##### 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 1934    
|          
|           |  | For the fiscal year ended July 31, 2005                                                     
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from          to                                              

Commission file number: 000-27597


NaviSite, Inc.


(Exact name of registrant as specified in its charter)


|                                                                                      |  |                                         
|------------------------------------------------------------------------------------- |  | ----------------------------------------
|Delaware                                                                              |  | 52-2137343                              
|(State or other jurisdiction of
    incorporation)                                    |  | (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:


None


Securities registered pursuant to Section 12(g) of the
Act:


Common Stock, $0.01 par value


(Title of Class)


þ o


þ


o þ


o þ






DOCUMENTS INCORPORATED BY REFERENCE












---










NAVISITE, INC.


2005 ANNUAL REPORT


ON FORM 10-K


TABLE OF CONTENTS


|                                                               |  |                                                                                                                      |  |        |     | 
|-------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------- |  | ------ | --- | 
|                                                               |  |                                                                                                                      |  | Page   |    
|                                                               |  |                                                                                                                      |  | Number |    
|                                                               |  |                                                                                                                      |  |        |    
|PART I                                                        
|Item 1.                                                        |  | Business                                                                                                             |  |        | 3   | 
|Item 2.                                                        |  | Properties                                                                                                           |  |        | 22  | 
|Item 3.                                                        |  | Legal Proceedings                                                                                                    |  |        | 23  | 
|Item 4.                                                        |  | Submission of Matters to a Vote of Security
    Holders                                                              |  |        | 25  | 
|                                                              
|PART II                                                       
|Item 5.                                                        |  | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities |  |        | 26  | 
|Item 6.                                                        |  | Selected Consolidated Financial Data                                                                                 |  |        | 27  | 
|Item 7.                                                        |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                            |  |        | 28  | 
|Item 7A.                                                       |  | Quantitative and Qualitative Disclosures
    about Market Risk                                                       |  |        | 37  | 
|Item 8.                                                        |  | Financial Statements and Supplementary
    Data                                                                      |  |        | 37  | 
|Item 9.                                                        |  | Changes in and Disagreements With
    Accountants on Accounting and Financial Disclosure                             |  |        | 37  | 
|Item 9A.                                                       |  | Controls and Procedures                                                                                              |  |        | 37  | 
|Item 9B.                                                       |  | Other Information                                                                                                    |  |        | 38  | 
|                                                              
|PART III                                                      
|Item 10.                                                       |  | Directors and Executive Officers of the
    Registrant                                                               |  |        | 38  | 
|Item 11.                                                       |  | Executive Compensation                                                                                               |  |        | 38  | 
|Item 12.                                                       |  | Security Ownership of Certain Beneficial
    Owners and Management                                                   |  |        | 38  | 
|Item 13.                                                       |  | Certain Relationships and Related
    Transactions                                                                   |  |        | 39  | 
|Item 14.                                                       |  | Principal Accounting Fees and Services                                                                               |  |        | 39  | 
|                                                              
|PART IV                                                       
|Item 15.                                                       |  | Exhibits, Financial Statement Schedules                                                                              |  |        | 39  | 
|                                                               |  | Signatures                                                                                                           |  |        | 40  | 
|                                                               |  | Index to NaviSite, Inc. Consolidated
    Financial Statements                                                        |  |        | F-1 | 
|Ex-10.63 Agreement and Acknowledgement, dated October 19, 2005
|Ex- 10.64 Employment Offer Letter, dated August 12, 2005      
|Ex-14 Code of Business Conduct and Ethics                     
|Ex-21 Subsidiaries of the Registrant                          
|Ex-23 Consent of KPMG LLP                                     
|Ex-31.1 Section 302 Certification of CEO                      
|Ex-31.2 Section 302 Certification of CFO                      
|Ex-32.1 Section 906 Certification of CEO                      
|Ex-32.2 Section 906 Certification of CFO                      



2



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##### Table of Contents






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






| |                 
| | ----------------
| | 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.
|
| |  | 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.                                                                                                                         
|
| |  | 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.                                                                                                                                                                                    
|
| |  | Software as a Service  Enablement of Software as a
    Service to the independent software vendor, or ISV, community.                                                                                                                                                                                                                                                                                                   



| |                     
| | --------------------
| | Outsourcing Services



| |   |                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------
| |  | Planning Services  Services include IT assessment,
    enterprise architecture planning, Web strategy, performance
    assessment and tuning.

3



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##### Table of Contents





| |   |                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Development Services  Services include eBusiness/Web
    solutions, enterprise integration, business intelligence,
    content management and user interface design
|
| |  | Management Services  Services include custom
    application management and remote infrastructure management.                                                      



| |                      
| | ---------------------
| | Professional Services



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | For leading enterprise software applications, which are provided
    by companies such as Oracle, PeopleSoft, JD Edwards and
    Siebel Systems, NaviSite Professional Services helps
    organizations plan, implement, maintain, and optimize scalable,
    business-driven software solutions. Specific services include
    planning, implementation, maintenance, optimization and
    compliance services.



tm tm tm


tm tm tm






www.navisite.com


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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 expense 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 August 2003, Atlantic Investors, LLC, the indirect majority
    stockholder of CBT, and its subsidiaries, became our majority
    stockholder upon CBTs transfer of its stock ownership in
    NaviSite to its stockholders. As of September 30, 2005,
    Atlantic Investors owned approximately 60% of the issued and
    outstanding shares of our common stock.                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | In June 2004, we completed the acquisition of substantially all
    of the assets and liabilities of Surebridge, Inc., a privately
    held provider of managed application services for mid-market
    companies. This acquisition broadened our managed application
    services, particularly in the areas of financial management,
    supply chain management, human resources management and customer
    relationship management.                                                                                                                                                                                                                                                                                                                          
|
| |  | In July 2005, we sold substantially all of our rights, title and
    interest in and to our Microsoft Business Solutions products and
    related services to Navint Consulting, LLC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             



Our Industry




5



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| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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;
|
| |  | 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




Continue to Broaden Our Service Offerings.


6



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Provide Excellent Customer Service.


Expand Our Global Delivery Capabilities.


Improve Operating Margins Through Efficiencies. tm


Grow Through Disciplined Acquisitions.


Our Services




Hosting Services




| |   |                     
| | - | --------------------
| |  | Application Services



| |   |                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Operational management and administration of Oracle eBusiness
    Suite, PeopleSoft, J.D. Edwards, Siebel Systems, Microsoft
    Business Solutions, Microsoft Exchange and Lotus Domino



| |   |                 
| | - | ----------------
| |  | Managed Services



| |   |                                               
| | - | ----------------------------------------------
| |  | Business continuity and disaster recovery     
|
| |  | Connectivity                                  
|
| |  | Content distribution                          
|
| |  | Database administration and performance tuning
|
| |  | Desktop support                               
|
| |  | Hardware management                           
|
| |  | Monitoring                                    
|
| |  | Network management                            

7



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| |   |                                       
| | - | --------------------------------------
| |  | Security management                   
|
| |  | Server and operating system management
|
| |  | Storage management                    



| |   |                    
| | - | -------------------
| |  | Colocation Services



| |   |             
| | - | ------------
| |  | Connectivity
|
| |  | Equipment   
|
| |  | Power       
|
| |  | Remote hands
|
| |  | Space       



| |   |                      
| | - | ---------------------
| |  | Software as a Service



| |   |                                                         
| | - | --------------------------------------------------------
| |  | Enablement of Software as a Service to the ISV community

Outsourcing Services




| |   |                  
| | - | -----------------
| |  | Planning Services



| |   |                                   
| | - | ----------------------------------
| |  | IT assessment                     
|
| |  | Enterprise architecture planning  
|
| |  | Web strategy                      
|
| |  | Performance assessment and testing



| |   |                     
| | - | --------------------
| |  | Development Services



| |   |                          
| | - | -------------------------
| |  | eBusiness / Web solutions
|
| |  | Enterprise integration   
|
| |  | Business intelligence    
|
| |  | Content management       
|
| |  | User interface design    



| |   |                    
| | - | -------------------
| |  | Management Services



| |   |                                 
| | - | --------------------------------
| |  | Application management          
|
| |  | Remote infrastructure management

Professional Services




| |   |                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------
| |  | Services  Planning, implementation, maintenance,
    optimization and compliance services related to packaged
    enterprise software
|
| |  | Applications  Oracle eBusiness Suite, PeopleSoft,
    J.D. Edwards, Siebel Systems and Microsoft Business Solutions                  



| |                   
| | ------------------
| | NaviViewtmPlatform

tm tm tm


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tm


Event Detection System


Synthetic Transaction Monitoring


Automated Remediation tm


Component Information Manager


Escalation Manager


Our Infrastructure




Network Operations Centers


Data Centers


Internet Connectivity


9



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Sales and Marketing


Direct Sales


Channel Relationships


Marketing


Customers










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Competition








| |   |                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------
| |  | quality of service 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, USinternetworking,
    Inc. (USi), Infocrossing, Inc., Electronic Data Systems Corp.
    and Computer Sciences Corporation;                                                                                       
|
| |  | content and electronic software distribution providers, such as
    Akamai, 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




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Government Regulation




Employees




Available Information




Risk Factors That May Affect Future Results




12



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We have negative working capital and significant
indebtedness that must be repaid in calendar 2006; therefore, we
need to obtain additional financing, which may not be available
on favorable terms, or at all.


We have a history of losses and may never achieve or
sustain profitability and may not continue as a going
concern.


The convertible promissory notes we issued in the
Surebridge acquisition may negatively affect our liquidity and
our ability to obtain additional financing and operate and
manage our business.




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Our common stockholders may suffer significant dilution in
the future upon the conversion of outstanding securities and the
issuance of additional securities in potential future
acquisitions or financings.








Our financing agreement with Silicon Valley Bank includes
various covenants and restrictions that may negatively affect
our liquidity and our ability to operate and manage our
business.




| |   |                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | create or incur additional indebtedness;                                                                                                                                                                                                      
|
| |  | sell, or permit any lien or security interest in, any of our
    assets;                                                                                                                                                                      
|
| |  | enter into or permit any material transaction with any of our
    affiliates;                                                                                                                                                                 
|
| |  | merge or consolidate with any other party, or acquire all or
    substantially all of the capital stock or property of another
    party, unless, among other things, the other party is in the
    same, or a similar line of business as us;
|
| |  | relocate our principal executive office or add any new offices
    or business locations;                                                                                                                                                     
|
| |  | change our state of formation;                                                                                                                                                                                                                
|
| |  | change our legal name;                                                                                                                                                                                                                        
|
| |  | make investments;                                                                                                                                                                                                                             
|
| |  | pay dividends or make any distribution or payment or redeem,
    retire or purchase our capital stock; and                                                                                                                                    
|
| |  | make or permit any payment on subordinated debt or amend any
    provision in any document relating to any subordinated debt.                                                                                                                 



14



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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.


Atlantic Investors 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.


15



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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;                                  
|
| |  | 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

16



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| |   |                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.


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.


17



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| |   |                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------
| |  | 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.


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.


18



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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.


The unpredictability of our quarterly results may cause
the trading price of our common stock to fluctuate or
decline.




| |   |                                                                                                 
| | - | ------------------------------------------------------------------------------------------------
| |  | a reduction of market demand and/or acceptance of our services;                                 
|
| |  | an oversupply of data center space in the industry;                                             
|
| |  | our ability to develop, market and introduce new services on a
    timely basis;                
|
| |  | the length of the sales cycle for our services;                                                 
|
| |  | the timing and size of sales of our services, which depends on
    the budgets of our customers;
|
| |  | downward price adjustments by our competitors;                                                  
|
| |  | changes in the mix of services provided by our competitors;                                     
|
| |  | technical difficulties or system downtime affecting the Internet
    or our hosting operations; 
|
| |  | our ability to meet any increased technological demands of our
    customers; and               
|
| |  | the amount and timing of costs related to our marketing efforts
    and service introductions.  



If we are unsuccessful in pending and potential litigation
matters, our financial condition may be adversely
affected.


19



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##### Table of Contents





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.






| |   |                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------
| |  | 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.


20



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##### Table of Contents







| |   |                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.


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


21



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Anti-takeover provisions in our corporate documents may
discourage or prevent a takeover.




| |   |                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | authorize the board to issue preferred stock without stockholder
    approval;                                                                                                    
|
| |  | prohibit cumulative voting in the election of directors;                                                                                                                          
|
| |  | limit the persons who may call special meetings of
    stockholders; and                                                                                                          
|
| |  | establish advance notice requirements for nominations for the
    election of directors or for proposing matters that can be acted
    on by stockholders at stockholder meetings.






|        |           
|------- | ----------
|Item 2. | Properties

Facilities




|                        |  |                        |  |                |        |  |                  |  |                | 
|----------------------- |  | ---------------------- |  | -------------- | ------ |  | ---------------- |  | -------------- | 
|                        |  |                        |  | Square Footage |        |  |                 
|                        |  |                        |  | Leased         |        |  |                 
|Location                |  | Type                   |  | (Approximate)  |        |  | Lease Expiration | 
|                        |  |                        |  |                |        |  |                  | 
|San Jose, CA(1)         |  | Data Center and Office |  |                | 66,350 |  |                  |  | November 2006  | 
|Los Angeles, CA         |  | Data Center            |  |                | 34,711 |  |                  |  | February 2009  | 
|San Francisco, CA       |  | Data Center            |  |                | 23,342 |  |                  |  | November 2009  | 
|Atlanta, GA(1)          |  | Office                 |  |                | 10,577 |  |                  |  | September 2006 | 
|Atlanta, GA             |  | Office                 |  |                | 4,598  |  |                  |  | May 2007       | 
|Chicago, IL(1)          |  | Office                 |  |                | 4,453  |  |                  |  | February 2008  | 
|Chicago, IL             |  | Data Center            |  |                | 6,800  |  |                  |  | January 2009   | 
|Oak Brook, IL           |  | Data Center            |  |                | 16,780 |  |                  |  | September 2009 | 
|Andover, MA             |  | Office                 |  |                | 26,500 |  |                  |  | March 2006     | 
|Andover, MA             |  | Data Center and Office |  |                | 90,000 |  |                  |  | January 2018   | 
|Boston, MA              |  | Data Center and Office |  |                | 4,651  |  |                  |  | December 2005  | 
|Lexington, MA(1)        |  | Office                 |  |                | 21,056 |  |                  |  | April 2006     | 
|Syracuse, NY            |  | Data Center            |  |                | 21,246 |  |                  |  | November 2008  | 
|Syracuse, NY(1)         |  | Office                 |  |                | 44,002 |  |                  |  | December 2007  | 
|Syracuse, NY(1)         |  | Office                 |  |                | 5,016  |  |                  |  | May 2009       | 
|New York, NY            |  | Office                 |  |                | 1,500  |  |                  |  | March 2006     | 
|New York, NY            |  | Data Center            |  |                | 33,286 |  |                  |  | May 2008       | 
|Las Vegas, NV(2)        |  | Data Center            |  |                | 28,560 |  |                  |  | February 2010  | 
|Dallas, TX              |  | Data Center            |  |                | 27,370 |  |                  |  | January 2010   | 
|Houston, TX(1)          |  | Data Center and Office |  |                | 29,545 |  |                  |  | October 2008   | 
|Vienna, VA              |  | Data Center and Office |  |                | 22,290 |  |                  |  | February 2010  | 
|Milwaukee, WI           |  | Data Center            |  |                | 5,200  |  |                  |  | March 2010     | 
|Gurgaon, Haryana, India |  | Office                 |  |                | 12,706 |  |                  |  | July 2008      | 
|London, 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, as sublandlord, have entered into a sublease with a third
    party for this facility, however we retain the use of
    approximately 2,000 square feet.

