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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                               ----------------

                                   FORM 10-K

                               ----------------

FOR ANNUAL AND TRANSITIONAL REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
   OF 1934

  For the fiscal year ended July 31, 2001

                                       OR

[_]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: 0-27597

                               ----------------

                                 NAVISITE, INC.
             (Exact name of registrant as specified in its charter)

              Delaware                                 52-2137343
           (State or other                          (I.R.S. Employer
   jurisdiction of incorporation)                  Identification No.)

         400 Minuteman Road                               01810
       Andover, Massachusetts                          (Zip Code)

   (jurisdiction of incorporation)
                                 (978) 682-8300
              (Registrant's telephone number, including area code)

                               ----------------

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

         Title of each class                 Name of each exchange on which
                 N/A                                   registered
                                                           N/A

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

                    Common Stock, par value $0.01 per share
                                (Title of class)

                               ----------------

   Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period than the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]

   Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

   The aggregate market value of the registrant's common stock, $0.01 par value
per share, held by non-affiliates of the registrant was approximately
$19,153,378, based on the last reported sale price of the registrant's common
stock on the Nasdaq National Market as of the close of business on October 26,
2001.

   As of October 26, 2001 there were 62,059,063 shares outstanding of the
registrant's common stock, par value $0.01 per share.

                      DOCUMENTS INCORPORATED BY REFERENCE

   Portions of the registrant's definitive proxy statement for its annual
meeting of stockholders for the fiscal year ended July 31, 2001, which will be
filed with the Securities and Exchange Commission within 120 days after the end
of the registrant's fiscal year, are incorporated by reference into Part III
hereof.

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<PAGE>

                                 NAVISITE, INC.
                               2001 ANNUAL REPORT
                                  ON FORM 10-K

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                          Page
                                                                         Number
                                                                         ------
 <C>      <S>                                                            <C>
          PART I
 Item 1.  Business....................................................      2
 Item 2.  Properties..................................................     18
 Item 3.  Legal Proceedings...........................................     18
 Item 4.  Submission of Matters to a Vote of Security Holders.........     19
          PART II
 Item 5.  Market for Registrant's Common Equity and Related
           Stockholder Matters........................................     21
 Item 6.  Selected Consolidated Financial Data........................     22
 Item 7.  Management's Discussion and Analysis of Financial Condition
           and Results of Operations..................................     23
 Item 7A. Quantitative and Qualitative Disclosures about Market Risk..     31
 Item 8.  Financial Statements and Supplementary Data.................     32
 Item 9.  Changes in and Disagreements With Accountants on Accounting
           and Financial Disclosure...................................     58
          PART III
 Item 10. Directors and Executive Officers of the Registrant..........     58
 Item 11. Executive Compensation......................................     58
 Item 12. Security Ownership of Certain Beneficial Owners and
           Management.................................................     58
 Item 13. Certain Relationships and Related Transactions..............     58
          PART IV
 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
           8K.........................................................     58
 Signatures............................................................    60
</TABLE>

                                       1
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                                     PART I

               Special Note Regarding Forward-Looking Statements

   This Form 10-K contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, 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. We undertake no obligation to publicly
reissue these forward-looking statements to reflect events or circumstances
that arise after the date hereof.

Item 1. Business

Company Overview

   NaviSite is a leading provider of managed website and application hosting
services for businesses who operate mission critical Internet applications. Our
managed application hosting services allow businesses to outsource the
deployment, configuration, hosting, management and support of their Internet
applications and Web sites in a cost-effective and rapid manner. This
outsourcing allows customers to control IT resources and capital expenses. Our
focus on enhanced management services, beyond basic co-location hosting
services, allows us to meet the expanding needs of businesses as their Web
sites and Internet applications become more complex. We also provide our
customers with access to our state-of-the-art data centers and the benefit of
our direct private transit Internet connections to multiple leading Internet
backbone providers, increasing reliability, download speeds and providing
extremely high levels of redundancy.

   The scalability of our infrastructure and cost-effectiveness of our
solutions allow us to offer a comprehensive suite of services to meet the
current and future hosting and management needs of our customers. Our suite of
service offerings includes:

   Managed Applications--for customers who want to outsource the end-to-end
management of their e-business application.

   Managed Servers--for customers who intend to manage the application, but
want to outsource the management of the infrastructure software--OS, web
servers, database servers, application servers--to a trusted third party.

   Managed Infrastructure--for customers who want to be able to select value
added security, network and storage options on an a la carte basis, knowing
that they are designed to be used either alone or together.

   Managed Facilities--for customers with significant IT resources who want a
vendor to manage the underlying data center and bandwidth facilities.

   Professional Services--for customers who want to leverage industry experts
to design and implement solutions that address their unique business needs,
enable execution of their e-strategy and exploit the full advantages of their
managed hosting environment.

Recent Developments

   On October 29, 2001, we entered into an agreement under which we will
receive a total of $65 million in financing from Compaq Financial Services
Corporation, or CFS, a wholly owned subsidiary of Compaq Computer Corporation,
and CMGI. Under the terms of the agreement, CFS and CMGI will provide us with
cash investments of $20 million and $10 million respectively in exchange for
convertible notes. Additionally,

                                       2
<PAGE>

CFS has agreed to restructure certain outstanding NaviSite lease obligations.
We have agreed to purchase equipment from CFS leased under operating leases in
exchange for a six-year, $35 million convertible note. As a result, we expect
to substantially reduce cash expenditures on operating leases over the next two
fiscal years. This note also allows us to finance past due lease payments, the
sales tax on the equipment purchase and the outright purchase of the equipment.

   The notes bear interest at 12% and will require payment of interest only for
the first three years from the date of issuance and then repayment of interest
and principal, on a straight-line basis, over the next three years until
maturity on the sixth anniversary of the date of issuance. The principal amount
may be convertible into our common stock at the option of the noteholders at
any time prior to or at maturity. Should CFS convert its notes into NaviSite
common stock, they would own a controlling stake in NaviSite. Additionally, the
agreement includes a provision for non-voting participation rights by CFS on
our board of directors.

   As a part of this agreement, CMGI has also agreed to convert its existing
$80 million in outstanding notes into approximately 14.5 million shares of our
common stock and an additional $16.2 million of other amounts due CMGI into
approximately 9.9 million shares of our common stock. The result of this
agreement is that $7 million in remaining interest payments due to CMGI, $9.2
million in unamortized debt issuance costs and the repayment of the $80 million
principal amount due in December 2003 will be converted to equity.

   This agreement has been approved by the boards of directors of each of
NaviSite, CMGI and CFS. Certain NaviSite terms relating to the authorization
and issuance of shares of our common stock upon conversion of the senior
secured convertible notes issued under the agreements will be subject to
approval by our stockholders.

Industry Background

   Growth of Internet Business Applications. The dramatic growth in Internet
usage combined with enhanced functionality, accessibility and security, has
made the Internet increasingly attractive to businesses as a medium for
communication and commerce. Initial use of the Internet was, for the most part,
focused on consumer applications. Businesses are now deploying Internet
applications on a large scale, to enhance their core business operations.

   As business use of the Internet grows, we believe that businesses utilizing
the Internet are seeking to identify and implement increasingly sophisticated
Internet applications. These new applications permit businesses to:

  . Increase operating efficiencies and reduce SG&A costs;

  . Engage in business-to-business and business-to-consumer e-commerce;

  . Build and enhance customer relationships by providing Internet-based
    customer service and technical support;

  . Manage vendor and supplier relationships through Web-based technologies
    such as online training, e-commerce enablement, and streaming; and

  . Communicate and conduct business more rapidly and cost-effectively with
    customers, suppliers and employees worldwide.

   As a result, the proliferation of business Web sites and Internet
applications has created a strong underlying demand for specialized information
technology support and application expertise.

   Movement Toward Outsourcing. A growing number of businesses using the
Internet as part of their business strategy have chosen to outsource Internet
application development, implementation and support, particularly the hosting
and management of their Web sites and Internet applications. According to
Gartner Dataquest, hosting will rise from 6% of the IT management services
market to better than 13% by 2004, and a Forrester Research report revealed
that 62% of the Global 3500 companies surveyed hire hosters to run their Web
sites. We believe that the growth in outsourced hosting and management of Web
sites and Internet applications is driven by a number of factors, including:

  . Need to improve the reliability, availability and overall performance of
    their Internet applications and Web sites as those applications increase
    in importance and complexity;

                                       3
<PAGE>

  . Requirements for rapid time to market, and a reduced time to deploy
    operationally efficient Internet applications;

  . Challenges faced by businesses in hiring, training and retaining
    application engineers and information technology employees with the
    requisite range of IT expertise;

  . Increasing complexity of managing the operations of Web sites; and

  . Deployment risk and the risk of technological obsolescence as businesses
    attempt to capitalize on leading-edge technologies.

Forrester Research has estimated that the market for managed Web site hosting
in the United States will grow from $1.4 billion in 1999 to $19.8 billion in
2004.

   Need for Providers of Managed Application Hosting Services. An increasing
number of businesses are outsourcing the hosting and management of their Web
sites and Internet applications. However, many Web site hosting companies
developed their businesses to provide co-location hosting services and lack the
requisite expertise to implement and manage increasingly sophisticated Internet
applications. Moreover, many of these providers lack the scalable capacity,
high-speed connectivity, monitoring capabilities and levels of reliability and
availability which businesses demand. System integrators and application
developers often have the requisite expertise and resources to supply
businesses with highly customized application solutions, but these solutions
are expensive and time consuming to implement, and project-oriented integrators
and developers are not focused on supporting customer's applications on an
ongoing basis. Some businesses attempt to reduce costs and shorten time to
deployment by utilizing multiple vendors, each of which provides only a partial
solution. This has created significant opportunity for managed application
hosting providers who can offer Web site and Internet application deployment,
configuration, hosting, management and support.

The NaviSite Solution

   NaviSite provides a range of integrated, scalable Internet application and
Web site hosting and application management services that can be deployed in a
cost-effective and rapid manner. We specialize in deploying and managing
dedicated, mission critical web solutions for our customers. We serve as the
single point of management for their Internet applications and focus on
enhanced management services that allow us to meet the expanding set of
customer needs as Web sites and their applications become more complex. Key
advantages of our solution include:

   Comprehensive and Integrated Solutions. We provide an integrated suite of
products and services that span the full application stack including data
center, bandwidth, storage, servers, security, databases, OS and Web and
application servers. We provide our services across both Unix and Windows
platforms and in highly secure, highly available and redundant environments.

   Cost-Effective Management Services. The combination of our scalable
infrastructure, the repeatability of our management processes and our extensive
base of expertise allows us to provide our customers with Web site and Internet
application hosting and management services on a cost-effective basis. Because
NaviSite has already deployed state-of-the-art infrastructure from the
industry's leading providers, our customers can immediately leverage equipment
and services that would typically not be cost effective for them to purchase
and deploy themselves. Second, we have made significant investments in our
operating platform and our automation capabilities. Furthermore, we have
refined these processes over time and across a large base of customers. By
leveraging this expertise, we can more efficiently configure, deploy and manage
complex applications and, thus, save our customers from hiring or developing
that same expertise in-house. By off-loading these resource and time-intensive
Web site operations, we allow our customers to focus on their core business. We
believe that our customers would otherwise be required to make significant
expenditures to replicate our performance, reliability and expertise either
internally or by using outside vendors.

   Rapid Deployment. We offer our customers the ability to rapidly deploy,
scale and adapt their Internet applications, often in a matter of days or
weeks, rather than months. Because NaviSite has already deployed sophisticated
infrastructure components and has the experience of deploying similar
applications for hundreds

                                       4
<PAGE>

of customers, we believe that we can deploy sophisticated Web sites much more
rapidly than businesses can in-house. This is especially important to many of
our customers who deploy mission critical applications for revenue enhancement
or cost improvement objectives. These applications need to be in place
immediately.

   High-Performance, World-Class Infrastructure. Our infrastructure has been
built by integrating "best of breed' components and designed specifically to
meet the more demanding technical requirements of providing managed
application hosting, compared to "co-location' hosting services. Our high-
performance infrastructure, together with our trained and experienced staff
enable us to offer levels of service which are backed by service level
guarantees we believe are among the highest and most comprehensive in the
industry.

Strategy

   NaviSite's objective is to service our customers by being the single point
of management for their outsourced IP applications. We plan to achieve this
goal by continuing to enhance and leverage our expertise, service offerings
and infrastructure to provide customers with integrated, reliable and secure
Internet-based business solutions. Four key components of our strategy
include:

   Deliver Industry-Leading Operational Metrics. NaviSite has developed, and
delivers to its customers, consistently high levels of operational metrics
across the areas that are most critical to businesses, including the
performance of customer applications, network elements, and service levels.
NaviSite's operating metrics are believed to be among the highest metrics in
the managed services industry. Because the quality and service level of our
managed services is transparent, we believe that our operating metrics are a
critical differentiator in the marketplace. NaviSite plans to continue driving
improvements in its operating metrics and corresponding improvements in the
quality of its customer service.

   Focus on High Value-Added Managed Services. NaviSite currently provides
horizontal infrastructure and application services that have broad appeal
across most market segments, including a wide range of industry segments,
including enterprises, ISV (Independent Software Vendors) and E-commerce
companies. To meet the changing needs of our current and prospective customer
base, we intend to augment our current service offerings by focusing on a sub-
set of complex, scale and expertise driven services that build on our value
proposition of outsourced IT operations. As a practice, we focus on network
and application services that are repeatable, meaning that they require
minimal additional customization and integration. We believe that this
repeatability decreases our time to market, reduces our operating risks and
produces a higher return on our investment and provides higher levels of
consistency to our customers.

   Partner to Deliver Customized Application Solutions. We believe that
companies will require an increasingly diverse range of capabilities and point
technologies as their applications increase in complexity. While NaviSite
specializes in delivering highly scalable management services for the
infrastructure, network and foundation application layers of the application
stack, we intend to leverage relationships with key system integration and
technology partners for services that extend beyond our product range. Driven
by differences in economic models, these are services that we will not perform
ourselves, but rather, will leverage partners in order to deliver integrated,
customized and complete solutions to our end-user customers.

   Leverage Distribution Channels with Strategic Partners. Historically,
NaviSite built strong industry relationships with leading technology companies
including hardware vendors, software manufacturers and system integrators. We
work closely with a small and select group of partners to jointly develop
higher value proposition offerings and distribute them through joint marketing
and sales efforts. By leveraging our industry relationships, and our partners'
distribution capabilities, we are able to increase visibility and sales
productivity.

Services

   We offer a comprehensive suite of services to meet the current and future
hosting needs of our customers.

   Internet Application and Web Site Management. We provide both enhanced
server management and specialized application management. Both types of
management services permit us to provide customers with a

                                       5
<PAGE>

single point of problem resolution management, from identification to
resolution to post-resolution analysis and reporting. To provide these
services, our trained technical personnel utilize advanced network monitoring
and management tools for Web site and application troubleshooting, together
with internal policies and procedures designed to ensure rapid, effective
solutions to technical problems. Our enhanced server management services
include custom reporting, hardware options, network and application load
balancing, system security, advanced back-up options, remote management and the
services of our business solution managers.

   Application Rentals. We offer select Internet application rentals to
customers and application developers who need to access sophisticated Internet
applications or application components, which can be customized by developers
as part of a complete software solution. We typically manage all or elements of
the applications. In addition, these applications may require experienced
personnel to deploy and configure them. Additionally, customers benefit from
the "one-stop shopping" aspect of procuring their applications in this manner.

   Basic Web Site and Application Hosting. Our Web site and Internet
application hosting services provide customers with the ability to leverage our
state-of-the-art data centers, redundant bandwidth and back-up, storage,
monitoring and reporting services. Customers are able to access their servers
24 hours a day, seven days a week. In fiscal 2001, less than 17% of our revenue
was derived from basic co-location customers to whom we provide no enhanced or
specialized management services. However, this is an attractive entry point for
some customers, from which they can purchase more enhanced services from
NaviSite, and migrate to enhanced managed services.

   Comprehensive Streaming Media Services. Through our Streaming Media Division
we offer managed streaming media services as a means of incorporating streaming
into e-business applications by providing companies with comprehensive digital
media production and distribution services. Our streaming services include the
production, encoding and broadcasting of customers' content, the immediate
integration of live event and on-demand streaming media into customers' Web
sites and the enhancement of customers' Web sites with high-speed multi-media
features. Our streaming services complement current customers' application
management and service offerings centered on e-commerce and enhance our
customers' online marketing efforts. These comprehensive streaming services are
now also being adopted by enterprises and other businesses seeking to use
streaming services for traditional business applications.

   Professional Services. We supply consulting and other professional services
such as, network and system configuration and architecture, scalability and
performance testing, project implementation, bandwidth planning and, in limited
cases, basic software development and system integration.

Sales and Marketing

   Our sales and marketing strategy is to achieve broad market penetration by
focusing on market segments that deploy mission critical Web sites and are
structured to realize the economic value of outsourcing. While NaviSite
initially focused on companies that adopted the Internet as an integral part of
their business strategy, the focus has evolved to include more traditional
enterprises as they incorporate the Internet in their business operations.
Here, NaviSite has been able to leverage its extensive experience and expertise
in delivering complex managed services to service the needs of evolving
enterprises.

   We sell our services through a direct sales force and we receive referrals
through an extensive network of business and channel partners.

   Direct Sales. Our direct sales professionals are organized into three
groups:

  . Sales representatives, who conduct sales campaigns, identify targeted
    prospects, oversee sales territories and manage customer relationships;

  . Sales engineers, who discuss prospective customers' Web site and Internet
    application hosting and management business needs and technical
    requirements; and

  . Telesales representatives, who qualify customer leads.

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   Our direct sales teams are currently located in: Andover, Massachusetts; New
York, New York; San Francisco, San Jose and Los Angeles, California; Atlanta,
Georgia; and Vienna, Virginia.

   Channel Sales. We have developed important industry relationships to enhance
our channel sales and marketing capabilities. We have developed a range of
partnerships, including relationships with many companies that have formally
joined NaviSite's Alliance program. Types of companies include Web and
application developers, system integrators/consultants, ISV (Independent
Software Vendors), and technology partners. These partners provide
complementary services and, thus, allow NaviSite customers to benefit from more
comprehensive solutions, and this allows NaviSite to focus on its core value-
added services. Many of these partners also provide a significant source of
lead referrals to NaviSite and in some cases are also our customers. As a
result, many of our partners' customers become NaviSite customers.
Historically, we have worked closely with our partners. Going forward, we
intend to strengthen these relationships to develop customer referrals, mutual
referral relationships, enhanced service offerings, and in some cases, co-
selling, cross-selling and reselling opportunities.

   Marketing. Our marketing group is responsible for building brand awareness
through public relations and marketing communications, identifying key market
and customer segments and creating marketing programs to target those segments.
The marketing organization focuses on supporting the direct sales as well as
developing and enhancing channel partner relationships. The primary mechanisms
include:

  . Comprehensive lead generation through telemarketing, direct marketing,
    direct mail programs, select electronic and print advertising, electronic
    and face-face seminars and targeted shows and events;

  . Interactive, online marketing programs;

  . Sponsorships of targeted partner and customer events;

  . Marketing communications and public relations materials to sustain press
    coverage in both trade and business publications;

  . Market development activities targeted to Internet application developers
    and consultants; and

  . Lead generation, referrals, mutual Web site links or co-marketing
    activities, leveraging close strategic relationships with technology
    partners such as Cisco Systems, Dell Corporation, Compaq Computer
    Corporation, BMC, Inc. and EMC Corporation.

Customers

   We were organized in 1996 by CMGI to support the networks and host the Web
sites of CMGI companies and a number of CMGI affiliates. In the fall of 1997,
we began supplying Web site hosting and management services to companies
unaffiliated with CMGI. As of July 31, 2001, we had approximately 288
customers, down from 362 as of July 31, 2000.

   A representative list of our hosting customers as of July 31, 2001 includes:
Biogen, Inc., Levi Strauss, Inc., Stop and Shop Supermarket Company, Optika,
Inc., Fuel Spot, Inc., Wolters Kluwer nv, Blue Cross Blue Shield of Central New
York, Sun Mircrosystems, Inc., SLI, Inc., The Premier Insurance Company of
Massachusetts and Restoration Hardware.

   A representative list of our streaming customers as of July 31, 2001
includes: St. Jude Hospital, MSN, Anheuser-Busch, NFL Films, TWI Interactive
and Northeast Utilities.

Product Management and Product Development

   Our product management and development organizations work together in
developing a broad range of "horizontal" managed infrastructure, network and
application services. Our teams identify and evaluate new Internet applications
and technologies; we develop monitoring and management services specifically
for these applications, and then incorporate these applications into our suite
of service offerings. We focus on Internet applications that permit us to offer
our customers repeatable, scalable services. Our goal is to introduce services

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capable of utilization by a large number of customers, seeking to maximize
revenue production and minimize the incremental operating cost for each
additional customer utilizing that service. As new applications are introduced,
our personnel integrate the application into our management and billing
systems, provide technical documentation and training and ensure the security
of the offering. This process is critical to our ability to provide integrated,
scalable applications to our customers and is designed to result in increased
operating margins, faster product delivery and improved customer service.

Customer Service and Support

   We believe high levels of customer service and support are critical to our
continued success and future growth. Our customer care staff is focused on
direct and indirect customer service and support. We have developed a
customized, life-cycle project management approach to our operations. For some
of our customers, we assign a single business solutions manager who services
the customer from deployment through the entire customer relationship. This
approach is designed to enhance our responsiveness to customer requests,
problem troubleshooting and technology upgrades.

   NaviSite offers a single point of problem resolution management for all of
our customers. Problems with a customer's Web sites can occur in any one of six
to eight layers. NaviSite can diagnose, identify and rapidly fix problems at
each of these levels, from the network to the operating system, from the server
hardware to the database, from the application-server to selected end-user
applications. The result is a single point of problem resolution management for
customers, a key value added service where NaviSite takes responsibility for
fixing problems or managing the process of getting problems fixed.

   To do this, we utilize a number of state-of-the-art automated systems,
including a knowledge-based problem resolution and trouble ticketing system,
and enterprise system monitoring platform, sophisticated data storage, an
enterprise tape backup system and a corporate intranet with a built-in document
management and source control system. We believe that our approach to customer
service and support and our ability to rapidly respond to customer needs
provides us with a significant competitive advantage.

Network Infrastructure, Technology, and Operations

   NaviSite entered the Internet application service market with the advantage
of a sophisticated and experience-tested infrastructure established to support
CMGI and a number of its affiliates, which were deploying some of the most
demanding, high-traffic Web applications. We have differentiated our
infrastructure from competing application service providers and co-location
hosting providers through our superior operational metrics that directly impact
customer performance and reliability, our experience with high-performance
Internet applications and our comprehensive managed service offerings. We
designed our infrastructure specifically to provide superior performance for
our Internet application and Web site hosting and management services,
including multi-level network redundancy to provide the highest levels of
network uptime, reliable and customized network security and fast, guaranteed
response time and availability of customers' content, which we deliver through
our private transit Internet connections. Our infrastructure is also designed
to scale to support continued growth. We believe that our sophisticated and
highly redundant infrastructure provides us with a competitive advantage over
other hosting vendors and most Internet service providers. Key elements of our
infrastructure include:

   Data Centers. NaviSite has built a select number of high performance managed
application data centers in order to provide our customers with a critical mass
of expertise in Internet applications and management services from each data
center, while capturing the benefits of centralized infrastructure and
staffing. We currently serve customers from two primary data centers, located
in Andover, Massachusetts and in San Jose California. These state-of-the-art
data centers incorporate technically sophisticated components, which are
designed to be fault-tolerant. The components used in our data centers include
Cisco redundant core routers, Cisco redundant core switching hubs and secure,
virtual local area networks. We utilize the equipment and tools necessary for
our data center operations, including our infrastructure hardware, networking
and software products, from industry leaders such as BMC, Cisco Systems, Compaq
Computer Corporation, Dell, EMC, Microsoft Corporation, Oracle, and Sun
Microsystems.

