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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

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

Commission file number: 000-27597

NaviSite, Inc.

(Registrant’s telephone number, including area code)

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

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

    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 þ         No o

    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.    o

    Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes o         No þ

     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 $7,570,739, based on the last reported sale price of the registrant’s common stock on the Nasdaq SmallCap Market as of the close of business on January 31, 2003.

     As of October 15, 2003, there were 24,691,476 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, 2003, 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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NAVISITE, INC.

2003 ANNUAL REPORT

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PART I

SPECIAL NOTE

      All share numbers and share prices provided in this Annual Report on Form 10-K have been adjusted to reflect the 1-for-15 reverse stock split of NaviSite’s common stock effected on January 7, 2003.

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. Investors are warned that actual results may differ materially from management’s expectations. We undertake no obligation to publicly reissue or update these forward-looking statements to reflect events or circumstances that arise after the date hereof.

Company Overview

      NaviSite, Inc. provides outsourced hosting and managed application services for mid-sized enterprises, divisions of large multi-national companies, government agencies and other businesses conducting mission critical business on the Internet. Our goal is to help customers focus on their core competencies by outsourcing the hosting and management of their operations and applications, allowing customers to improve the efficiency of their operations. Our focus on Managed Application Services (A-Services), Managed Infrastructure Services (I-Services) and Managed Messaging Services (M-Services) allows us to meet the expanding needs of our customers as their applications become more complex.

      NaviSite operates 14 data centers in the United States and one data center in the United Kingdom. We combine a highly scalable and developed infrastructure with expertise, experience, intellectual property, software platforms, processes and procedures for delivering simple to complex hosting and application management services. We provide a combination of high availability infrastructure, high performance monitoring systems, and proactive problem resolution and change management processes designed to recognize patterns and identify and address potentially crippling problems before they are able to cause downtime in customers’ operations. The price for our services varies from customer to customer based on the number of managed servers and the nature, extent and level of services provided. Customers typically enter into agreements with a term of one to three years and monthly payment installments.

      We derive our revenue primarily from hosting services comprised of a variety of service offerings, including providing related professional and consulting services, to mid-sized enterprises, divisions of large multi-national companies, government agencies and other businesses. These hosting services include:

	•	Managed Application Services (A-Services): An advanced portfolio of collaborative application monitoring and management services, managed hosting services and application development services;
	•	Managed Infrastructure Services (I-Services): A set of infrastructure services consisting of co-location hosting, bandwidth, connectivity, content distribution networks and electronic software delivery services; and
	•	Managed Messaging Services (M-Services): A suite of outsourced and managed messaging applications built on Lotus Domino and Microsoft Exchange software, including fully-managed Domino applications and email messaging services.

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      NaviSite was started in 1996 within CMGI, Inc., its former majority stockholder, to support the networks and host Web sites of CMGI, its subsidiaries and certain of its affiliated companies. In 1997, we began offering and supplying Web site hosting and management services to companies not affiliated with CMGI. NaviSite was incorporated in Delaware in December 1998. In October 1999, NaviSite completed its initial public offering of common stock and remained a majority-owned subsidiary of CMGI until September 11, 2002. On September 11, 2002, ClearBlue Technologies, Inc. and its subsidiaries became NaviSite’s majority stockholder upon its acquisition from CMGI and Hewlett-Packard Financial Services Company of all of their shares of NaviSite common stock, warrants to purchase NaviSite common stock and convertible promissory notes issued by NaviSite. In August 2003, Atlantic Investors, LLC, the indirect majority stockholder of ClearBlue Technologies, Inc., and its subsidiaries, became our majority stockholder upon ClearBlue Technologies, Inc.’s transfer of its stock ownership interests in NaviSite to its stockholders. Since January 31, 2000, our corporate headquarters have been located at 400 Minuteman Road, Andover, Massachusetts. A description of NaviSite’s recent developments through merger and acquisition activities is set forth in Note 6 of the Notes to the Consolidated Financial Statements included in Item 8 below and is incorporated herein by reference.