22



---



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|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

IPO Securities Litigation








23



---



##### Table of Contents











Engage Bankruptcy Trustee Claim




24



---



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Wrongful Termination Claim









|        |                                                         
|------- | --------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders.



25



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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 |   |       | Low | 
|                                |                                           |      |   |       |     | 
|Fiscal Year Ended July 31, 2005 |                                           |      |   |       |     |  |   |     
|                                | May 1, 2005 through July 31, 2005         |      | $ | 2.40  |     |  | $ | 1.16 | 
|                                | February 1, 2005 through April 30, 2005   |      | $ | 2.29  |     |  | $ | 1.23 | 
|                                | November 1, 2004 through January 31, 2005 |      | $ | 3.30  |     |  | $ | 1.94 | 
|                                | August 1, 2004 through October 31, 2004   |      | $ | 3.64  |     |  | $ | 1.32 | 
|Fiscal Year Ended July 31, 2004 |                                           |      |   |       |     |  |   |     
|                                | May 1, 2004 through July 31, 2004         |      | $ | 5.45  |     |  | $ | 1.78 | 
|                                | February 1, 2004 through April 30, 2004   |      | $ | 8.00  |     |  | $ | 3.74 | 
|                                | November 1, 2003 through January 31, 2004 |      | $ | 10.48 |     |  | $ | 4.21 | 
|                                | August 1, 2003 through October 31, 2003   |      | $ | 5.45  |     |  | $ | 2.31 | 









26



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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,                                                                        |        
|                                                                           |                                                     |                                                                                            |        
|                                                                           |                                                     | 2005                                                                                       |         |         | 2004    |   |         | 2003   |         |   | 2002    |         |         | 2001 |       
|                                                                           |                                                     |                                                                                            |         |         |         |   |         |        |         |   |         |         |         |      |       
|                                                                           |                                                     | (In thousands, except per share data)                                                      |        
|Revenue                                                                    |                                                     | $                                                                                          | 109,731 |         |         | $ | 91,126  |        |         | $ | 75,281  |         |         | $    | 40,968 |         |          | $ | 66,358  |        
|Revenue, related parties                                                   |                                                     |                                                                                            | 132     |         |         |   | 46      |        |         |   | 1,310   |         |         |      | 18,453 |         |          |   | 36,368  |        
|                                                                           |                                                     |                                                                                            |         |         |         |   |         |        |         |   |         |         |         |      |       
|                                                                           | Total revenue                                       |                                                                                            |         | 109,863 |         |   |         | 91,172 |         |   |         | 76,591  |         |      |        | 59,421  |          |   |         | 102,726 |         
|                                                                           |                                                     |                                                                                            |         |         |         |   |         |        |         |   |         |         |         |      |       
|Cost of revenue                                                            |                                                     |                                                                                            | 80,227  |         |         |   | 68,379  |        |         |   | 70,781  |         |         |      | 67,000 |         |          |   | 127,155 |        
|Impairment, restructuring and other                                        |                                                     |                                                                                            | 383     |         |         |   | 917     |        |         |   |        |         |         |      | 68,317 |         |          |   | 1,930   |        
|                                                                           |                                                     |                                                                                            |         |         |         |   |         |        |         |   |         |         |         |      |       
|                                                                           |                                                     | Total cost of revenue                                                                      |         |         | 80,610  |   |         |        | 69,296  |   |         |         | 70,781  |      |        |         | 135,317  |   |         |         | 129,085  |  
|                                                                           |                                                     |                                                                                            |         |         |         |   |         |        |         |   |         |         |         |      |       
|                                                                           |                                                     | Gross profit (loss)                                                                        |         |         | 29,253  |   |         |        | 21,876  |   |         |         | 5,810   |      |        |         | (75,896  | ) |         |         | (26,359  | )
|                                                                           |                                                     |                                                                                            |         |         |         |   |         |        |         |   |         |         |         |      |       
|Operating expenses:                                                        |                                                     |                                                                                            |         |         |         |   |         |        |         |   |         |         |         |      |        |         |          |   |         |        
|                                                                           | Product development                                 |                                                                                            |         | 224     |         |   |         | 1,075  |         |   |         | 950     |         |      |        | 5,281   |          |   |         | 14,072  |         
|                                                                           | Selling and marketing                               |                                                                                            |         | 12,769  |         |   |         | 9,567  |         |   |         | 5,960   |         |      |        | 9,703   |          |   |         | 32,251  |         
|                                                                           | General and administrative                          |                                                                                            |         | 23,600  |         |   |         | 24,714 |         |   |         | 20,207  |         |      |        | 19,272  |          |   |         | 33,011  |         
|                                                                           | Impairment, restructuring and other                 |                                                                                            |         | 2,662   |         |   |         | 5,286  |         |   |         | 8,882   |         |      |        | (2,633  | )        |   |         | 8,011   |         
|                                                                           |                                                     |                                                                                            |         |         |         |   |         |        |         |   |         |         |         |      |       
|                                                                           |                                                     | Total operating expenses                                                                   |         |         | 39,255  |   |         |        | 40,642  |   |         |         | 35,999  |      |        |         | 31,623   |   |         |         | 87,345   |  
|                                                                           |                                                     |                                                                                            |         |         |         |   |         |        |         |   |         |         |         |      |       
|                                                                           |                                                     | Loss from operations                                                                       |         |         | (10,002 | ) |         |        | (18,766 | ) |         |         | (30,189 | )    |        |         | (107,519 | ) |         |         | (113,704 | )
|Other income (expense):                                                    |                                                     |                                                                                            |         |         |         |   |         |        |         |   |         |         |         |      |        |         |          |   |         |        
|                                                                           | Interest income                                     |                                                                                            |         | 61      |         |   |         | 126    |         |   |         | 851     |         |      |        | 1,060   |          |   |         | 2,753   |         
|                                                                           | Interest expense                                    |                                                                                            |         | (7,590  | )       |   |         | (3,181 | )       |   |         | (43,403 | )       |      |        | (14,718 | )        |   |         | (8,042  | )       
|                                                                           | Other income (expense), net                         |                                                                                            |         | 2,785   |         |   |         | 468    |         |   |         | (733    | )       |      |        | (516    | )        |   |         | 292     |         
|                                                                           |                                                     |                                                                                            |         |         |         |   |         |        |         |   |         |         |         |      |       
|                                                                           |                                                     | Loss before income tax expense and cumulative effect of change
    in accounting principle |         |         | (14,746 | ) |         |        | (21,353 | ) |         |         | (73,474 | )    |        |         | (121,693 | ) |         |         | (118,701 | )
|                                                                           | Income tax expense                                  |                                                                                            |         | (1,338  | )       |   |         | (1     | )       |   |         | (153    | )       |      |        |        |          |   |         |        |         
|                                                                           |                                                     |                                                                                            |         |         |         |   |         |        |         |   |         |         |         |      |       
|                                                                           |                                                     | Loss before cumulative effect of change in accounting principle                            |         |         | (16,084 | ) |         |        | (21,354 | ) |         |         | (73,627 | )    |        |         | (121,693 | ) |         |         | (118,701 | )
|                                                                           | Cumulative effect of change in accounting principle |                                                                                            |         |        |         |   |         |       |         |   |         |        |         |      |        |        |          |   |         | (4,295  | )       
|                                                                           |                                                     |                                                                                            |         |         |         |   |         |        |         |   |         |         |         |      |       
|                                                                           |                                                     | Net loss                                                                                   |         | $       | (16,084 | ) |         | $      | (21,354 | ) |         | $       | (73,627 | )    |        | $       | (121,693 | ) |         | $       | (122,996 | )
|                                                                           |                                                     |                                                                                            |         |         |         |   |         |        |         |   |         |         |         |      |       
|Per common share:                                                          |                                                     |                                                                                            |         |         |         |   |         |        |         |   |         |         |         |      |        |         |          |   |         |        
|                                                                           | Basic and diluted:                                  |                                                                                            |         |         |         |   |         |        |         |   |         |         |         |      |        |         |          |   |         |         |         
|                                                                           |                                                     | Loss before cumulative effect of change in accounting principle                            |         | $       | (0.57   | ) |         | $      | (0.85   | ) |         | $       | (6.32   | )    |        | $       | (22.30   | ) |         | $       | (30.18   | )
|                                                                           |                                                     | Cumulative effect of change in accounting principle                                        |         |         |        |   |         |        |        |   |         |         |        |      |        |         |         |   |         |         | (1.09    | )
|                                                                           |                                                     |                                                                                            |         |         |         |   |         |        |         |   |         |         |         |      |       
|                                                                           |                                                     | Net loss                                                                                   |         | $       | (0.57   | ) |         | $      | (0.85   | ) |         | $       | (6.32   | )    |        | $       | (22.30   | ) |         | $       | (31.27   | )
|                                                                           |                                                     |                                                                                            |         |         |         |   |         |        |         |   |         |         |         |      |       
|Basic and diluted weighted average number of common shares
    outstanding |                                                     |                                                                                            | 28,202  |         |         |   | 25,160  |        |         |   | 11,654  |         |         |      | 5,457  |         |          |   | 3,933   |        
|                                                                           |                                                     |                                                                                            |         |         |         |   |         |        |         |   |         |         |         |      |       
|BALANCE SHEET DATA:                                                        |                                                     |                                                                                            |         |         |         |   |         |        |         |   |         |         |         |      |        |         |          |   |         |        
|Working capital (deficit)                                                  |                                                     | $                                                                                          | (77,560 | )       |         | $ | (36,711 | )      |         | $ | (16,301 | )       |         | $    | 16,516 |         |          | $ | (9,683  | )      
|Total assets                                                               |                                                     | $                                                                                          | 101,177 |         |         | $ | 123,864 |        |         | $ | 69,371  |         |         | $    | 53,534 |         |          | $ | 112,266 |        
|Long-term obligations                                                      |                                                     | $                                                                                          | 5,515   |         |         | $ | 50,224  |        |         | $ | 13,577  |         |         | $    | 28,073 |         |          | $ | 69,852  |        
|Stockholders equity (deficit)                                             |                                                     | $                                                                                          | (2,672  | )       |         | $ | 11,082  |        |         | $ | 16,879  |         |         | $    | 8,544  |         |          | $ | (6,962  | )      

27



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|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|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 the heading 
Risk Factors that May Affect Future Results 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










28



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Results of Operations for the Three Years Ended July 31,
2005, 2004 and 2003




|                                    |                                     |                          |       |       |      |   |       |       |      |   |       |       |      |  
|----------------------------------- | ----------------------------------- | ------------------------ | ----- | ----- | ---- | - | ----- | ----- | ---- | - | ----- | ----- | ---- | -
|                                    |                                     | Year Ended July 31,      |      
|                                    |                                     |                          |      
|                                    |                                     | 2005                     |       |       | 2004 |   |       | 2003  |     
|                                    |                                     |                          |       |       |      |   |       |       |     
|Revenue                             |                                     |                          | 99.9  | %     |      |   | 99.9  | %     |      |   | 98.3  | %    
|Revenue, related parties            |                                     |                          | 0.1   | %     |      |   | 0.1   | %     |      |   | 1.7   | %    
|                                    |                                     |                          |       |       |      |   |       |       |     
|                                    | Total revenue                       |                          |       | 100.0 | %    |   |       | 100.0 | %    |   |       | 100.0 | %   
|                                    |                                     |                          |       |       |      |   |       |       |     
|Cost of revenue                     |                                     |                          | 73.0  | %     |      |   | 75.0  | %     |      |   | 92.4  | %    
|Impairment, restructuring and other |                                     |                          | 0.4   | %     |      |   | 1.0   | %     |      |   | 0.0   | %    
|                                    |                                     |                          |       |       |      |   |       |       |     
|                                    | Total cost of revenue               |                          |       | 73.4  | %    |   |       | 76.0  | %    |   |       | 92.4  | %   
|                                    |                                     |                          |       |       |      |   |       |       |     
|Gross profit                        |                                     |                          | 26.6  | %     |      |   | 24.0  | %     |      |   | 7.6   | %    
|                                    |                                     |                          |       |       |      |   |       |       |     
|Operating expenses:                 |                                     |                          |       |       |      |   |       |       |      |   |       |      
|                                    | Product development                 |                          |       | 0.2   | %    |   |       | 1.2   | %    |   |       | 1.2   | %   
|                                    | Selling and marketing               |                          |       | 11.6  | %    |   |       | 10.5  | %    |   |       | 7.8   | %   
|                                    | General and administrative          |                          |       | 21.5  | %    |   |       | 27.1  | %    |   |       | 26.4  | %   
|                                    | Impairment, restructuring and other |                          |       | 2.4   | %    |   |       | 5.8   | %    |   |       | 11.6  | %   
|                                    |                                     |                          |       |       |      |   |       |       |     
|                                    |                                     | Total operating expenses |       |       | 35.7 | % |       |       | 44.6 | % |       |       | 47.0 | %
|                                    |                                     |                          |       |       |      |   |       |       |     
|Loss from operations                |                                     |                          | (9.1  | )%    |      |   | (20.6 | )%    |      |   | (39.4 | )%   
|Other income (expense):             |                                     |                          |       |       |      |   |       |       |      |   |       |      
|                                    | Interest income                     |                          |       | 0.1   | %    |   |       | 0.1   | %    |   |       | 1.1   | %   
|                                    | Interest expense                    |                          |       | (6.9  | )%   |   |       | (3.4  | )%   |   |       | (56.7 | )%  
|                                    | Other income (expense), net         |                          |       | 2.5   | %    |   |       | (0.5  | )%   |   |       | (1.0  | )%  
|                                    |                                     |                          |       |       |      |   |       |       |     
|Loss before income tax expense      |                                     |                          | (13.4 | )%    |      |   | (23.4 | )%    |      |   | (96.0 | )%   
|Income tax expense                  |                                     |                          | (1.2  | )%    |      |   | (0.0  | )%    |      |   | (0.2  | )%   
|                                    |                                     |                          |       |       |      |   |       |       |     
|Net loss                            |                                     |                          | (14.6 | )%    |      |   | (23.4 | )%    |      |   | (96.2 | )%   
|                                    |                                     |                          |       |       |      |   |       |       |     

29



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| |                                            
| | -------------------------------------------
| | Comparison of the Years 2005, 2004 and 2003

Revenue










Gross Profit








30



---



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Cost of Revenue  Impairment, Restructuring and
Other




Operating Expenses


Product Development.






Selling and Marketing.






General and Administrative.






