


1,254,499



8.67


$
1.58



512,177


$
1.581.59 - 1.67


207,959



8.96


$
1.66



67,932


$
1.661.68 - 1.79


218,454



8.91


$
1.76



85,668


$
1.761.80 - 2.37


217,898



8.67


$
1.95



87,889


$
1.952.38 - 2.51


175,542



8.38


$
2.43



113,582


$
2.412.52 - 2.55


878,537



7.09


$
2.55



824,876


$
2.552.56 - 3.53


215,312



8.36


$
2.90



105,893


$
3.043.54 - 3.95


182,000



9.69


$
3.87



6,457


$
3.953.96 - 4.39


434,624



8.31


$
4.33



218,435


$
4.394.40 - 4.97


170,114



8.65


$
4.63



73,763


$
4.734.98 - 5.39


200,000



7.74


$
5.39



137,500


$
5.395.40 - 5.68


802,000



7.50


$
5.41



701,416


$
5.415.69 - and up


113,625



7.46


$
6.22



95,473


$
6.316,453,130











3,326,576  F-31




---



##### Table of Contents



NAVISITE,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  (e) Other
    Stock Option Grants    (16) Related
    Party Transactions
  day-to-day
      (17) Selected
    Quarterly Financial Data (Unaudited)
    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
)   Fiscal Year Ended July 31, 2005Q1


Q2


Q3


Q4(In thousands)Revenue

$
28,894


$
28,381


$
26,796


$
25,792Gross profit


6,074



7,713



7,534



7,932Net loss


(6,576
)


(4,632
)


(3,033
)


(1,843
)Net loss per common share (a)

$
(0.24
)

$
(0.17
)

$
(0.11
)

$
(0.06
)     (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-32




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##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM     Form 10-K. Form 10-K.
     F-33




---



##### Table of Contents



NAVISITE,
    INC.
  VALUATION
    AND QUALIFYING ACCOUNTS
  Years Ended July 31, 2006, 2005, and 2004Balance at


Additions





Deductions


Balance atBeginning


Charged to





from


End ofof Year


Expense


Other


Reserve


Year(In thousands)Year ended July 31, 2004:Allowance for doubtful accounts

$
2,030


$
2,568


$



$
(2,100
)

$
2,498Year ended July 31, 2005:Allowance for doubtful accounts

$
2,498


$
2,288


$



$
(1,899
)

$
2,887Year ended July 31, 2006:Allowance for doubtful accounts

$
2,887


$
51


$



$
(994
)

$
1,944  F-34