Fiscal Year 2003 Events and Developments

      There have been a number of internal and external events and developments which impacted NaviSite during and subsequent to fiscal 2003. Some of the significant events and developments included:

	•	On September 11, 2002, each of CMGI and Hewlett-Packard Financial Services Company sold and transferred to ClearBlue Technologies, Inc., a privately-held managed service provider based in San Francisco, California, and certain subsidiaries, the following equity and debt interests in NaviSite, thus becoming NaviSite’s majority stockholder:

	•	Pursuant to a Note and Stock Purchase Agreement by and between CMGI and ClearBlue Technologies, Inc., CMGI sold and transferred to ClearBlue Technologies, Inc. approximately 4.7 million shares of NaviSite common stock, representing approximately 76% of the outstanding capital stock of NaviSite, warrants to purchase approximately 347,000 shares of NaviSite common stock and a convertible note with an aggregate principal amount outstanding of $10 million. The $10 million convertible note was convertible into approximately 2.5 million shares of NaviSite common stock.
	•	Pursuant to a Note and Stock Purchase Agreement by and between Hewlett-Packard Financial Services Company and ClearBlue Technologies, Inc., Hewlett-Packard Financial Services Company sold and transferred to ClearBlue Technologies, Inc. approximately 213,000 shares of NaviSite common stock, and a convertible note with an aggregate principal amount outstanding of approximately $55 million. The $55 million convertible notes were convertible into approximately 14.1 million shares of NaviSite common stock.

	•	In connection with: (i) an Assignment Agreement dated October 8, 2002 among NaviSite and Fir Tree Recovery Master Fund, LP and Fir Tree Value Partners, LDC; and (ii) a series of open market transactions from certain other third-party holders, NaviSite acquired for $2.0 million approximately $36.4 million face value, 10% convertible senior notes due in 2006 of Interliant, Inc., a provider of managed services which filed a petition under Chapter 11 of Title 11 of the United States Bankruptcy Code (the “Bankruptcy Code”).
	•	On December 12, 2002, ClearBlue Finance, Inc., a wholly-owned subsidiary of ClearBlue Technologies, Inc.: (i) converted in full the $10 million note formerly held by CMGI; and (ii) converted $10 million of the $55 million notes formerly held by Hewlett-Packard Financial Services Company, including interest and pre-paid interest, into an aggregate of approximately 5,587,000 shares of common stock. A new convertible promissory note was issued to ClearBlue Finance, Inc. with respect to the portion of the outstanding principal and interest due under the promissory note formerly held by Hewlett-Packard Financial Services Company that was not converted (approximately $45.0 million).