Operating Expenses  Impairment, Restructuring and
Other




31



---



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Interest Income






Interest Expense






Other Income (Expense), Net






Income Tax Expense




32



---



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Liquidity and Capital Resources












33



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Contractual Obligations and Commercial Commitments




|                                   |  |                |         |           |        |   |        |           |  |   |           |  |  |         |       |  |  |   |        | 
|---------------------------------- |  | -------------- | ------- | --------- | ------ | - | ------ | --------- |  | - | --------- |  |  | ------- | ----- |  |  | - | ------ | 
|                                   |  |                |         | Less than |        |   |        |           |  |   | More than | 
|Description                        |  | Total          |         |           | 1 Year |   |        | 1-3 Years |  |   | 4-5 Years |  |  | 5 Years |      
|                                   |  |                |         |           |        |   |        |           |  |   |           |  |  |         |      
|                                   |  | (In thousands) |        
|Short/ Long-term debt              |  | $              | 66,315  |           |        | $ | 65,906 | (a)       |  | $ | 409       |  |  | $       |      |  |  | $ |       | 
|Interest on debt(b)                |  |                | 9,051   |           |        |   | 9,040  |           |  |   | 11        |  |  |         |      |  |  |   |       | 
|Capital leases                     |  |                | 2,632   |           |        |   | 1,469  |           |  |   | 1,163     |  |  |         |      |  |  |   |       | 
|Operating leases                   |  |                | 615     |           |        |   | 315    |           |  |   | 300       |  |  |         |      |  |  |   |       | 
|Bandwidth commitments              |  |                | 4,899   |           |        |   | 2,947  |           |  |   | 1,952     |  |  |         |      |  |  |   |       | 
|Maintenance for hardware/ software |  |                | 298     |           |        |   | 166    |           |  |   | 132       |  |  |         |      |  |  |   |       | 
|Property leases(c)(d)              |  |                | 47,673  |           |        |   | 10,938 |           |  |   | 16,664    |  |  |         | 8,802 |  |  |   | 11,269 | 
|                                   |  |                |         |           |        |   |        |           |  |   |           |  |  |         |      
|                                   |  | $              | 131,483 |           |        | $ | 90,781 |           |  | $ | 20,631    |  |  | $       | 8,802 |  |  | $ | 11,269 | 
|                                   |  |                |         |           |        |   |        |           |  |   |           |  |  |         |      






|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Amount includes the outstanding balance on the accounts
    receivable financing line as of July 31, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(b) |  | Amounts do not include interest on the accounts receivable
    financing line, as interest rate is variable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(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 acquired 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 will
    receive $55,682 per month over two years. 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.

Off-Balance Sheet Financing Arrangements




34



---



##### Table of Contents



Critical Accounting Policies




Revenue Recognition.




Allowance for Doubtful Accounts.


35



---



##### Table of Contents



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;                                                               
|
| |  | significant declines in our stock price for a sustained
    period; and                                         
|
| |  | our market capitalization relative to net book value.                                                           





Recent Accounting Pronouncements






36



---



##### Table of Contents














|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures About Market
    Risk








|        |                                            
|------- | -------------------------------------------
|Item 8. | Financial Statements and Supplementary Data








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure








|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

Evaluation of Disclosure Controls and Procedures.


Changes in Internal Control Over Financial Reporting.


37



---



##### Table of Contents








|         |                  
|-------- | -----------------
|Item 9B. | Other Information






PART III









|         |                                                   
|-------- | --------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant



Code of Ethics.







|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation








| |          |                                                                                                   
| | -------- | --------------------------------------------------------------------------------------------------
| | Item 12. | Security Ownership of Certain Beneficial Owners and
    Management and Related Stockholder Matters



Equity Compensation Plan Information as of July 31,
2005




|                                                           |  |                         |           |  |                      |     |      |                               |  |  |         | 
|---------------------------------------------------------- |  | ----------------------- | --------- |  | -------------------- | --- | ---- | ----------------------------- |  |  | ------- | 
|                                                           |  |                         |           |  |                      | (c) |     
|                                                           |  | (a)                     |           |  | (b)                  |     |      | Number of Securities          | 
|                                                           |  | Number of Securities to |           |  | Weighted-average     |     |      | Available for Future Issuance | 
|                                                           |  | be Issued Upon Exercise |           |  | Exercise Price of    |     |      | Under Equity Compensation     | 
|                                                           |  | of Outstanding Options, |           |  | Outstanding Options, |     |      | Plans (excluding securities   | 
|Plan Category                                              |  | Warrants and Rights     |           |  | Warrants and Rights  |     |      | reflected in column (a))      | 
|                                                           |  |                         |           |  |                      |     |      |                               | 
|Equity compensation plans approved by security holders     |  |                         | 6,086,655 |  |                      | $   | 3.26 |                               |  |  | 736,820 | 
|Equity compensation plans not approved by security holders |  |                         |          |  |                      |     | N/A  |                               |  |  |        | 
|                                                           |  |                         |           |  |                      |     |      |                               | 
|Total                                                      |  |                         | 6,086,655 |  |                      |     |      |                               |  |  | 736,820 | 
|                                                           |  |                         |           |  |                      |     |      |                               | 

38



---



##### Table of Contents








|         |                                               
|-------- | ----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions








|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accounting Fees and Services






PART IV







|         |                                        
|-------- | ---------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules













39



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##### Table of Contents






SIGNATURES






| |               
| | --------------
| | Navisite, Inc.



| |     |                     
| | --- | --------------------
| | By: | /s/ Arthur P. Becker

| |                        
| | -----------------------
| |                        
| | Arthur P. Becker       
| | Chief Executive Officer



|                                             |  |                                                                                        |  |                  |  | 
|-------------------------------------------- |  | -------------------------------------------------------------------------------------- |  | ---------------- |  | 
|Signatures                                   |  | Title                                                                                  |  | Date            
|                                             |  |                                                                                        |  |                 
|                                            
|/s/ Andrew RuhanAndrew
    Ruhan             |  | Chairman of the Board                                                                  |  | October 31, 2005
|                                            
|/s/ Arthur P. BeckerArthur
    P. Becker     |  | President, Chief Executive
    Officer and Director
    (Principal Executive Officer)  |  | October 31, 2005
|                                            
|/s/ John J. Gavin, Jr.John
    J. Gavin, Jr. |  | Chief Financial Officer
    (Principal Financial and
    Principal Accounting Officer) |  | October 31, 2005
|                                            
|/s/ Gabriel RuhanGabriel
    Ruhan           |  | Director                                                                               |  | October 31, 2005
|                                            
|/s/ James H. DennedyJames
    H. Dennedy     |  | Director                                                                               |  | October 31, 2005
|                                            
|/s/ Larry W. SchwartzLarry
    W. Schwartz   |  | Director                                                                               |  | October 31, 2005
|                                            
|/s/ Thomas R. EvansThomas
    R. Evans       |  | Director                                                                               |  | October 31, 2005

40



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##### Table of Contents



INDEX TO EXHIBITS


|            |   |    |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|----------- | - | -- | ---------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |   |    | Description of Exhibit
|            |   |    |                       
|            | 2 | .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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    



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##### Table of Contents



|            |    |     |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|----------- | -- | --- | ---------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    |     | Description of Exhibit
|            |    |     |                       
|            | 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).                                                                                                                                                                                                                               
|            | 10 | .2  |                        | Amendment No. 1 to Lease, by and between 400 River Limited
    Partnership and the Registrant is incorporated by reference to
    Exhibits to the Registrants Quarterly Report on
    Form 10-Q for the fiscal quarter ended October 31,
    2003 (File No. 000-27597).                                                                                                                                                                                                
|            | 10 | .3  |                        | Amendment No. 2 to Lease, dated December 1, 2003, by
    and between 400 River Limited Partnership and the Registrant is
    incorporated herein by reference to Exhibits to the
    Registrants Registration Statement on Form S-2 filed
    January 22, 2004 (File No. 333-112087).                                                                                                                                                                                  
|            | 10 | .4  |                        | Amendment No. 3 to Lease, by and between 400 River Limited
    Partnership and the Registrant, is incorporated herein by
    reference to Exhibit 99.1 to the Registrants Current
    Report on Form 8-K dated September 21, 2004 (File
    No. 000-27597).                                                                                                                                                                                                            
|            | 10 | .5  |                        | Lease, made as of April 30, 1999, by and between
    CarrAmerica Realty Corporation and the Registrant is
    incorporated herein by reference to Exhibits to the
    Registrants Registration Statement on Form S-1 (File
    No. 333-83501).                                                                                                                                                                                                                         
|            | 10 | .6* |                        | 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 | .7* |                        | 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 | .8  |                        | 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 | .9* |                        | 2000 Stock Option Plan is incorporated herein by reference to
    Exhibits to the Registrants Annual Report on
    Form 10-K/ A for the fiscal year ended July 31, 2002
    (File No. 000-27597).                                                                                                                                                                                                                                                                      
|            | 10 | .10 |                        | 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 | .11 |                        | 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 | .12 |                        | 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 | .13 |                        | 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 | .14 |                        | 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).                                                                                                                               



---



##### Table of Contents



|            |    |      |                        |                                                                                                                                                                                                                                                                                                                                                                                                                         
|----------- | -- | ---- | ---------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    |      | Description of Exhibit
|            |    |      |                       
|            | 10 | .15  |                        | 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 | .16  |                        | 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 | .17  |                        | 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).                                                                                                                                             
|            | 10 | .18  |                        | 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 | .19  |                        | 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 | .20  |                        | 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 | .21  |                        | 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 | .22  |                        | 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 | .23* |                        | 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 | .24  |                        | Accounts Receivable Financing Agreement dated May 27, 2003
    by and between Silicon Valley Bank and the Registrant, ClearBlue
    Technologies Management, Inc., Avasta, Inc., Conxion Corporation
    and Intrepid Acquisition Corp., 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 | .25  |                        | First Loan Modification Agreement, dated as of January 30,
    2004, by and among the Registrant, Silicon Valley Bank,
    ClearBlue Technologies Management, Inc., Avasta, Inc., Conxion
    Corporation and Intrepid Acquisition Corp. is incorporated
    herein by reference to Exhibit 10.1 to the
    Registrants Current Report on Form 8-K dated
    January 30, 2004 (File No. 000-27597).                    
|            | 10 | .26  |                        | Second Loan Modification Agreement, dated April 29, 2004,
    by and among the Registrant, Silicon Valley Bank, ClearBlue
    Technologies Management, Inc., Avasta, Inc., Conxion Corporation
    and Intrepid Acquisition Corp. is incorporated herein by
    reference to Exhibit 10.1 to the Registrants Current
    Report on Form 8-K dated April 29, 2004 (File
    No. 000-27597).                             
|            | 10 | .27  |                        | Registration Rights Agreement, dated May 27, 2003, by and
    between the Registrant and Silicon Valley Bank, is incorporated
    herein by reference to Exhibits to the Registrants
    Quarterly Report on Form 10-Q for the fiscal quarter ended
    April 30, 2003 (File No. 000-27597).                                                                                                                           
|            | 10 | .28  |                        | Registration Rights Agreement, dated as of January 30,
    2004, by and between the Registrant and Silicon Valley Bank is
    incorporated herein by reference to Exhibit 10.2 to the
    Registrants Current Report on Form 8-K dated
    January 30, 2004 (File No. 000-27597).                                                                                                                                      
|            | 10 | .29  |                        | 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).                                                                                                                                                      



---



##### Table of Contents



|            |    |      |                        |                                                                                                                                                                                                                                                                                                                                                                                                                              
|----------- | -- | ---- | ---------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    |      | Description of Exhibit
|            |    |      |                       
|            | 10 | .30  |                        | Intellectual Property Security 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 | .31  |                        | Letter Agreement dated April 29, 2004 by and among Silicon
    Valley Bank and the Registrant, ClearBlue Technologies
    Management, Inc., Avasta, Inc., Conxion Corporation and Intrepid
    Acquisition Corp. is incorporated herein by reference to
    Exhibit 10.56 of the Registrants Annual Report on
    Form 10-K for the fiscal year ended July 31, 2004
    (File No. 000-27597).                               
|            | 10 | .32  |                        | Letter Agreement dated October 27, 2004 by and among
    Silicon Valley Bank and the Registrant, ClearBlue Technologies
    Management, Inc., Avasta, Inc., Conxion Corporation, Intrepid
    Acquisition Corp. and Lexington Acquisition Corp. is
    incorporated herein by reference to Exhibit 10.57 of the
    Registrants Annual Report on Form 10-K for the fiscal
    year ended July 31, 2004 (File No. 000-27597).
|            | 10 | .33  |                        | 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 | .34* |                        | 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 | .35  |                        | 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., Kenneth Drake 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 | .36  |                        | 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 | .37  |                        | 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 | .38  |                        | 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 | .39  |                        | 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 | .40  |                        | 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 | .41  |                        | 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 | .42  |                        | 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 Exhibit
|            |    |      |                       
|            | 10 | .43  |                        | 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 | .44  |                        | 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 | .45  |                        | 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 | .46  |                        | 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 | .47  |                        | 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 | .48  |                        | 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 | .49  |                        | 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 | .50* |                        | 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 | .51  |                        | 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 | .52  |                        | Primary Note, dated June 10, 2004, issued by the Registrant
    to Surebridge, Inc. is incorporated herein by reference to
    Exhibit 10.2 to the Registrants Current Report on
    Form 8-K dated June 10, 2004 (File No. 000-27597).                                                                                                                                                                                                                                                                                            
|            | 10 | .53  |                        | Escrow Note, dated June 10, 2004, issued by the Registrant
    to Surebridge, Inc. is incorporated herein by reference to
    Exhibit 10.3 to the Registrants Current Report on
    Form 8-K dated June 10, 2004 (File No. 000-27597).                                                                                                                                                                                                                                                                                             
|            | 10 | .54* |                        | 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 | .55  |                        | Joinder Agreement dated as of July 28, 2004 by and between
    Silicon Valley Bank and the Registrant, ClearBlue Technologies
    Management, Inc., Avasta, Inc., Conxion Corporation, Intrepid
    Acquisition Corp. and Lexington Acquisition Corp. is
    incorporated herein by reference to Exhibit 10.58 of the
    Registrants Annual Report on Form 10-K for the fiscal
    year ended July 31, 2004 (File No. 000-27597).                                                                                                 
|            | 10 | .56  |                        | Joinder Agreement dated as of December 7, 2004 by and
    between Silicon Valley Bank and the Registrant, ClearBlue
    Technologies Management, Inc., Avasta, Inc., Conxion
    Corporation, Intrepid Acquisition Corp., Lexington Acquisition
    Corp., Surebridge Services, Inc., Surebridge Acquisition Corp.
    and ManagedOps.com, Inc 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,
    2004 (File No. 000-27597).



---



##### Table of Contents



|            |    |      |                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|----------- | -- | ---- | ---------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    |      | Description of Exhibit
|            |    |      |                       
|            | 10 | .57  |                        | Joinder Agreement dated as of December 7, 2004 by and
    between Silicon Valley Bank and the Registrant, ClearBlue
    Technologies Management, Inc., Avasta, Inc., Conxion
    Corporation, Intrepid Acquisition Corp., Lexington Acquisition
    Corp., Surebridge Services, Inc., Surebride Acquisition Corp.,
    ManagedOps.com, ClearBlue Technologies/ Chicago-Wells, Inc.,
    ClearBlue Technologies/ Las Vegas, Inc., ClearBlue Technologies/
    Milwaukee, Inc., ClearBlue Technologies/ Los Angeles, Inc.,
    ClearBlue Technologies/ Oakbrook, Inc., ClearBlue Technologies/
    Vienna, 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 10.2 to
    the Registrants Quarterly Report on Form 10-Q for the
    fiscal quarter ended October 31, 2004 (File
    No. 000-27597).
|            | 10 | .58  |                        | 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 | .59* |                        | 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 | .60* |                        | 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 | .61* |                        | 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            | 10 | .62* |                        | 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 | .63  |                        | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            | 10 | .64* |                        | Employment Offer Letter, dated August 12, 2005, between the
    Registrant and Monique Cormier.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            | 14 |      |                        | Code of Business Conduct and Ethics.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            | 21 |      |                        | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            | 23 |      |                        | Consent of KPMG LLP, Independent Registered Public Accounting
    Firm.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            | 31 | .1   |                        | Certification of Chief Executive Officer pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            | 31 | .2   |                        | Certification of Chief Financial Officer pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            | 32 | .1   |                        | Certification of the Chief Executive Officer pursuant to
    18 U.S.C. Section 1350, as Adopted Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            | 32 | .2   |                        | Certification of the Chief Financial Officer pursuant to
    18 U.S.C. Section 1350, as Adopted Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           






|    |                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------
|(*) | Management contract or compensatory plan or arrangement required
    to be filed as an Exhibit to this Annual Report on
    Form 10-K.