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<PAGE>

   Private Transit Internet Connectivity. Our use of direct private transit
Internet connections to three major Internet backbone providers differentiates
our network infrastructure from those of our competitors. We have redundant
high-capacity Internet connections to UUNet, InterNap, and Cable and Wireless
on the East Coast and UUNet and InterNap on the West Coast. We have deployed
direct private transit Internet connections specifically to avoid congestion
and data loss at public Internet exchange points and the resulting degradation
of performance. Our private transit system enables us to provide fast, reliable
access for our customers' Web sites and Internet applications. Because we have
direct private transit links to Internet providers, we can directly monitor the
capacity of all of our connections and intend that we will have the aggregate
bandwidth to move large quantities of data at high transmission speeds. We
believe that our private transit Internet connections also enable us to more
effectively launch new applications, such as streaming, which require high
bandwidth availability and run more effectively in a private transit model.

   Service Level Agreements. The combination of our state-of-the-art
infrastructure, our customer-focused operations group and our hosting and
management expertise enable us to offer our customers service levels backed by
guarantees that we believe are among the highest and most comprehensive in the
industry. For example, one of our offerings is a 99.99% full site high
availability SLA that covers their entire application stack.

   Network Security. Our network incorporates host-based security with
CheckPoint back-end firewalls and Cisco router access control lists, as well as
SecureID token-based authentication. In addition to these physical security
measures, we have a formal security policy in place, including employee
training, that governs all facets of our business and guidelines governing
internal and external access to information housed in our network system.

   Network Operations Centers. We monitor the operations of our infrastructure
and customer Web Sites using our own network operations centers. Each network
operations center is fully staffed 24 hours a day, seven days a week with
Windows NT, UNIX, application and support personnel. Our network operations
centers perform first-level problem identification and resolution. The design
of our network operations centers allows network engineers and support
personnel to be promptly alerted to problems, and we have established
procedures for rapidly resolving any technical issues that arise. Network
management and monitoring tools continuously monitor the network and server
performance.

Competition

   We compete in the managed application hosting service market. The overall
hosting market is evolving rapidly, is highly competitive and is likely to be
characterized by an increasing number of market entrants and by industry
consolidation. We believe that NaviSite's focus on higher-level managed
application services provides significant differentiation from traditional co-
location hosting providers, and provides significantly higher customer value.
We believe that participants in this market must grow rapidly and achieve a
significant presence to compete effectively. We believe that managed
applications services are difficult to provide well and require an
infrastructure, work processes and management systems tuned to this business
model. We believe that the primary competitive factors determining success in
our market include:

  . quality of service delivered;

   .ability to consistently measure, track and report on operational metrics;

   .Web site and Internet application hosting and management expertise;

   .fast, redundant, and reliable Internet connectivity;

   .a state-of-the-art infrastructure providing availability, speed,
scalability and security;

   .comprehensive and diverse service offerings and timely addition of value-
added services;

  . brand recognition;

  . competitive pricing; and

  . adequate capital to permit continued investment in infrastructure,
    customer service and support and sales and marketing.


                                       9
<PAGE>

   Our current and prospective competitors include:

  . other providers of co-location or high-end Web site hosting and related
    services, including AboveNet Communications, Inc., Digex Corporation,
    Exodus Communications, Inc., Globix Corporation, Genuity, Inc., Data
    Return Corporation, and a large number of local and regional hosting
    providers;

  . companies that focus on customized Internet application services and
    application hosting, including CORIO, Inc., IBM Global Services and
    LoudCloud;

  . large system integrators and information technology outsourcing firms,
    including Electronic Data Systems Corporation and International Business
    Machines Corporation; and

  . global telecommunications companies, including AT&T Corp., Quest and
    Sprint Corporation, and regional and local telecommunications companies,
    including AT&T Broadband.

   Many of our competitors may be able to develop and expand their network
infrastructures 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, devote greater resources
to the marketing and sale of their services and adopt more aggressive pricing
policies than we can. Because of these competitive factors and due to our
comparatively small size and our lack of financial resources, we may be unable
to successfully compete in the Internet application service market.

   In addition, we believe that there will be continued consolidation within
the Internet hosting market in which we compete. Our competitors may
consolidate with one another, or acquire software application vendors or
technology providers, enabling them to more effectively compete with us. This
consolidation could affect prices and other competitive factors in ways, which
would impede our ability to compete successfully in the Internet application
service market.

Proprietary Rights

   We rely on a combination of trademark, service mark, copyright and trade
secret laws and contractual restrictions to establish and protect our
proprietary rights and promote our reputation and the growth of our business.
We do not own any patents that would prevent or inhibit competitors from using
our technology or entering our market. While it is our practice to require all
of our employees, consultants and independent contractors to enter into
agreements containing non-disclosure, non-competition and non-solicitation
restrictions and covenants, and while our agreements with some of our customers
and suppliers include provisions prohibiting or restricting the disclosure of
proprietary information, we can not assure you that these contractual
arrangements or the other steps taken by us to protect our proprietary rights
will prove sufficient to prevent misappropriation of our proprietary rights or
to deter independent, third-party development of similar proprietary assets. In
addition, we offer our services in other countries where the laws may not
afford adequate protection for our proprietary rights.

   We license or lease most technologies used in our Internet application
services. Our technology suppliers may become subject to third-party
infringement claims, or other claims or assertions, which could result in their
inability or unwillingness to continue to license their technology to us. The
loss of certain of our technologies could impair our ability to provide
services to our customers or require us to obtain substitute technologies of
lower quality or performance standards or at greater cost. We expect that we
and our customers increasingly will be subject to third-party infringement
claims as the number of Web sites and third-party service providers for Web-
based businesses grows. In addition, we have received notices alleging that our
use of our service marks infringes the trademark rights of third parties.
Although we do not believe that any of these allegations have merit, or that
our technologies or services otherwise infringe the proprietary rights of any
third parties, we cannot assure you that third parties will not assert claims
against us in the future or that these claims will not be successful. Any
infringement claim as to our technologies or services, regardless of its merit,
could be time-consuming, result in costly litigation, cause delays in service,
installation or upgrades, adversely impact our relationships with suppliers or
customers or require us to enter into royalty or licensing agreements.

                                       10
<PAGE>

Government Regulation

   While there currently are few laws or regulations directly applicable to the
Internet or to managed application hosting service providers, due to the
increasing popularity of the Internet and Web-based applications it is likely
that such laws and regulations may be adopted. These laws may cover a variety
of issues including, for example, user privacy and the pricing, characteristics
and quality of products and services. The adoption or modification of laws or
regulations relating to commerce over the Internet could substantially impair
the future growth of our business or expose us to unanticipated liabilities.
Moreover, the applicability of existing laws to the Internet and managed
application hosting service providers is uncertain. These existing laws could
expose us to substantial liability if they are found to be applicable to our
business. For example, we offer services over the Internet in many states in
the United States and internationally and we facilitate the activities of our
customers in those jurisdictions. As a result, we may be required to qualify to
do business, be subject to taxation or be subject to other laws and regulations
in these jurisdictions, even if we do not have a physical presence or employees
or property there. The application of existing laws and regulations to the
Internet or our business, or the adoption of any new legislation or regulations
applicable to the Internet or our business, could materially adversely affect
our financial condition and operating results.

Employees

   As of July 31, 2001, we had 386 employees. Of these employees, 215 were
principally engaged in operations, 65 were principally engaged in sales and
marketing, 54 were principally engaged in product development and 52 were
principally engaged in finance and administration. None of our employees is
party to a collective bargaining agreement and we believe our relationship with
our employees is good. We also employ consultants and independent contractors
on a regular basis to assist in the completion of projects. It is our practice
to require all of our employees, consultants and independent contractors to
enter into agreements containing non-disclosure, non-competition and non-
solicitation restrictions or covenants.

Certain Factors That May Affect Future Results

   The risks and uncertainties described below are not the only risks we face.
Additional risks and uncertainties not presently known to us or that are
currently deemed immaterial may also impair our business operations. If any of
the following risks actually occur, our financial condition and operating
results could be materially adversely affected.

   We have a history of operating losses and expect future losses. We cannot
assure you that we will ever achieve profitability on a quarterly or annual
basis or, if we achieve profitability, that it will be sustainable. We were
organized in 1996 by CMGI to support the networks and host the Web sites of
CMGI and a number of CMGI affiliates. It was not until the fall of 1997 that we
began providing Web site hosting and Internet application management services
to companies unaffiliated with CMGI. Since our inception in 1996, we have
experienced operating losses and negative cash flows for each quarterly and
annual period. As of July 31, 2001, we had an accumulated deficit of $215.7
million. We anticipate increased expenses as we continue to improve our
infrastructure, introduce new services, enhance our application management
expertise, expand our sales and marketing efforts and pursue additional
industry relationships. As a result, we expect to incur operating losses for at
least the next fiscal year.

   Fluctuations in our quarterly operating results may negatively impact our
stock price. Our quarterly operating results may fluctuate significantly in the
future as a result of a variety of factors, many of which are outside our
control. These factors include: reduction of market demand and or acceptance
for our Web site and Internet application hosting and management services;
oversupply of data center space in the industry; our ability to develop, market
and introduce new services on a timely basis; downward price adjustments by our
competitors; changes in the mix of services provided by our competitors;
technical difficulties or system downtime affecting the Internet generally or
our hosting operations specifically; our ability to meet any increased
technological demands of our customers; the amount and timing of costs related
to our marketing efforts and service introductions; and economic conditions
specific to the Internet application service provider industry. Our operating
results for any particular quarter may fall short of our expectations or those
of investors or securities analysts. In this event, the market price of our
common stock would be likely to fall.

                                       11
<PAGE>

   CMGI is currently a majority stockholder and CFS is a potential majority
stockholder, and both may have interests that conflict with the interests of
our other stockholders. As of July 31, 2001, CMGI beneficially owned
approximately 76.74% of our outstanding common stock. Accordingly, CMGI has the
power, acting alone, to elect a majority of our board of directors and has the
ability to determine the outcome of any corporate actions requiring stockholder
approval, regardless of how our other stockholders may vote. Under Delaware
law, CMGI may exercise its voting power by written consent, without convening a
meeting of the stockholders, meaning that CMGI could affect a sale or merger of
our company without prior notice to, or the consent of, our other stockholders.
CMGI's interests could conflict with the interests of our other stockholders.
The possible need of CMGI to maintain control of us in order to avoid becoming
a registered investment company could influence future decisions by CMGI as to
the disposition of any or all of its ownership position in our company. CMGI
would be subject to numerous regulatory requirements with which it would have
difficulty complying if it were required to register as an investment company.
As a result, CMGI may be motivated to maintain at least a majority ownership
position in us, even if our other stockholders might consider a sale of control
of our company to be in their best interests. As long as it is a majority
stockholder, CMGI has contractual rights to purchase shares in any of our
future financing sufficient to maintain its majority ownership position. CMGI's
ownership may have the effect of delaying, deferring or preventing a change in
control of our company or discouraging a potential acquirer from attempting to
obtain control of us, which in turn could adversely affect the market price of
our common stock.

   As of October 29, 2001, in conjunction with the restructuring of certain of
our lease obligations, we have agreed to issue CFS convertible notes which,
upon conversion, would give CFS a controlling interest in NaviSite.
Accordingly, CFS would have the power, acting alone, to elect a majority of our
board of directors. If CFS becomes a majority stockholder, it may have
interests that conflict with the interests of our other stockholders, as
described above for CMGI.

   A significant portion of our revenue currently is generated by services
provided to CMGI and companies affiliated with CMGI, and the loss of this
revenue would substantially impair the growth of our business. We anticipate
that we will continue to receive a significant portion of our revenue in the
future from CMGI and CMGI affiliates. CMGI and CMGI affiliates accounted for
approximately 35% of our revenue in the fiscal year ended July 31, 2001,
approximately 50% of our revenue in the fiscal year ended July 31, 2000, and
approximately 68% of our revenue in the fiscal year ended July 31, 1999. We
cannot assure you that revenues generated by CMGI and CMGI affiliates will
continue or that we will be able to secure business from unaffiliated customers
to replace this revenue in the future. The loss of revenue from CMGI and CMGI
affiliates, or our inability to replace this operating revenue, would
substantially impair the growth of our business.

   Our ability to grow our business would be substantially impaired if we were
unable to obtain, on commercially reasonable terms, certain equipment that is
currently provided under leases. Certain of the equipment that we use or
provide to our customers for their use in connection with our services is
provided under leases. We or our customers will have to obtain this equipment
for new leases and renewal of existing leases directly, on a stand alone basis.
Our business would be substantially impaired if we were unable to obtain or
continue these leases on commercially reasonable terms.

   We are attempting to renogotiate certain lease obligations. During the
renegotiations of our equipment lease obligations, we have not paid certain
scheduled lease payments to certain vendors. Our total remaining lease
obligation to these vendors is approximately $57 million. Of this amount,
approximately $27 million will be restructured in the CFS agreement, which
provides for our purchase of equipment under operating lease. During these
renegotiations, we have been notified by certain lessors that we are in default
of our lease agreements. Remedies under these leases, if the event of default
is not cured, include the demand of all remaining lease payments under the
original lease terms, payment of stipulated loss amounts or return of the
underlying equipment. We plan to cure these defaults within 60 days of closing
the CFS agreement. In the event we do not cure these defaults, these lessors
may enforce their rights.

   If the market for Internet commerce and communication does not continue, or
it continues to decrease, there may be insufficient demand for our services,
and as a result, our business strategy may not be successful. The increased use
of the Internet for retrieving, sharing and transferring information among
businesses and consumers has developed only recently, and the market for the
purchase of products and

                                       12
<PAGE>

services over the Internet is new and emerging. If acceptance and growth of the
Internet as a medium for commerce and communication does not continue, our
business strategy may not be successful because there may not be a continuing
market demand for our Web site and Internet application hosting and management
services. Our business could be substantially impaired if the market for
Internet application services fails to continue to develop or if we cannot
continue to achieve broad market acceptance. The market for Internet
application services has recently developed and is evolving.

   Our ability to successfully market our services could be substantially
impaired if we are unable to deploy new Internet applications or if new
Internet applications deployed by us prove to be unreliable, defective or
incompatible. We cannot assure you that we will not experience difficulties
that could delay or prevent the successful development, introduction or
marketing of Internet application services in the future. If any newly
introduced Internet applications suffer from reliability, quality or
compatibility problems, market acceptance of our services could be greatly
hindered and our ability to attract new customers could be adversely affected.
We cannot assure you that new applications deployed by us will be free from any
reliability, quality, or compatibility problems. If we incur increased costs or
are unable, for technical or other reasons, to host and manage new Internet
applications or enhancements of existing applications, our ability to
successfully market our services could be substantially impaired.

   The market we serve is highly competitive, and we may lack the financial and
other resources, expertise or capability needed to capture increased market
share or maintain market share. We compete in the Internet application service
market. This market is rapidly evolving, highly competitive and likely to be
characterized by over capacity and industry consolidation. We believe that
participants in this market must grow rapidly and achieve a significant
presence to compete effectively. Our business is not as developed as that of
many of our competitors. Many of our competitors have substantially greater
financial, technical and marketing resources, greater name recognition and more
established relationships in the industry. We may lack the financial and other
resources, expertise or capability needed to capture increased or maintain
market share in this environment in the future.

   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. Our customers rely on our ability to move their digital
content as efficiently as possible to the people accessing their Web sites and
Internet applications. We utilize our direct private transit Internet
connections to major backbone providers as a means of avoiding congestion and
resulting performance degradation at public Internet exchange points. We rely
on these telecommunications network suppliers to maintain the operational
integrity of their backbones so that our private transit Internet connections
operate effectively.

   Increased costs associated with our private transit Internet connections
could result in the loss of customers or significant increases in operating
costs. Our private transit Internet connections are already more costly than
alternative arrangements commonly utilized to move Internet traffic. If
providers increase the pricing associated with utilizing their bandwidth, we
may be required to identify alternative methods to distribute our customers'
digital content. We cannot assure you that our customers will continue to be
willing to pay the higher costs associated with direct private transit or that
we could effectively move to another network approach. If we are unable to
access alternative networks to distribute our customers' digital content on a
cost-effective basis or to pass any additional costs on to our customers, our
operating costs would increase significantly.

   If we are unable to maintain existing and develop additional relationships
with Internet application software vendors, the sale, marketing and provision
of our Internet application services may be unsuccessful. We believe that to
penetrate the market for Web site and Internet application hosting and
management services we must maintain existing and develop additional
relationships with industry-leading Internet application software vendors and
other third parties. We license or lease select software applications from
Internet application software vendors. The loss of our ability to continually
obtain and utilize any of these applications could materially impair our
ability to provide services to our customers or require us to obtain

                                       13
<PAGE>

substitute software applications of lower quality or performance standards or
at greater cost. In addition, because we generally license applications on a
non-exclusive basis, our competitors may license and utilize the same software
applications. In fact, many of the companies with which we have strategic
relationships currently have, or could enter into, similar license agreements
with our competitors or prospective competitors. We cannot assure you that
software applications will continue to be available to us from Internet
application software vendors on commercially reasonable terms. If we are unable
to identify and license software applications which meet our targeted criteria
for new application introductions, we may have to discontinue or delay
introduction of services relating to these applications.

   We purchase from a limited number of suppliers key components of our
infrastructure, including networking equipment. We cannot assure you that we
will have the necessary hardware or parts on hand or that our suppliers will be
able to provide them in a timely manner in the event of equipment failure. Our
dependency to obtain and continue to maintain the necessary hardware or parts
on a timely basis could result in sustained equipment failure and a loss of
revenue due to customer loss or claims for service credits under our service
level guarantees.

   Our inability to scale our infrastructure or manage customer growth and the
related expansion of our operations could result in decreased revenue and
continued operating losses. In order to service our customer base, we will need
to continue to improve our network infrastructure. Our ability to continue to
meet the needs of a substantial number of customers while maintaining superior
performance is largely unproven. If our network infrastructure is not scalable,
we may not be able to provide our services to additional customers, which would
result in decreased revenue.

   Our customer base includes a significant number of dot.com businesses that
face increased risk of loss of funding depending upon the availability of the
private and/or public funding. Many of our customers are small start-up
Internet based businesses that have traditionally been initially funded by
venture capital firms and then through public securities offerings. If the
market for technology and Internet based businesses is not supported by the
private investors who have funded these customers, we face the risk that these
customers may cease, curtail or limit Website operations hosted by us. We have
experienced and may continue to experience a loss of revenue associated with
these customers and will then have to increase sales to other businesses using
the Internet in order to preserve and grow our revenue.

   You may experience dilution because of our recent financing arrangements
with CFS and CMGI. The financing arrangement, as of October 29, 2001, with CFS
and CMGI includes terms which allow CFS and CMGI at their discretion, to
convert the debt obligation of $65 million into our common stock at a
conversion price of $0.26 per share, subject to our stockholder approval. This
conversion will increase the number of our common stock shares issued by
approximately 250 million shares. In addition, we may pay a portion of interest
due to CFS and all interest due to CMGI with our common shares. Moreover, if
additional funds are raised through the issuance of additional equity or
convertible debt securities, your percentage of ownership in us will be reduced
and you may experience additional dilution. In certain circumstances, if we
issue equity or convertible debt securities at values below those provided to
CFS, we must issue CFS additional shares of our common stock which will further
dilute existing stockholders.

   Funding may not be available to us on favorable terms, if at all. We may
need to raise additional funds from time to time, and we cannot assure you that
additional financing will be available on terms favorable to us, if at all. In
addition, pursuant to our financing arrangements with CFS as of October 29,
2001, we may need to obtain approval from CFS for incremental funding, and we
may not obtain this approval from CFS.

   Our network infrastructure could fail, which would impair our ability to
provide guaranteed levels of service and could result in significant operating
losses. To provide our customers with guaranteed levels of service, we must
operate our network infrastructure 24 hours a day, seven days a week without
interruption. In order to operate in this manner, we must protect our network
infrastructure, equipment and customer files against damage from human error,
natural disasters, unexpected equipment failure, power loss or

                                       14
<PAGE>

telecommunications failures, sabotage or other intentional acts of vandalism.
Even if we take precautions, the occurrence of a natural disaster, equipment
failure or other unanticipated problem at one or more of our data centers could
result in interruptions in the services we provide to our customers. We cannot
assure you that our disaster recovery plan will address all, or even most, of
the problems we may encounter in the event of such a disaster.

   We have experienced service interruptions in the past, and any future
service interruptions could: require us to spend substantial amounts of money
to replace equipment or facilities; entitle customers to claim service credits
under our service level guarantees; cause customers to seek damages for losses
incurred; or make it more difficult for us to attract new customers, retain
current customers or enter into additional strategic relationships. Any of
these occurrences could result in significant operating losses.

   The misappropriation of our proprietary rights could result in the loss of
our competitive advantage in the market. We rely on a combination of trademark,
service mark, copyright and trade secret laws and contractual restrictions to
establish and protect our proprietary rights. We do not own any patents that
would prevent or inhibit competitors from using our technology or entering our
market. We cannot assure you that the contractual arrangements or other steps
taken by us to protect our proprietary rights will prove sufficient to prevent
misappropriation of our proprietary rights or to deter independent, third-party
development of similar proprietary assets. In addition, we provide our services
in other countries where the laws may not afford adequate protection for our
proprietary rights.

   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 license or lease most technologies used in
the Internet application services that we offer. Our technology suppliers may
become subject to third-party infringement claims or other claims and
assertions, which could result in their inability or unwillingness to continue
to license their technology to us. We expect that we and our customers
increasingly will be subject to third-party infringement claims as the number
of Web sites and third-party service providers for Web-based businesses grows.
In addition, we have received notices alleging that our service marks infringe
the trademark rights of third parties. We cannot assure you that third parties
will not assert claims against us in the future or that these claims will not
be successful. Any infringement claim as to our technologies or services,
regardless of its merit, could result in delays in service, installation or
upgrades, the loss of customers or costly and time-consuming litigation, or
require us to enter into royalty or licensing agreements.

   The loss of key officers, key management, and other personnel could impair
our ability to successfully execute our business strategy, because we
substantially rely on their experience and management skills, or could
jeopardize our ability to continue to provide service to our customers. We
believe that the continued service of key personnel, including Tricia Gilligan,
our President and Chief Executive Officer, is a key component of the future
success of our business. None of our key officers or personnel is currently a
party to an employment agreement with us. This means that any officer or
employee can terminate his or her relationship with us at any time. In
addition, we do not carry life insurance for any of our key personnel to insure
our business in the event of their death. In addition, the loss of key members
of our sales and marketing teams or key technical service personnel could
jeopardize our positive relations with our customers. Any loss of key technical
personnel would jeopardize the stability of our infrastructure and our ability
to provide the guaranteed service levels our customers expect. On July 31,
2001, we initiated a reduction in force eliminating 126 full- and part-time
employees, representing approximately 25 percent of our total staff. We also
announced the departure of 7 of 13 vice presidents, in the areas of sales,
human resources, international, strategic planning, managed services, marketing
and technology planning, as well as our general counsel. In addition, since
July 31, 2001, both Joel B. Rosen, our then Chief Executive Officer, and
Kenneth W. Hale, our then Chief Financial Officer, have left our company.
Although further reductions are not presently anticipated, we cannot assure you
that such reductions will not be necessary in the future.