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		In addition, ClearBlue Finance, Inc. waived all interest for the period from December 15, 2002 through December 31, 2003 resulting from the unconverted promissory note.
	•	On December 31, 2002, NaviSite completed the acquisition of all of the issued and outstanding stock of ClearBlue Technologies Management, Inc., a wholly-owned subsidiary of ClearBlue Technologies, Inc., which, in June 2002, acquired certain assets from the bankrupt estate of AppliedTheory, Inc., a provider of complex hosting and application management services, in exchange for approximately 568,000 shares of NaviSite common stock.
	•	Beginning January 1, 2003, NaviSite agreed to provide certain management services as well as manage the day-to-day operations of data centers owned, directly or indirectly, by ClearBlue Technologies, Inc. pursuant to an Outsourcing Agreement with ClearBlue Technologies, Inc. In connection with the Outsourcing Agreement, NaviSite issued to ClearBlue Technologies, Inc. a promissory note pursuant to which NaviSite may borrow amounts from ClearBlue Technologies, Inc. for working capital needs. In addition, ClearBlue Technologies, Inc. issued to NaviSite a promissory note pursuant to which ClearBlue Technologies, Inc. may borrow amounts from NaviSite for working capital needs. The two notes may be drawn down upon, at the sole discretion of the lender, up to a maximum aggregate amount of $2.0 million per promissory note.
	•	On January 29, 2003, NaviSite entered into a $10 million Loan and Security Agreement with Atlantic Investors, LLC, an affiliate of ClearBlue Technologies, Inc. The loan agreement has a termination date of February 1, 2004 and bears interest at the rate of 8% per annum. Under the loan agreement, NaviSite can require Atlantic Investors, LLC to make a loan to it: (i) up to $2.0 million to repay an amount due from ClearBlue Technologies Management, Inc. to Unicorn Worldwide Holdings Limited, each a related party of NaviSite and Atlantic Investors, LLC; (ii) $1.0 million for costs associated with our acquisition of Avasta, Inc.; and (iii) up to $500,000 for the post-acquisition working capital needs of Avasta, Inc. Atlantic Investors, LLC, at its sole and absolute discretion, may advance other amounts to NaviSite such that the aggregate amount borrowed by NaviSite does not exceed the maximum loan amount, defined as the lesser of $10.0 million or 65% of consolidated NaviSite accounts receivables. The loan is secured by all of NaviSite’s accounts receivables.
	•	On February 5, 2003, NaviSite acquired Avasta, Inc., a provider of remote hosting and managed service operations located in San Francisco, California, for approximately 231,000 shares of NaviSite common stock. The acquisition was made to enhance NaviSite’s ability to be a full-service provider of applications management services and technology to its customers. An additional 179,353 shares of our common stock were issued to the former stockholders of Avasta, Inc. in September 2003 as an earnout payment.
	•	On February 19, 2003, the Board of Directors elected Arthur P. Becker, a member of NaviSite’s Board of Directors and an officer and director of ClearBlue Technologies, Inc., as NaviSite’s Chief Executive Officer and President, effective as of February 21, 2003, to succeed Patricia Gilligan.
	•	On April 2, 2003, NaviSite completed the acquisition of Conxion Corporation, a provider of software distribution services and network/server security expertise. The shareholders of Conxion received an aggregate of $1,925,000 in cash.
	•	On May 16, 2003, NaviSite, through a wholly-owned subsidiary, completed the acquisition of substantially all of the assets, other than certain accounts receivable, relating to the managed infrastructure solutions business, encompassing messaging and collaboration, managed hosting, bundled-in managed security, and integrated and related professional services in the United States and in Europe, of Interliant, Inc. and several of its subsidiaries (the “Interliant Assets”). The aggregate purchase price for the Interliant Assets was approximately $7.2 million, subject to certain net worth adjustments, comprised of approximately $5.8 million in cash, $624,000 in the form of a credit of future distributions to be paid on certain promissory notes of Interliant held by NaviSite, $550,000 in principal amount of a non-interest bearing promissory note due December 2003, and approximately $200,000 in acquisition-related costs. As part of the transaction, the NaviSite subsidiary agreed to

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		assume up to $5,766,000 in liabilities relating to the Interliant Assets. On June 6, 2003, NaviSite acquired certain accounts receivable of Interliant and its subsidiaries.
	•	On May 27, 2003, NaviSite entered into an Accounts Receivable Financing Agreement with Silicon Valley Bank whereunder NaviSite may borrow up to a maximum of $10.0 million based on eligible accounts receivables. As part of the Financing Agreement, on May 27, 2003, NaviSite issued warrants to Silicon Valley Bank to purchase up to 165,000 shares of NaviSite common stock with an exercise price of $2.50, which was the trading price of our common stock on this date.
	•	On June 16, 2003, NaviSite repaid approximately $3.9 million of the $45.0 million of outstanding debt payable to ClearBlue Finance, Inc. by offsetting amounts due to us by ClearBlue Technologies, Inc. On June 17, 2003, NaviSite received written notice from ClearBlue Finance, Inc. stating its election to convert the remaining approximately $41.2 million of the promissory note into 10,559,248 shares of common stock effective June 19, 2003.
	•	On August 8, 2003, NaviSite completed the acquisition of certain assets and the assumption of certain liabilities of ClearBlue Technologies, Inc. pursuant to a Stock and Asset Acquisition Agreement (the “CBT Agreement”). Pursuant to the CBT Agreement, NaviSite acquired all outstanding shares of six (6) wholly-owned subsidiaries of ClearBlue Technologies, Inc. with data centers located in Chicago, Las Vegas, Los Angeles, Milwaukee, Oakbrook and Vienna.