---













INDEX TO NAVISITE, INC. CONSOLIDATED FINANCIAL STATEMENTS









|                                                                                                                              |  |      |      | 
|----------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---- | 
|                                                                                                                              |  | Page |     
|                                                                                                                              |  |      |     
|Report of Independent Registered Public
    Accounting Firm                                                                   |  |      | F-2  | 
|Consolidated Balance Sheets as of
    July 31, 2005 and 2004                                                                  |  |      | F-3  | 
|Consolidated Statements of Operations for
    the years ended July 31, 2005, 2004 and 2003                                    |  |      | F-4  | 
|Consolidated Statements of Changes in
    Stockholders Equity (Deficit) for the years ended
    July 31, 2005, 2004 and 2003 |  |      | F-5  | 
|Consolidated Statements of Cash Flows for
    the years ended July 31, 2005, 2004 and 2003                                    |  |      | F-6  | 
|Notes to Consolidated Financial
    Statements                                                                                |  |      | F-7  | 
|Report of Independent Registered Public
    Accounting Firm on Financial Statement Schedule                                   |  |      | F-36 | 
|Financial Statement
    Schedule II  Valuation and Qualifying
    Accounts                                                   |  |      | F-37 | 



F-1



---



##### Table of Contents






REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




















F-2



---



##### Table of Contents






NAVISITE, INC. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS


|                                                                                                                                                    |                                                                                                                            |                                                      |          |        |         |   |          |        |         | 
|--------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------- | -------- | ------ | ------- | - | -------- | ------ | ------- | 
|                                                                                                                                                    |                                                                                                                            | July 31,                                             |         
|                                                                                                                                                    |                                                                                                                            |                                                      |         
|                                                                                                                                                    |                                                                                                                            | 2005                                                 |          |        | 2004    |  
|                                                                                                                                                    |                                                                                                                            |                                                      |          |        |         |  
|                                                                                                                                                    |                                                                                                                            | (In thousands,                                       |         
|                                                                                                                                                    |                                                                                                                            | except par value)                                    |         
|ASSETS                                                                                                                                             
|Current assets:                                                                                                                                     |                                                                                                                            |                                                      |          |        |         |   |          |       
|                                                                                                                                                    | Cash and cash equivalents                                                                                                  |                                                      | $        | 6,816  |         |   | $        | 3,195  |        
|                                                                                                                                                    | Accounts receivable, less allowance for doubtful accounts of
    $2,887 and $2,498 at July 31, 2005 and 2004, respectively |                                                      |          | 10,688 |         |   |          | 16,584 |        
|                                                                                                                                                    | Due from related party                                                                                                     |                                                      |          | 101    |         |   |          | 101    |        
|                                                                                                                                                    | Unbilled accounts receivable                                                                                               |                                                      |          | 363    |         |   |          | 1,854  |        
|                                                                                                                                                    | Prepaid expenses and other current assets                                                                                  |                                                      |          | 2,806  |         |   |          | 4,113  |        
|                                                                                                                                                    |                                                                                                                            |                                                      |          |        |         |  
|                                                                                                                                                    |                                                                                                                            | Total current assets                                 |          |        | 20,774  |   |          |        | 25,847  | 
|Property and equipment, net                                                                                                                         |                                                                                                                            |                                                      | 15,199   |        |         |   | 20,794   |       
|Customer lists, less accumulated amortization of $13,228 and
    $7,875 at July 31, 2005 and 2004, respectively                                     |                                                                                                                            |                                                      | 16,563   |        |         |   | 23,151   |       
|Goodwill                                                                                                                                            |                                                                                                                            |                                                      | 43,159   |        |         |   | 45,920   |       
|Other assets                                                                                                                                        |                                                                                                                            |                                                      | 4,383    |        |         |   | 6,316    |       
|Restricted cash                                                                                                                                     |                                                                                                                            |                                                      | 1,099    |        |         |   | 1,836    |       
|                                                                                                                                                    |                                                                                                                            |                                                      |          |        |         |  
|                                                                                                                                                    |                                                                                                                            | Total assets                                         |          | $      | 101,177 |   |          | $      | 123,864 | 
|                                                                                                                                                    |                                                                                                                            |                                                      |          |        |         |  
|                                                                                                                                                   
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                                                                                                     
|Current liabilities:                                                                                                                                |                                                                                                                            |                                                      |          |        |         |   |          |       
|                                                                                                                                                    | Accounts receivable financing line, net                                                                                    |                                                      | $        | 20,347 |         |   | $        | 20,240 |        
|                                                                                                                                                    | Notes payable to the AppliedTheory Estate                                                                                  |                                                      |          | 6,000  |         |   |          |       |        
|                                                                                                                                                    | Notes payable, current portion                                                                                             |                                                      |          | 1,145  |         |   |          | 751    |        
|                                                                                                                                                    | Convertible notes payable to Waythere, Inc. (formerly Surebridge)                                                          |                                                      |          | 35,361 |         |   |          | 800    |        
|                                                                                                                                                    | Note payable to related party                                                                                              |                                                      |          | 3,000  |         |   |          | 3,000  |        
|                                                                                                                                                    | Capital lease obligations, current portion                                                                                 |                                                      |          | 1,259  |         |   |          | 2,921  |        
|                                                                                                                                                    | Accounts payable                                                                                                           |                                                      |          | 8,122  |         |   |          | 8,285  |        
|                                                                                                                                                    | Accrued expenses                                                                                                           |                                                      |          | 12,865 |         |   |          | 18,231 |        
|                                                                                                                                                    | Accrued interest                                                                                                           |                                                      |          | 5,494  |         |   |          | 659    |        
|                                                                                                                                                    | Accrued lease abandonment costs, current portion                                                                           |                                                      |          | 2,435  |         |   |          | 4,269  |        
|                                                                                                                                                    | Deferred revenue and deferred other income                                                                                 |                                                      |          | 1,923  |         |   |          | 2,670  |        
|                                                                                                                                                    | Customer deposits                                                                                                          |                                                      |          | 383    |         |   |          | 732    |        
|                                                                                                                                                    |                                                                                                                            |                                                      |          |        |         |  
|                                                                                                                                                    |                                                                                                                            | Total current liabilities                            |          |        | 98,334  |   |          |        | 62,558  | 
|Capital lease obligations, less current portion                                                                                                     |                                                                                                                            |                                                      | 1,105    |        |         |   | 469      |       
|Accrued lease abandonment costs, less current portion                                                                                               |                                                                                                                            |                                                      | 1,359    |        |         |   | 2,782    |       
|Deferred tax liability                                                                                                                              |                                                                                                                            |                                                      | 1,338    |        |         |   |         |       
|Other long-term liabilities                                                                                                                         |                                                                                                                            |                                                      | 1,304    |        |         |   | 1,349    |       
|Notes payable to the AppliedTheory Estate, less current portion                                                                                     |                                                                                                                            |                                                      |         |        |         |   | 6,000    |       
|Notes payable, less current portion                                                                                                                 |                                                                                                                            |                                                      | 409      |        |         |   | 1,157    |       
|Convertible notes payable to Waythere, Inc. (formerly
    Surebridge), less current portion                                                         |                                                                                                                            |                                                      |         |        |         |   | 38,467   |       
|                                                                                                                                                    |                                                                                                                            |                                                      |          |        |         |  
|                                                                                                                                                    |                                                                                                                            | Total liabilities                                    |          |        | 103,849 |   |          |        | 112,782 | 
|                                                                                                                                                    |                                                                                                                            |                                                      |          |        |         |  
|Commitments 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, 2005 and 2004                      |                                                                                                                            |                                                      |         |        |         |   |         |       
|Common stock, $0.01 par value; Authorized
    395,000 shares; Issued and outstanding: 28,487 and 27,924
    at July 31, 2005 and 2004, respectively |                                                                                                                            |                                                      | 285      |        |         |   | 279      |       
|Deferred compensation                                                                                                                               |                                                                                                                            |                                                      | (633     | )      |         |   | (1,514   | )     
|Accumulated other comprehensive income                                                                                                              |                                                                                                                            |                                                      | 156      |        |         |   | 15       |       
|Additional paid-in capital                                                                                                                          |                                                                                                                            |                                                      | 453,458  |        |         |   | 452,156  |       
|Accumulated deficit                                                                                                                                 |                                                                                                                            |                                                      | (455,938 | )      |         |   | (439,854 | )     
|                                                                                                                                                    |                                                                                                                            |                                                      |          |        |         |  
|                                                                                                                                                    |                                                                                                                            | Total stockholders equity (deficit)                 |          |        | (2,672  | ) |          |        | 11,082  | 
|                                                                                                                                                    |                                                                                                                            |                                                      |          |        |         |  
|                                                                                                                                                    |                                                                                                                            | Total liabilities and stockholders equity (deficit) |          | $      | 101,177 |   |          | $      | 123,864 | 
|                                                                                                                                                    |                                                                                                                            |                                                      |          |        |         |  



F-3



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##### Table of Contents






NAVISITE, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                                           |                                          |                                       |         |         |        |   |         |        |        |   |         |         |        | 
|-------------------------------------------------------------------------- | ---------------------------------------- | ------------------------------------- | ------- | ------- | ------ | - | ------- | ------ | ------ | - | ------- | ------- | ------ | 
|                                                                           |                                          | Years Ended July 31,                  |        
|                                                                           |                                          |                                       |        
|                                                                           |                                          | 2005                                  |         |         | 2004   |   |         | 2003   |       
|                                                                           |                                          |                                       |         |         |        |   |         |        |       
|                                                                           |                                          | (In thousands, except per share data) |        
|Revenue                                                                    |                                          | $                                     | 109,731 |         |        | $ | 91,126  |        |        | $ | 75,281  |        
|Revenue, related parties                                                   |                                          |                                       | 132     |         |        |   | 46      |        |        |   | 1,310   |        
|                                                                           |                                          |                                       |         |         |        |   |         |        |       
|                                                                           | Total revenue                            |                                       |         | 109,863 |        |   |         | 91,172 |        |   |         | 76,591  |       
|                                                                           |                                          |                                       |         |         |        |   |         |        |       
|Cost of revenue                                                            |                                          |                                       | 80,227  |         |        |   | 68,379  |        |        |   | 70,781  |        
|Impairment, restructuring and other, net                                   |                                          |                                       | 383     |         |        |   | 917     |        |        |   |        |        
|                                                                           |                                          |                                       |         |         |        |   |         |        |       
|                                                                           | Total cost of revenue                    |                                       |         | 80,610  |        |   |         | 69,296 |        |   |         | 70,781  |       
|                                                                           |                                          |                                       |         |         |        |   |         |        |       
|Gross profit                                                               |                                          |                                       | 29,253  |         |        |   | 21,876  |        |        |   | 5,810   |        
|                                                                           |                                          |                                       |         |         |        |   |         |        |       
|Operating expenses:                                                        |                                          |                                       |         |         |        |   |         |        |        |   |         |        
|                                                                           | Product development                      |                                       |         | 224     |        |   |         | 1,075  |        |   |         | 950     |       
|                                                                           | Selling and marketing                    |                                       |         | 12,769  |        |   |         | 9,567  |        |   |         | 5,960   |       
|                                                                           | General and administrative               |                                       |         | 23,600  |        |   |         | 24,714 |        |   |         | 20,207  |       
|                                                                           | Impairment, restructuring and other, net |                                       |         | 2,662   |        |   |         | 5,286  |        |   |         | 8,882   |       
|                                                                           |                                          |                                       |         |         |        |   |         |        |       
|                                                                           |                                          | Total operating expenses              |         |         | 39,255 |   |         |        | 40,642 |   |         |         | 35,999 | 
|                                                                           |                                          |                                       |         |         |        |   |         |        |       
|Loss from operations                                                       |                                          |                                       | (10,002 | )       |        |   | (18,766 | )      |        |   | (30,189 | )      
|Other income (expense):                                                    |                                          |                                       |         |         |        |   |         |        |        |   |         |        
|                                                                           | Interest income                          |                                       |         | 61      |        |   |         | 126    |        |   |         | 851     |       
|                                                                           | Interest expense                         |                                       |         | (7,590  | )      |   |         | (3,181 | )      |   |         | (43,403 | )     
|                                                                           | Other income (expense), net              |                                       |         | 2,785   |        |   |         | 468    |        |   |         | (733    | )     
|                                                                           |                                          |                                       |         |         |        |   |         |        |       
|Loss before income tax expense                                             |                                          |                                       | (14,746 | )       |        |   | (21,353 | )      |        |   | (73,474 | )      
|Income tax expense                                                         |                                          |                                       | (1,338  | )       |        |   | (1      | )      |        |   | (153    | )      
|                                                                           |                                          |                                       |         |         |        |   |         |        |       
|Net loss                                                                   |                                          | $                                     | (16,084 | )       |        | $ | (21,354 | )      |        | $ | (73,627 | )      
|                                                                           |                                          |                                       |         |         |        |   |         |        |       
|Basic and diluted net loss per common share                                |                                          | $                                     | (0.57   | )       |        | $ | (0.85   | )      |        | $ | (6.32   | )      
|                                                                           |                                          |                                       |         |         |        |   |         |        |       
|Basic and diluted weighted average number of common shares
    outstanding |                                          |                                       | 28,202  |         |        |   | 25,160  |        |        |   | 11,654  |        
|                                                                           |                                          |                                       |         |         |        |   |         |        |       