   If we fail to attract or retain skilled personnel, our ability to provide
Web site and Internet application management and technical support may be
limited, and as a result, we may be unable to attract customers. Our business
requires individuals with significant levels of Internet application expertise,
in particular, to win

                                       15
<PAGE>

consumer confidence in outsourcing the hosting and management of mission-
critical applications. Qualified technical personnel are likely to remain a
limited resource for the foreseeable future. We may not be able to retain or
hire the necessary personnel to implement our business strategy or may need to
provide higher compensation to such personnel than we currently anticipate.

   Any future acquisitions we make of companies or technologies may result in
disruptions to our business or distractions of our management due to
difficulties in assimilating acquired personnel and operations. Our business
strategy contemplates future acquisitions of complementary technologies. If we
do pursue additional acquisitions, our risks may increase because our ongoing
business may be disrupted and management's attention and resources may be
diverted from other business concerns. In addition, through acquisitions, we
may enter into markets or market segments in which we have limited prior
experience.

   Once we complete an acquisition, we will face additional risks. These risks
include: difficulty assimilating acquired operations, technologies and
personnel; inability to retain management and other key personnel of the
acquired business; and changes in management or other key personnel that may
harm relationships with the acquired business's customers and employees. We
cannot assure you that any acquisitions will be successfully identified and
completed or that, if one or more acquisitions are completed, the acquired
business, assets or technologies will generate sufficient revenue to offset the
associated costs or other adverse effects.

   The emergence and growth of a market for our Internet application services
will be impaired if third parties do not continue to develop and improve the
Internet infrastructure. The recent growth in the use of the Internet has
caused frequent periods of performance degradation, requiring the upgrade of
routers and switches, telecommunications links and other components forming the
infrastructure of the Internet-by-Internet service providers and other
organizations with links to the Internet. Any perceived degradation in the
performance of the Internet as a means to transact business and communicate
could undermine the benefits and market acceptance of our Web site and Internet
application hosting and management services. Our services are ultimately
limited by, and dependent upon, the speed and reliability of hardware,
communications services and networks operated by third parties. Consequently,
the market for our Internet application services may be impaired if
improvements are not made to the entire Internet infrastructure to alleviate
overloading and congestion.

   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. A significant barrier
to the growth of e-commerce and communications over the Internet has been the
need for secure transmission of confidential information. Several of our
Internet application services utilize encryption and authentication technology
licensed from third parties to provide the protections necessary to ensure
secure transmission of confidential information. We also rely on security
systems designed by third parties and the personnel in our network operations
centers to secure those data centers. Any unauthorized access, computer
viruses, accidental or intentional actions and other disruptions could result
in increased operating costs. For example, we may incur additional significant
costs to protect against these interruptions and the threat of security
breaches or to alleviate problems caused by such interruptions or breaches, and
we may expend additional financial resources in the future to equip our data
centers with enhanced security measures. If a third party were able to
misappropriate a consumer's personal or proprietary information, including
credit card information, during the use of an application solution provided by
us, we could be subject to claims, litigation or other potential liability.

   We may become subject to burdensome government regulation and legal
uncertainties that could substantially impair our business or expose us to
unanticipated liabilities. It is likely that laws and regulations directly
applicable to the Internet or to Internet application service providers may be
adopted. These laws may cover a variety of issues, including user privacy and
the pricing, characteristics and quality of products and services. The adoption
or modification of laws or regulations relating to commerce over the Internet
could substantially impair our business or expose us to unanticipated
liabilities. Moreover, the applicability of existing laws to the Internet and
Internet application service providers is uncertain. These existing laws could

                                       16
<PAGE>

expose us to substantial liability if they are found to be applicable to our
business. For example, we provide services over the Internet in many states in
the United States and elsewhere and facilitate the activities of our customers
in such jurisdictions. As a result, we may be required to qualify to do
business, be subject to taxation or be subject to other laws and regulations in
these jurisdictions, even if we do not have a physical presence, employees or
property there.

   We may be subject to legal claims in connection with the information
disseminated through our network, which could have the effect of diverting
management's attention and require us to expend significant financial
resources. We may face potential direct and indirect liability for claims of
defamation, negligence, copyright, patent or trademark infringement, violation
of securities laws and other claims based on the nature and content of the
materials disseminated through our network. For example, lawsuits may be
brought against us claiming that content distributed by some of our current or
future customers may be regulated or banned. In these and other instances, we
may be required to engage in protracted and expensive litigation that could
have the effect of diverting management's attention and require us to expend
significant financial resources. Our general liability insurance may not
necessarily cover any of these claims or may not be adequate to protect us
against all liability that may be imposed.

   In addition, on a limited number of occasions in the past, businesses,
organizations and individuals have sent unsolicited commercial e-mails from
servers hosted at our facilities to a number of people, typically to advertise
products or services. This practice, known as "spamming," can lead to
complaints against service providers that enable such activities, particularly
where recipients view the materials received as offensive. We have in the past
received, and may in the future receive, letters from recipients of information
transmitted by our customers and service providers objecting to such
transmission. Although we prohibit our customers by contract from spamming, we
cannot assure you that our customers will not engage in this practice, which
could subject us to claims for damages.

   The market price of our common stock may experience extreme price and volume
fluctuations. The market price of our common stock may fluctuate substantially
due to a variety of factors, including: any actual or anticipated fluctuations
in our financial condition and operating results; public announcements
concerning us or our competitors, or the Internet industry; the introduction or
market acceptance of new service offerings by us or our competitors; changes in
industry research analysts' earnings estimates; changes in accounting
principles; sales of our common stock by existing stockholders; and the loss of
any of our key personnel.

   In addition, the stock market has experienced extreme price and volume
fluctuations. The market prices of the securities of technology and Internet-
related companies have been especially volatile. This volatility often has been
unrelated to the operating performance of particular companies. In the past,
securities class action litigation often has been brought against companies
that experience volatility in the market price of their securities. Whether or
not meritorious, litigation brought against us could result in substantial
costs and a diversion of management's attention and resources.

   Our common stock may be delisted from Nasdaq. On September 5, 2001, we
received a deficiency notice from Nasdaq indicating that our common stock had
failed to maintain a minimum bid price of $1.00 over the previous 30
consecutive trading days and that we had until December 4, 2001 to regain
compliance with Nasdaq's listing requirements. Nasdaq informed us that if we
failed to demonstrate compliance with Nasdaq's listing requirements on or
before December 4, 2001, Nasdaq would provide us with written notification that
it had determined that we do not meet the standards for continued listing, and
our securities would be delisted from Nasdaq. However, on September 27, 2001,
Nasdaq announced that it had suspended its minimum bid and market value of
public float requirements for continued listing until January 2, 2002. Nasdaq
adopted this measure to help companies remain listed in view of the
extraordinary market conditions following the tragedy of September 11, 2001.
Under the temporary relief provided by the new rules, companies will not be
cited for bid price or market value of public float deficiencies and companies,
such as NaviSite, currently under review for deficiencies or in the hearings
process will be taken out of the process with respect to the bid price or market
value of public float requirements and no deficiencies will accrue during the
proposed suspension process.

                                       17
<PAGE>

Nevertheless, if the minimum bid price requirement for continued listing on
Nasdaq is reinstated on January 2, 2002, new delisting proceedings may be
initiated against our common stock. If we are unable to regain compliance with
this requirement, our common stock may be delisted from trading on Nasdaq. If
our common stock were delisted from Nasdaq, among other things, this could
result in a number of negative implications, including reduced liquidity in our
common stock as a result of the loss of market efficiencies associated with
Nasdaq and the loss of federal preemption of state securities laws as well as
the potential loss of confidence by suppliers, customers and employees, the
loss of analyst coverage and institutional investor interest, fewer business
development opportunities and greater difficulty in obtaining financing.

Item 2. Properties

Facilities

   Our executive offices are located at 400 Minuteman Road, Andover,
Massachusetts, in an approximately 150,000 square foot facility leased pursuant
to an agreement, which expires in 2011. The 400 Minuteman facility is also
partly utilized as a data center (52,000 square feet of raised floor).

 Data centers

   We currently have two domestic data center locations, with a total of
approximately 74,000 square feet of raised floor. In addition to the 400
Minuteman Road data center, we also occupy a 66,000 square foot facility
located in the Valley Technology Centre, 2720 Zanker Road, San Jose, California
(22,000 square feet of raised floor), part of which is utilized as a data
center, leased pursuant to an agreement which expires in 2006.

   On July 31, 2001, we closed a 22,000 square foot facility located at 300
Federal Street, Andover, Massachusetts (10,000 square feet of raised floor). In
addition, we also closed our 14,100 square foot facility at 1700 Green Hill
Road, Scotts Valley, California (4,000 square feet of raised floor). The
closing of these original data centers will allow us to operate our data
centers more efficiently. In addition to our existing data centers, we
presently utilize approximately 10,000 square feet of space in Sunnyvale,
California and approximately 2,000 square feet of space in New York through an
arrangement with Level 3.

 Sales and Marketing Space:

   In connection with our sales and marketing efforts, we occupy offices at
11601 Wilshire Boulevard, Suite 500, Los Angeles, California; 680 Third Avenue
10th Floor, New York, New York; 2720 Zanker Road, San Jose, California; 8300
Boone Boulevard, Suite 540, Vienna, Virginia; 3340 Peachtree Road, Atlanta, GA;
575 Market Street, San Francisco, California; and 400 Minuteman Road, Andover,
Massachusetts.

 Streaming Media Division

   Our Streaming Media Division currently occupies approximately 16,800 square
feet at 4225 Executive Square, LaJolla, California, pursuant to an agreement
that expires November 2006. This location is used as both the production
facility and as the administrative offices of the Streaming Media Division.

Item 3. Legal Proceedings

   On or about June 13, 2001, Stuart Werman and Lynn McFarlane filed a lawsuit
against us, BancBoston Robertson Stephens, Inc., an underwriter of our initial
public offering in October 1999, Joel B. Rosen, our then Chief Executive
Officer, and Kenneth W. Hale, our then Chief Financial Officer. The suit was
filed in the United States District Court for the Southern District of New
York. The suit generally alleges that the defendants violated federal
securities laws by not disclosing certain actions allegedly taken by Robertson

                                       18
<PAGE>

Stephens in connection with our initial public offering. The suit alleges
specifically that Robertson Stephens, in exchange for the allocation to its
customers of shares of our common stock sold in our initial public offering,
solicited and received from its customers undisclosed commissions on
transactions in other securities and required its customers to purchase
additional shares of our common stock in the aftermarket at pre-determined
prices. The suit seeks unspecified monetary damages and certification of a
plaintiff class consisting of all persons who acquired shares of our common
stock between October 22, 1999 and December 6, 2000.

   On or about June 21, 2001, David Federico filed in the United States
District Court for the Southern District of New York a lawsuit against us, Mr.
Rosen, Mr. Hale, FleetBoston Robertson Stephens, Inc. and other underwriter
defendants including J.P. Morgan Chase, First Albany Companies, Inc., Bank of
America Securities, LLC, Bear Stearns & Co., Inc., B.T. Alex.Brown, Inc., Chase
Securities, Inc., CIBC World Markets, Credit Suisse First Boston Corp., Dain
Rauscher, Inc., Deutsche Bank Securities, Inc., The Goldman Sachs Group, Inc.,
J.P. Morgan & Co., J.P. Morgan Securities, Lehman Brothers, Inc., Merrill
Lynch, Pierce, Fenner & Smith, Inc., Morgan Stanley Dean Witter & Co., Robert
Fleming, Inc. and Salomon Smith Barney, Inc. The suit generally alleges that
the defendants violated the anti-trust laws and the federal securities laws by
conspiring and agreeing to raise and increase the compensation received by the
underwriter defendants by requiring those who received allocation of initial
public offering stock to agree to purchase shares of manipulated securities in
the after-market of the initial public offering at escalating price levels
designed to inflate the price of the manipulated stock, thus artificially
creating an appearance of demand and high prices for that stock, and initial
public offering stock in general, leading to further stock offerings. The suit
also alleges that the defendants arranged for the underwriter defendants to
receive undisclosed and excessive brokerage commissions and that, as a
consequence, the underwriter defendants successfully increased investor
interest in the manipulated initial public offering securities and increased
the underwriter defendants' individual and collective underwritings,
compensation and revenues. The suit further alleges that the defendants
violated the federal securities laws by issuing and selling securities pursuant
to the initial public offering without disclosing to investors that the
underwriter defendants in the offering, including the lead underwriters, had
solicited and received excessive and undisclosed commissions from certain
investors. The suit seeks unspecified monetary damages and certification of a
plaintiff class consisting of all persons who acquired shares of our common
stock between October 22, 1999 and June 12, 2001.

   We believe that the allegations are without merit and we intend to
vigorously defend against the plantiffs' claims. As the litigation is in an
initial stage, we are not able to predict the possible outcome of the suits and
their ultimate effect, if any, on our financial condition.

   We are also subject to other legal proceedings and claims which arise in the
ordinary course of our business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
consolidated financial position or results from operations of our company.

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

   No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year ended July 31, 2001.

Executive Officers of NaviSite

   Patricia Gilligan, age 50, has served as NaviSite's President and Chief
Executive Officer since July 2001. From June 2000 to July 2001, Ms. Gilligan
served as Navisite's Chief Operating Officer . From January 1999 to June 2000,
Ms. Gilligan served as Vice President of Worldwide Services of Incentive
Systems, an incentive compensation application developer. From April 1997 to
January 1999, Ms. Gilligan served as Vice President of East Coast Operations of
Razorfish, Inc., a digital solutions provider. From January 1992 to April 1997,
Ms. Gilligan served as Chief Information Officer of Cahners Publishing Company,
a business information company.

                                       19
<PAGE>


   Anthony Amato, age 36, has served as NaviSite's Vice President of Finance
since September 2001. From August 2000 to August 2001, Mr. Amato served as
Director of Finance at CMGI, Inc. From July 1999 to August 2000, Mr. Amato
served as Director of Finance and Administration at Raging Bull, Inc., a
financial messaging board provider and subsidiary of CMGI. From April 1998 to
July 1999, Mr. Amato served as Controller for Software Emancipation Technology,
Inc., a software developer of information systems. From December 1996 to April
1998, Mr. Amato was Controller at MyWay.com Corporation, formerly known as
Planet Direct Corporation, a personal on-line content service and subsidiary of
CMGI.

   Kevin Lo, age 28, has served as NaviSite's Vice President of Products,
Services and Business Development since July, 2001 and has served as Chief
Technology Officer since January 2001. From October 2000 to January 2001, Mr.
Lo served NaviSite as the Director of Utility Infrastructure Services. From
August 1997 to October 2000, Mr. Lo served as Chairman and Chief Executive
Officer at X-Collaboration Software Corporation, an application infrastructure
provider of collaborative Web services. From September 1995 to August 1997, Mr.
Lo was a Strategy Consultant at Bain & Company.

   Martin Sinozich, age 39, has served as NaviSite's Vice President of
Operations since March 2001. Mr. Sinozich served as Chief Operating Officer of
Epesi, a web services firm, from November 2000 to March 2001. From June 1999 to
November 2000, Mr. Sinozich served as Vice President of Operations for Engage,
Inc., a subsidiary of CMGI. From November 1996 to June 1999, Mr. Sinozich
served as Vice President at Fidelity Investments. From April 1995 to November
1996, Mr. Sinozich served as Vice President of Desktop Computing for MBNA
America Bank.

   Wayne Whitcomb, age 42, has served as NaviSite's Vice President of
Engineering since October 2001. From February 2001 to September 2001, Mr.
Whitcomb served as Chief Infrastructure Architect for NaviSite. From August
2000 to February 2001, Mr. Whitcomb was Vice President of Engineering for
Mirror Image, a content delivery network. From August 1998 to August 2000, Mr.
Whitcomb was Vice President of Engineering at MyWay.com Corporation, formerly
known as Planet Direct Corporation, a subsidiary of CMGI. From May 1997 to
August 1998, Mr. Whitcomb was Director of Information Services at MyWay.com.
From February 1997 to May 1997, Mr. Whitcomb was a consultant for OceanOne
Technologies LLC, a technology consulting firm. From April 1995 to February
1997, Mr. Whitcomb was a Manager and Team Leader of Integrated Business Systems
at Borden Global Packaging.

                                       20
<PAGE>

                                    PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

Price Range of Common Stock

   Our common stock commenced trading on the Nasdaq National Market on October
22, 1999 and is traded under the symbol "NAVI." As of September 30, 2001, there
were 118 holders of record of our common stock. Because brokers and other
institutions on behalf of stockholders hold many of such shares, we are unable
to estimate the total number of stockholders represented by these record
holders. The following table sets forth for the periods indicated the high and
low sales prices for our common stock as reported on the Nasdaq National
Market, adjusted to reflect the effect of the April 5, 2000 two-for-one stock
split.

<TABLE>
<CAPTION>
                                                                 Closing Price
                                                                 --------------
                                                                  High    Low
                                                                 ------- ------
   <S>                                                           <C>     <C>
   Fiscal Year Ending July 31, 2001:
     May 1, 2001 through July 31, 2001.......................... $  2.85 $ 0.75
     February 1, 2001 through April 30, 2001....................    3.59   1.03
     November 1, 2000 through January 31, 2001..................   12.75   2.03
     August 1, 2000 through October 31, 2000....................   53.00   7.78
   Fiscal Year Ending July 31, 2000:
     May 1, 2000 through July 31, 2000.......................... $ 58.88 $34.00
     February 1, 2000 through April 30, 2000....................  164.94  26.50
     November 1, 1999 through January 31, 2000..................   63.25  21.50
     October 22, 1999 through October 31, 1999..................   25.50  14.06
</TABLE>

   We believe that a number of factors may cause the market price of our common
stock to fluctuate significantly. See "Item 1. Business--Certain Factors That
May Affect Future Results."

   We have never paid cash dividends on our capital stock. We currently
anticipate retaining all available funds, if any, to finance internal growth
and product development. Payment of dividends in the future will depend upon
our earnings and financial condition and such other factors as the directors
may consider or deem appropriate at the time.

Recent Sales of Unregistered Securities

   On June 11, 2001, we issued 158,956 shares of our common stock to CMGI for
payment of interest in an amount of $586,155 related to the $80 million
convertible notes payable to CMGI. These shares were issued on June 11, 2001,
representing the number of shares of common stock equal to $586,155 divided by
the average of the closing prices per share of common stock as reported on the
Nasdaq National Market on January 24, 25, 26, 29 and 30, 2001, rounded up to
the nearest whole share. On June 11, 2001, we issued 801,675 shares of our
common stock to CMGI for payment of interest in an amount of $1,518,375 related
to the notes. These shares were issued on June 11, 2001, representing the
number of shares of common stock equal to $1,518,375 divided by the average of
the closing prices per share of common stock as reported on the Nasdaq National
Market on April 23, 24, 25, 26 and 27, 2001, rounded up to the nearest whole
share. On July 31, 2001, we issued 1,829,075 shares of our common stock to CMGI
for payment of interest in an amount of $1,503,500 related to the notes. These
shares were issued on July 31, 2001, representing the number of shares of
common stock equal to $1,503,500 divided by the average of the closing prices
per share of common stock as reported on the Nasdaq National Market on July 24,
25, 26, 27 and 30, 2001, rounded up to the nearest whole share. The common
stock was issued in reliance upon the exemptions from registration under
Section 4(2) of the Securities Act and Regulation D promulgated thereunder,
relative to sales by an issuer not involving a public offering. No underwriters
were involved in the sale of these securities.

                                       21
<PAGE>

Item 6. Selected Consolidated 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 Form 10-K. Historical results are not
necessarily indicative of results of any future period.

<TABLE>
<CAPTION>
(Amounts in 000's except per                  Year Ended July 31,
share data)                       ------------------------------------------------
                                    2001       2000      1999      1998     1997
                                  ---------  --------  --------  --------  -------
<S>                               <C>        <C>       <C>       <C>       <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
  Revenue.......................  $  66,358  $ 24,870  $  3,461  $    158  $   --
  Revenue, related parties......     36,368    24,893     7,058     3,871    3,361
                                  ---------  --------  --------  --------  -------
Total revenue...................    102,726    49,763    10,519     4,029    3,361
Cost of revenue.................    129,085    68,496    20,338     8,876    3,494
                                  ---------  --------  --------  --------  -------
    Gross margin................    (26,359)  (18,733)   (9,819)   (4,847)    (133)
Operating expenses:
  Product development...........     14,072     5,197     2,620       287      --
  Selling and marketing.........     32,251    22,805     6,888     2,530      347
  General and administrative....     33,011    12,270     4,823     1,412      467
  Restructuring.................      8,011       --        --        --       --
                                  ---------  --------  --------  --------  -------
    Total operating expenses....     87,345    40,272    14,331     4,229      814
Loss from operations............   (113,704)  (59,005)  (24,150)   (9,076)    (947)
Other income (expense):
  Interest income...............      2,753     2,027         4       --       --
  Interest expense..............     (8,042)   (1,001)     (347)      (85)      (1)
  Other income (expense), net...        292         9       (39)      (11)     --
                                  ---------  --------  --------  --------  -------
Loss before cumulative effect of
 change in accounting
 principle......................   (118,701)  (57,970)  (24,532)   (9,172)    (948)
Cumulative effect of change in
 accounting principle...........     (4,295)      --        --        --       --
                                  ---------  --------  --------  --------  -------
Net loss........................   (122,996)  (57,970)  (24,532)   (9,172)    (948)
Accretion of dividends on Series
 C and D convertible redeemable
 preferred stock................        --        --       (172)      --       --
                                  ---------  --------  --------  --------  -------
Net loss applicable to common
 shareholders...................  $(122,996) $(57,970) $(24,704) $ (9,172) $  (948)
                                  =========  ========  ========  ========  =======
Basic and diluted net loss per
 common share:
  Before cumulative effect of
   change in accounting
   principle....................  $   (2.01) $  (1.37) $  (3.71) $  (0.57) $ (0.12)
  Cumulative effect of change in
   accounting principle.........      (0.07)      --        --        --       --
                                  ---------  --------  --------  --------  -------
Basic and diluted net loss per
 common share...................  $   (2.08) $  (1.37) $  (3.71) $  (0.57) $ (0.12)
                                  =========  ========  ========  ========  =======
Basic and diluted weighted
 average number of common shares
 outstanding....................     58,993    42,270     6,663    16,034    8,000
                                  =========  ========  ========  ========  =======
BALANCE SHEET DATA:
Working capital (deficit).......  $  (9,683) $ 48,159  $ (1,355) $(13,552) $(2,566)
                                  =========  ========  ========  ========  =======
Total assets....................  $ 112,266  $175,461  $ 21,111  $  5,479  $ 2,010
                                  =========  ========  ========  ========  =======
Long-term obligations...........  $  69,852  $ 24,988  $  1,935  $  1,090  $   --
                                  =========  ========  ========  ========  =======
Shareholder's equity (deficit)..  $  (6,962) $ 97,474  $ (4,369) $(10,066) $  (895)
                                  =========  ========  ========  ========  =======
</TABLE>

                                       22
<PAGE>

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.

   In March 2000, our board of directors approved a two-for-one common stock
split, affected in the form of a stock dividend of one share of common stock
for each share of common stock outstanding. The stock dividend was paid on
April 5, 2000 to stockholders of record at the close of business on March 22,
2000. Accordingly, the consolidated financial statements have been
retroactively adjusted for all periods presented to reflect this event. Unless
otherwise indicated, all share information in this Management's Discussion and
Analysis of Financial Condition and Results of Operations reflects the two-for-
one stock split.

Overview

   We provide outsourced Web hosting and managed application services for
companies conducting business on the Internet, including enterprises and other
businesses deploying Internet applications. Our goal is to help customers focus
on their core competencies by outsourcing the management and hosting of their
Web operations and applications, allowing customers to fundamentally improve
the efficiency of their Web operations. We also provide related professional
and consulting services. Our focus on enhanced management services, beyond
basic co-location services, allows us to meet the expanding needs of businesses
as their Web sites and Internet applications become more complex. We believe
that we are one of only a relatively small number of companies that combine a
highly scalable and developed infrastructure with experience, intellectual
property, skill sets, processes and procedures for delivering managed hosting
services. The cost for our services varies from customer to customer based on
the number of managed servers and the nature, extent and level of services
provided.