In addition, NaviSite assumed the revenue and expense, as of the date of the CBT Agreement, of four (4) additional wholly-owned subsidiaries of ClearBlue Technologies, Inc. with data centers located in Dallas, New York, San Francisco and Santa Clara. Ownership of these subsidiaries will automatically be transferred, under certain conditions, to NaviSite for no additional consideration in February 2004.

In exchange for these subsidiaries and certain assets and contracts relating to them, NaviSite: (i) issued 1.1 million shares of NaviSite common stock, to ClearBlue Technologies, Inc.; (ii) released ClearBlue Technologies, Inc. from certain inter-company advances in an amount up to $300,000; (iii) assumed all of ClearBlue Technologies, Inc.’s obligations under certain assets and contracts relating to the these subsidiaries; and (iv) released ClearBlue Technologies, Inc. from certain payment obligations owed to NaviSite pursuant to the Outsourcing Agreement in an amount not to exceed $263,000.

	•	The audit report on our fiscal year 2003 consolidated financial statements from KPMG LLP, our independent auditors, contains an explanatory paragraph that states that our recurring losses since inception and accumulated deficit, as well as other factors, raise substantial doubt about our ability to continue as a going concern. During fiscal year 2003 and thereafter, we have undergone a significant transition, including all of the acquisitions discussed above and a balance sheet restructuring, to position ourselves among the leaders in the hosting and managed application services market. While we cannot assure you that we will continue as a going concern, as part of our transition efforts, we believe that we have developed and are implementing an operational plan that will bring costs more in line with projected revenue growth.

Industry Background

      The dramatic growth in Internet usage and Internet enabled applications combined with enhanced functionality, accessibility and security, has made the Internet increasingly attractive to businesses as a medium for communication and commerce. Businesses are now deploying Internet applications on a large scale, to enhance their core business operations, and such applications have become mission critical. Such applications now go well beyond Web sites and e-commerce applications into core enterprise applications such as financial, enterprise resource management (ERP), supply chain management (SCM) and customer relationship management (CRM) applications.

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      As business use of the Internet increases, we believe that businesses utilizing the Internet are seeking, and will continue to seek, to identify and implement increasingly sophisticated Internet enabled applications. These applications permit businesses to:

	•	increase operating efficiencies and reduce sales, general and administrative costs;
	•	build and enhance customer relationships by providing Internet-based customer service and technical support;
	•	manage vendor and supplier relationships through Internet-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-enabled applications has created a strong underlying demand for specialized information technology support and application expertise. Many businesses using the Internet as part of their business strategies have chosen to outsource the hosting and management of these enterprise applications.

      The outsourced hosting and management services of Internet-enabled applications are driven by a number of factors, including:

	•	the need to improve the reliability, availability and overall performance of Internet-enabled applications as those applications increase in importance and complexity;
	•	the need to focus on core competitively differentiating activities and not complex IT management activities;
	•	challenges and costs faced by businesses in hiring, training and retaining application engineers and information technology employees with the requisite range of IT expertise; and
	•	increasing complexity of managing the operations of Internet-enabled applications.