F-4



---



##### Table of Contents






NAVISITE, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS
EQUITY (DEFICIT)


|                                                                             |  |                |        |   |          |       |               |              |  |            |         |   |  |             |               |   |         |   |         |           |  |   |          |   |  |   |         |  
|---------------------------------------------------------------------------- |  | -------------- | ------ | - | -------- | ----- | ------------- | ------------ |  | ---------- | ------- | - |  | ----------- | ------------- | - | ------- | - | ------- | --------- |  | - | -------- | - |  | - | ------- | -
|                                                                             |  |                |        |   |          |       |               | Accumulated  |  |            |         |   |  |             |              
|                                                                             |  |                |        |   |          | Other |               |              |  |            |         |   | 
|                                                                             |  | Common Stock   |        |   |          |       | Comprehensive |              |  | Additional |         |   |  |             | Stockholders |  
|                                                                             |  |                |        |   | Deferred |       |               | Income       |  |            | Paid-In |   |  | Accumulated |               |   | Equity  |  
|                                                                             |  | Shares         |        |   | Amount   |       |               | Compensation |  |            | (Loss)  |   |  | Capital     |               |   | Deficit |   |         | (Deficit) | 
|                                                                             |  |                |        |   |          |       |               |              |  |            |         |   |  |             |               |   |         |   |         |           | 
|                                                                             |  | (In thousands) |       
|Balance at July 31, 2002                                                     |  |                | 6,248  |   |          | $     | 62            |              |  | $          |        |   |  | $           |              |   |         | $ | 345,820 |           |  | $ | (337,338 | ) |  | $ | 8,544   |  
|Exercise of common stock options                                             |  |                | 2      |   |          |       |              |              |  |            |        |   |  |             |              |   |         |   | 2       |           |  |   |         |   |  |   | 2       |  
|Common control merger with CBTM                                              |  |                | 568    |   |          |       | 6             |              |  |            |        |   |  |             |              |   |         |   | 3,360   |           |  |   | (515     | ) |  |   | 2,851   |  
|Common control merger with CBT                                               |  |                |       |   |          |       |              |              |  |            |        |   |  |             |              |   |         |   | 16,664  |           |  |   | (4,259   | ) |  |   | 12,405  |  
|Conversion of CBT convertible debt and other amounts due to CBT              |  |                | 16,363 |   |          |       | 165           |              |  |            |        |   |  |             |              |   |         |   | 65,816  |           |  |   |         |   |  |   | 65,981  |  
|Issuance of common stock  Avasta acquisition                                |  |                | 231    |   |          |       | 2             |              |  |            |        |   |  |             |              |   |         |   | 367     |           |  |   |         |   |  |   | 369     |  
|Issuance of stock warrants to Silicon Valley Bank                            |  |                |       |   |          |       |              |              |  |            |        |   |  |             |              |   |         |   | 370     |           |  |   |         |   |  |   | 370     |  
|Currency translation adjustment                                              |  |                |       |   |          |       |              |              |  |            |        |   |  |             | (16           | ) |         |   |        |           |  |   |         |   |  |   | (16     | )
|Net loss                                                                     |  |                |       |   |          |       |              |              |  |            |        |   |  |             |              |   |         |   |        |           |  |   | (73,627  | ) |  |   | (73,627 | )
|                                                                             |  |                |        |   |          |       |               |              |  |            |         |   |  |             |               |   |         |   |         |           | 
|Balance at July 31, 2003                                                     |  |                | 23,412 |   |          |       | 235           |              |  |            |        |   |  |             | (16           | ) |         |   | 432,399 |           |  |   | (415,739 | ) |  |   | 16,879  |  
|Exercise of common stock options                                             |  |                | 159    |   |          |       | 1             |              |  |            |        |   |  |             |              |   |         |   | 403     |           |  |   |         |   |  |   | 404     |  
|Issuance of deferred stock-based compensation                                |  |                |       |   |          |       |              |              |  |            | (1,987  | ) |  |             |              |   |         |   | 1,987   |           |  |   |         |   |  |   |        |  
|Amortization of deferred stock-based compensation                            |  |                |       |   |          |       |              |              |  |            | 473     |   |  |             |              |   |         |   |        |           |  |   |         |   |  |   | 473     |  
|Issuance of common stock  Avasta earn-out                                   |  |                | 179    |   |          |       | 2             |              |  |            |        |   |  |             |              |   |         |   | 741     |           |  |   |         |   |  |   | 743     |  
|Issuance of stock warrants to Silicon Valley Bank                            |  |                |       |   |          |       |              |              |  |            |        |   |  |             |              |   |         |   | 213     |           |  |   |         |   |  |   | 213     |  
|Exercise 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   | ) |  |   | 43      |  
|Issuance of common stock  Surebridge acquisition                            |  |                | 3,000  |   |          |       | 30            |              |  |            |        |   |  |             |              |   |         |   | 13,620  |           |  |   |         |   |  |   | 13,650  |  
|Currency translation adjustment                                              |  |                |       |   |          |       |              |              |  |            |        |   |  |             | 31            |   |         |   |        |           |  |   |         |   |  |   | 31      |  
|Net loss                                                                     |  |                |       |   |          |       |              |              |  |            |        |   |  |             |              |   |         |   |        |           |  |   | (21,354  | ) |  |   | (21,354 | )
|                                                                             |  |                |        |   |          |       |               |              |  |            |         |   |  |             |               |   |         |   |         |           | 
|Balance at July 31, 2004                                                     |  |                | 27,924 |   |          |       | 279           |              |  |            | (1,514  | ) |  |             | 15            |   |         |   | 452,156 |           |  |   | (439,854 | ) |  |   | 11,082  |  
|Exercise of common stock options                                             |  |                | 35     |   |          |       | 1             |              |  |            |        |   |  |             |              |   |         |   | 88      |           |  |   |         |   |  |   | 89      |  
|Issuance of common stock related to Avasta arbitration settlement            |  |                | 522    |   |          |       | 5             |              |  |            |        |   |  |             |              |   |         |   | 1,325   |           |  |   |         |   |  |   | 1,330   |  
|Issuance of restricted stock                                                 |  |                | 7      |   |          |       |              |              |  |            |        |   |  |             |              |   |         |   | 6       |           |  |   |         |   |  |   | 6       |  
|Forfeiture of restricted stock                                               |  |                | (1     | ) |          |       |              |              |  |            |        |   |  |             |              |   |         |   |        |           |  |   |         |   |  |   |        |  
|Forfeiture of deferred stock-based compensation                              |  |                |       |   |          |       |              |              |  |            | 122     |   |  |             |              |   |         |   | (122    | )         |  |   |         |   |  |   |        |  
|Stock compensation and amortization of deferred stock-based
    compensation |  |                |       |   |          |       |              |              |  |            | 759     |   |  |             |              |   |         |   | 5       |           |  |   |         |   |  |   | 764     |  
|Currency translation adjustment                                              |  |                |       |   |          |       |              |              |  |            |        |   |  |             | 141           |   |         |   |        |           |  |   |         |   |  |   | 141     |  
|Net loss                                                                     |  |                |       |   |          |       |              |              |  |            |        |   |  |             |              |   |         |   |        |           |  |   | (16,084  | ) |  |   | (16,084 | )
|                                                                             |  |                |        |   |          |       |               |              |  |            |         |   |  |             |               |   |         |   |         |           | 
|Balance at July 31, 2005                                                     |  |                | 28,487 |   |          | $     | 285           |              |  | $          | (633    | ) |  | $           | 156           |   |         | $ | 453,458 |           |  | $ | (455,938 | ) |  | $ | (2,672  | )
|                                                                             |  |                |        |   |          |       |               |              |  |            |         |   |  |             |               |   |         |   |         |           | 



F-5



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##### Table of Contents






NAVISITE, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                  |                                                                                                |                                                                                |                                                |                                                      |        |        |        |         |        |        |         |         |        |        |         |  
|------------------------------------------------- | ---------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | ---------------------------------------------- | ---------------------------------------------------- | ------ | ------ | ------ | ------- | ------ | ------ | ------- | ------- | ------ | ------ | ------- | -
|                                                  |                                                                                                | Years Ended July 31,                                                           |                                               
|                                                  |                                                                                                |                                                                                |                                               
|                                                  |                                                                                                | 2005                                                                           |                                                |                                                      | 2004   |        |        | 2003    |       
|                                                  |                                                                                                |                                                                                |                                                |                                                      |        |        |        |         |       
|                                                  |                                                                                                | (In thousands)                                                                 |                                               
|Cash flows from operating activities:             |                                                                                                |                                                                                |                                                |                                                      |        |        |        |         |        |        |         |        
|                                                  | Net loss                                                                                       |                                                                                | $                                              | (16,084                                              | )      |        | $      | (21,354 | )      |        | $       | (73,627 | )     
|                                                  | Adjustments to reconcile net loss to net cash provided by (used
    for) operating activities: |                                                                                |                                                |                                                      |        |        |        |         |        |        |         |         |       
|                                                  |                                                                                                | Depreciation and amortization                                                  |                                                |                                                      | 14,684 |        |        |         | 12,902 |        |         |         | 14,148 |       
|                                                  |                                                                                                | Amortization of beneficial conversion feature to interest expense              |                                                |                                                      |       |        |        |         |       |        |         |         | 37,398 |       
|                                                  |                                                                                                | Interest on debt paid in stock                                                 |                                                |                                                      |       |        |        |         |       |        |         |         | 2,098  |       
|                                                  |                                                                                                | Impairment of long-lived assets                                                |                                                |                                                      | 1,820  |        |        |         | 1,145  |        |         |         | 1,190  |       
|                                                  |                                                                                                | Impairment of goodwill and intangibles                                         |                                                |                                                      |       |        |        |         |       |        |         |         | 1,831  |       
|                                                  |                                                                                                | (Gain) loss on disposal of assets                                              |                                                |                                                      | (17    | )      |        |         | 6      |        |         |         | 250    |       
|                                                  |                                                                                                | Avasta settlement in common stock                                              |                                                |                                                      | 490    |        |        |         |       |        |         |         |       |       
|                                                  |                                                                                                | Gain on equipment lease settlement                                             |                                                |                                                      | (65    | )      |        |         |       |        |         |         |       |       
|                                                  |                                                                                                | Gain on sale of MBS practice                                                   |                                                |                                                      | (2,499 | )      |        |         |       |        |         |         |       |       
|                                                  |                                                                                                | Costs associated with abandoned leases                                         |                                                |                                                      | 1,226  |        |        |         | 5,058  |        |         |         | 6,127  |       
|                                                  |                                                                                                | Amortization of warrants                                                       |                                                |                                                      | 107    |        |        |         | 358    |        |         |         | 66     |       
|                                                  |                                                                                                | Non-cash stock compensation                                                    |                                                |                                                      | 769    |        |        |         | 473    |        |         |         |       |       
|                                                  |                                                                                                | Provision for bad debts                                                        |                                                |                                                      | 2,288  |        |        |         | 2,568  |        |         |         | 1,583  |       
|                                                  |                                                                                                | Changes in operating assets and liabilities, net of impact of
    acquisitions |                                                |                                                      |        |        |        |         |        |        |         |         |        |       
|                                                  |                                                                                                |                                                                                | Accounts receivable                            |                                                      |        | 3,364  |        |         |        | 586    |         |         |        | (1,371 | )      
|                                                  |                                                                                                |                                                                                | Due from CMGI and affiliates                   |                                                      |        |       |        |         |        |       |         |         |        | (22    | )      
|                                                  |                                                                                                |                                                                                | Due to CMGI                                    |                                                      |        |       |        |         |        |       |         |         |        | (3,241 | )      
|                                                  |                                                                                                |                                                                                | Due from CBT                                   |                                                      |        |       |        |         |        | (101   | )       |         |        |       |        
|                                                  |                                                                                                |                                                                                | Unbilled accounts receivable                   |                                                      |        | 1,491  |        |         |        | (360   | )       |         |        | 45     |        
|                                                  |                                                                                                |                                                                                | Prepaid expenses and other current assets, net |                                                      |        | 1,404  |        |         |        | (79    | )       |         |        | 1,775  |        
|                                                  |                                                                                                |                                                                                | Long-term assets                               |                                                      |        | 369    |        |         |        | 498    |         |         |        | 675    |        
|                                                  |                                                                                                |                                                                                | Accounts payable                               |                                                      |        | 1,399  |        |         |        | (814   | )       |         |        | (2,614 | )      
|                                                  |                                                                                                |                                                                                | Customer deposits                              |                                                      |        | (289   | )      |         |        | (1     | )       |         |        | 192    |        
|                                                  |                                                                                                |                                                                                | Long-term liabilities                          |                                                      |        | 1,293  |        |         |        | (844   | )       |         |        | 163    |        
|                                                  |                                                                                                |                                                                                | Accrued expenses and deferred revenue          |                                                      |        | (5,146 | )      |         |        | (4,687 | )       |         |        | (1,215 | )      
|                                                  |                                                                                                |                                                                                |                                                |                                                      |        |        |        |         |       
|                                                  |                                                                                                |                                                                                |                                                | Net cash provided by (used for) operating activities |        |        | 6,604  |         |        |        | (4,646  | )       |        |        | (14,549 | )
|                                                  |                                                                                                |                                                                                |                                                |                                                      |        |        |        |         |       
|Cash flows from investing activities:             |                                                                                                |                                                                                |                                                |                                                      |        |        |        |         |        |        |         |        
|                                                  | Net cash acquired in acquisitions                                                              |                                                                                |                                                |                                                     |        |        |        | 6       |        |        |         | 3,981   |       
|                                                  | Cash used to acquire Interliant assets                                                         |                                                                                |                                                |                                                     |        |        |        |        |        |        |         | (5,830  | )     
|                                                  | Purchase of property and equipment                                                             |                                                                                |                                                | (4,790                                               | )      |        |        | (4,269  | )      |        |         | (1,067  | )     
|                                                  | Proceeds from the sale of equipment                                                            |                                                                                |                                                | 434                                                  |        |        |        | 95      |        |        |         | 475     |       
|                                                  | Purchase of debt securities                                                                    |                                                                                |                                                |                                                     |        |        |        |        |        |        |         | (1,963  | )     
|                                                  | Loan to related party                                                                          |                                                                                |                                                |                                                     |        |        |        |        |        |        |         | (1,596  | )     
|                                                  | Proceeds from repayment of loan to related party                                               |                                                                                |                                                |                                                     |        |        |        |        |        |        |         | 200     |       
|                                                  | Proceeds from the sale of MBS practice                                                         |                                                                                |                                                | 3,449                                                |        |        |        |        |        |        |         |        |       
|                                                  |                                                                                                |                                                                                |                                                |                                                      |        |        |        |         |       
|                                                  |                                                                                                |                                                                                |                                                | Net cash used for investing activities               |        |        | (907   | )       |        |        | (4,168  | )       |        |        | (5,800  | )
|                                                  |                                                                                                |                                                                                |                                                |                                                      |        |        |        |         |       
|Cash flows from financing activities:             |                                                                                                |                                                                                |                                                |                                                      |        |        |        |         |        |        |         |        
|                                                  | Release of restricted cash                                                                     |                                                                                |                                                | 607                                                  |        |        |        | 1,676   |        |        |         | 3,878   |       
|                                                  | Proceeds from exercise of stock options                                                        |                                                                                |                                                | 89                                                   |        |        |        | 404     |        |        |         |        |       
|                                                  | Proceeds from sale leaseback                                                                   |                                                                                |                                                |                                                     |        |        |        | 120     |        |        |         |        |       
|                                                  | Proceeds from notes payable                                                                    |                                                                                |                                                | 1,003                                                |        |        |        | 450     |        |        |         |        |       
|                                                  | Repayment of notes payable                                                                     |                                                                                |                                                | (1,614                                               | )      |        |        | (2,055  | )      |        |         |        |       
|                                                  | Repayment of notes payable to the AppliedTheory Estate                                         |                                                                                |                                                |                                                     |        |        |        |        |        |        |         | (6,100  | )     
|                                                  | Borrowing under note to affiliate                                                              |                                                                                |                                                |                                                     |        |        |        |        |        |        |         | 5,850   |       
|                                                  | Net borrowings under accounts receivable line                                                  |                                                                                |                                                |                                                     |        |        |        | (6,874  | )      |        |         | 6,359   |       
|                                                  | Net proceeds from modified accounts receivable line                                            |                                                                                |                                                |                                                     |        |        |        | 20,400  |        |        |         |        |       
|                                                  | Payments under note to affiliates                                                              |                                                                                |                                                |                                                     |        |        |        | (30     | )      |        |         | (2,600  | )     
|                                                  | Payoff of Surebridge line of credit and term note                                              |                                                                                |                                                |                                                     |        |        |        | (3,865  | )      |        |         |        |       
|                                                  | Payment on note payable to Waythere, Inc. (formerly Surebridge)                                |                                                                                |                                                | (800                                                 | )      |        |        |        |        |        |         |        |       
|                                                  | Payments on capital lease obligations                                                          |                                                                                |                                                | (1,361                                               | )      |        |        | (2,079  | )      |        |         | (5,018  | )     
|                                                  |                                                                                                |                                                                                |                                                |                                                      |        |        |        |         |       
|                                                  |                                                                                                |                                                                                |                                                | Net cash provided by (used for) financing activities |        |        | (2,076 | )       |        |        | 8,147   |         |        |        | 2,369   |  
|                                                  |                                                                                                |                                                                                |                                                |                                                      |        |        |        |         |       
|Net increase (decrease) in cash                   |                                                                                                |                                                                                | 3,621                                          |                                                      |        |        | (667   | )       |        |        | (17,980 | )      
|Cash and cash equivalents, beginning of year      |                                                                                                |                                                                                | 3,195                                          |                                                      |        |        | 3,862  |         |        |        | 21,842  |        
|                                                  |                                                                                                |                                                                                |                                                |                                                      |        |        |        |         |       
|Cash and cash equivalents, end of year            |                                                                                                | $                                                                              | 6,816                                          |                                                      |        | $      | 3,195  |         |        | $      | 3,862   |        
|                                                  |                                                                                                |                                                                                |                                                |                                                      |        |        |        |         |       
|Supplemental disclosure of cash flow information: |                                                                                                |                                                                                |                                                |                                                      |        |        |        |         |        |        |         |        
|                                                  |                                                                                                | Cash paid for interest                                                         |                                                | $                                                    | 3,020  |        |        | $       | 1,898  |        |         | $       | 2,263  |       
|                                                  |                                                                                                |                                                                                |                                                |                                                      |        |        |        |         |       