   We were incorporated in Delaware in December 1998 as a wholly owned
subsidiary of NaviSite Internet Services Corporation as part of a corporate
reorganization of NaviSite Internet Services Corporation. At that time, we
received a contribution of assets from NaviSite Internet Services Corporation
in exchange for 60,589 shares of our common stock and 1,323,953 shares of our
Series A convertible preferred stock. At the same time, NaviSite Internet
Services Corporation contributed the remainder of its assets to NaviNet, Inc.,
another newly formed subsidiary of NaviSite Internet Services Corporation.
Effective as of October 1, 1999, NaviSite Internet Services Corporation was
merged with and into CMGI, leaving NaviSite and NaviNet, Inc. as direct
subsidiaries of CMGI.

   Our predecessor, NaviSite Internet Services Corporation, was incorporated in
Delaware in February 1997 under the name CMG Information Technology, Inc. and
changed its name to NaviSite Internet Services Corporation in May 1997. We
commenced operations in July 1996, funded by CMGI, to support the networks and
host the Web sites of CMGI and a number of CMGI affiliates. CMGI affiliates
include all entities in which CMGI holds an equity interest. We began providing
Web site hosting and Internet application management services to companies
unaffiliated with CMGI in the fall of 1997.

   All financial information presented here refers only to NaviSite, including
the hosting and Internet application management segments of NaviSite Internet
Services Corporation, and does not include the financial condition or results
of operations of NaviNet, Inc., including the dial-up operations of NaviSite
Internet Services Corporation.

   In July 1998, we acquired Servercast Communications, L.L.C., a Delaware
limited liability company and developer and integrator of Internet
applications, for $1.0 million in notes, plus bridge notes receivable of
$25,000 and $20,000 in acquisition costs. We acquired Servercast principally
for its expertise in application management, online advertising, e-commerce,
content management and streaming media. In February 2000, we acquired
ClickHear, Inc. for consideration valued at approximately $4,693,000, including
approximately $50,000 of direct costs of the acquisition. We acquired ClickHear
principally for its expertise in streaming media management and development.

   Since January 31, 2000, our corporate headquarters has been located at 400
Minuteman Road, Andover, Massachusetts. Before this date, our corporate
headquarters was shared with CMGI and several other CMGI

                                       23
<PAGE>

affiliates. CMGI allocated rent, facility maintenance and service costs among
these affiliates based upon headcount within each affiliate and within each
department of each affiliate. Other services provided by CMGI to us included
support for enterprise services, human resources and benefits and Internet
marketing and business development. Management believes that costs approximate
the fair value of the services received. Actual expenses could have varied had
we been operating on a stand-alone basis. Costs are allocated to us on the
basis of the fair market value for the facilities used and the services
provided. Through July 31, 2001, we operated two data centers in California and
two data centers in Andover, Massachusetts. On July 31, 2001, we announced the
closure of our two original data centers, one in Andover, Massachusetts and one
in Scotts Valley, California.

   We derive our revenue primarily from managed hosting services, but within
that framework, from a variety of services, including: Web site and Internet
application hosting, which includes access to our state-of-the-art data
centers, a range of bandwidth services, Content Distribution Network services,
advanced back-up options, managed storage and monitoring services; enhanced
server management, which includes custom reporting, hardware options, network
and application load balancing, system security, and the services of our
technical account managers; specialized application management, which includes
management of e-commerce and other sophisticated applications support services,
including scalability testing, streaming services for managed hosting
customers, databases and transaction processing services. We also derive
revenue from related consulting and other professional services, and from
providing a full suite of streaming services for the production, management,
reporting, and tracking of live and on-demand web events. Revenue also includes
income from the rental of equipment to customers, termination fees and one-time
installation fees. Revenue is recognized in the period in which the services
are performed. Installation fees are recognized over the period of the customer
contract. Previous to fiscal year 2001, installation revenue was recognized at
the time installation services were provided. Our customer contracts generally
are a one to three year commitment.

   We have incurred significant net losses and negative cash flows from
operations since our inception and, as of July 31, 2001, had an accumulated
deficit of approximately $215.7 million. These losses primarily have been
funded by CMGI through the issuance of common stock, preferred stock and
convertible debt, our initial public offering and related underwriters' over-
allotment in October 1999 and November 1999, respectively, and the sale-
leaseback of certain assets. We intend to continue to invest in sales,
marketing, promotion, technology and infrastructure development as we grow. We
believe that we will continue to incur operating losses and negative cash flows
from operations for at least the next fiscal year.

Recent Developments

   On October 29, 2001, we entered into an agreement under which we will
receive a total of $65 million in financing from CFS and CMGI. Under the terms
of the agreement, CFS and CMGI will provide us with cash investments of $20
million and $10 million respectively in exchange for convertible notes.
Additionally, CFS has agreed to restructure certain outstanding NaviSite lease
obligations. We have agreed to purchase equipment from CFS leased under
operating leases in exchange for a six-year, $35 million convertible note. As a
result, we expect to substantially reduce cash expenditures on operating leases
over the next two fiscal years. This note also allows us to finance past due
lease payments, the sales tax on the equipment purchase and the outright
purchase of the equipment.

   The notes bear interest at 12% and will require payment of interest only for
the first three years from the date of issuance and then repayment of interest
and principal, on a straight-line basis, over the next three years until
maturity on the sixth anniversary of the date of issuance. The principal amount
may be convertible into our common stock at the option of the noteholders at
any time prior to or at maturity. Should CFS convert its notes into NaviSite
common stock, they would own a controlling stake in NaviSite. Additionally, the
agreement includes a provision for non-voting participation rights by CFS on
our board of directors.

   As a part of this agreement, CMGI has also agreed to convert its existing
$80 million in outstanding notes into approximately 14.5 million shares of our
common stock and an additional $16.2 million of other amounts

                                       24
<PAGE>

due CMGI into approximately 9.9 million shares of our common stock. The result
of this agreement is that $7 million in remaining interest payments due to
CMGI, $9.2 million in unamortized debt issuance costs and the repayment of the
$80 million principal amount due in December 2003 will be converted to equity.

   This agreement has been approved by the boards of directors of each of
NaviSite, CMGI and CFS. Certain NaviSite terms relating to the authorization
and issuance of shares of our common stock upon conversion of the senior
secured convertible notes issued under the agreements will be subject to
approval by our stockholders.

Results of Operations

   The following table sets forth the consolidated statement of operations data
for the periods indicated as a percentage of revenues:

<TABLE>
<CAPTION>
                                                     Year Ended July 31
                                                    ------------------------
                                                     2001     2000     1999
                                                    ------   ------   ------
   <S>                                              <C>      <C>      <C>
   Revenue:
     Revenue.......................................   64.6%    50.0%    32.9%
     Revenue, related parties......................   35.4%    50.0%    67.1%
                                                    ------   ------   ------
       Total revenue...............................  100.0%   100.0%   100.0%
   Cost of revenue.................................  125.7%   137.6%   193.3%
                                                    ------   ------   ------
       Gross margin................................  (25.7)%  (37.6)%  (93.3)%
   Operating expenses:
     Product development...........................   13.7%    10.4%    24.9%
     Selling and marketing.........................   31.4%    45.8%    65.5%
     General and administrative....................   32.1%    24.7%    45.9%
     Restructuring.................................    7.8%     0.0%     0.0%
                                                    ------   ------   ------
       Total operating expenses....................   85.0%    80.9%   136.3%
                                                    ------   ------   ------
   Loss from operation............................. (110.7)% (118.5)% (229.6)%
   Other income (expense):
     Interest income...............................    2.7%     4.1%     0.1%
     Interest expense..............................   (7.8)%   (2.0)%   (3.3)%
     Other income (expense), net...................    0.3%     0.0%    (0.4)%
                                                    ------   ------   ------
       Total other income (expense)................   (4.8)%    2.1%    (3.6)%
                                                    ------   ------   ------
   Loss before cumulative effect of change in
    accounting principle........................... (115.5)% (116.4)% (233.2)%
   Cumulative effect of change in accounting
    principle......................................   (4.2)%    0.0%     0.0%
                                                    ------   ------   ------
   Net loss........................................ (119.7)% (116.4)% (233.2)%
                                                    ======   ======   ======
</TABLE>

Comparison of Fiscal Years Ended July 31, 2001 and 2000

 Revenue

   Our revenue from sales to related parties principally consists of sales of
services to CMGI and other customers that are CMGI affiliates. In general, in
pricing the services provided to CMGI and its affiliates, we have: negotiated
the services and levels of service to be provided; calculated the price of the
services at those service levels based on our then-current, standard prices;
and, in exchange for customer referrals provided to us by CMGI, discounted
these prices by 10%. In fiscal 2001, we sold services to CMGI and CMGI
affiliates totaling approximately $36.4 million, or 35% of revenue. Four of
these customers accounted for approximately 24.64%, 17.14%, 15.07% and 13.57%
of revenue, respectively. As of July 31, 2001, CMGI owned approximately 69.35%
of our outstanding common stock, the balance of the common stock owned by the
public.

                                       25
<PAGE>

   Total revenue increased 106% to approximately $102.7 million in fiscal 2001,
from approximately $49.8 million in fiscal 2000. The increase in revenue is due
primarily to an increase of approximately $13.8 million of revenue related to
the 114 new unaffiliated customers in the fiscal year and additional business
with both existing unaffiliated customers, and affiliated customers of CMGI.
Revenue from unaffiliated customers increased to approximately $66.4 million or
65% of total revenue, from approximately $24.8 million or 50% of total revenue
for fiscal year 2000. The number of unaffiliated customers decreased 19% to 273
at July 31, 2001 from 338 as of July 31, 2000. We will continue to focus our
efforts to expand our revenues with new unaffiliated enterprise customers over
the near term. However, there can be no assurance that we will be successful or
that the industry trend towards outsourcing IT functions and Web hosting
applications will increase in the future. For fiscal year 2002, we are
anticipating a 10 to 15% decrease in revenue from the fiscal year 2001 levels.

   During fiscal year 2001, we adopted SEC Staff Accounting Bulletin No. 101--
Revenue Recognition in Financial Statements ("SAB 101"). Under SAB 101,
installation fees are recognized over the life of the related customer
contracts. Prior to fiscal year 2001, we recognized installation fees at the
time the installation occurred. The cumulative effect of the change in
accounting principle on all prior years resulted in a $4.3 million increase in
net loss for the year ended July 31, 2001 and is reflected as a cumulative
effect of change in accounting principle. Revenue for the year ended July 31,
2001 includes $1.5 million that was included in the cumulative effect
adjustment. The $1.5 million of 2001 revenue was primarily attributable to the
recognition of previously deferred revenue on customers lost during 2001.

 Cost of Revenue

   Cost of revenue consists primarily of salaries and benefits for operations
personnel, bandwidth fees and related Internet connectivity charges, equipment
costs and related depreciation and costs to run our four data centers, such as
rent and utilities. With the growth of our business, we expect these costs to
increase in dollar terms, but decline on a percentage of revenue basis. We also
expect to achieve economies of scale as a result of spreading more volume over
fixed assets, increasing productivity and using new technological tools. For
fiscal year 2002, we are anticipating that the cost of sales will decrease from
the fiscal year 2001 levels. The anticipated decrease is a result of our fiscal
year 2001 restructuring efforts. The restructuring efforts are expected to
result in decreased labor costs and reduced equipment and infrastructure
expenses going forward.

   Cost of revenue in dollars increased 88% to approximately $129.1 million in
fiscal 2001, from approximately $68.5 million in fiscal 2000. As a percentage
of revenue, cost of revenue decreased to 126% in fiscal 2001, from 138% in
fiscal 2000. The dollar-value increase is due primarily to the costs associated
with increased investment in our data centers. These costs principally include
labor and headcount expenses, additional equipment and maintenance costs and
increased bandwidth. Included in the fiscal year 2001 cost of revenue is a
charge of approximately $1.9 million related to certain equipment under
operating leases, which has been deemed not to have a future economic benefit
us.

 Gross Margin

   Gross margin improved to approximately a negative (25.7%) of total revenue
for fiscal year 2001, from approximately a negative (37.6%) of total revenue
for fiscal year 2000. The improvement in the gross margin is a direct result of
scaling the fixed infrastructure and labor costs across a larger customer base.
Our business model requires that we make "up-front" fixed investments in both
equipment and personnel. These costs are leveraged across our data centers. We
anticipate that our gross margins will continue to improve, based on current
estimates and expectations and barring unforeseen circumstances, as our
occupancy rate increases and we achieve higher operational efficiencies and
economies of scale.

 Operating Expenses

   Product Development. Product development expenses consist mainly of salaries
and related costs. Our product development staff focuses on Internet
applications and network architecture. This group identifies new

                                       26
<PAGE>

Internet application software offerings, incorporates these new offerings into
our suite of service offerings and positions these new offerings for marketing,
sale and deployment. Our product development group also implements the various
technologies, including network storage and back-up, that provide the
infrastructure for both our internal network and the solutions we offer our
customers. As with sales and marketing, we believe that increased investment in
product development is critical to attaining our strategic objectives and
maintaining our competitive edge. For fiscal year 2002, we expect the dollar
value of product development expenses to decline on a percentage of revenue
basis. Product development expenses increased to $14.1 million in fiscal 2001,
from approximately $5.2 million in fiscal 2000. As a percentage of revenue,
product development expenses increased to 14% in fiscal 2001, from 10% in
fiscal 2000. The dollar-value increase in product development expenses is
primarily related to the headcount and related costs resulting from the
increase in product development personnel to 54 at July 31, 2001 from 31 at
July 31, 2000. This growth in product development personnel reflects our
increased service offerings and emphasis on application services.

   Selling and Marketing. Selling and marketing expenses consist primarily of
salaries and related benefits, commissions and marketing expenses such as
advertising, product literature, trade shows, marketing and direct mail
programs. For fiscal year 2002, we expect selling and marketing expenses to
decline in dollar terms. We continue to make targeted investments in areas that
promote brand recognition and increase new customer acquisitions. We intend to
accomplish this by adding capabilities in our direct sales and marketing
organizations, building leveraged distribution channels with selected
technology partners and increasing spending in targeted PR and marketing
programs.

   Selling and marketing expenses increased 41% to approximately $32.3 million
in fiscal 2001, from approximately $22.8 million in fiscal 2000. As a
percentage of revenue, selling and marketing expenses decreased to 31% in
fiscal 2001, from 46% in fiscal 2000. The dollar-value increase is due
primarily to increased headcount, salaries and commissions and expenses for
marketing programs, advertising and product literature.

   General and Administrative. General and administrative expenses include the
costs of financial, leasing, human resources, IT and administrative personnel,
professional services, bad debt, and corporate overhead. Also included are
intercompany charges from CMGI for facilities (prior to our move to our new
headquarters in January 2000), human resource support and business development.
With the growth of our business, we expect the dollar value of these expenses
to increase, but decline on a percentage of revenue basis, as we hire
additional personnel and incur additional costs related to the growth of our
business.

   General and administrative expenses increased 170% to approximately $33.0
million in fiscal 2001, from approximately $12.3 million in fiscal 2000. As a
percentage of revenue, general and administrative expenses increased to 32% in
fiscal 2001, from 25% in fiscal 2000. The dollar-value increase in general and
administrative expenses is primarily due to an increase in headcount, salaries
and related costs, to approximately $9.9 million in fiscal 2001, from
approximately $4.3 million in fiscal 2000, resulting from the hiring of
additional administrative, legal, human resource, IT and finance personnel to
support our growing and expanding operations and an increase in bad debt
expense to approximately $11.9 million in fiscal 2001, from approximately $1.0
million in fiscal 2000. For fiscal year 2002, we are anticipating a decrease in
general and administrative expense resulting from the fiscal year 2001
restructuring, lower labor levels and decreased bad debt expense.

   Restructuring. During July 2001, we announced a plan, approved by our board
of directors, to restructure our operations and consolidate data centers, which
resulted in a charge of $8,011,000. Of the total restructuring charge,
approximately $1,810,000 is related to employee termination benefits. We
terminated 126 employees on July 31, 2001 and paid all termination benefits in
the first fiscal quarter 2002. The restructuring charge also includes
approximately $6,201,000 of costs related to the closing of our original data
centers (Scotts Valley, California and Andover, Massachusetts). The components
of the facility closing costs included $3,829,000 of lease costs and other
contractual obligations, to be paid over the term of the respective agreements,
and $2,372,000 of write-offs of leasehold improvements.

                                       27
<PAGE>

 Interest Income

   Interest income increased to approximately $2.8 million in fiscal 2001, from
approximately $2.1 million in fiscal 2000. The increase is due primarily to the
increase of average cash on hand due to additional financing events during the
fiscal year.

 Interest Expense

   Interest expense increased to approximately $8.0 million in fiscal 2001,
from approximately $1.0 million in fiscal 2000. This increase is due primarily
to the interest on the $80.0 million CMGI Notes and related warrant
amortization.

Comparison of Fiscal Years Ended July 31, 2000 and 1999

 Revenue

   Total revenue increased 373% to approximately $49.8 million in fiscal 2000,
from approximately $10.5 million in fiscal 1999. The increase in revenue is due
primarily to an increase of approximately $18.5 million of revenue related to
the 275 new unaffiliated customers in the quarter and additional business with
both existing unaffiliated customers, and affiliated customers of CMGI. Revenue
from unaffiliated customers increased to approximately $24.9 million or 50% of
total revenue, from approximately $3.5 million or 33% of total revenue for
fiscal year 1999. The number of unaffiliated customers increased 68.6% to 338
at July 31, 2000 from 106 as of July 31, 1999.

 Cost of Revenue

   Cost of revenue increased 237% to approximately $68.5 million in fiscal
2000, from approximately $20.3 million in fiscal 1999. As a percentage of
revenue, cost of revenue decreased to 138% in fiscal 2000, from 193% in fiscal
1999. The dollar-value increase in each period was due primarily to the costs
associated with increased investment in our existing data centers. These costs
principally included labor and headcount expenses, additional equipment and
maintenance costs and increased bandwidth and connectivity charges.

 Gross Margin

   Gross margin improved to approximately a negative (38%) of total revenue for
fiscal year 2000, from approximately a negative (93%) of total revenue for
fiscal year 1999. The improvement in the gross margin is a direct result of
scaling the fixed infrastructure and labor costs across a larger customer base.
Our business model requires that we make "up-front" fixed investments in both
equipment and personnel. These costs are leveraged across our data centers. We
anticipate that our gross margins should continue to improve, based on current
estimates and expectations and barring unforeseen circumstances, as our
occupancy rate increases and we achieve higher operational efficiencies and
economies of scale.

 Operating Expenses

   Product Development. Product development expenses increased to $5.2 million
in fiscal 2000, from approximately $2.6 million in fiscal 1999. This increase
was due primarily to the costs associated with an increase in product
development personnel by July 31, 2000 to 31, from 20 at July 31, 1999. This
growth in product development personnel reflects our increased service
offerings and emphasis on application services.

   Selling and Marketing. Selling and marketing expenses increased 231% to
approximately $22.8 million in fiscal 2000, from approximately $6.9 million in
fiscal 1999. This increase was due primarily to the development of NaviSite's
sales and marketing capability in connection with the commencement of sales to
unaffiliated customers. These costs primarily included salaries and commissions
and expenses for marketing programs, advertising and product literature.

                                       28
<PAGE>

   General and Administrative. General and administrative expenses increased
154% to approximately $12.3 million in fiscal 2000, from approximately $4.8
million in fiscal 1999. The dollar-value increase in general and administrative
expenses was due to both an increase in salaries and related costs, to
approximately $4.3 million in fiscal 2000, from approximately $1.7 million in
fiscal 1999, resulting from the hiring of additional administrative and finance
personnel to support our growing operations and expanding operations.

 Interest Income

   Interest income increased to approximately $2.1 million in fiscal 2000, from
approximately $4,000 in fiscal 1999. The increase is due primarily to the funds
available for investment resulting from our various fiscal year 2000 financing
activities, including our $80.4 million initial public offering, a $50.0
million private placement of common stock and a $30.0 million sale-leaseback of
certain assets.

 Interest Expense

   Interest expense, increased to approximately $1.0 million in fiscal 2000,
from $347,000 in fiscal 1999. This increase is due primarily to interest
incurred on capital lease obligations.

Liquidity and Capital Resources

   Since our inception, our operations have been funded primarily by CMGI
through the issuance of common stock, preferred stock and convertible debt, our
initial public offering the issuance of preferred stock to strategic investors
and related underwriters' over-allotment in October 1999 and November 1999,
respectively.

   Our cash and cash equivalents decreased to $22.2 million at July 31, 2001
from $77.9 million at July 31, 2000 and we had a working capital deficit of
$9.7 million at July 31, 2001. Net cash used in operating activities was $88.8
million for the year ended July 31, 2001, resulting primarily from net losses
and increases in accounts receivable, and decreases in accounts payable,
accrued expenses and deferred revenue, partially offset by increases in amounts
due to CMGI, bad debt expense, and depreciation and amortization. The increases
in accounts receivable are a direct result of the related increase in revenue
during 2001 compared to 2000, net of increased bad debt expense associated
primarily with customers concentrated in the Internet and dot.com sector.

   Net cash used in investing activities was $17.4 million for the year ended
July 30, 2001, primarily associated with the acquisition of property and
equipment and restricted cash required to secure lease commitments, partially
offset by proceeds on the sale-leaseback of certain equipment. Net cash
provided by financing activities was $50.5 million for the year ended July 31,
2001, comprised primarily of $80 million received through the issuance of
convertible notes payable to CMGI offset by payments under capital lease
obligations.

   During fiscal 2000, we sold certain of our equipment and leasehold
improvements in our two new data centers in a sale-leaseback transaction
(referred to as the capital lease) to a bank for approximately $30.0 million.
During fiscal year 2001, we repaid the remaining balance of the capital lease
obligation totaling approximately $27.0 million.

                                       29
<PAGE>

   During fiscal year 2001, we sold certain equipment in a sale-leaseback
transaction to an equipment vendor for approximately $13.9 million. We
simultaneously entered into an operating lease of the equipment with the
vendor. The lease is payable in monthly installments through December 2002.

   During fiscal year 2001, we renewed a letter of credit for the lease of our
Andover, Massachusetts facility. The terms of the letter of credit require a
pledge of approximately $4.4 million, which is reflected on the balance sheet
as restricted cash at July 31, 2001.

   During fiscal year 2001, we entered into a letter of credit for the lease of
our San Diego, California facility. The terms of the letter of credit require a
pledge of approximately $555,000, which is also reflected on the balance sheet
as restricted cash at July 31, 2001. On October 3, 2001, the bank did not renew
the letter of credit and the funds were remitted to the landlord.

   During fiscal year 2001, we entered into a Note and Warrant Purchase
Agreement (referred to as the Agreement) with CMGI. The Agreement provided for
the sale of a subordinated, unsecured, convertible note in the principal amount
of $50 million and a subordinated, unsecured, convertible note in the principal
amount of $30 million (collectively referred to as the Notes). The Notes are
convertible at CMGI's option, and by NaviSite under defined circumstances, into
our common stock at a conversion price equal to $5.535 per share. We received
gross proceeds of $80 million from the issuance of the Notes. The annual
interest rate on the notes is 7.5% payable quarterly in, at our discretion,
either cash or our common stock. The principal amount is due in full by
December 12, 2003. In connection with the Agreement, we granted CMGI, effective
December 15, 2000, a warrant to purchase 2,601,625 shares of our common stock
at $5.77 per share, and a warrant to purchase 2,601,625 shares of our common
stock at $6.92 per share. The warrants are exercisable upon issuance and expire
on December 15, 2005. We ascribed a fair value of $12.9 million to the warrants
using the Black-Scholes model and are amortizing this fair value over the life
of the Notes as an additional component of interest expense.