Strategy

      Enhancing stockholder value through growth, obtaining and sustaining profitability and market leadership is our continued objective. We intend to pursue growth through expanding our customer base, establishing relationships with new strategic partners and augmenting penetration within our established customers, and through the potential acquisition of companies. Our strategic objective is to build a leadership position with mid-sized enterprises, divisions of large multi-national companies, government agencies and other businesses conducting mission critical business on the Internet. We believe this can be accomplished by providing an integrated set of business process outsourcing solutions for target customers. We believe traditional outsourcers cannot serve these customers profitably. NaviSite believes it can profitably customize services for these customers. Key elements of our strategy include:

	Leverage Existing Operating Platform Through Potential Acquisitions. We intend to leverage our existing operating platform through the acquisition of companies serving mid-sized enterprises, divisions of large multi-national companies and government agencies. By acquiring companies with a low cost basis, we can leverage fixed costs and improve margins by servicing more customers with minimal additional administrative and fixed costs.
	Deepen our Relationships With Existing Customers by Adding New Service Capabilities. We plan to increase our services portfolio so that we can service our customers as the single point of management across solutions. Acquisitions, such as Avasta, Conxion and the Interliant Assets, have provided us with strategically important capabilities, such as application management, content delivery and managed messaging. New service capabilities will allow us to further penetrate existing client relationships and increase sales.

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	Build Partnerships with Key System Integrators and Independent Software Vendors. We plan to partner with key system integrators to deliver value across the full lifecycle of each software solution. This allows systems integrators to improve their competitive position and revenue opportunities by presenting their customers with a hosted and managed solution that meets their customers’ exact requirements. We also plan to partner with independent software vendors in order to allow them to quickly create and deploy their application software as a service in order to meet demand from end-users for subscription-based application services.
	Continue Driving Improvements in Industry-Leading Operational Metrics. NaviSite plans to continue driving improvements in its operating metrics and corresponding improvements in the quality of its customer service. NaviSite believes it 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.

The NaviSite Solution

      NaviSite provides a range of application, infrastructure and messaging services that can be deployed in a cost-effective and rapid manner. We specialize in developing, deploying and managing dedicated mission-critical Internet-based solutions for our customers. We serve as the single point of management for our customers’ outsourced business applications and our focus on management of customer business computing infrastructure allows us to meet an expanding set of customer needs as customers’ applications become more complex. Further, we provide our services across Unix, Windows, and Linux platforms and in highly secure, highly available and redundant environments.

      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 application hosting and management services on a cost-effective basis. NaviSite has already deployed state-of-the-art infrastructure from the industry’s leading providers, and, therefore, our customers can immediately leverage equipment and services that would typically not be cost effective for them to purchase and deploy themselves. In addition, 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 outsourcing these resources and time-intensive Internet-enabled applications, we allow our customers to focus on their core businesses. 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.

      Our infrastructure and technology have been built by integrating “best of breed” components and have been designed specifically to meet the more demanding technical requirements of providing managed application hosting. Our high-performance infrastructure, together with our trained and experienced staff, enables us to offer levels of service that are backed by high service level guarantees.

      Network Operations Centers. We monitor the operations of our infrastructure and customer Internet applications from our own state-of-the-art network operations centers. Our primary network operations center in Andover, Massachusetts is staffed 24 hours per day, seven days per week with Network, Security, Windows NT, Linux and UNIX personnel. We run a fully operational real-time backup network operations center in San Jose, California. Our network operations centers perform first-level problem identification, validation 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.

      Data Centers. We currently serve customers from 14 data centers located in the United States and one data center located in the United Kingdom. These data centers incorporate technically sophisticated

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      Internet Connectivity. Our use of direct private transit Internet connections to major Internet backbone providers differentiates our network infrastructure from those of our competitors. We have redundant high-capacity Internet connections to Level3, InterNap and Wiltel on the east coast and Level3, XO Communications and Wiltel on the west coast. We have deployed direct private transit Internet connections to utilize the provider’s peering capabilities and to enhance routes via their networks to improve global performance. Our private transit system enables us to provide fast, reliable access for our customers’ Internet-based applications.