F-6



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##### Table of Contents






NAVISITE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1) Description of Business




(2) Summary of Significant Accounting Policies




| |                          
| | -------------------------
| | (a) Basis of Presentation



| |                                    
| | -----------------------------------
| | One-for-fifteen Reverse Stock Split





| |                                
| | -------------------------------
| | Change in Controlling Ownership





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Pursuant to a Note and Stock Purchase Agreement by and between
    ClearBlue and CMGI (the CMGI Agreement), CMGI sold and
    transferred to ClearBlue 4,735,293 shares of our common stock,
    $0.01 par value per share, representing approximately 76% of the
    outstanding capital stock of NaviSite, warrants to purchase
    346,883 shares of our common stock and a convertible note of
    NaviSite with an aggregate principal amount outstanding of
    $10.0 million. The $10.0 million convertible note was
    convertible into 2,564,103 shares of our common stock, under
    certain circumstances as defined therein.
|
| |  | Pursuant to a Note and Stock Purchase Agreement by and between
    ClearBlue and HPFS (the HPFS Agreement), HPFS sold and
    transferred to ClearBlue 213,804 shares of our common stock,
    representing approximately 3.4% of our outstanding capital
    stock, and convertible notes of NaviSite with an aggregate
    principal amount outstanding of approximately
    $55.0 million, convertible into 14,126,496 shares of our
    common stock, under certain circumstances as defined therein.                                                                                                                                 

F-7



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##### Table of Contents



NAVISITE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)














| |                       
| | ----------------------
| | Impact of Acquisitions



F-8



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##### Table of Contents



NAVISITE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)














| |                                
| | -------------------------------
| | (b) Principles of Consolidation



F-9



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##### Table of Contents



NAVISITE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                     
| | --------------------
| | (c) Use of Estimates





| |                                                      
| | -----------------------------------------------------
| | (d) Cash and Cash Equivalents and Restricted
    Cash





| |                        
| | -----------------------
| | (e) Revenue Recognition





| |                                 
| | --------------------------------
| | (f) Concentration of Credit Risk



F-10



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##### Table of Contents



NAVISITE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                                
| | -------------------------------
| | (g) Comprehensive Income (Loss)





| |                           
| | --------------------------
| | (h) Property and Equipment







| |                                                          
| | ---------------------------------------------------------
| | (i) Long-lived Assets, Goodwill and Other
    Intangibles







| |                 
| | ----------------
| | (j) Income Taxes



F-11



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##### Table of Contents



NAVISITE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                      
| | ---------------------
| | (k) Advertising Costs





| |                                   
| | ----------------------------------
| | (l) Stock-Based Compensation Plans



|                                                                                                                                             |                                 |                                       |         |       |      |   |         |       |   |   |         |       |  
|-------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------- | ------------------------------------- | ------- | ----- | ---- | - | ------- | ----- | - | - | ------- | ----- | -
|                                                                                                                                             |                                 | 2005                                  |         |       | 2004 |   |         | 2003  |  
|                                                                                                                                             |                                 |                                       |         |       |      |   |         |       |  
|                                                                                                                                             |                                 | (In thousands, except per share data) |        
|Net loss, as reported                                                                                                                        |                                 | $                                     | (16,084 | )     |      | $ | (21,354 | )     |   | $ | (73,627 | )    
|Add: Stock-based employee compensation expense from the Amended
    and Restated 2003 Stock Incentive Plan included in reported net
    loss |                                 |                                       | 769     |       |      |   | 473     |       |   |   |        |      
|Deduct: Total stock based employee compensation expense
    determined under fair value based method for all awards                          |                                 |                                       | (5,651  | )     |      |   | (5,702  | )     |   |   | (8,062  | )    
|                                                                                                                                             |                                 |                                       |         |       |      |   |         |       |  
|Net loss, as adjusted                                                                                                                        |                                 | $                                     | (20,966 | )     |      | $ | (26,583 | )     |   | $ | (81,689 | )    
|                                                                                                                                             |                                 |                                       |         |       |      |   |         |       |  
|Net loss per common share:                                                                                                                   |                                 |                                       |         |       |      |   |         |       |   |   |         |      
|                                                                                                                                             | Basic and diluted  as reported |                                       | $       | (0.57 | )    |   | $       | (0.85 | ) |   | $       | (6.32 | )
|                                                                                                                                             |                                 |                                       |         |       |      |   |         |       |  
|                                                                                                                                             | Basic and diluted  as adjusted |                                       | $       | (0.74 | )    |   | $       | (1.06 | ) |   | $       | (7.01 | )
|                                                                                                                                             |                                 |                                       |         |       |      |   |         |       |  



|          |                                                                  |  |   |        |   |  |   |        |   |  |   |        |  
|--------- | ---------------------------------------------------------------- |  | - | ------ | - |  | - | ------ | - |  | - | ------ | -
|NaviSite: |                                                                  |  |   |        |   |  |   |        |   |  |   |       
|          | Risk-free interest rate                                          |  |   | 3.19   | % |  |   | 2.68   | % |  |   | 1.93   | %
|          | Expected volatility                                              |  |   | 124.95 | % |  |   | 137.34 | % |  |   | 160.16 | %
|          | Expected life (years)                                            |  |   | 2.12   |   |  |   | 2.08   |   |  |   | 3.07   |  
|          | Weighted average fair value of options granted during the period |  | $ | 1.78   |   |  | $ | 4.58   |   |  | $ | 2.23   |  



| |                                                                                       
| | --------------------------------------------------------------------------------------
| | (m) Historical and Unaudited Pro Forma Basic and
    Diluted Net Loss Per Common Share



F-12



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##### Table of Contents



NAVISITE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








| |                      
| | ---------------------
| | (n) Segment Reporting





| |                                     
| | ------------------------------------
| | (o) Recent Accounting Pronouncements







F-13



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##### Table of Contents



NAVISITE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








| |                     
| | --------------------
| | (p) Foreign Currency





| |                      
| | ---------------------
| | (r) Reclassifications



(3) Liquidity








F-14



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##### Table of Contents



NAVISITE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








(4) Impairment of Long-Lived Assets






F-15



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##### Table of Contents



NAVISITE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












(5) Property and Equipment




|                                                |  |                |         |   |      |   |         |  
|----------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | -
|                                                |  | July 31,       |        
|                                                |  |                |        
|                                                |  | 2005           |         |   | 2004 |  
|                                                |  |                |         |   |      |  
|                                                |  | (In thousands) |        
|Office furniture and equipment                  |  | $              | 3,159   |   |      | $ | 3,625   |  
|Computer equipment                              |  |                | 38,690  |   |      |   | 35,117  |  
|Software licenses                               |  |                | 10,658  |   |      |   | 10,405  |  
|Leasehold improvements                          |  |                | 9,369   |   |      |   | 10,245  |  
|                                                |  |                |         |   |      |  
|                                                |  |                | 61,876  |   |      |   | 59,392  |  
|Less: Accumulated depreciation and amortization |  |                | (46,677 | ) |      |   | (38,598 | )
|                                                |  |                |         |   |      |  
|Property and equipment, net                     |  | $              | 15,199  |   |      | $ | 20,794  |  
|                                                |  |                |         |   |      |  



F-16



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##### Table of Contents



NAVISITE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                          |  |                |        |   |      |   |        |  
|----------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | -
|                                          |  | July 31,       |       
|                                          |  |                |       
|                                          |  | 2005           |        |   | 2004 |  
|                                          |  |                |        |   |      |  
|                                          |  | (In thousands) |       
|Cost                                      |  | $              | 6,637  |   |      | $ | 6,797  |  
|Accumulated depreciation and amortization |  |                | (6,097 | ) |      |   | (4,644 | )
|                                          |  |                |        |   |      |  
|                                          |  | $              | 540    |   |      | $ | 2,153  |  
|                                          |  |                |        |   |      |  

(6) Intangible Assets




|                               |  |                |         |   |          |   |        |  
|------------------------------ |  | -------------- | ------- | - | -------- | - | ------ | -
|                               |  | July 31,       |         |   | July 31, |  
|                               |  | 2005           |         |   | 2004     |  
|                               |  |                |         |   |          |  
|                               |  | (In thousands) |        
|Gross carrying amount          |  | $              | 29,791  |   |          | $ | 31,026 |  
|Less: Accumulated amortization |  |                | (13,228 | ) |          |   | (7,875 | )
|                               |  |                |         |   |          |  
|Customer lists, net            |  | $              | 16,563  |   |          | $ | 23,151 |  
|                               |  |                |         |   |          |  





|                     |  |                |       | 
|-------------------- |  | -------------- | ----- | 
|Year Ending July 31, |  |               
|                     |  |               
|                     |  | (In thousands) |      
|                     |  |                |      
|2006                 |  | $              | 4,876 | 
|2007                 |  | $              | 3,932 | 
|2008                 |  | $              | 3,044 | 
|2009                 |  | $              | 1,868 | 
|2010                 |  | $              | 1,005 | 

F-17



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##### Table of Contents



NAVISITE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(7) Goodwill




|                                                     |  |                |        |   |        |   |        |        |  |   |       | 
|---------------------------------------------------- |  | -------------- | ------ | - | ------ | - | ------ | ------ |  | - | ----- | 
|                                                     |  | Fiscal         |        |   | Fiscal |   |        | Fiscal | 
|                                                     |  | 2005           |        |   | 2004   |   |        | 2003   | 
|                                                     |  |                |        |   |        |   |        |        | 
|                                                     |  | (In thousands) |       
|Goodwill as of August 1,                             |  | $              | 45,920 |   |        | $ | 3,206  |        |  | $ |      | 
|Goodwill  common control merger with CBTM           |  |                |       |   |        |   |       |        |  |   | 3,206 | 
|Goodwill acquired                                    |  |                |       |   |        |   | 42,714 |        |  |   |      | 
|Adjustments to preliminary purchase price allocation |  |                | (2,761 | ) |        |   |       |        |  |   |      | 
|                                                     |  |                |        |   |        |   |        |        | 
|Goodwill as of July 31,                              |  | $              | 43,159 |   |        | $ | 45,920 |        |  | $ | 3,206 | 
|                                                     |  |                |        |   |        |   |        |        | 



(8) Acquisition


Surebridge. .




|                          |  |                           |         |  
|------------------------- |  | ------------------------- | ------- | -
|                          |  | Year Ended July 31, 2004  |        
|                          |  |                           |        
|                          |  | (In thousands, except per |        
|                          |  | share amounts)            |        
|                          |  |                           |        
|                          |  | Pro Forma (Unaudited)     |        
|                          |  |                           |        
|Revenue                   |  | $                         | 129,764 |  
|Net loss                  |  | $                         | (27,481 | )
|Net loss per common share |  | $                         | (0.99   | )

F-18



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##### Table of Contents



NAVISITE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(9) Investment in Debt Securities






(10) Accrued Expenses




|                                                    |  |                |        |  |      |   |        | 
|--------------------------------------------------- |  | -------------- | ------ |  | ---- | - | ------ | 
|                                                    |  | July 31,       |       
|                                                    |  |                |       
|                                                    |  | 2005           |        |  | 2004 |  
|                                                    |  |                |        |  |      |  
|                                                    |  | (In thousands) |       
|Accrued payroll, benefits and commissions           |  | $              | 3,846  |  |      | $ | 6,580  | 
|Accrued legal                                       |  |                | 1,361  |  |      |   | 3,098  | 
|Accrued accounts payable                            |  |                | 2,896  |  |      |   | 2,727  | 
|Accrued contract termination fees                   |  |                | 429    |  |      |   | 984    | 
|Accrued sales/use, property and miscellaneous taxes |  |                | 1,075  |  |      |   | 932    | 
|Accrued other                                       |  |                | 3,258  |  |      |   | 3,910  | 
|                                                    |  |                |        |  |      |  
|                                                    |  | $              | 12,865 |  |      | $ | 18,231 | 
|                                                    |  |                |        |  |      |  

F-19



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##### Table of Contents



NAVISITE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(11) Debt




|                                                                  |  |                |        |  |          |   |        | 
|----------------------------------------------------------------- |  | -------------- | ------ |  | -------- | - | ------ | 
|                                                                  |  | July 31,       |        |  | July 31, |  
|                                                                  |  | 2005           |        |  | 2004     |  
|                                                                  |  |                |        |  |          |  
|                                                                  |  | (In thousands) |       
|Accounts receivable financing line, net                           |  | $              | 20,347 |  |          | $ | 20,240 | 
|Note payable to Atlantic Investors                                |  |                | 3,000  |  |          |   | 3,000  | 
|Notes payable to the AppliedTheory Estate                         |  |                | 6,000  |  |          |   | 6,000  | 
|Notes payable to landlord                                         |  |                | 1,157  |  |          |   | 1,908  | 
|Convertible notes payable to Waythere, Inc. (formerly Surebridge) |  |                | 35,361 |  |          |   | 39,267 | 
|Other notes payable                                               |  |                | 397    |  |          |   |       | 
|                                                                  |  |                |        |  |          |  
|Total                                                             |  |                | 66,262 |  |          |   | 70,415 | 
|Less current portion                                              |  |                | 65,853 |  |          |   | 24,791 | 
|                                                                  |  |                |        |  |          |  
|Long-term debt                                                    |  | $              | 409    |  |          | $ | 45,624 | 
|                                                                  |  |                |        |  |          |  



| |                                               
| | ----------------------------------------------
| | (a) Silicon Valley Bank Financing Arrangements





| |                                                
| | -----------------------------------------------
| | (b) Note Payable to Atlantic Investors,
    LLC



F-20



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##### Table of Contents



NAVISITE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








| |                                                 
| | ------------------------------------------------
| | (c) Note Payable to the AppliedTheory
    Estate





| |                              
| | -----------------------------
| | (d) Notes Payable to Landlord







| |                                                             
| | ------------------------------------------------------------
| | (e) Notes Payable to Waythere, Inc. (formerly
    Surbridge)



F-21



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##### Table of Contents



NAVISITE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


















| |   |                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the 18-month anniversary of the closing if the aggregate
    principal outstanding under the notes at such time is greater
    than or equal to $10.0 million;
|
| |  | the second anniversary of the closing; and                                                                                                                    
|
| |  | an event of default thereunder.                                                                                                                               

(12) Commitments and Contingencies




| |           
| | ----------
| | (a) Leases

Abandoned Leased Facilities.