   On October 29, 2001, we entered into an agreement between CMGI and CFS.
Under the terms of the agreement, we have agreed to purchase equipment from CFS
leased by us under operating lease agreements expiring through 2003 in exchange
for a note of approximately $35 million. This note also allows us to finance
past due lease payments, the sales tax on the equipment purchase and the
outright purchase of the equipment. Additionally, we will receive $20 million
and $10 million in cash from CFS and CMGI, respectively, in exchange for six-
year convertible notes. The notes bear interest at 12% and require payment of
interest only for the first three years from date of issuance. All interest to
CMGI and a portion of the interest payable to CFS in the first two years may be
paid in our common stock. Principal and interest payments are due on a straight
line basis commencing in year four until maturity on the sixth anniversary from
the issuance date. The convertible notes will be secured by substantially all
of our assets and cannot be prepaid. Holders of the convertible notes are
entitled to both demand and "piggyback" registration rights, and CFS is
entitled to anti-dulution protection under certain circumstances. The agreement
with CFS also contains certain restrictive covenants, including but not limited
to limitations on the issuance of additional debt, the sale of equity
securities to affiliates and certain acquisitions and dispositions of assets.

   The principal balances may be converted into our common stock at the option
of the holders at any time prior to or at maturity, at a conversion price of
$0.26 per share. CMGI also agreed to convert its existing $80 million in
principal outstanding under the notes into approximately 14.5 million shares of
our common stock. CMGI also agreed to convert approximately $16.2 million in
other amounts due by us to CMGI into approximately 9.9 million shares of our
common stock. Should CFS convert its notes into our common stock, they would
own a controlling interest in our company.

   During the renegotiations of our equipment lease obligations, we have not
paid certain scheduled lease payments to certain vendors. Our total remaining
lease obligation to these vendors is approximately $57 million. Of this amount,
approximately $27 million was restructured in the CFS agreement, which provides
for our purchase of equipment under operating leases. During the
renegotiations, we have been notified by certain lessors that we are in default
of our lease agreements.

                                       30
<PAGE>

Remedies under these leases, if the event of default is not cured, include the
demand of all remaining lease payments under the original lease terms, payment
of stipulated loss amounts, or return of the underlying equipment. We plan to
cure these defaults within 60 days of closing the transactions contemplated by
the CFS agreement.

   We have experienced a substantial increase in our expenditures since
inception consistent with our growth in operations and staffing. We anticipate
that expenditures will continue to increase as we grow our business.
Additionally, we will continue to evaluate investment opportunities in
businesses that management believes will complement our technologies and market
strategies.

   We currently anticipate that our available cash resources at July 31, 2001
combined with the cash to be received from CMGI and CFS, as described above
will be sufficient to meet our anticipated needs, barring unforeseen
circumstances, for working capital and capital expenditures over the next
twelve months. However, we may need to raise additional funds in order to
develop new, or enhance existing, services or products, to respond to
competitive pressures or to acquire complementary businesses, products or
technologies. In addition, on a long-term basis, we may require additional
external financing for working capital and capital expenditures through credit
facilities, sales of additional equity or other financing vehicles. Under our
arrangement with CFS, we must obtain their consent in order to issue debt
securities or sell shares of our common stock to affiliates. We may not receive
their consent. If additional funds are raised through the issuance of equity or
convertible debt securities, the percentage ownership of our stockholders will
be reduced and our stockholders may experience additional dilution. We cannot
assure you that additional financing will be available on terms favorable to
us, if at all. If adequate funds are not available or are not available on
acceptable terms, our ability to fund our expansion, take advantage of
unanticipated opportunities, develop or enhance services or products or
otherwise respond to competitive pressures would be significantly limited.

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

   Our exposure to market rate risk for changes in interest rates relates
primarily to our cash equivalents. We invest our cash primarily in money market
funds. An increase or decrease in interest rates would not significantly
increase or decrease interest expense on capital lease obligations due to the
fixed nature of such obligations. We also have fixed rate notes payable to
CMGI. On October 29, 2001, CMGI agreed to convert these notes, including
unamortized debt issuance costs, into our common stock. We do not currently
have any foreign operations and thus are not exposed to foreign currency
fluctuations.

                                       31
<PAGE>

Item 8. Financial Statements and Supplementary Data.

                                 NAVISITE, INC.

                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
<S>                                                                        <C>
Independent Auditors' Report..............................................  33

Consolidated Balance Sheets as of July 31, 2001 and 2000..................  34

Consolidated Statements of Operations for the years ended July 31, 2001,
 2000 and 1999............................................................  35

Consolidated Statements of Changes in Stockholders' Equity (Deficit) for
 the years ended
 July 31, 2001, 2000 and 1999.............................................  36

Consolidated Statements of Cash Flows for the years ended July 31, 2001,
 2000, and 1999...........................................................  37

Notes to Consolidated Financial Statements................................  38

Independent Auditors' Report on Financial Statement Schedule..............  56

Financial Statement Schedule II--Valuation and Qualifying Accounts........  57
</TABLE>

                                       32
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
NaviSite, Inc. and Subsidiary:

   We have audited the accompanying consolidated balance sheets of NaviSite,
Inc. and subsidiary as of July 31, 2001 and 2000, and the related consolidated
statements of operations, changes in stockholders' equity (deficit), and cash
flows for each of the years in the three-year period ended July 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

   We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

   In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NaviSite, Inc. and
subsidiary as of July 31, 2001 and 2000, and the results of their operations
and their cash flows for each of the years in the three-year period ended July
31, 2001, in conformity with accounting principles generally accepted in the
United States of America.

   As discussed in note 2 to the consolidated financial statements, effective
August 1, 2000, the Company changed its method of accounting for installation
services.

                                          /s/ KPMG LLP

Boston, Massachusetts
September 25, 2000 except as to note 15,  which is as of October 29, 2001

                                       33
<PAGE>

                                 NAVISITE, INC.

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                 July 31,
                                                             ------------------
                                                               2001      2000
                                                             --------  --------
                                                              (in thousands,
                                                             except par value)
<S>                                                          <C>       <C>
                           ASSETS
                           ------
Current assets:
 Cash and cash equivalents.................................. $ 22,214  $ 77,947
 Accounts receivable, less allowance for doubtful accounts
  of $6,859 and $1,219 at July 31, 2001 and 2000,
  respectively..............................................   10,933    14,025
 Due from CMGI and affiliates...............................    4,362     5,985
 Prepaid expenses and other current assets..................    2,184     3,201
                                                             --------  --------
   Total current assets.....................................   39,693   101,158
Property and equipment, net.................................   63,410    70,651
Other assets................................................    3,718     3,051
Restricted cash.............................................    5,051       --
Goodwill, net of accumulated amortization of $631 and $424
 at July 31, 2001 and 2000, respectively....................      394       601
                                                             --------  --------
   Total assets............................................. $112,266  $175,461
                                                             ========  ========
       LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
       ----------------------------------------------
Current liabilities:
 Capital lease obligations, current portion................. $     42  $  5,689
 Due to CMGI................................................   14,821     5,310
 Accounts payable...........................................   10,341    13,457
 Accrued expenses...........................................   19,299    27,079
 Deferred revenue...........................................    3,818       697
 Software vendor payable, current portion...................      837       767
 Customer deposits..........................................      218       --
                                                             --------  --------
   Total current liabilities................................   49,376    52,999
Capital lease obligations, less current portion.............      --     23,999
Software vendor payable, less current portion...............       79       989
Convertible notes payable to CMGI, net......................   69,773       --
                                                             --------  --------
   Total liabilities........................................  119,228    77,987
Commitments and contingencies (note 7)
Stockholders' equity (deficit):
 Preferred Stock, $.01 par value, 5,000 shares authorized;
  0 and 0 shares issued and outstanding at
  July 31, 2001 and 2000, respectively......................      --        --
 Common Stock, $.01 par value, 150,000 shares authorized:
  61,868 and 58,364 shares issued and outstanding at July
  31, 2001 and 2000, respectively...........................      619       584
 Deferred compensation......................................      --       (762)
 Additional paid-in capital.................................  208,064   190,301
 Accumulated deficit........................................ (215,645)  (92,649)
                                                             --------  --------
   Total stockholders' equity (deficit).....................   (6,962)   97,474
                                                             --------  --------
     Total liabilities and stockholders' equity (deficit)... $112,266  $175,461
                                                             ========  ========
</TABLE>

          See accompanying notes to consolidated financial statements

                                       34
<PAGE>

                                 NAVISITE, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                    Year Ended July 31,
                                                -----------------------------
                                                  2001       2000      1999
                                                ---------  --------  --------
                                                 (in thousands, except par
                                                          value)
<S>                                             <C>        <C>       <C>
Revenue:
  Revenue...................................... $  66,358  $ 24,870  $  3,461
  Revenue, related parties.....................    36,368    24,893     7,058
                                                ---------  --------  --------
    Total revenue..............................   102,726    49,763    10,519
Cost of revenue................................   129,085    68,496    20,338
                                                ---------  --------  --------
    Gross margin...............................   (26,359)  (18,733)   (9,819)
Operating expenses:
  Product development..........................    14,072     5,197     2,620
  Selling and marketing........................    32,251    22,805     6,888
  General and administrative...................    33,011    12,270     4,823
  Restructuring................................     8,011       --        --
                                                ---------  --------  --------
    Total operating expenses...................    87,345    40,272    14,331
                                                ---------  --------  --------
Loss from operations...........................  (113,704)  (59,005)  (24,150)
Other income (expense):
  Interest income..............................     2,753     2,027         4
  Interest expense.............................    (8,042)   (1,001)     (347)
  Other income (expense), net..................       292         9       (39)
                                                ---------  --------  --------
Loss before cumulative effect of change in
 accounting principle..........................  (118,701)  (57,970)  (24,532)
Cumulative effect of change in accounting
 principle.....................................    (4,295)      --        --
                                                ---------  --------  --------
Net loss.......................................  (122,996)  (57,970)  (24,532)
Accretion of dividends on Series C and D
 convertible redeemable preferred stock........       --        --       (172)
                                                ---------  --------  --------
Net loss applicable to common shareholders..... $(122,996) $(57,970) $(24,704)
                                                =========  ========  ========
Basic and diluted net loss per common share:
Before cumulative effect of change in
 accounting principle.......................... $   (2.01) $  (1.37) $  (3.71)
Cumulative effect of change in accounting
 principle.....................................     (0.07)      --        --
                                                ---------  --------  --------
Basic and diluted net loss per common share.... $   (2.08) $  (1.37) $  (3.71)
                                                =========  ========  ========
Basic and diluted weighted average number of
 common shares outstanding.....................    58,993    42,270     6,663
                                                =========  ========  ========
Unaudited pro forma basic and diluted net loss
 per share.....................................       --   $  (1.08) $  (0.75)
                                                =========  ========  ========
Pro forma weighted average number of basic and
 diluted shares outstanding....................       --     53,829    32,814
                                                =========  ========  ========
</TABLE>

                 See accompanying notes to financial statements

                                       35
<PAGE>

                                 NAVISITE, INC.

      CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
                          Series A       Series B
                        Convertible     Convertible
                         Preferred       Preferred
                           Stock           Stock       Common Stock                 Additional             Stockholders'
                       --------------- -------------- ----------------   Deferred    Paid-In   Accumulated    Equity
                       Shares   Amount Shares  Amount  Shares   Amount Compensation  Capital     Deficit     (Deficit)
                       -------  ------ ------  ------ --------  ------ ------------ ---------- ----------- -------------
<S>                    <C>      <C>    <C>     <C>    <C>       <C>    <C>          <C>        <C>         <C>
Balance at July 31,
 1998................      --    $--     --     $--     16,102   $ 81    $   --      $    --    $ (10,147)   $ (10,066)
Reorganization.......    1,324     13    --      --    (16,000)   (80)       --        15,755         --        15,688
Conversion of Debt to
 CMGI Convertible
 Preferred Stock.....      --     --     542       5       --     --         --        14,708         --        14,713
Exercise of stock
 options.............      --     --     --      --         36    --         --           --          --           --
Accretion of
 dividends on Series
 C and D Preferred
 Stock...............      --     --     --      --        --     --         --          (172)        --          (172)
Net loss.............      --     --     --      --        --     --         --           --      (24,532)     (24,532)
                       -------   ----  -----    ----  --------   ----    -------     --------   ---------    ---------
Balance at July 31,
 1999................    1,324     13    542       5       138      1        --        30,291     (34,679)      (4,369)
Conversion of Debt to
 CMGI into Series B
 Preferred Stock.....      --     --      88     --        --     --         --        12,257         --        12,257
Conversion of Series
 B, C, and D
 Convertible
 Redeemable Preferred
 Stock into common
 stock...............   (1,324)   (13)  (630)     (5)   43,244    432        --        15,006         --        15,420
Issuance of common
 stock in conjunction
 with public
 offering, net of
 offering costs of
 $8,169..............      --     --     --      --     13,631    137        --       130,054         --       130,191
Issuance of common
 stock in connection
 with employee stock
 purchase plan and
 exercise of stock
 options.............      --     --     --      --      1,283     13        --         1,105         --         1,118
Deferred stock
 compensation related
 to acquisition......      --     --     --      --         68      1     (1,589)       1,588         --           --
Amortization of
 deferred stock
 compensation........      --     --     --      --        --     --         827          --          --           827
Net loss.............      --     --     --      --        --     --         --           --      (57,970)     (57,970)
                       -------   ----  -----    ----  --------   ----    -------     --------   ---------    ---------
Balance at July 31,
 2000................      --     --     --      --     58,364    584       (762)     190,301     (92,649)      97,474
Issuance of common
 stock in connection
 with employee stock
 purchase plan and
 exercise of stock
 options.............      --     --     --      --        714      7        --           975         --           982
Issuance of stock
 warrants in
 connection with
 convertible debt....      --     --     --      --        --     --         --        12,918         --        12,918
Issuance of common
 stock in connection
 with the interest on
 convertible debt....      --     --     --      --      2,790     28        --         3,581         --         3,609
Deferred stock
 compensation related
 to acquisition......      --     --     --      --        --     --        (289)         289         --           --
Amortization of
 deferred stock
 compensation........      --     --     --      --        --     --       1,051          --          --         1,051
Net loss.............      --     --     --      --        --     --         --           --     (122,996)    (122,996)
                       -------   ----  -----    ----  --------   ----    -------     --------   ---------    ---------
Balance at July 31,
 2001................      --    $--     --     $--     61,868   $619    $   --      $208,064   $(215,645)   $  (6,962)
                       =======   ====  =====    ====  ========   ====    =======     ========   =========    =========
</TABLE>

          See accompanying notes to consolidated financial statements

                                       36
<PAGE>

                                 NAVISITE, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                    Years ended July 31,
                                                 -----------------------------
                                                   2001       2000      1999
                                                 ---------  --------  --------
                                                       (in thousands)
<S>                                              <C>        <C>       <C>
Cash flows from operating activities:
 Net loss....................................... $(122,996) $(57,970) $(24,532)
 Adjustments to reconcile net loss to net cash
  used for operating activities:
  Depreciation and amortization.................    15,154     9,081     2,081
  (Gain)/loss on disposal of assets.............      (133)      --         39
  Provision for bad debts.......................    11,948     1,069       275
  Amortization of deferred compensation.........     1,051       827       --
  Interest on convertible notes payable to
   CMGI.........................................     3,609       --        --
  Accretion of debt discount....................     2,691       --        --
  Changes in operating assets and liabilities,
   net of impact of acquisitions:
   Accounts receivable..........................    (6,373)  (12,898)   (1,667)
   Due from CMGI and affiliates.................     1,623    (5,908)      (77)
   Prepaid expenses and other current assets....     1,016    (1,738)      739
   Due to CMGI..................................     9,511     5,310       --
   Deposits.....................................       (58)   (2,660)     (232)
   Deferred IPO costs...........................       --        --       (335)
   Accounts payable.............................    (3,116)   11,049     1,000
   Customer deposits............................       218       --        --
   Accrued expenses and deferred revenue........    (2,945)   23,618     2,553
                                                 ---------  --------  --------
    Net cash used for operating activities......   (88,800)  (30,220)  (20,156)
Cash flows from investing activities:
 Net cash acquired in acquisition...............       --          7       --
 Purchases of property and equipment............   (25,515)  (66,328)   (9,767)
 Proceeds from the sale of equipment............    13,884       --        --
 Restricted cash................................    (5,051)      --        --
 Other assets...................................      (747)      --        --
                                                 ---------  --------  --------
    Net cash used for investing activities......   (17,429)  (66,321)   (9,767)
Cash flows from financing activities:
 Issuance of convertible notes payable to CMGI..    80,000       --        --
 Proceeds from increase in debt to CMGI, net....       --     12,257    18,962
 Proceeds from issuance of Series C and D
  Convertible Redeemable Preferred Stock, net of
  financing costs...............................       --        --     15,249
 Proceeds from exercise of stock options and
  employee stock purchase plan..................       982     1,118       --
 Proceeds from issuance of common stock, net of
  offering costs of $8,169......................       --    130,190       --
 Proceeds from sale-leaseback...................       --     30,000       --
 Repayment of note payable......................       --     (1,000)      --
 Payments of capital lease obligations..........   (29,646)     (720)     (122)
 Payments of software vendor obligations........      (840)     (709)     (814)
                                                 ---------  --------  --------
    Net cash provided by financing activities...    50,496   171,136    33,275
                                                 ---------  --------  --------
Net increase in cash............................   (55,733)   74,595     3,352
Cash, beginning of period.......................    77,947     3,352       --
                                                 ---------  --------  --------
Cash, end of period............................. $  22,214  $ 77,947  $  3,352
                                                 =========  ========  ========
Supplemental disclosure of cash flow
 information:
Cash paid during the period for:
 Interest....................................... $   1,364  $    676  $     77
                                                 =========  ========  ========
</TABLE>

                 See accompanying notes to financial statements

                                       37
<PAGE>

                                 NAVISITE, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Description of Business

   NaviSite, Inc. (the "Company" or "NaviSite") is a provider of business
critical Internet outsourcing solutions, specializing in high-end Web hosting
and application services for companies conducting business on the Internet.
Substantially all revenues are generated from customers in the United States.

(2) Summary of Significant Accounting Policies

 (a) Basis of Presentation

   The Company is a majority owned subsidiary of CMGI, Inc. ("CMGI") or
("Parent"). The consolidated financial statements include certain allocations
from CMGI for certain general and administrative expenses such as rent, legal
services, insurance, and employee benefits. Allocations are based primarily on
headcount. Management believes that the method used to allocate the costs and
expenses is reasonable; however, such allocated amounts may or may not
necessarily be indicative of what actual expenses would have been incurred had
the Company operated independently of CMGI.

 (b) Principles of Consolidation

   The accompanying financial statements include the accounts of the Company
and its wholly owned subsidiary, ClickHear, Inc. ("ClickHear") after
elimination of all significant intercompany balances and transactions.

 (c) Liquidity

   At July 31, 2001, the Company had cash and cash equivalents of $22.2
million, a working capital deficit of $9.7 million and an accumulated deficit
of $215.6 million. Additionally, the Company has incurred losses since its
inception as infrastructure costs were incurred in advance of obtaining
customers. Subsequent to year end, the Company ceased making payments due under
certain operating lease agreements as part of an effort to restructure payment
terms.

   Management has taken several actions to ensure that the Company will
continue as a going concern through July 31, 2001, including the closing of two
data centers, headcount reductions, and reductions in discretionary
expenditures. Further, as discussed in note 15, the Company has entered into an
agreement in which it will receive $30 million in additional cash, amounts due
to CMGI will be converted into equity and restructured lease payments
subsequent to year end. Management believes that these actions will enable the
Company to continue as a going concern through July 31, 2002.

 (d) Use of Estimates

   The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect certain reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.

 (e) Revenue Recognition and Accounting Change

   Revenue consists of monthly fees for Web site and Internet application
management, application rentals, and hosting. Revenue (other than installation
fees) is generally billed and recognized over the term of the contract,
generally one to three years, based on actual usage. Payments received in
advance of providing

                                       38
<PAGE>

                                 NAVISITE, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

services are deferred until the period such services are provided. Effective
August 1, 2001, the Company adopted SEC Staff Accounting Bulletin No. 101--
Revenue Recognition in Financial Statements ("SAB 101"). Under SAB 101,
installation fees are recognized over the life of the related customer
contract. Prior to fiscal year 2001, the Company recognized installation fees
at the time that the installation occurred. The cumulative effect of the change
in accounting for installation services on all prior years resulted in a $4.3
million increase in net loss for the year ended July 31, 2001 and is reflected
as a cumulative effect of change in accounting principle. Revenue for the year
ended July 31, 2001 includes $1.5 million that was included in the cumulative
effect adjustment.

 (f) Cash

   Cash equivalents consist of a money market fund, which invests, in high
quality short-term debt obligations, including commercial paper, asset-backed
commercial paper, corporate bonds, U.S. government agency obligations, taxable
municipal securities and repurchase agreements.

   On February 3, 2001, the Company renewed two letters of credit related to
certain of its leased facilities. Under the terms of the letters of credit, the
Company was required to pledge approximately $5.0 million in cash, which is
reflected as restricted cash on the accompanying balance sheet at July 31,
2001. Subsequent to July 31, 2001, the letter of credit related to the La
Jolla, California facility was not renewed and the landlord drew down the
related $555,000 of restricted cash.

   During Fiscal 2000, non-cash financing activities included the issuance of
175,096 shares of the Company's Series B Convertible Preferred Stock ("Series B
Preferred Stock") in exchange for a $12,256,694 reduction in debt to CMGI (see
note 5).

   During fiscal 2000, in connection with the closing of the Company's initial
public offering on October 27, 1999, all of the outstanding shares of Series A,
Series B, Series C and Series D convertible preferred stock, par value $0.01
per share, of the Company automatically converted into 43,244,630 shares of
common stock, $.01 par value per share (the "Common Stock").

   During fiscal 1999, non-cash financing activities included the issuance of
1,323,953 shares of the Company's Series A Convertible Preferred Stock ("Series
A Preferred Stock") in exchange for 8,000,000 shares of the Company's Common
Stock and $15,767,600 reduction in debt to CMGI and the issuance of 541,859
shares of the Company's Series B Convertible Preferred Stock ("Series B
Preferred Stock") in exchange for a $14,713,000 reduction in debt to CMGI (see
note 9). Non-cash financing activities also included a software licensing
arrangement, including services and maintenance of $923,000, for an aggregate
of $2.5 million, payable over a three-year period. The Company has recorded
deferred IPO costs of $496,000, which are included in accrued expenses at July
31, 1999.

 (g) Software Development Costs

   Software development costs are accounted for under Statement of Financial
Accounting Standard No. 86, Accounting for Costs of Computer Software to be
Sold, Leased or Otherwise Marketed ("SFAS 86"). Capitalization of software
development costs commences upon the establishment of technological
feasibility. To date, all such amounts have been insignificant, and,
accordingly, the Company has charged all such costs to product development
expense.

   The Company accounts for costs incurred for computer software developed or
obtained for internal use in accordance with AICPA Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use."

                                       39
<PAGE>

                                 NAVISITE, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 (h) Property and Equipment

   Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements and assets acquired under capital leases are amortized
using the straight-line method over the shorter of the lease term or estimated
useful life of the asset. Assets acquired under capital leases in which title
transfers to the Company at the end of the agreement are amortized over the
useful life of the asset. Expenditures for maintenance and repairs are charged
to expense as incurred.

 (i) Goodwill

   Goodwill relates to the Company's purchase of Servercast in July 1998 and
the Company's purchase of its wholly owned subsidiary ClickHear in February
2000 (see note 3). Such costs are being amortized on a straight-line basis over
five years, the period expected to be benefited.

 (j) Accounting for Impairment of Long-Lived Assets

   The Company assesses the need to record impairment losses on long-lived
assets used in operations when indicators of impairment are present. On an
ongoing basis, management reviews the value and period of amortization or
depreciation of long-lived assets, including goodwill. During this review, the
significant assumptions used in determining the original cost of long-lived
assets are reevaluated. Although the assumptions may vary from transaction to
transaction, they generally include revenue growth, operating results, cash
flows and other indicators of value. Management then determines whether there
has been a permanent impairment of the value of long-lived assets by comparing
future undiscounted cash flows to the asset's carrying value. If the estimated
future undiscounted cash flows are less than the carrying value of the asset, a
loss is recorded based on the excess of the asset's carrying value over fair
value.

 (k) Income Taxes

   The Company accounts for income taxes under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

   Previous to the fiscal year ended July 31, 2000, the Company was greater
than 80% owned by CMGI, and as such, CMGI realized the full benefit of all
federal and part of the state net operating losses that had been incurred by
the Company for those periods before the fiscal year ended July 31, 2000.
Therefore, such net operating losses incurred by the Company were not available
to the Company. The tax sharing agreement between the Company and CMGI required
the Company to reimburse CMGI for the amounts it contributed to the
consolidated tax liability of the CMGI group; however, under the policy, CMGI
was not obligated to reimburse the Company for any losses utilized in the
consolidated CMGI group. After the Company's public offering, CMGI's ownership
fell below 80% and the Company is no longer included in the federal
consolidated group of CMGI. Thus, the Company's federal and state net operating
losses can be carried forward to offset its future taxable income.

 (l) Advertising Costs

   The Company recognizes advertising costs as incurred. Advertising expense
was approximately $3,126,000, $1,462,000 and $417,000 for the fiscal years
ended July 31, 2001, 2000 and 1999, respectively, and is included in the
accompanying statement of operations as a component of selling and marketing
expenses.

                                       40
<PAGE>

                                 NAVISITE, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 (m) Stock-Based Compensation Plans

   The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations, in accounting for
its fixed plan stock options. As such, compensation expense would be recorded
on the date of grant only if the current market price of the underlying stock
exceeded the exercise price. SFAS No. 123, "Accounting for Stock-Based
Compensation," established accounting and disclosure requirements using a fair
value-based method of accounting for stock-based employee compensation plans.
As allowed by SFAS No. 123, the Company has elected to continue to apply the
intrinsic value-based method of accounting described above, and has adopted the
disclosure requirements of SFAS No. 123.

 (n) Financial Instruments

   The Company's financial instruments include cash, accounts receivable,
obligations under capital leases, software agreements, accounts payable and
accrued expenses. As of July 31, 2001, the carrying cost of these instruments
approximated their fair value. The Company also has fixed rate notes payable to
CMGI. On October 29, 2001, CMGI agreed to convert these notes into equity (Note
15).

 (o) Historical and Unaudited Pro Forma Basic and Diluted Net Loss per Share

   Basic earnings (loss) per share is computed using the weighted average
number of common shares outstanding during the period. Diluted earnings (loss)
per share is computed using the weighted average number of common and diluted
common equivalent shares outstanding during the period, using either the "if-
converted" method for convertible preferred stock or the treasury stock method
for options, unless amounts are anti-dilutive.

   For fiscal years ended July 31, 2001, 2000, and 1999, net loss per basic and
diluted share is based on weighted average common shares and excludes any
Common Stock equivalents, as they would be anti-dilutive due to the reported
loss. For fiscal 2001, 2,516,907 of diluted shares related to employee stock
options were excluded as they have an anti-dilutive effect due to the loss. For
the fiscal years ended July 31, 2000 and 1999, a pro forma basic and diluted
loss per share calculation, assuming the conversion of all amounts due to CMGI
and all outstanding shares of preferred stock into Common Stock using the "if-
converted" method form the later of the date of issuance or beginning of the
period, is presented. The following table provides a reconciliation of the
denominators used in calculating the pro forma basic and diluted earnings
(loss) per share for the fiscal years ended July 31, 2000 and 1999.

<TABLE>
<CAPTION>
                                                            Fiscal Year Ended
                                                                July 31,
                                                            ------------------
                                                              2000      1999
                                                            --------  --------
   <S>                                                      <C>       <C>
   Numerator:
     Net loss.............................................. $(57,970) $(24,704)
                                                            --------  --------
   Denominator:
     Common shares outstanding.............................   42,270     6,663
     Assumed conversion of preferred stock.................   11,559    26,151
                                                            --------  --------
       Weighted average number of pro forma basic and
        diluted share outstanding.......................... $ 53,829  $ 32,814
                                                            ========  ========
   Pro forma basic and diluted net loss per share.......... $  (1.08) $  (0.75)
                                                            ========  ========
</TABLE>

   See also Note 15.

                                       41
<PAGE>

                                 NAVISITE, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 (p) Segment Reporting

   The Company currently operates in one segment, Internet web hosting and
application services.

 (q) New Accounting Pronouncements

   In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). SFAS 133 was amended by SFAS
138 in June 2000. The Company adopted these statements on August 1, 2000. SFAS
133 requires that the Company record all derivatives on the balance sheet as
either an asset or liability measured at fair value. The adoption of SFAS 133
and SFAS 138 did not have a material impact on the Company's consolidated
financial statements.

   In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 will apply
to all business combinations that the Company enters into after June 30, 2001,
and eliminates the pooling-of-interests method of accounting. SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001. Under the new
Statements, goodwill and intangible assets deemed to have indefinite lives will
no longer be amortized but will be subject to annual impairment tests in
accordance with the Statements. Other intangible assets will continue to be
amortized over their useful lives.

   The Company is required to adopt these Statements for accounting for
goodwill and other intangible assets beginning in the first quarter of fiscal
year 2003. Application of the non-amortization provisions of the Statement is
indeterminable at July 31, 2001 as the Company intends to continue to perform
an impairment analysis of the remaining goodwill through the end of fiscal year
2002. Upon adoption on August 1, 2002, the Company will perform the required
impairment tests of goodwill and has not yet determined what effect these tests
will have on the earnings and financial position of the Company.

(3) Business Combinations

   On February 22, 2000, NaviSite acquired ClickHear for consideration valued
at approximately $4,693,000, including approximately $50,000 of direct costs of
the acquisition. The consideration for the acquisition consisted of 41,968
shares of CMGI common stock valued at the closing price of CMGI common stock on
February 22, 2000, resulting in consideration value of approximately
$4,643,000. On February 22, 2000, CMGI contributed their ClickHear common stock
to NaviSite in exchange for 67,906 shares of NaviSite Common Stock. NaviSite's
direct costs of acquisition were recorded as a component of the purchase price.
Based on the terms of the acquisition agreement, the value of the CMGI shares
issued were recorded as deferred compensation by NaviSite. The CMGI shares
issued were subject to forfeiture by the ClickHear stockholders based on
employment criteria as well as performance goals. The deferred compensation
component of the consideration initially valued at $4,643,000 was accounted for
on a variable basis at market value at the end of each reporting period, and
was amortized to compensation expense over the eleven-month performance
contingency period. Compensation expense of $1,051,000 and $827,000 was
recognized in fiscal years ended July 31, 2001 and 2000, respectively.

   The acquisition was accounted for using the purchase method, and,
accordingly, the purchase price has been allocated to the assets purchased and
liabilities assumed based upon their fair values at the dates of acquisition.
The results of operations of Clickhear, Inc. have been included in the
Company's consolidated financial statements from the acquisition date.


                                       42
<PAGE>

                                 NAVISITE, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(4) Property and Equipment

<TABLE>
<CAPTION>
                                                               July 31,
                                                           -----------------
                                  Estimated Useful Life      2001     2000
                                -------------------------- --------  -------
                                                            (in thousands)
   <S>                          <C>                        <C>       <C>
   Office furniture and
    equipment..................          5 years           $  5,318  $ 4,335
   Computer equipment..........          3 years             18,178   21,558
   Software licenses........... 3 years or life of license   16,657   11,941
   Leasehold improvements......  4 years or life of lease    45,452   42,101
                                                           --------  -------
                                                             85,605   79,935
   Less: Accumulated
    depreciation
      and amortization.........                             (22,195)  (9,284)
                                                           --------  -------
                                                           $ 63,410  $70,651
                                                           ========  =======
</TABLE>

   The cost and related accumulated amortization of property and equipment held
under capital leases is as follows:

<TABLE>
<CAPTION>
                                                                     July 31,
                                                                   ------------
                                                                   2001  2000
                                                                   ---- -------
                                                                       (in
                                                                    thousands)
   <S>                                                             <C>  <C>
   Cost........................................................... $238 $28,728
   Accumulated depreciation and amortization......................  205   2,719
                                                                   ---- -------
                                                                   $ 33 $26,009
                                                                   ==== =======
</TABLE>

   During fiscal year 2001, the Company wrote-off leasehold improvements of
$2,372,000 related to the closing of two data centers (see Note 11).

(5) Debt to CMGI

   On December 12, 2000, the Company entered into a Note and Warrant Purchase
Agreement the "Agreement") with CMGI. The Agreement provides for the sale of a
subordinated, unsecured, convertible note in the principal amount of
$50,000,000 and a subordinated, unsecured, convertible note in the principal
amount of $30,000,000 (collectively, the "Notes"). The Notes are convertible at
CMGI's option, and by NaviSite under defined circumstances, into NaviSite
common stock, $.01 par value per share ("Common Stock"), at a conversion price
of $5.535 per share. In connection with the Agreement, the Company granted to
CMGI, effective December 15, 2000, two warrants, each totaling 2,601,626 shares
of Common Stock, for a combined total of 5,203,252 shares of Common Stock. The
exercise price for each warrant is $5.77 and $6.92 per share, respectively.
These warrants are exercisable upon issuance and expire on December 15, 2005.
The Company ascribed a fair value, using the Black-Scholes method, to the
warrants of approximately $12.9 million and is amortizing this value over the
life of the Notes as an additional component of interest expense. During fiscal
year 2001, the Company recognized $2,691,000 of expense related to the
amortization of the warrants.

   During the quarter ended January 31, 2001, the Company received gross
proceeds of $80.0 million from the issuance of the Notes. The annual interest
rate of the Notes is 7.5% payable quarterly in, at the Company's discretion,
either cash or Common Stock. In the fourth fiscal quarter of fiscal year 2001,
the Company elected to pay the interest related to the Notes for fiscal year
2001 in the form of 2,789,706 shares of Common Stock. The principal amount of
the Notes is due in full by December 12, 2003.

   In conjunction with the refinancing of certain operating lease obligations,
on October 29, 2001, CMGI has agreed to convert the Notes into shares of
NaviSite common stock (see Note 15).

                                       43
<PAGE>

                                NAVISITE, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   In May 1999, the Company formalized its borrowing arrangement with CMGI and
executed a secured convertible demand note with CMGI dated as of May 1, 1999
(the "Secured Convertible Demand Note"). The Secured Convertible Demand Note
covers advances made by CMGI to the Company for periods commencing in November
1998. Effective June 4, 1999, CMGI elected to convert advances and accrued
interest outstanding at May 31, 1999 in the amount of $14,713,000 into 541,859
shares of Series B Convertible Preferred Stock. Effective October 27, 1999,
CMGI elected to convert advances and accrued interest outstanding at October
21, 1999 in the amount of $12,256,594 into $175,096 shares of Series B
Convertible Preferred Stock. All shares of Series B Convertible Preferred
Stock were converted to Common Stock on October 27, 1999. See also Note 9.

(6) Accrued Expenses

   Accrued expenses consist of the following:

<TABLE>
<CAPTION>
                                                                   July 31,
                                                                ---------------
                                                                 2001    2000
                                                                ------- -------
                                                                (in thousands)
   <S>                                                          <C>     <C>
   Accrued payroll, benefits and commissions................... $ 2,772 $ 6,503
   Accrued accounts payable....................................   3,078   3,099
   Accrued lease payments......................................   6,030   1,696
   Accrued restructuring.......................................   5,236     --
   Accrued equipment costs.....................................     --    9,289
   Other.......................................................   2,183   6,492
                                                                ------- -------
                                                                $19,299 $27,079
                                                                ======= =======
</TABLE>

(7) Commitments and Contingencies

 (a) Leases

   The Company is obligated under various capital and operating leases for
facilities and equipment. CMGI has entered into noncancelable operating and
capital leases on behalf of the Company covering certain of its office
facilities and equipment, which expire through 2007. In addition, until the
Company moved its headquarters in January 2000, the Company paid CMGI for
office facilities used as the Company's headquarters for which it was charged
based upon an allocation of the total costs for the facilities at market
rates. Prior to the Company's IPO substantially all leases for real property
were guaranteed by CMGI. CMGI charges the Company the actual lease fees under
these arrangements. Total rent expense amounted to $50,416,000, $18,509,000
and $5,983,000 for the fiscal years ended July 31, 2001, 2000 and 1999,
respectively.

   On October 29, 2001, the Company renegotiated certain of its operating
lease obligations. See Note 15.

   In June 2000, the Company sold certain equipment and leasehold improvements
in its two new data centers in a sale-leaseback transaction to a bank for
approximately $30.0 million. The Company entered into a capital lease (the
"Capital Lease") for the leaseback of those assets. In January 2001, the
Company paid-off the Capital Lease obligation for approximately $27.0 million.

   During the second quarter of fiscal year 2001, the Company sold certain
equipment in sale-leaseback transactions for a total of approximately $13.9
million. Simultaneously with the sales, the Company entered into operating
leases for the equipment. The leases are payable in monthly installments of
principal and interest totaling approximately $607,000 through December 31,
2002.


                                      44
<PAGE>

                                 NAVISITE, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   Minimum annual rental commitments under operating and capital leases are as
follows as of July 31, 2001:

<TABLE>
<CAPTION>
                                                              Operating Capital
                                                               Leases   Leases
                                                              --------- -------
                                                               (in thousands)
   <S>                                                        <C>       <C>
   2002......................................................  $42,544    $43
   2003......................................................   22,916    --
   2004......................................................    7,539    --
   2005......................................................    5,132    --
   2006......................................................    4,029
   Thereafter................................................    8,289    --
                                                               -------    ---
                                                               $90,449     43
                                                               =======    ---
   Less amounts representing interest........................               1
                                                                          ---
   Present value of future minimum lease payments--current...             $42
                                                                          ===
</TABLE>

   The Company charged $1.9 million to cost of revenue during fiscal 2001
related to remaining operating lease obligations for permanently idle
equipment.

 (b) Legal Matters

   On or about June 13, 2001, Stuart Werman and Lynn McFarlane filed a lawsuit
against the Company, BancBoston Robertson Stephens, Inc., an underwriter of the
Company's initial public offering in October 1999, Joel B. Rosen, the Company's
then Chief Executive Officer, and Kenneth W. Hale, the Company's then Chief
Financial Officer. The suit was filed in the United States District Court for
the Southern District of New York. The suit generally alleges that the
defendants violated federal securities laws by not disclosing certain actions
allegedly taken by Robertson Stephens in connection with the Company's initial
public offering. The suit alleges specifically that Robertson Stephens, in
exchange for the allocation to its customers of shares of the Company's common
stock sold in the Company's initial public offering, solicited and received
from its customers undisclosed commissions on transactions in other securities
and required its customers to purchase additional shares of the Company's
common stock in the aftermarket at pre-determined prices. The suit seeks
unspecified monetary damages and certification of a plaintiff class consisting
of all persons who acquired shares of the Company's common stock between
October 22, 1999 and December 6, 2000.

   On or about June 21, 2001, David Federico filed in the United States
District Court for the Southern District of New York a lawsuit against the
Company, Mr. Rosen, Mr. Hale, FleetBoston Robertson Stephens, Inc. and other
underwriter defendants including J.P. Morgan Chase, First Albany Companies,
Inc., Bank of America Securities, LLC, Bear Stearns & Co., Inc., B.T.
Alex.Brown, Inc., Chase Securities, Inc., CIBC World Markets, Credit Suisse
First Boston Corp., Dain Rauscher, Inc., Deutsche Bank Securities, Inc., The
Goldman Sachs Group, Inc., J.P. Morgan & Co., J.P. Morgan Securities, Lehman
Brothers, Inc., Merrill Lynch, Pierce, Fenner & Smith, Inc., Morgan Stanley
Dean Witter & Co., Robert Fleming, Inc. and Salomon Smith Barney, Inc. The suit
generally alleges that the defendants violated the anti-trust laws and the
federal securities laws by conspiring and agreeing to raise and increase the
compensation received by the underwriter defendants by requiring those who
received allocation of initial public offering stock to agree to purchase
shares of manipulated securities in the after-market of the initial public
offering at escalating price levels designed to inflate the price of the
manipulated stock, thus artificially creating an appearance of demand and high
prices for that stock, and initial public offering stock in general, leading to
further stock offerings. The suit also alleges that the defendants arranged for
the underwriter defendants to receive undisclosed and excessive brokerage
commissions and that, as a consequence, the underwriter defendants successfully
increased investor interest in

                                       45
<PAGE>

                                 NAVISITE, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

the manipulated initial public offering securities and increased the
underwriter defendants' individual and collective underwritings, compensation
and revenues. The suit further alleges that the defendants violated the federal
securities laws by issuing and selling securities pursuant to the initial
public offering without disclosing to investors that the underwriter defendants
in the offering, including the lead underwriters, had solicited and received
excessive and undisclosed commissions from certain investors. The suit seeks
unspecified monetary damages and certification of a plaintiff class consisting
of all persons who acquired shares of the Company's common stock between
October 22, 1999 and June 12, 2001.

   The Company believes that the allegations are without merit and it intends
to vigorously defend against the plantiffs' claims. As the litigation is in an
initial stage, the Company is not able to predict the possible outcome of the
suits and their ultimate effect, if any, on its financial condition.

   The Company is also subject to other legal proceedings and claims which
arise in the ordinary course of its business. In the opinion of management, the
amount of ultimate liability with respect to these actions will not materially
affect the consolidated financial position or results from operations of the
Company.

(8) Income Taxes

   No provision for federal or state income taxes has been recorded as the
Company incurred net operating losses for all periods presented. Prior to the
Company's initial public offering on October 21, 1999, the Company was included
in the federal consolidated group of CMGI. As a result, substantially all of
the federal and state net operating losses incurred prior to the public
offering have been utilized by the parent. After the Company's public offering,
CMGI's ownership in NaviSite fell below 80% and NaviSite is no longer included
in the federal consolidated group of CMGI. Thus, the Company's federal and
state net operating losses can be carried forward to offset its future taxable
income. The Company has recorded a full valuation allowance against its
deferred tax assets since management believes that, after considering all the
available objective evidence, both positive and negative, historical and
prospective, with greater weight given to historical evidence, it is not more
likely than not that these assets will be realized. No income tax benefit has
been recorded for all periods presented because of the valuation allowance.

   Temporary differences between the financial statement carrying and tax bases
of assets and liabilities that give rise to significant portions of deferred
tax assets (liabilities) are comprised of the following:

<TABLE>
<CAPTION>
                                                               2001      2000
                                                             --------  --------
                                                              (in thousands)
                                                             ------------------
   <S>                                                       <C>       <C>
   Deferred tax assets:
     Accruals and reserves.................................. $  5,614  $  1,451
     Loss carryforwards.....................................   86,487    18,279
     Depreciation and amortization..........................    3,390     2,263
                                                             --------  --------
   Total deferred tax asset................................. $ 95,491  $ 21,993
   Less: valuation allowance................................ $(95,491) $(21,993)
                                                             --------  --------
         Net deferred taxes................................. $    --   $    --
                                                             ========  ========
</TABLE>

   Valuation allowance increased by $73.5 million and $21.5 million for the
years ended July 31, 2001 and 2000, respectively. Approximately reported tax
benefits related to $27.8 million of the valuation allowance at July 31, 2001,
will be recorded as an increase to paid-in capital, when realized or
recognized, as it relates to tax benefits from stock-based compensation.

   The Company has net operating loss carryforward for federal tax purposes of
approximately $219.0 million, expiring from 2020 to 2021. The Company also has
state net operating loss carryforwards for

                                       46
<PAGE>

                                 NAVISITE, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

approximately $223.0 million, expiring from 2003 to 2006. The utilization of
these net operating losses may be limited pursuant to Internal Revenue Code
Section 382 as a result of ownership changes.

(9) Stockholders' Equity

 (a) Issuance of Common Stock

   On October 21, 1999, the Company's Registration Statement for an initial
public offering was declared effective. The Company sold 11,000,000 shares of
its Common Stock par value $0.01 per share at $7 per share. On November 18,
1999, the underwriters of the Company's initial public offering exercised their
over-allotment option in full to purchase an additional 1,650,000 shares of
Common Stock at $7 per share. The closing in connection with the exercise of
the over-allotment option was held on November 23, 1999. The Company received
proceeds of approximately $80.4 million, net of offering costs of approximately
$8.2 million from its initial public offering and the subsequent exercise by
the underwriters of the over-allotment option.

   In connection with the closing of the Company's initial public offering on
October 27, 1999, all of the outstanding shares of Series A, Series B, Series C
and Series D convertible preferred stock, par value $0.01 per share, of the
Company automatically converted into 43,244,630 shares of Common Stock.
Immediately following the automatic conversion of all of the Company's
outstanding shares of convertible preferred stock the Company filed an amended
and restated certificate of incorporation. Under the amended and restated
certificate of incorporation, the Company is authorized to issue 150,000,000
shares of Common Stock and 5,000,000 shares of preferred stock, par value $0.01
per share. There currently are no shares of preferred stock issued and
outstanding.

   On June 8, 2000, the Company sold 980,873 shares of its Common Stock to CMGI
for the sum of $49.8 million, net of offering costs, in a private placement
transaction. The number of shares was determined by dividing $50.0 million by
the average of the closing prices per share of the Company's Common Stock as
reported on the Nasdaq National Market System five-day, rounded up to the
nearest whole share.

   On October 29, 2001, CMGI has agreed to convert the $80 million notes
payable and certain other amounts due to CMGI into shares of NaviSite common
stock (Note 15).

 (b) Two-For-One Stock Split

   The consolidated financial statements have been retroactively adjusted to
reflect the two-for-one stock split, effected in the form of a stock dividend
of one share of Common Stock for each share of Common Stock outstanding. The
stock dividend was paid on April 5, 2000 to stockholders of record at the close
of business on March 22, 2000.

 (c) Preferred Stock

   In October 1998, the Company's stockholders authorized 5,000,000 shares of
preferred stock of which 1,323,953 shares have been designated as Series A
Preferred Stock. In May 1999, the Company's Board of Directors designated
1,000,000 shares as Series B Preferred Stock, 1,095,472 shares to be designated
as series C Convertible Preferred Stock ("Series C Preferred Stock") and
993,243 shares to be designated as Series D Convertible Preferred Stock
("Series D Preferred Stock").

Series A Preferred Stock

   In December 1998, the Board of Directors authorized and issued 1,323,953
shares of Series A Preferred Stock in exchange for 8,000,000 shares of Common
Stock and $15,767,600 in principal amount of Debt to

                                       47
<PAGE>

                                 NAVISITE, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

CMGI. The Series A Preferred Stock entitled to receive annual dividends at 7%
commencing November 1, 1998, as and if declared. No cash dividends were
declared or paid by the Company. The Series A Preferred Stock was voting and
convertible into 10 shares of Common Stock subject to certain adjustments. In
October 1999, all of the Series A preferred shares were converted into
13,259,530 shares of Common Stock.