F-22



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##### Table of Contents



NAVISITE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


















F-23



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##### Table of Contents



NAVISITE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|                             |  |               |       |  |          |          |                |                   |                |              |          |  |            |               |        |   |  |   |       | 
|---------------------------- |  | ------------- | ----- |  | -------- | -------- | -------------- | ----------------- | -------------- | ------------ | -------- |  | ---------- | ------------- | ------ | - |  | - | ----- | 
|                             |  |               |       |  |          | Purchase |                |                   | Payments, less |              |          | 
|                             |  | Balance at    |       |  |          |          | Accounting and |                   |                | Accretion of |          |  | Balance at |              
|Lease Abandonment Costs for: |  | July 31, 2004 |       |  | Expenses |          |                | Other Adjustments |                |              | Interest |  |            | July 31, 2005 |       
|                             |  |               |       |  |          |          |                |                   |                |              |          |  |            |               |       
|Andover, MA                  |  | $             | 1,040 |  |          | $        |               |                   |                | $            |         |  |            | $             | (244   | ) |  | $ | 796   | 
|La Jolla, CA                 |  |               | 1,136 |  |          |          | (519           | )                 |                |              |         |  |            |               | (617   | ) |  |   |      | 
|Chicago, IL                  |  |               | 922   |  |          |          | 41             |                   |                |              |         |  |            |               | (97    | ) |  |   | 866   | 
|Amsterdam, The Netherlands   |  |               | 120   |  |          |          |               |                   |                |              | 12       |  |            |               | (132   | ) |  |   |      | 
|Vienna, VA                   |  |               | 548   |  |          |          | (35            | )                 |                |              |         |  |            |               | (513   | ) |  |   |      | 
|San Francisco, CA            |  |               | 248   |  |          |          |               |                   |                |              |         |  |            |               | (248   | ) |  |   |      | 
|Houston, TX                  |  |               | 905   |  |          |          | 239            |                   |                |              |         |  |            |               | (445   | ) |  |   | 699   | 
|Syracuse, NY                 |  |               | 357   |  |          |          | 259            |                   |                |              |         |  |            |               | (362   | ) |  |   | 254   | 
|Syracuse, NY                 |  |               | 112   |  |          |          | 42             |                   |                |              |         |  |            |               | (117   | ) |  |   | 37    | 
|San Jose, CA                 |  |               | 1,019 |  |          |          | 267            |                   |                |              |         |  |            |               | (704   | ) |  |   | 582   | 
|Atlanta, GA                  |  |               | 230   |  |          |          |               |                   |                |              | 88       |  |            |               | (194   | ) |  |   | 124   | 
|Atlanta, GA                  |  |               | 275   |  |          |          |               |                   |                |              |         |  |            |               | (209   | ) |  |   | 66    | 
|Bedford, NH                  |  |               | 139   |  |          |          |               |                   |                |              | 19       |  |            |               | (158   | ) |  |   |      | 
|Lexington, MA                |  |               |      |  |          |          | 932            |                   |                |              |         |  |            |               | (562   | ) |  |   | 370   | 
|                             |  |               |       |  |          |          |                |                   |                |              |          |  |            |               |       
|                             |  | $             | 7,051 |  |          | $        | 1,226          |                   |                | $            | 119      |  |            | $             | (4,602 | ) |  | $ | 3,794 | 
|                             |  |               |       |  |          |          |                |                   |                |              |          |  |            |               |       



|                                  |  |                |         |           |        |   |        |        |  |   |        |  |  |        |       |  |        |   |       |        |  |   |       |  |  |   |        | 
|--------------------------------- |  | -------------- | ------- | --------- | ------ | - | ------ | ------ |  | - | ------ |  |  | ------ | ----- |  | ------ | - | ----- | ------ |  | - | ----- |  |  | - | ------ | 
|                                  |  |                |         | Less than |        |   |        |        |  |   |        |  |  |        | After | 
|Description                       |  | Total          |         |           | 1 Year |   |        | Year 2 |  |   | Year 3 |  |  | Year 4 |       |  | Year 5 |   |       | Year 5 | 
|                                  |  |                |         |           |        |   |        |        |  |   |        |  |  |        |       |  |        |   |       |        | 
|                                  |  | (In thousands) |        
|Short/ Long-term debt             |  | $              | 66,315  |           |        | $ | 65,906 | (a)    |  | $ | 409    |  |  | $      |      |  |        | $ |      |        |  | $ |      |  |  | $ |       | 
|Interest on debt(b)               |  |                | 9,051   |           |        |   | 9,040  |        |  |   | 11     |  |  |        |      |  |        |   |      |        |  |   |      |  |  |   |       | 
|Capital leases                    |  |                | 2,632   |           |        |   | 1,469  |        |  |   | 1,162  |  |  |        | 1     |  |        |   |      |        |  |   |      |  |  |   |       | 
|Operating leases                  |  |                | 615     |           |        |   | 315    |        |  |   | 289    |  |  |        | 11    |  |        |   |      |        |  |   |      |  |  |   |       | 
|Bandwidth commitments             |  |                | 4,899   |           |        |   | 2,947  |        |  |   | 1,501  |  |  |        | 451   |  |        |   |      |        |  |   |      |  |  |   |       | 
|Maintenance for hardware/software |  |                | 298     |           |        |   | 166    |        |  |   | 126    |  |  |        | 6     |  |        |   |      |        |  |   |      |  |  |   |       | 
|Property leases(c)(d)             |  |                | 47,673  |           |        |   | 10,938 |        |  |   | 8,865  |  |  |        | 7,799 |  |        |   | 5,636 |        |  |   | 3,166 |  |  |   | 11,269 | 
|                                  |  |                |         |           |        |   |        |        |  |   |        |  |  |        |       |  |        |   |       |        | 
|                                  |  | $              | 131,483 |           |        | $ | 90,781 |        |  | $ | 12,363 |  |  | $      | 8,268 |  |        | $ | 5,636 |        |  | $ | 3,166 |  |  | $ | 11,269 | 
|                                  |  |                |         |           |        |   |        |        |  |   |        |  |  |        |       |  |        |   |       |        | 






|    |  |                                                                                                                               
|--- |  | ------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Amount includes the outstanding balance on the accounts
    receivable financing line as of July 31, 2005.                    
|   
|(b) |  | Amounts do not include interest on the accounts receivable
    financing line, as interest rate is variable.                  
|   
|(c) |  | Amounts exclude certain common area maintenance and other
    property charges that are not included within the lease payment.

F-24



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##### Table of Contents



NAVISITE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 will receive $55,682
    per month over two years. 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.







| |                  
| | -----------------
| | (b) Legal Matters

IPO Securities Litigation






F-25



---



##### Table of Contents



NAVISITE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










F-26



---



##### Table of Contents



NAVISITE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






Engage Bankruptcy
Trustee Claim








F-27



---



##### Table of Contents



NAVISITE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Wrongful Termination
Claim




(13) Income Taxes




|        |  |                |   |          |               |   |        |               |  |         |       |  |          |   |       |  |  |         |   |  |          |   |   |       |  |   |      |   |  |   |     |  |  |   |     | 
|------- |  | -------------- | - | -------- | ------------- | - | ------ | ------------- |  | ------- | ----- |  | -------- | - | ----- |  |  | ------- | - |  | -------- | - | - | ----- |  | - | ---- | - |  | - | --- |  |  | - | --- | 
|        |  | July 31, 2005  |   |          | July 31, 2004 |   |        | July 31, 2003 | 
|        |  |                |   |          |               |   |        |               | 
|        |  | Current        |   | Deferred |               |   | Total  |               |  | Current |       |  | Deferred |   | Total |  |  | Current |   |  | Deferred |   |   | Total | 
|        |  |                |   |          |               |   |        |               |  |         |       |  |          |   |       |  |  |         |   |  |          |   |   |       | 
|        |  | (In thousands) |  
|Federal |  | $              |  |          |               | $ | 1,109  |               |  | $       | 1,109 |  |          | $ |      |  |  | $       |  |  |          | $ |  |       |  | $ | (513 | ) |  | $ | 513 |  |  | $ |    | 
|Foreign |  |                |  |          |               |   |       |               |  |         |      |  |          |   | 1     |  |  |         |  |  |          |   | 1 |       |  |   |     |   |  |   |    |  |  |   |    | 
|State   |  |                |  |          |               |   | 229    |               |  |         | 229   |  |          |   |      |  |  |         |  |  |          |   |  |       |  |   | 153  |   |  |   |    |  |  |   | 153 | 
|        |  |                |   |          |               |   |        |               |  |         |       |  |          |   |       |  |  |         |   |  |          |   |   |       |  |   |     
|        |  |                |   |          |               | $ | $1,338 |               |  | $       | 1,338 |  |          | $ | 1     |  |  | $       |  |  |          | $ | 1 |       |  | $ | (360 | ) |  | $ | 513 |  |  | $ | 153 | 
|        |  |                |   |          |               |   |        |               |  |         |       |  |          |   |       |  |  |         |   |  |          |   |   |       |  |   |     



|                                               |  |                |        |   |               |   |        |               |  |   |         |  
|---------------------------------------------- |  | -------------- | ------ | - | ------------- | - | ------ | ------------- |  | - | ------- | -
|                                               |  | July 31, 2005  |        |   | July 31, 2004 |   |        | July 31, 2003 | 
|                                               |  |                |        |   |               |   |        |               | 
|                                               |  | (In thousands) |       
|Computed expected tax expense (benefit)      |  | $              | (5,014 | ) |               | $ | (7,260 | )             |  | $ | (24,981 | )
|State taxes, net of federal income tax benefit |  |                | 151    |   |               |   |       |               |  |   | 101     |  
|Losses not benefited                           |  |                | 6,201  |   |               |   | 7,261  |               |  |   | 25,033  |  
|                                               |  |                |        |   |               |   |        |               | 
|Total                                          |  | $              | 1,338  |   |               | $ | 1      |               |  | $ | 153     |  
|                                               |  |                |        |   |               |   |        |               | 

F-28



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##### Table of Contents



NAVISITE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                  |                               |                              |        |        |               |   |   |        |         |  
|--------------------------------- | ----------------------------- | ---------------------------- | ------ | ------ | ------------- | - | - | ------ | ------- | -
|                                  |                               | July 31, 2005                |        |        | July 31, 2004 |  
|                                  |                               |                              |        |        |               |  
|                                  |                               | (In thousands)               |       
|Deferred tax assets:              |                               |                              |        |        |               |   |   |       
|                                  | Accruals and reserves         |                              | $      | 6,526  |               |   | $ | 6,422  |        
|                                  | Loss carryforwards            |                              |        | 39,919 |               |   |   | 30,943 |        
|                                  | Depreciation and amortization |                              |        | 25,395 |               |   |   | 25,579 |        
|                                  |                               |                              |        |        |               |  
|                                  |                               | Total deferred tax assets    |        |        | 71,840        |   |   |        | 62,944  |  
|                                  |                               | Less: Valuation allowance    |        |        | (71,840       | ) |   |        | (62,944 | )
|                                  |                               |                              |        |        |               |  
|Deferred tax liabilities:         |                               |                              |        |        |               |   |   |       
|                                  |                               | Amortization of tax goodwill |        |        | (1,338        | ) |   |        |        |  
|                                  |                               |                              |        |        |               |  
|Net deferred assets/(liabilities) |                               | $                            | (1,338 | )      |               | $ |  |       
|                                  |                               |                              |        |        |               |  









(14) Stockholders Equity




| |                         
| | ------------------------
| | Issuance of Common Stock





F-29



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##### Table of Contents



NAVISITE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


















F-30



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##### Table of Contents



NAVISITE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






(15) Stock Option Plans






| |                                      
| | -------------------------------------
| | (a) 1999 Employee Stock Purchase Plan







| |                                    
| | -----------------------------------
| | (b) NaviSite 2000 Stock Option Plan



F-31



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##### Table of Contents



NAVISITE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                         |  |        |        |          |          |   |        |        |          |  |          |   |  |          |        |  |          |  |         |   |  |   |        | 
|---------------------------------------- |  | ------ | ------ | -------- | -------- | - | ------ | ------ | -------- |  | -------- | - |  | -------- | ------ |  | -------- |  | ------- | - |  | - | ------ | 
|                                         |  | 2005   |        |          | 2004     |   |        | 2003   |         
|                                         |  |        |        |          |          |   |        |        |         
|                                         |  |        |        | Weighted |          |   |        |        | Weighted |  |          |   |  | Weighted |       
|                                         |  | Number |        |          | Average  |   |        | Number |          |  | Average  |   |  | Number   |        |  | Average  | 
|                                         |  | of     |        |          | Exercise |   |        | of     |          |  | Exercise |   |  | of       |        |  | Exercise | 
|                                         |  | Shares |        |          | Price    |   |        | Shares |          |  | Price    |   |  | Shares   |        |  | Price    | 
|                                         |  |        |        |          |          |   |        |        |          |  |          |   |  |          |        |  |          | 
|Options outstanding, beginning of year   |  |        | 3,708  |          |          | $ | 128.44 |        |          |  | 4,872    |   |  | $        | 128.44 |  |          |  | 16,266  |   |  | $ | 128.44 | 
|Granted                                  |  |        |       |          |          |   |       |        |          |  |         |   |  |          |       |  |          |  |        |   |  |   |       | 
|Exercised                                |  |        |       |          |          |   |       |        |          |  |         |   |  |          |       |  |          |  |        |   |  |   |       | 
|Cancelled                                |  |        | (1,146 | )        |          |   | 128.44 |        |          |  | (1,164   | ) |  |          | 128.44 |  |          |  | (11,394 | ) |  |   | 128.44 | 
|                                         |  |        |        |          |          |   |        |        |          |  |          |   |  |          |        |  |          | 
|Options outstanding, end of year         |  |        | 2,562  |          |          |   | 128.44 |        |          |  | 3,708    |   |  |          | 128.44 |  |          |  | 4,872   |   |  |   | 128.44 | 
|                                         |  |        |        |          |          |   |        |        |          |  |          |   |  |          |        |  |          | 
|Options exercisable, end of year         |  |        | 2,562  |          |          |   | 128.44 |        |          |  | 3,708    |   |  |          | 128.44 |  |          |  | 4,872   |   |  |   | 128.44 | 
|                                         |  |        |        |          |          |   |        |        |          |  |          |   |  |          |        |  |          | 
|Options available for grant, end of year |  |        |       |          |          |   |        |        |          |  |          |   |  |          |        |  |          |  | 61,794  |   |  |   |        | 
|                                         |  |        |        |          |          |   |        |        |          |  |          |   |  |          |        |  |          | 



| |                                        
| | ---------------------------------------
| | (c) NaviSite 1998 Equity Incentive Plan