Series B Preferred Stock

   In May 1999, the Board of Directors approved the designation of 1,000,000
shares of the Company's preferred stock as Series B Preferred Stock. Effective
June 4, 1999, CMGI elected to convert the advances and accrued interest
outstanding under the Secured Convertible Demand Note as of January 31, 1999,
April 30 and May 31, 1999, in the aggregate amount of $14,713,000 into 541,859
shares of Series B Preferred Stock. The Series B Preferred Stock was entitled
to received noncumulative annual dividends at 7%, as and if declared. No cash
dividends were declared or paid by the Company. The Series B Preferred Stock
was fully participating, voting and convertible into 10 shares of Common Stock,
subject to certain adjustments. In October 1999, all of the Series B preferred
shares were converted into 5,418,590 shares of Common Stock.

Series C Preferred Stock

   In May 1999, the Board of Directors approved the designation of 1,095,472
shares of the Company's preferred stock as Series C Preferred Stock. The Series
C Preferred Stock was entitled to receive noncumulative annual dividends at 7%,
as and if declared. No cash dividends were declared or paid by the Company. The
Series C Preferred Stock was fully participating, voting and convertible at the
option of the holder into shares of Common Stock at $7.40 per share, subject to
certain adjustments. In June 1999 the Company sold 1,095,422 Series C preferred
shares for $7,997,493, net of issuance costs of $109,000. In October 1999, all
of the Series C preferred shares were converted into 1,095,472 of Common Stock.

Series D Preferred Stock

   In May 1999, the Board of Directors approved the designation of 993,243
shares of the Company's preferred stock as Series D Preferred Stock. The Series
D Preferred Stock was entitled to receive noncumulative annual dividends at 7%,
as and if declared. No cash dividends were declared or paid by the Company. The
Series D Preferred Stock was fully participating, voting and convertible at the
option of the holder into shares of Common Stock at $7.40 per share, subject to
certain adjustments. In June 1999, the Company sold 993,243 Series D preferred
shares for $7,252,000, net of issuance costs of $99,000. In October 1999, all
of the Series D preferred shares were converted into 993,243 of Common Stock.

(10) Stock Option Plans

 (a) 1999 Employee Stock Purchase Plan

   The 1999 Employee Stock Purchase Plan (the "Stock Purchase Plan") was
adopted by the Company's Board of Directors and Stockholders in October 1999.
The Stock Purchase Plan provides for the issuance of a maximum of 100,000
shares of the Company's Common Stock. During fiscal year 2000, 62,671 shares
were issued under this plan.

   On March 2, 2001, an additional 150,000 shares were authorized for issuance
under the Stock Purchase Plan. During fiscal year 2001, 187,189 shares were
issued under this plan.

 (b) Deferred Compensation Plan

   A Deferred Compensation Plan (the "Deferred Compensation Plan") was adopted
by the Company's Board of Directors in October 1999. Under the terms of the
Deferred Compensation Plan, the Company's

                                       48
<PAGE>

                                 NAVISITE, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

employees who are selected by the Board of Directors (as well as certain of the
Company's employees who previously participated in a deferred compensation plan
sponsored by CMGI) will be able to elect to defer a portion of their
compensation for the following calendar year. The Company also may make
discretionary contributions to a participant's account, to which the
participant generally will become entitled after five years of service with the
Company. During 2001 and 2000, no discretionary contributions were made by the
Company.

 (c) 1999 Director Stock Option Plan

   In October 1999, the Company ceased issuing options under the 1998 Director
Plan and the Board of Directors and the Stockholders approved and adopted the
1999 Stock Option Plan for Non-Employee Directors (the "1999 Director Plan"). A
total of 500,000 shares of Common Stock are reserved for issuance under the
1999 Director Plan. Directors who are not NaviSite employees or otherwise
affiliates, employees or designees of an institutional or corporate investor
that owns more than 5% of outstanding Common Stock will be eligible to receive
non-statutory stock options under the 1999 Director Plan. Under the 1999
Director Plan, the Company will grant an initial option to acquire 25,000
shares of Common Stock to each eligible director who is elected a director for
the first time.

   The Company also will grant to eligible directors an additional option for
the purchase of 6,250 shares of Common Stock on the first, and each subsequent,
anniversary of the grant of each director's initial option if the director is
still serving as one of the Company's directors on that anniversary date.

   The Board of Directors has discretion to increase to up to 100,000 shares
the number of shares of Common Stock subject to any initial option or
additional option covering any vesting period of up to 48 months that may be
granted to an eligible director after the date of the increase.

   As of July 31, 2001, 60,000 options were granted and 90,000 options were
outstanding under the 1999 Director Plan with a weighted average exercise price
of $16.79.

 (d) 1998 Director Stock Option Plan

   In December 1998, the Company's Board of Directors and Stockholders approved
the 1998 Director Stock Option Plan (the "1998 Director Plan"). In October 1999
the Company ceased issuing options under the 1998 Director Plan upon the
adoption of the 1999 Director Plan, each NaviSite director (who is not also an
employee of NaviSite, any subsidiary of NaviSite or of CMGI) was entitled to
receive, upon the date of his or her election, a non-statutory option to
purchase Common Stock as defined. A maximum number of 250,000 shares of Common
Stock were authorized for issuance under the 1998 Director Plan. Each automatic
grant had an exercise price equal to the current fair market value of the
Common Stock at the time of grant and a maximum term of ten years, subject to
earlier termination following the optionee's cessation of service on the board
of directors.

   During fiscal 2001, no options were granted and 150,000 options were
outstanding under the 1998 Director Plan with a weighted average exercise price
of $2.45.

 (e) NaviSite 2000 Stock Option Plan

   In November 2000, the Company's Board of Directors approved the 2000 Stock
Option Plan ("the Plan"). Under the Plan, non-qualified stock options or
incentive stock options may be granted to the Company's employees, other than
those who are also officers or directors, and the Company's consultants and
advisors, as defined, up to a maximum number of shares of Common Stock not to
exceed 1,000,000 shares. The Board of Directors administers this plan, selects
the individuals who are eligible to be granted options under the Plan and
determines the number of shares and exercise price of each option. Options
granted under the Plan have a five-year maximum term and typically vest over a
one-year period. The following table reflects activity of stock options under
the Company's Plan for the year ended July 31, 2001:

                                       49
<PAGE>

                                 NAVISITE, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


<TABLE>
<CAPTION>
                                                                    2001
                                                             -------------------
                                                                        Weighted
                                                                        Average
                                                             Number of  Exercise
                                                              Shares     Price
                                                             ---------  --------
      <S>                                                    <C>        <C>
      Options outstanding, beginning of year................      --    $   --
      Granted...............................................  795,560   $8.5625
      Exercised.............................................      --    $   --
      Cancelled............................................. (313,204)  $8.5625
                                                             --------   -------
      Options outstanding, end of year......................  482,356   $8.5625
                                                             ========   =======
      Options exercisable, end of year......................      --    $   --
                                                             ========   =======
      Options available for grant, end of year..............  517,644
                                                             ========
</TABLE>

   As of July 31, 2001, 482,356 options were outstanding under the Plan with a
weighted average exercise price of $8.56.

 (f) NaviSite 1998 Equity Incentive Plan

   In December 1998, the Company's Board of Directors and Stockholders approved
the 1998 Equity Incentive Plan, as amended (the "1998 Plan"). The 1998 plan
replaced NaviSite Internet Services Corporation's 1997 Equity Incentive Plan
(the "1997 Plan"). All options outstanding under the 1997 Plan were cancelled
and replaced with an equivalent amount of options issued in accordance with the
1998 Plan. Under the original 1998 Plan, non-qualified stock options or
incentive stock options may be granted to the Company's or its affiliates'
employees, directors and consultants, as defined, up to a maximum number of
shares of Common Stock not to exceed 5,000,000 shares. In August 1999, the
Board of Directors approved an increase in the number of shares authorized
under the 1998 Plan to 11,124,424. In December 2000, the Board of Directors
approved an additional increase in the number of shares authorized under the
1998 Plan to 15,000,000 shares. The Board of Directors administers this plan,
selects the individuals who are eligible to be granted options under the 1998
Plan and determines the number of shares and exercise price of each option. The
Chief Executive Officer, upon authority, granted by the Board of Directors, is
authorized to approve the grant of options to purchase Common Stock under the
1998 Plan to certain persons. Options are granted at fair market value. Options
granted under the 1998 Plan have a five-year maximum term and typically vest
over a four year period, with 25% of options granted becoming exercisable one
year from the date of grant and the remaining 75% vesting monthly for the next
thirty-six (36) months. The following table reflects activity and historical
exercise prices of stock options under the Company's 1998 Plan for the three
years ended July 31, 2001:

<TABLE>
<CAPTION>
                                 2001                 2000                 1999
                          -------------------- -------------------- --------------------
                                      Weighted             Weighted             Weighted
                                      Average              Average              Average
                          Number of   Exercise Number of   Exercise Number of   Exercise
                            Shares     Price     Shares     Price     Shares     Price
                          ----------  -------- ----------  -------- ----------  --------
<S>                       <C>         <C>      <C>         <C>      <C>         <C>
Options outstanding,
 beginning of year......   8,013,931   $27.79   4,861,324   $ 1.27   3,091,500   $0.08
  Granted...............   6,414,575     6.68   4,936,774    46.01   2,868,458    2.15
  Exercised.............    (527,307)    0.60  (1,219,405)    0.43     (36,638)   0.01
  Cancelled.............  (6,062,805)   19.84    (564,762)   17.88  (1,061,996)   0.23
                          ----------   ------  ----------   ------  ----------   -----
Options outstanding, end
 of year................   7,838,394   $18.40   8,013,931   $27.79   4,861,324   $1.27
                          ==========   ======  ==========   ======  ==========   =====
Options exercisable, end
 of year................   2,977,086   $17.79   1,453,370   $ 1.23   1,281,326   $0.05
                          ==========   ======  ==========   ======  ==========   =====
Options available for
 grant, end of year.....   5,276,218            1,752,412                  --
                          ==========           ==========           ==========
</TABLE>


                                       50
<PAGE>

                                NAVISITE, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   The following table summarizes information about the Company's stock
options outstanding at July 31, 2001:

<TABLE>
<CAPTION>
                       Options Outstanding              Options Exercisable
                -------------------------------------  -----------------------
                               Weighted
                                Average
                               Remaining    Weighted                 Weighted
  Range of                    Contractual   Average                  Average
  Exercise        Number         Life       Exercise     Number      Exercise
   Prices       Outstanding     (years)      Price     Outstanding    Price
  --------      -----------   -----------   --------   -----------   --------
<S>             <C>           <C>           <C>        <C>           <C>
$ 0.01-$3.70     4,633,738       3.75        $ 1.62     1,896,751    $  1.58
$ 3.71-$7.00       458,663       3.28          6.71       210,505       7.00
$ 7.01-$25.00      420,533       4.23         11.50         3,749      23.96
$25.01-$50.00    1,562,172       3.71         43.41       564,705      43.52
$50.01-$75.00      567,725       3.57         66.03       228,692      66.47
$75.01 up          195,563       3.62        120.10        72,684     118.66
                 ---------                              ---------    -------
                 7,838,394                              2,977,086    $ 17.79
                 =========                              =========    =======
</TABLE>

 (g) CMGI 1986 Stock Option Plan

   Certain NaviSite employees have been granted options for the purchase of
CMGI Common Stock under the CMGI 1986 Stock Option Plan (the "1986 Plan").
Options under the 1986 Plan are granted at fair market value on the date of
the grant and are generally exercisable in equal cumulative installments over
a four-to-ten year period beginning one year after the date of grant.
Outstanding options under the 1986 Plan expire through 2007. Under the 1986
Plan, non-qualified stock options or incentive stock options may be granted to
CMGI's or its subsidiaries' employees, as defined. The Board of Directors of
CMGI administers this plan, selects the individuals to whom options will be
granted and determines the number of shares and exercise price of each option.

   The following table reflects activity and historical exercise prices of
stock options granted to Company employees under the 1986 Plan for the three
years ended July 31, 2001. Options held by employees who transferred to
NaviSite from CMGI or CMGI subsidiaries during fiscal year 2001 are shown as
transfers into the 1986 plan.

<TABLE>
<CAPTION>
                                 2001               2000               1999
                          ------------------- ------------------ -----------------
                                     Weighted           Weighted          Weighted
                                     Average   Number   Average  Number   Average
                          Number of  Exercise    of     Exercise   of     Exercise
                           Shares     Price    Shares    Price   Shares    Price
                          ---------  -------- --------  -------- -------  --------
<S>                       <C>        <C>      <C>       <C>      <C>      <C>
Options outstanding,
 beginning of year......   510,923    $27.85   773,538   $19.11  177,680   $ 1.13
  Granted...............       --        --        --       --   663,200    22.10
  Transfers.............    14,615     24.40    36,000    15.81      --       --
  Exercised.............   (48,803)     4.72  (177,280)    4.04  (67,342)    1.12
  Cancelled.............  (127,173)    44.60  (121,335)    3.31      --       --
                          --------    ------  --------   ------  -------   ------
Options outstanding, end
 of year................   349,562    $26.10   510,923   $27.85  773,538   $19.11
                          ========    ======  ========   ======  =======   ======
Options exercisable, end
 of year................   261,090    $31.39   158,106   $27.36   14,000   $ 1.15
                          ========    ======  ========   ======  =======   ======
</TABLE>

                                      51
<PAGE>

                                 NAVISITE, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The following table summarizes information about stock options granted to
Company employees under the 1986 Plan outstanding at July 31, 2001:

<TABLE>
<CAPTION>
                        Options Outstanding              Options Exercisable
                 -------------------------------------  -----------------------
                                Weighted
                                 Average
                                Remaining    Weighted                 Weighted
Range of                       Contractual   Average                  Average
Exercise           Number         Life       Exercise     Number      Exercise
Prices           Outstanding     (years)      Price     Outstanding    Price
--------         -----------   -----------   --------   -----------   --------
<S>              <C>           <C>           <C>        <C>           <C>
$ 1.01--$5.00      209,412        2.12        $ 5.00      136,830      $ 5.00
$ 5.01--$20.00      11,501        2.28        $ 9.42        5,083      $ 9.44
$20.01 up          128,649        2.79        $59.27      119,177      $60.63
                   -------                                -------      ------
                   349,562                                261,090      $31.39
                   =======                                =======      ======
</TABLE>

 (h) Other Stock Option Grants

   During fiscal 2001, the Company granted 20,000 stock options outside of
existing plans to certain directors at an exercise price of $2.00. These stock
options were fully vested and have a contractual life of 10 years.

   SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), sets
forth a fair-value based method of recognizing stock-based compensation
expense. As permitted by SFAS No. 123, the Company has elected to continue to
apply APB No. 25 to account for the stock-based compensation plans in which the
Company's employees participate.

   Had compensation cost for awards in fiscal 2001, 2000 and 1999 under the
stock-based compensation plans in which the Company's employees and directors
participate been determined based on the fair value method set forth under SFAS
123, the pro forma effect on the Company's net loss would have been as follows:

<TABLE>
<CAPTION>
                              Year Ended           Year Ended            Year Ended
                            July 31, 2001         July 31, 2000         July 31, 1999
                         --------------------  --------------------  --------------------
                             As                   As                    As
                          Reported  Pro Forma  Reported   Pro Forma  Reported   Pro Forma
                         ---------- ---------  ---------  ---------  ---------  ---------
<S>                      <C>        <C>        <C>        <C>        <C>        <C>
Net loss applicable to
 common stockholders'
 (in thousands)......... $(122,996) $(163,068) $(57,970)  $(86,269)  $(24,704)  $(26,161)
                         ========== =========  =========  =========  =========  =========
Net loss per share...... $   (2.08) $  (2.76)  $   (1.37) $   (1.50) $   (3.71) $   (3.93)
                         ========== =========  =========  =========  =========  =========
</TABLE>

   The pro forma per share net loss reflects the fair-value compensation cost
associated with option grants to the Company's employees and directors under
the Company's stock based compensation plans and the CMGI 1986 Stock Option
Plan.

   The fair value of each stock option granted under the Company's plans have
been estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions for fiscal 2001, 2000 and
1999, respectively: volatility of 185.1%, 167.5% and 100%; risk-free interest
rate of 4.5%, 6.3% and 5.16%; 2.08 year expected life of options for 2001 and
2.8 for years 2000 and 1999; and 0% dividend yield for all years. The weighted
average fair value per share of options granted during fiscal 2001, 2000 and
1999 was $14.62, $46.24 and $1.35, respectively.

   The fair value of each stock option granted under the CMGI 1986 Plan has
been estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions for fiscal 2001, 2000 and
1999, respectively: volatility of 126.95%, 103.4% and 100%; risk-free interest
rate of 4.19%,

                                       52
<PAGE>

                                 NAVISITE, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

6.28% and 5.16%; expected life of options of 2.91, 3.03 and 4.3 years
respectively; and 0% dividend yield for all years. The weighted average fair
value per share of options granted during fiscal 2001, 2000 and 1999 was
$12.85, $0 and $31.58, respectively.

(11) Restructuring Charge

   During July 2001, the Company announced a plan, approved by its Board of
Directors, to restructure its operations and consolidate data centers, which
resulted in a charge of $8,011,000.

   Of the total restructuring charge, approximately $1,810,000 is related to
employee termination benefits. The Company terminated 126 employees on July 31,
2001 and paid all termination benefits in the first fiscal quarter 2002.

   The restructuring charge also includes approximately $6,201,000 of costs
related to the closing of the Company's original data centers (Scotts Valley,
California and Andover, Massachusetts). The components of the facility closing
costs included $3,829,000 of lease costs and other contractual obligations, to
be paid over the term of the respective agreements through 2002, and $2,372,000
of write-offs of leasehold improvements.

(12) Related Party Transactions

   CMGI has provided the Company with accounting, systems and related services
at amounts that approximated the fair value of services received in each of the
periods presented in these financial statements. The Company also occupied
facilities through January 2000 that are leased by CMGI, whereby CMGI charges
the Company for its share of rent and related facility costs for CMGI's
corporate headquarters through an allocation based upon the company's headcount
located on the premises in relation to total headcount for all CMGI companies
located in the premises. The Company has also purchased certain employee
benefits (including 401(k) plan participation by employees of the Company) and
insurance (including property and casualty insurance) through CMGI. CMGI also
has provided the Company with Internet marketing and business development
services. Amounts due to CMGI totaled approximately $14,821,000 and $5,310,000
as of July 31, 2001 and 2000, respectively. See also Note 15.

   The following table summarizes the expenses allocated to the Company by CMGI
for enterprise services, rent and facilities, human resources and benefits and
Internet marketing and business development:

<TABLE>
<CAPTION>
                                                              Year Ended July
                                                                    31,
                                                             ------------------
                                                              2001   2000  1999
                                                             ------ ------ ----
   <S>                                                       <C>    <C>    <C>
   Enterprise services...................................... $  --  $  315 $240
   Rent and facilities......................................    222    248  251
   Human resources and benefits.............................  3,638  1,507  530
   Internet marketing and business development..............  1,238    585  325
</TABLE>

   The Company sells its products and services to companies in which CMGI has
an investment interest or a significant ownership interest. Total revenue
realized from services to related parties was $36,368,000, $24,893,000 and
$7,058,000 for the fiscal years ended July 31, 2001, 2000 and 1999,
respectively. These related parties typically receive a 10% discount for
services provided by the Company. The related cost of revenue is consistent
with the costs incurred on similar transactions with unrelated parties.

   The Company provides administrative services to CMGI and related entities as
they relate to lease schedules for equipment ordered by NaviSite prior to
October 22, 1999. These lease schedules include equipment leased for both
NaviSite and CMGI, however, the majority of the equipment is used by NaviSite.
As

                                       53
<PAGE>

                                 NAVISITE, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

part of this agreement, CMGI provides administrative services for leases that
include equipment for both NaviSite and CMGI under which CMGI or a related
entity is the majority equipment user. The administrative services include the
payment of the lessor's monthly lease charges. In both cases, the entire
providing the administrative services charges the other for the actual lease
fees, however in all of these cases, CMGI bears all liability for the payment
and NaviSite is not financially obligated under the leases.

(13) Concentration of Credit Risk

   Amounts included in the consolidated balance sheets for accounts receivable,
debt to CMGI, accounts payable, accrued expenses and notes payable approximate
their fair value due to their short maturities. Financial instruments that
potentially subject the Company to concentration of credit risk consist
primarily of trade receivables. The Company performs periodic credit
evaluations of its customers' financial condition and generally does not
require collateral or other security against trade receivable balances;
however, it does maintain an allowance for potential credit losses and such
losses have been within management's expectations.

   For the fiscal year ended July 31, 2001, 35.4% ($36,368,000) of the
Company's revenue was earned from related parties. Four of these related
parties accounted for 24.64%, 17.14%, 15.07%, and 13.57% of revenue earned for
the fiscal year ended July 31, 2001. For the fiscal year ended July 31, 2000,
50% ($24,893,000) of the Company's revenue was earned from related parties.
Three of these related parties accounted for 12.05%, 9.96% and 9.35% of revenue
earned during the fiscal year ended July 31, 2000. For the fiscal year ended
July 31, 1999, 67% ($7,058,000) of the Company's revenue was earned from
related parties. Two of these related parties accounted for 22%, and 16% of
revenue earned for the fiscal year ended July 31, 1999.

(14) Selected Quarterly Financial Data (Unaudited)

   Financial information for interim periods were as follows:

<TABLE>
<CAPTION>
                                         Fiscal Year Ended July 31, 2001
                                       --------------------------------------
                                          Q1        Q2        Q3        Q4
                                       --------  --------  --------  --------
   <S>                                 <C>       <C>       <C>       <C>
   Net revenue........................ $ 26,036  $ 27,698  $ 26,163  $ 22,829
   Gross margin.......................   (6,021)   (6,072)   (6,782)   (7,484)
   Loss before cumulative effect of
    change in accounting principle....  (23,084)  (31,910)  (29,325)  (34,382)
   Cumulative effect of change in
    accounting principle..............      --        --        --     (4,295)
   Net loss...........................  (23,084)  (31,910)  (29,325)  (38,677)
   Net loss per share before
    cumulative effect of change in
    accounting principle..............    (0.39)    (0.54)    (0.50)    (0.57)
   Net loss per share................. $  (0.39) $  (0.54) $  (0.50) $  (0.55)
<CAPTION>
                                         Fiscal Year Ended July 31, 2000
                                       --------------------------------------
                                          Q1        Q2        Q3        Q4
                                       --------  --------  --------  --------
   <S>                                 <C>       <C>       <C>       <C>
   Net revenue........................ $  5,866  $  9,170  $ 14,195  $ 20,532
   Gross margin.......................   (3,203)   (3,152)   (5,966)   (6,412)
   Net loss...........................  (10,551)  (11,442)  (16,430)  (19,547)
   Net loss per share(a)..............    (1.75) $  (0.21) $  (0.29) $  (0.34)
   Per share, pro forma(b)............ $  (0.24)      --        --        --
</TABLE>

                                       54
<PAGE>

                                 NAVISITE, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

--------
(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.
(b) See note 2 (o).

(15) Subsequent Events

   On October 29, 2001, the Company entered into an agreement between CMGI and
Compaq Financial Services ("CFS"), a wholly-owned subsidiary of Compaq Computer
Corporation (a shareholder of CMGI). Under the terms of the agreement, the
Company has agreed to purchase equipment from CFS leased by the Company under
operating lease agreements expiring through 2003 in exchange for a note payable
of approximately $35 million. This note also allows the Company to finance past
due lease payments, the sales tax on the equipment purchase and the outright
purchase of the equipment. Additionally, the Company will receive $20 million
and $10 million in cash from CFS and CMGI, respectively, in exchange for six-
year convertible notes payable. The notes bear interest at 12% and require
payment of interest only for the first three years from the date of issuance.
All interest to CMGI and a portion of the interest payable to CFS in the first
two years may be paid in NaviSite common stock. Principal and interest payments
are due on a straight line basis commencing in year four until maturity on the
sixth anniversary from the issuance date. The convertible notes payable will be
secured by substantially all assets of the Company and cannot be prepaid.

   Holders of the convertible notes payable are entitled to both demand and
"piggyback" registration rights, and CFS is entitled to anti-dilution
protection under certain circumstances. The agreement with CFS also contains
certain restrictive covenants, including but not limited to limitations on the
issuance of additional debt, the sale of equity securities to affiliates and
certain acquisitions and dispositions of assets.

   The principal balances may be converted into NaviSite common stock at the
option of the holders at any time prior to maturity at a conversion rate of
$0.26 per share. CMGI also agreed to convert its $80 million in principal
outstanding under the existing notes payable into approximately 14.5 million
shares of NaviSite common stock. CMGI also agreed to convert approximately
$16.2 million in other amounts due by NaviSite to CMGI into approximately 9.9
million shares of NaviSite common stock. Should CFS convert its notes payable
into the Company's common stock, they would own a controlling interest in
NaviSite.

   During the renegotiations of the equipment lease obligations, the Company
did not make certain scheduled lease payments to certain vendors. The Company's
total remaining lease obligation to these vendors is approximately $57 million.
Of this amount, approximately $27 million was restructured in the CFS
agreement. The Company has been notified by certain other lessors that it is in
default of the respective lease agreements. Remedies under these leases, if the
event of default is not cured, include the demand of all remaining lease
payments under the original lease terms, payment of stipulated loss amounts or
return of the underlying equipment. The Company plans to cure these defaults
within 60 days of closing the CFS agreement.

                                       55
<PAGE>

          INDEPENDENT AUDITORS REPORT ON FINANCIAL STATEMENT SCHEDULE

The Board of Directors and Stockholders
NaviSite, Inc. and Subsidiary:

   Under date of September 25, 2001, except as to note 15, which is as of
October 29, 2001, we reported on the consolidated balance sheets of NaviSite,
Inc. as of July 31, 2001 and 2000 and the related consolidated statements of
operations, changes in stockholders' equity (deficit) and cash flows for each
of the fiscal years in the three-year period ended July 31, 2001, which are
included in the Form 10-K for the year ended July 31, 2001. In connection with
our audits of the aforementioned consolidated financial statements, we also
audited the related consolidated financial statement schedule of Valuation and
Qualifying Accounts in the Form 10-K. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits. In our
opinion, such financial statement schedule when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.

                                          /s/ KPMG LLP

Boston, Massachusetts
September 25, 2001

                                       56
<PAGE>

                                 NAVISITE, INC.

                       VALUATION AND QUALIFYING ACCOUNTS
                For the Year Ended July 31, 2001, 2000 and 1999
                                 (in thousands)

<TABLE>
<CAPTION>
                           Balance at Additions  Deductions
                           Beginning  Charged to    from              Balance at
                            of Year    Expense    Reserve   Other(1) End of Year
                           ---------- ---------- ---------- -------- -----------
<S>                        <C>        <C>        <C>        <C>      <C>
Year ended July 31, 1999:
  Allowance for doubtful
   accounts..............    $    7    $   275    $   (20)    $--      $  262
Year ended July 31, 2000:
  Allowance for doubtful
   accounts..............    $  262    $ 1,069    $  (269)    $158     $1,219
Year ended July 31, 2001:
  Allowance for doubtful
   accounts..............    $1,219    $11,948    $(6,308)    $--      $6,859
</TABLE>

                                       57
<PAGE>

Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.

   None.

                                    PART III

   Certain information required by Part III of this Form 10-K is omitted
because we will file a definitive proxy statement pursuant to Regulation 14A
(the "Proxy Statement") not later than 120 days after the end of the fiscal
year covered by this Form 10-K, and certain information to be included therein
is incorporated herein by reference.

Item 10. Directors and Executive Officers of the Registrant

   The information regarding directors and compliance with Section 16(a) of the
Securities Exchange Act of 1934, as amended, required by Item 10 of this Form
10-K is incorporated herein by reference to our Proxy Statement. The
information regarding executive officers is included in Part I of this Form 10-
K under the section captioned "Election of Directors."

Item 11. Executive Compensation

   The information required by Item 11 of Form 10-K is incorporated herein by
reference to our Proxy Statement under the section captioned "Executive
Compensation and Other Information." The information specified in Item 402 (k)
and (l) of Regulation S-K and set forth in our Proxy Statement is not
incorporated by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

   The information required by Item 12 of Form 10-K is incorporated herein by
reference to our Proxy Statement under the section captioned "Security
Ownership of Certain Beneficial Owners and Management."

Item 13. Certain Relationships and Related Transactions

   The information required by Item 13 of Form 10-K is incorporated herein by
reference to our Proxy Statement under the section captioned "Certain
Relationships and Related Transactions."

                                    PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)(1)List of Financial Statements

   Independent Auditors' Report

   Consolidated Balance Sheets as of July 31, 2001 and 2000

   Consolidated Statements of Operations for the Years Ended July 31, 2001,
   2000 and 1999

   Consolidated Statements of Changes in Stockholders' Equity (Deficit) for
   the Years Ended July 31, 2001, 2000 and 1999

   Consolidated Statements of Cash Flows for the Years Ended July 31, 2001,
   2000 and 1999

   Notes to Consolidated Financial Statement

                                       58
<PAGE>

(a)(2)List of Schedules

   Schedule II--Valuation and Qualifying Accounts for the Years Ended July
   31, 2001, 2000 and 1999

   Independent Auditors Report on Financial Statement Schedule

      All other financial statement schedules not listed have been omitted
   because they are either not required, not applicable, or the information
   has been included elsewhere in the consolidated financial statements or
   notes thereto.

(a)(3)Exhibits

      The Exhibits listed in the Exhibit Index immediately preceding such
   exhibits are filed as part of this Annual Report on Form 10-K.

(b)Reports on Form 8-K

      On June 18, 2001, we filed a Current Report on Form 8-K, dated June 13,
   2001, under Item 5 with respect to a class-action lawsuit filed against
   us.

      On August 15, 2001, we filed a Current Report on Form 8-K, dated June
   21, 2001, under Item 5 with respect to another class-action lawsuit filed
   against us.

      On August 17, 2001, we filed a Current Report on Form 8-K, dated July
   18, 2001, under Items 5 and 7 with respect to the voluntary resignation of
   our then President and Chief Executive Officer, Joel B. Rosen, effective
   July 31, 2001 (publicly announced on July 18, 2001) and the reduction of
   our workforce by 126 full and part-time employees, representing
   approximately 25 percent of our total staff (publicly announced on July
   31, 2001).

                                       59
<PAGE>

                                   SIGNATURES

   Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                          NAVISITE, INC.
October 29, 2001

                                                   /s/ Patricia Gilligan
                                          By: _________________________________
                                                     Patricia Gilligan
                                                  Chief Executive Officer

   Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
in the capacities indicated, on October 29, 2001.

<TABLE>
<CAPTION>
              Signatures                         Title                   Date
              ----------                         -----                   ----

<S>                                    <C>                        <C>
      /s/ Patricia Gilligan            President and Chief         October 29, 2001
______________________________________  Executive Officer
          Patricia Gilligan             (Principal Executive
                                        Officer, Principal
                                        Financial Officer and
                                        Principal Accounting
                                        Officer)

      /s/ David S. Wetherell           Chairman of the Board       October 29, 2001
______________________________________
          David S. Wetherell

       /s/ Craig D. Goldman            Director                    October 29, 2001
______________________________________
           Craig D. Goldman

       /s/ George McMillan             Director                    October 29, 2001
______________________________________
           George McMillan

      /s/ Stephen D.R. Moore           Director                    October 29, 2001
______________________________________
          Stephen D.R. Moore
</TABLE>


                                       60
<PAGE>

                               Index to Exhibits

<TABLE>
<CAPTION>
 Exhibit No.                       Description of Exhibit
 -----------                       ----------------------
 <C>         <S>
  2.1        Asset Assignment Agreement, dated December 28, 1998, among
             NaviSite Internet Services Corporation and the Registrant is
             incorporated herein by reference to the Registant's Registration
             Statement on Form S-1 (File No. 333-83501).

  2.2        Purchase Agreement, dated as of July 1, 1998, among NaviSite
             Internet Services Corporation, Neil Black, in his capacity as
             Managing Member of Servercast Communications, L.L.C. and all of
             the other members of Servercast Communications, L.L.C.
             individually, as named therein is incorporated herein by reference
             to Exhibits to the Registrant's Registration Statement on Form S-1
             (File No. 333-83501).

  2.3        Stock Purchase Agreement, dated as of February 16, 2000, by and
             among CMGI, Inc., ClickHear, Inc., the Stockholders of ClickHear,
             Inc. and the Registrant is incorporated herein by reference to
             Exhibits to the Registrant's Current Report on Form 8-K dated
             February 22, 2000.

  2.4        Inter-Company Agreement, dated February 22, 2000, between CMGI,
             Inc. and the Registrant is incorporated herein by reference to
             Exhibits to the Registrant's Current Report on Form 8-K dated
             February 22, 2000.

  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 period ended October 31, 1999.

  3.2        Amended and Restated By-Laws is incorporated herein by reference
             to Exhibits to the Registrant's Quarterly Report on Form 10-Q for
             the period ended October 31, 1999.

  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 (File No. 333-83501).

  4.2        Series C Convertible Preferred Stock Purchase Agreement, dated as
             of June 3, 1999, by and between Dell USA L.P. and the Registrant
             is incorporated herein by reference to Exhibits to the
             Registrant's Registration Statement on Form S-1 (File No. 333-
             83501).

  4.3        Series D Convertible Preferred Stock Purchase Agreement, dated as
             of June 3, 1999, by and between Microsoft 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).

  4.4        Investor Rights Agreement, dated as of October 27, 1999, by the
             between CMGI, Inc. and the Registrant is incorporated herein by
             reference to Exhibits to the Registrant's Quarterly Report on Form
             10-Q for the period ended October 31, 1999.

 10.1        Net Lease Agreement, dated as of March 20, 1997, by and between
             CMG Information Technologies, Inc. and Borland International,
             Inc., as amended by First Amendment dated June 1, 1998 is
             incorporated herein by reference to Exhibits to the Registrant's
             Registration Statement on Form S-1 (File No. 333-83501).

 10.2        Lease, dated as of March, 1997, by and between William J. Callahan
             and William J. Callahan, Jr., as trustees of Andover Park Realty
             Trust, and CMG Information Services, Inc. is incorporated herein
             by reference to Exhibits to the Registrant's Registration
             Statement on Form S-1 (File No. 333-83501).

 10.3        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).

 10.4        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).
</TABLE>

                                       1
<PAGE>

<TABLE>
 <C>      <S>
 10.5     Term Note in favor of Peter C. Kirwan, Jr., dated July 1, 1998,
          executed by NaviSite Internet Services Corporation is incorporated
          herein by reference to Exhibits to the Registrant's Registration
          Statement on Form S-1 (File No. 333-83501).

 10.6(*)  Bonus Agreement, dated as of July 1, 1998, by and between NaviSite
          Internet Services Corporation and Peter C. Kirwan, Jr. is
          incorporated herein by reference to Exhibits to the Registrant's
          Registration Statement on Form S-1 (File No. 333-83501).

 10.7     Secured Convertible Demand Note issued by the Registrant to CMGI,
          Inc., dated as of May 1, 1999 is incorporated herein by reference to
          Exhibits to the Registrant's Registration Statement on Form S-1 (File
          No. 333-83501).

 10.8     Intellectual Property Security Agreement between the Registrant and
          CMGI, Inc., dated as of May 1, 1999 is incorporated herein by
          reference to Exhibits to the Registrant's Registration Statement on
          Form S-1 (File No. 333-83501).

 10.9     Security Agreement between the Registrant and CMGI, Inc., dated as of
          May 1, 1999 is incorporated herein by reference to Exhibits to the
          Registrant's Registration Statement on Form S-1 (File No. 333-83501).

 10.10(*) 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 period ended October 31, 1999.

 10.11(*) Amended and Restated 1998 Director Stock Option Plan is incorporated
          herein by reference to Exhibits to the Registrant's Quarterly Report
          on Form 10-Q for the period ended October 31, 1999.

 10.12(*) 1999 Employee Stock Purchase Plan is incorporated herein by reference
          to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the
          period ended October 31, 1999.

 10.13(*) 1999 Stock Option Plan for Non-Employee Directors is incorporated
          herein by reference to Exhibits to the Registrant's Quarterly Report
          on Form 10-Q for the period ended October 31, 1999.

 10.14(*) Deferred Compensation Plan is incorporated herein by reference to
          Exhibits to the Registrant's Quarterly Report on Form 10-Q for the
          period ended October 31, 1999.

 10.15    Form of Director Indemnification Agreement, as executed by Directors
          is incorporated herein by reference to Exhibits to the Registrant's
          Quarterly Report on Form 10-Q for the period ended October 31, 1999.

 10.16    Facilities and Administrative Agreement, dated as of October 27,
          1999, between CMGI, Inc. and the Registrant is incorporated herein by
          reference to Exhibits to the Registrant's Quarterly Report on Form
          10-Q for the period ended October 31, 1999.

 10.17    Tax Allocation Agreement, dated as of October 27, 1999, between CMGI,
          Inc. and the Registrant is incorporated herein by reference to
          Exhibits to the Registrant's Quarterly Report on Form 10-Q for the
          period ended October 31, 1999.

 10.18    Standard Form of Agreements, dated as of June 14, 1999, between the
          Registrant, as Owner, and XL Construction, as Design/Builder, for
          NaviSite, Inc. Zanker Road Data Center, San Jose, California is
          incorporated herein by reference to Exhibits to the Registrant's
          Quarterly Report on Form 10-Q for the period ended October 31, 1999.

 10.19    Cost Plus Fee Standard Form of Agreement, dated as of April 12, 1999,
          between the Registrant, as Tenant, and Gilbane Building Company, as
          Construction Manager is incorporated herein by reference to Exhibits
          to the Registrant's Quarterly Report on Form 10-Q for the period
          ended October 31, 1999.

 10.20    Irrevocable Standby Letter of Credit, dated as of December 3, 1999,
          between BankBoston, N.A. and the Registrant is incorporated herein by
          reference to Exhibits to the Registrant's Quarterly Report on Form
          10-Q for the period ended January 31, 2000.
</TABLE>

                                       2
<PAGE>

<TABLE>
 <C>      <S>
 10.21    Security Agreement and Assignment of Account, dated December 3, 1999,
          between BankBoston, N.A. and the Registrant is incorporated herein by
          reference to Exhibits to the Registrant's Quarterly Report on Form
          10-Q for the period ended January 31, 2000.

 10.22(*) Severance Agreement and General Release, dated November 8, 1999, and
          as amended on December 2, 1999, between Barbara Fortier and the
          Registrant is incorporated herein by reference to Exhibits to the
          Registrant's Quarterly Report on Form 10-Q for the period ended
          January 31, 2000.

 10.23    Common Stock Purchase Agreement, dated as of June 8, 2000, by and
          between the Registrant and CMGI, Inc. is incorporated herein by
          reference to Exhibits to the Registrant's Quarterly Report on Form
          10-Q for the period ended April 30, 2000.

 10.24    Amendedment No. 1 to the Investor Rights Agreement, dated as of
          October 27, 1999, by and between CMGI, Inc. and the Registrant is
          incorporated herein by reference to Exhibits to the Registrant's
          Quarterly Report on Form 10-Q for the period ended April 30, 2000.

 10.25    Master Equipment Lease Agreement No. 35076, dated as of May 26, 2000,
          by and between the Registrant and Fleet Capital Corporation, along
          with the related schedules and transaction documents is incorporated
          herein by reference to Exhibits to the Registrant's Quarterly Report
          on Form 10-Q for the period ended April 30, 2000.

 10.26(*) Separation Agreement and General Release, dated as of July 18, 2000,
          by and between Robert B. Eisenberg and the Registrant is incorporated
          herein by reference to Exhibits to the Registrant's Annual Report on
          Form 10-K for the year ended July 31, 2000.

 10.27    Waiver and Second Amendment to Lease Schedule No. 35076-00002 to
          Master Equipment Lease Agreement No. 35076, dated as of December 8,
          2000, by and between the Registrant and Fleet Capital Corporation is
          incorporated herein by reference to Exhibits to the Registrant's
          Quarterly Report on Form 10-Q for the period ended October 31, 2000.

 10.28    Cash Collateral Agreement, dated as of December 11, 2000, by and
          between the Registrant and Fleet Capital Corporation is incorporated
          herein by reference to Exhibits to the Registrant's Quarterly Report
          on Form 10-Q for the period ended October 31, 2000.

 10.29    Note and Warrant Purchase Agreement, dated as of December 12, 2000,
          by and between the Registrant and CMGI, Inc. is incorporated herein
          by reference to Exhibits to the Registrant's Quarterly Report on Form
          10-Q for the period ended October 31, 2000.

 10.30    7.5% Convertible Subordinated Note due December 12, 2003 issued by
          the Registrant to CMGI, Inc., dated as of December 12, 2000, is
          incorporated herein by reference to Exhibits to the Registrant's
          Quarterly Report on Form 10-Q for the period ended October 31, 2000.

 10.31    Form of 7.5% Convertible Subordinated Note due December 12, 2003,
          issued by the Registrant to CMGI, Inc. is incorporated herein by
          reference to Exhibits to the Registrant's Quarterly Report on Form
          10-Q for the period ended October 31, 2000.

 10.32    Form of Common Stock Warrant No. 1 issued by the Registrant to CMGI,
          Inc., dated as of December 15, 2000 is incorporated herein by
          reference to Exhibits to the Registrant's Quarterly Report on Form
          10-Q for the period ended October 31, 2000.

 10.33    Form of Common Stock Warrant No. 2 issued by the Registrant to CMGI,
          Inc., dated as of December 15, 2000, is incorporated herein by
          reference to Exhibits to the Registrant's Quarterly Report on Form
          10-Q for the period ended October 31, 2000.

 10.34    Amendment No. 2 to the Investor Rights Agreement, dated as of October
          27, 1999 and first amended on June 8, 2000, by and between the
          Registrant and CMGI, Inc. is incorporated herein by reference to
          Exhibits to the Registrant's Quarterly Report on Form 10-Q for the
          period ended October 31, 2000.
</TABLE>

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<PAGE>

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 10.35    Subordination Agreement, dated as of December 12, 2000, by and
          between the Registrant and CMGI, Inc. is incorporated herein by
          reference to Exhibits to the Registrant's Quarterly Report on Form
          10-Q for the period ended October 31, 2000.

 10.36    Common Stock Warrant No. 1, dated as of December 15, 2000, issued by
          the Registrant to CMGI, Inc. is incorporated herein by reference to
          Exhibits to the Registrant's Quarterly Report on Form 10-Q for the
          period ended January 31, 2001.

 10.37    Common Stock Warrant No. 2, dated as of December 15, 2000, issued by
          the Registrant to CMGI, Inc. is incorporated herein by reference to
          Exhibits to the Registrant's Quarterly Report on Form 10-Q for the
          period ended January 31, 2001.

 10.38    7.5% Convertible Subordinated Note due December 12, 2003, dated as of
          January 24, 2001, issued by the Registrant to CMGI, Inc. is
          incorporated herein by reference to Exhibits to the Registrant's
          Quarterly Report on Form 10-Q for the period ended January 31, 2001.

 10.39    Non-Competition Agreement, dated as of January 18, 2001, by and
          between the Registrant and John B. Muleta is incorporated herein by
          reference to Exhibits to the Registrant's Quarterly Report on Form
          10-Q for the period ended January 31, 2001.

 10.40    Security Agreement and Assignment of Account, dated as of January 30,
          2001, between the Registrant and Fleet National Bank is incorporated
          herein by reference to Exhibits to the Registrant's Quarterly Report
          on Form 10-Q for the period ended January 31, 2001.

 10.41    Security Agreement and Assignment of Account, dated as of February 7,
          2001, between the Registrant and Fleet National Bank is incorporated
          herein by reference to Exhibits to the Registrant's Quarterly Report
          on Form 10-Q for the period ended January 31, 2001.

 10.42    Amended and Restated Director Indemnification Agreement, dated
          February 23, 2001, by and between the Registrant and James F. Moore,
          Ph.D. is incorporated herein by reference to Exhibits to the
          Registrant's Quarterly Report on Form 10-Q for the period ended April
          30, 2001.

 10.43    Amended and Restated Director Indemnification Agreement, dated
          February 23, 2001, by and between the Registrant and Stephen D.R.
          Moore is incorporated herein by reference to Exhibits to the
          Registrant's Quarterly Report on Form 10-Q for the period April 30,
          2001.

 10.44(*) Non-Statutory Stock Option Agreement, dated February 23, 2001, by and
          between the Registrant and James F. Moore, Ph.D. is incorporated
          herein by reference to Exhibits to the Registrant's Quarterly Report
          on Form 10-Q for the period ended April 30, 2001.

 10.45(*) Non-Statutory Stock Option Agreement, dated February 23, 2001, by and
          between the Registrant and Stephen D.R. Moore is incorporated herein
          by reference to Exhibits to the Registrant's Quarterly Report on Form
          10-Q for the period ended April 30, 2001.

 10.46(*) Form of Executive Retention Agreement by and between the Registrant
          and each of Patricia Gilligan, Kenneth Hale, Kevin Lo, Jill Maunder,
          John Muleta, Scott Semel, James Sherman and Joel Rosen is
          incorporated herein by reference to Exhibits to the Registrant's
          Quarterly Report on Form 10-Q for the period ended April 30, 2001.

 10.47    Form of Indemnification Agreement by and between the Registrant and
          each of Patricia Gilligan, Kenneth Hale, Kevin Lo, John Muleta and
          Scott Semel is incorporated herein by reference to Exhibits to the
          Registrant's Quarterly Report on Form 10-Q for the period ended April
          30, 2001.

 10.48    Form of Amended and Restated Director Indemnification Agreement by
          and between the Registrant and each of Craig Goldman, Andrew
          Hajducky, Joel Rosen and David Wetherell is incorporated herein by
          reference to Exhibits to the Registrant's Quarterly Report on Form
          10-Q for the period ended April 30, 2001.
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                                       4
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<TABLE>
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 10.49(*) Form of Executive Non-Statutory Stock Option Agreement by and between
          the Registrant and each of Patricia Gilligan, Kenneth Hale, Kevin Lo,
          Jill Maunder, John Muleta, Scott Semel, James Sherman and Joel Rosen
          is incorporated herein by reference to Exhibits to the Registrant's
          Quarterly Report on Form 10-Q for the period ended April 30, 2001.

 10.59(*) Letter Agreement by and between Patricia Gilligan and the Registrant,
          dated as of July 17, 2001.

 10.60    Transaction Agreement by and among CMGI, Inc., AltaVista Company,
          Compaq Computer Corporation, Compaq Financial Services Corporation,
          Compaq Financial Services Company, Compaq Financial Services Canada
          Corporation and the Registrant, dated as of October 29, 2001.

 10.61    Note Purchase Agreement by and among Compaq Financial Services
          Corporation, CMGI, Inc. and the Registrant, dated as of October 29,
          2001, with Form of Initial Note, Form of Guarantee and Security
          Agreement and Form of Amendment to and Restatement of the Investor
          Rights Agreement attached as exhibits thereto.

 21.1     Subsidiaries of the Registrant.

 23.1     Consent of KPMG LLP.
</TABLE>
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(*) Management contract or compensatory plan or arrangement required to be
    filed as an Exhibit to this Annual Report on Form 10-K.

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