F-32



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##### Table of Contents



NAVISITE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                         |  |        |         |          |          |   |        |        |          |  |          |   |  |           |       |         |          |  |          |   |  |   |        | 
|---------------------------------------- |  | ------ | ------- | -------- | -------- | - | ------ | ------ | -------- |  | -------- | - |  | --------- | ----- | ------- | -------- |  | -------- | - |  | - | ------ | 
|                                         |  | 2005   |         |          | 2004     |   |        | 2003   |         
|                                         |  |        |         |          |          |   |        |        |         
|                                         |  |        |         | Weighted |          |   |        |        | Weighted |  |          |   |  | Weighted  |      
|                                         |  | Number |         |          | Average  |   |        | Number |          |  | Average  |   |  |           |       | Average |         
|                                         |  | of     |         |          | Exercise |   |        | of     |          |  | Exercise |   |  | Number of |       |         | Exercise | 
|                                         |  | Shares |         |          | Price    |   |        | Shares |          |  | Price    |   |  | Shares    |       |         | Price    | 
|                                         |  |        |         |          |          |   |        |        |          |  |          |   |  |           |       |         |          | 
|Options outstanding, beginning of year   |  |        | 232,053 |          |          | $ | 52.59  |        |          |  | 265,969  |   |  | $         | 66.14 |         |          |  | 452,801  |   |  | $ | 149.40 | 
|Granted                                  |  |        |        |          |          |   |       |        |          |  | 40,000   |   |  | $         | 3.53  |         |          |  | 128,164  |   |  |   | 2.57   | 
|Exercised                                |  |        |        |          |          |   |       |        |          |  | (11,006  | ) |  | $         | 2.44  |         |          |  | (1,905   | ) |  |   | 1.18   | 
|Cancelled                                |  |        | (30,895 | )        |          | $ | 357.49 |        |          |  | (62,910  | ) |  | $         | 87.61 |         |          |  | (313,091 | ) |  |   | 160.79 | 
|                                         |  |        |         |          |          |   |        |        |          |  |          |   |  |           |       |         |          | 
|Options outstanding, end of year         |  |        | 201,158 |          |          | $ | 5.76   |        |          |  | 232,053  |   |  | $         | 52.59 |         |          |  | 265,969  |   |  |   | 66.14  | 
|                                         |  |        |         |          |          |   |        |        |          |  |          |   |  |           |       |         |          | 
|Options exercisable, end of year         |  |        | 200,720 |          |          | $ | 5.76   |        |          |  | 224,005  |   |  | $         | 54.02 |         |          |  | 175,555  |   |  |   | 84.18  | 
|                                         |  |        |         |          |          |   |        |        |          |  |          |   |  |           |       |         |          | 
|Options available for grant, end of year |  |        |        |          |          |   |        |        |          |  |         |   |  |           |       |         |          |  | 571,661  |   |  |   |        | 
|                                         |  |        |         |          |          |   |        |        |          |  |          |   |  |           |       |         |          | 

|                         |  |                     |         |           |                     |  |          |          |  |   |             |          |  |          |         |  |  |   |        | 
|------------------------ |  | ------------------- | ------- | --------- | ------------------- |  | -------- | -------- |  | - | ----------- | -------- |  | -------- | ------- |  |  | - | ------ | 
|                         |  | Options Outstanding |         |           |                    
|                         |  |                     |         |           | Options Exercisable | 
|                         |  |                     |         | Weighted  |                     |  |          |          |  |  
|                         |  |                     |         | Average   |                     |  | Weighted |          |  |   |             | Weighted | 
|                         |  |                     |         | Remaining |                     |  | Average  |          |  |   |             | Average  | 
|                         |  | Number              |         |           | Contractual         |  |          | Exercise |  |   | Number      |          |  | Exercise |        
|Range of Exercise Prices |  | Outstanding         |         |           | Life (Years)        |  |          | Price    |  |   | Outstanding |          |  | Price    |        
|                         |  |                     |         |           |                     |  |          |          |  |   |             |          |  |          |        
|$0.01 - 2.55             |  |                     | 121,141 |           |                     |  | 7.89     |          |  | $ | 2.55        |          |  |          | 120,765 |  |  | $ | 2.55   | 
|2.56 - 3.53              |  |                     | 40,066  |           |                     |  | 8.16     |          |  | $ | 3.53        |          |  |          | 40,046  |  |  | $ | 3.53   | 
|3.54 - 3.90              |  |                     | 26,464  |           |                     |  | 1.64     |          |  | $ | 3.90        |          |  |          | 26,464  |  |  | $ | 3.90   | 
|3.91 - 15.47             |  |                     | 4,996   |           |                     |  | .69      |          |  | $ | 14.80       |          |  |          | 4,954   |  |  | $ | 14.88  | 
|15.48 - 73.13            |  |                     | 7,693   |           |                     |  | .61      |          |  | $ | 32.57       |          |  |          | 7,693   |  |  | $ | 32.57  | 
|73.14 - 221.25           |  |                     | 432     |           |                     |  | .23      |          |  | $ | 143.14      |          |  |          | 432     |  |  | $ | 143.14 | 
|221.26 and up            |  |                     | 366     |           |                     |  | .12      |          |  | $ | 597.57      |          |  |          | 366     |  |  | $ | 597.57 | 
|                         |  |                     |         |           |                     |  |          |          |  |   |             |          |  |          |        
|                         |  |                     | 201,158 |           |                     |  |          |          |  |   |             |          |  |          | 200,720 |  |  |   |        | 
|                         |  |                     |         |           |                     |  |          |          |  |   |             |          |  |          |        



| |                                       
| | --------------------------------------
| | (d) NaviSite 2003 Stock Incentive Plan





F-33



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##### Table of Contents



NAVISITE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                         |  |           |            |          |          |   |      |           |          |  |           |   |  |           |      |  |          |  |           |   |  |   |      | 
|---------------------------------------- |  | --------- | ---------- | -------- | -------- | - | ---- | --------- | -------- |  | --------- | - |  | --------- | ---- |  | -------- |  | --------- | - |  | - | ---- | 
|                                         |  | 2005      |            |          | 2004     |   |      | 2003      |         
|                                         |  |           |            |          |          |   |      |           |         
|                                         |  |           |            | Weighted |          |   |      |           | Weighted |  |           |   |  | Weighted  |     
|                                         |  |           |            | Average  |          |   |      |           | Average  |  |           |   |  | Average   |     
|                                         |  | Number of |            |          | Exercise |   |      | Number of |          |  | Exercise  |   |  | Number of |      |  | Exercise | 
|                                         |  | Shares    |            |          | Price    |   |      | Shares    |          |  | Price     |   |  | Shares    |      |  | Price    | 
|                                         |  |           |            |          |          |   |      |           |          |  |           |   |  |           |      |  |          | 
|Options outstanding, beginning of year   |  |           | 3,492,287  |          |          | $ | 3.85 |           |          |  | 2,189,000 |   |  | $         | 2.55 |  |          |  |          |   |  | $ |     | 
|Granted                                  |  |           | 4,898,275  |          |          | $ | 2.70 |           |          |  | 1,967,375 |   |  | $         | 4.92 |  |          |  | 2,272,000 |   |  | $ | 2.55 | 
|Exercised                                |  |           | (34,831    | )        |          | $ | 2.55 |           |          |  | (148,079  | ) |  | $         | 2.55 |  |          |  |          |   |  | $ |     | 
|Cancelled                                |  |           | (2,475,461 | )        |          | $ | 3.47 |           |          |  | (516,009  | ) |  | $         | 2.75 |  |          |  | (83,000   | ) |  | $ | 2.55 | 
|                                         |  |           |            |          |          |   |      |           |          |  |           |   |  |           |      |  |          | 
|Options outstanding, end of year         |  |           | 5,880,270  |          |          | $ | 3.06 |           |          |  | 3,492,287 |   |  | $         | 3.85 |  |          |  | 2,189,000 |   |  | $ | 2.55 | 
|                                         |  |           |            |          |          |   |      |           |          |  |           |   |  |           |      |  |          | 
|Options exercisable, end of year         |  |           | 2,379,088  |          |          | $ | 3.68 |           |          |  | 1,340,969 |   |  | $         | 3.58 |  |          |  |          |   |  | $ |     | 
|                                         |  |           |            |          |          |   |      |           |          |  |           |   |  |           |      |  |          | 
|Options available for grant, end of year |  |           | 736,820    |          |          |   |      |           |          |  | 159,634   |   |  |           |      |  |          |  | 411,000   |   |  |   |      | 
|                                         |  |           |            |          |          |   |      |           |          |  |           |   |  |           |      |  |          | 



|                         |  |                     |           |           |                     |  |          |          |  |   |             |          |  |          |           |  |  |   |      | 
|------------------------ |  | ------------------- | --------- | --------- | ------------------- |  | -------- | -------- |  | - | ----------- | -------- |  | -------- | --------- |  |  | - | ---- | 
|                         |  | Options Outstanding |           |           |                    
|                         |  |                     |           |           | Options Exercisable | 
|                         |  |                     |           | Weighted  |                     |  |          |          |  |  
|                         |  |                     |           | Average   |                     |  | Weighted |          |  |   |             | Weighted | 
|                         |  |                     |           | Remaining |                     |  | Average  |          |  |   |             | Average  | 
|                         |  | Number              |           |           | Contractual         |  |          | Exercise |  |   | Number      |          |  | Exercise |          
|Range of Exercise Prices |  | Outstanding         |           |           | Life (Years)        |  |          | Price    |  |   | Outstanding |          |  | Price    |          
|                         |  |                     |           |           |                     |  |          |          |  |   |             |          |  |          |          
|$0.01 - 1.50             |  |                     | 95,050    |           |                     |  | 9.63     |          |  | $ | 1.34        |          |  |          | 11,153    |  |  | $ | 1.43 | 
|1.51 - 1.58              |  |                     | 1,434,961 |           |                     |  | 9.67     |          |  | $ | 1.58        |          |  |          | 132,663   |  |  | $ | 1.58 | 
|1.59 - 1.79              |  |                     | 379,541   |           |                     |  | 9.86     |          |  | $ | 1.72        |          |  |          | 6,904     |  |  | $ | 1.64 | 
|1.80 - 2.51              |  |                     | 485,686   |           |                     |  | 9.43     |          |  | $ | 2.20        |          |  |          | 127,922   |  |  | $ | 2.34 | 
|2.52 - 2.55              |  |                     | 1,342,272 |           |                     |  | 8.08     |          |  | $ | 2.55        |          |  |          | 922,139   |  |  | $ | 2.55 | 
|2.56 - 3.95              |  |                     | 205,166   |           |                     |  | 8.81     |          |  | $ | 3.05        |          |  |          | 102,807   |  |  | $ | 3.19 | 
|3.96 - 4.39              |  |                     | 621,846   |           |                     |  | 8.86     |          |  | $ | 4.39        |          |  |          | 303,959   |  |  | $ | 4.39 | 
|4.40 - 5.39              |  |                     | 375,623   |           |                     |  | 8.72     |          |  | $ | 5.10        |          |  |          | 183,926   |  |  | $ | 5.08 | 
|5.40 - 5.68              |  |                     | 802,000   |           |                     |  | 8.50     |          |  | $ | 5.41        |          |  |          | 500,916   |  |  | $ | 5.41 | 
|5.69 - and up            |  |                     | 138,125   |           |                     |  | 8.46     |          |  | $ | 6.24        |          |  |          | 86,699    |  |  | $ | 6.47 | 
|                         |  |                     |           |           |                     |  |          |          |  |   |             |          |  |          |          
|                         |  |                     | 5,880,270 |           |                     |  |          |          |  |   |             |          |  |          | 2,379,088 |  |  |   |      | 
|                         |  |                     |           |           |                     |  |          |          |  |   |             |          |  |          |          

F-34



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##### Table of Contents



NAVISITE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                              
| | -----------------------------
| | (e) Other Stock Option Grants



(16) Related Party Transactions




| |                                                              
| | -------------------------------------------------------------
| | ClearBlue Technologies (UK) Limited Outsourcing
    Agreement



(15) Selected Quarterly Financial Data (Unaudited)




|                             |  |                                 |        |   |    |   |        |    |  |   |        |   |  |   |        |  
|---------------------------- |  | ------------------------------- | ------ | - | -- | - | ------ | -- |  | - | ------ | - |  | - | ------ | -
|                             |  | Fiscal Year Ended July 31, 2005 |       
|                             |  |                                 |       
|                             |  | Q1                              |        |   | Q2 |   |        | Q3 |  |   | Q4     |  
|                             |  |                                 |        |   |    |   |        |    |  |   |        |  
|                             |  | (In thousands)                  |       
|Revenue                      |  | $                               | 28,894 |   |    | $ | 28,381 |    |  | $ | 26,796 |   |  | $ | 25,792 |  
|Gross profit                 |  |                                 | 6,074  |   |    |   | 7,713  |    |  |   | 7,534  |   |  |   | 7,932  |  
|Net loss                     |  |                                 | (6,576 | ) |    |   | (4,632 | )  |  |   | (3,033 | ) |  |   | (1,843 | )
|Net loss per common share(a) |  | $                               | (0.24  | ) |    | $ | (0.17  | )  |  | $ | (0.11  | ) |  | $ | (0.06  | )

|                             |  |                                 |        |   |    |   |        |    |  |   |        |   |  |   |         |  
|---------------------------- |  | ------------------------------- | ------ | - | -- | - | ------ | -- |  | - | ------ | - |  | - | ------- | -
|                             |  | Fiscal Year Ended July 31, 2004 |       
|                             |  |                                 |       
|                             |  | Q1                              |        |   | Q2 |   |        | Q3 |  |   | Q4     |  
|                             |  |                                 |        |   |    |   |        |    |  |   |        |  
|                             |  | (In thousands)                  |       
|Revenue                      |  | $                               | 23,473 |   |    | $ | 22,329 |    |  | $ | 20,185 |   |  | $ | 25,185  |  
|Gross profit                 |  |                                 | 4,916  |   |    |   | 5,571  |    |  |   | 5,968  |   |  |   | 5,421   |  
|Net loss                     |  |                                 | (3,353 | ) |    |   | (3,439 | )  |  |   | (3,026 | ) |  |   | (11,536 | )
|Net loss per common share(a) |  | $                               | (0.14  | ) |    | $ | (0.14  | )  |  | $ | (0.12  | ) |  | $ | (0.43   | )






|    |  |                                                                                                                                                                                                                                                                                              
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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-35



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##### Table of Contents






REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


ON FINANCIAL STATEMENT SCHEDULE
















F-36



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##### Table of Contents






NAVISITE, INC. AND SUBSIDIARIES


VALUATION AND QUALIFYING ACCOUNTS


|                                |  |                                           |       |           |         |   |       |          |  |            |         |  |            |      |        |   |  |   |       | 
|------------------------------- |  | ----------------------------------------- | ----- | --------- | ------- | - | ----- | -------- |  | ---------- | ------- |  | ---------- | ---- | ------ | - |  | - | ----- | 
|                                |  | Years Ended July 31, 2005, 2004, and 2003 |      
|                                |  |                                           |      
|                                |  |                                           |       | Additions |         |   |      
|                                |  | Balance at                                |       |           | Charged |   |       |          |  | Deductions |         |  | Balance at |     
|                                |  | Beginning                                 |       |           | to      |   |       |          |  | from       |         |  | End of     |     
|                                |  | of Year                                   |       |           | Expense |   |       | Other(1) |  |            | Reserve |  |            | Year |       
|                                |  |                                           |       |           |         |   |       |          |  |            |         |  |            |      |       
|                                |  | (In thousands)                            |      
|Year ended July 31, 2003:       |  |                                           |       |           |         |   |       |          |  |            |         |  |            |      |        |   |  |   |       | 
|Allowance for doubtful accounts |  | $                                         | 617   |           |         | $ | 1,778 |          |  | $          | 3,119   |  |            | $    | (3,484 | ) |  | $ | 2,030 | 
|Year ended July 31, 2004:       |  |                                           |       |           |         |   |       |          |  |            |         |  |            |      |        |   |  |   |       | 
|Allowance for doubtful accounts |  | $                                         | 2,030 |           |         | $ | 2,568 |          |  | $          |        |  |            | $    | (2,100 | ) |  | $ | 2,498 | 
|Year ended July 31, 2005:       |  |                                           |       |           |         |   |       |          |  |            |         |  |            |      |        |   |  |   |       | 
|Allowance for doubtful accounts |  | $                                         | 2,498 |           |         | $ | 2,288 |          |  | $          |        |  |            | $    | (1,899 | ) |  | $ | 2,887 | 






|    |                                                                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents allowance for doubtful accounts of CBTM (acquired in
    fiscal year 2003) and CBT (acquired in fiscal year 2004) which
    were accounted for in a manner similar to a pooling-of-interest
    due to common control ownership.

F-37