      In fiscal 2003, NaviSite expanded its service offerings and its customer base. NaviSite’s acquisitions of ClearBlue Technologies Management, Inc., Avasta, Conxion, the Interliant Assets and, subsequent to the end of fiscal 2003, the data centers owned by ClearBlue Technologies, Inc. provided NaviSite with an increase in, and significant diversification of, its customer base from approximately 145 to over 800 and the ability to increase and improve its suite of service offerings to its new and existing customers. The universe of offerings is provided to customers a la carte, enabling customers to design configurations to meet their particular needs for availability, security and performance. NaviSite also has developed a number of “ready made”, yet customizable, configurations that are based on best practices and on field-proven architectures. The services provided to NaviSite’s customers range from simple co-location to application managed services.

      NaviSite’s services consist of:

	•	Managed Application Services (A-Services);
	•	Managed Infrastructure Services (I-Services); and
	•	Managed Messaging Services (M-Services).

              A-Services

      A-Services consist of:

	•	Application Development;
	•	Application Hosting; and
	•	Collaborative Application Management Platform.

      Application Development — These services combine NaviSite’s skill and experience in designing attractive and effective Web brands and interfaces. NaviSite’s tailored Web site workflow systems improve timeliness of Web site content, empower multiple content administrators and improve Web site control. NaviSite customizes back-end and user interface designs to enable the customer to share Web-based information.

      Application Hosting — NaviSite provides fully managed hosting for mid-sized enterprises, divisions of large multi-national companies, government agencies and other businesses conducting mission-critical business on the Internet. NaviSite manages data centers, Internet connectivity, servers and networking, security (including firewall, virtual private networks and intrusion detection), storage, load balancers, database clusters and operating system and Web and application servers. NaviSite also provides more advanced management services for leading databases and applications. Most application hosting services are available in one of NaviSite’s data centers or via remote management on a customer’s own premises.

      Collaborative Application Management (CAM) — The CAM platform enables NaviSite, IT teams and systems integrator partners to work together to provide seamless, integrated application management to end

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	•	NaviSite Event Detection System — This NaviSite custom-developed technology allows NaviSite’s operations personnel to efficiently process alerts across heterogeneous environments. This system collects and aggregates data from all of the major enterprise systems management software packages utilized by an IT organization.
	•	Synthetic Transaction Monitoring — These NaviSite-developed synthetic transaction methods emulate the end-user experience and monitor for application latency or malfunctions that affect user productivity.
	•	Automated Remediation — NaviSite automatically applies domain expertise to address predicted issues raised by automated monitoring. These automated fixes help ensure availability and reliability by remediating known issues in real time, keeping applications up and running while underlying problems or potential problems are diagnosed.
	•	Component Information Manager — This central repository for network, database, application and device information allows NaviSite to consolidate, present and track disparate sources of critical system device information in a unified view.
	•	Escalation Manager — This unique workflow automation technology allows NaviSite to streamline routine tasks and escalate critical issues in a fraction of the time that manual procedures require. Escalation Manager initiates specific orders and tasks based on pre-defined conditions, ensuring clear, consistent communications between NaviSite and its customers.

      An integral part of CAM is its customer portal that provides customers with a real-time view into systems and application operations, including access to metrics and reports, incidents, service requests, customer knowledge base, standard remediation procedures and change control management. This portal provides NaviSite’s customers with the transparency and control that customers and strategic partners rely on to manage critical systems and applications.

      I-Services consist of NaviSite’s infrastructure services, which provide the building blocks for all Internet-enabled services. I-Services consist of:

	•	Co-location hosting;
	•	Bandwidth;
	•	Security;
	•	Disaster recovery; and
	•	Content distribution networks.

      Co-location — NaviSite’s co-location data centers provide customers with a secure place to gain rapid access to the Internet, without having to build their own environments. NaviSite’s data centers include multiple levels of security with camera surveillance, redundant uninterruptible power supply and power, data grade heating ventilation and air conditioning, 24/7 customer access which is constantly monitored and advanced fire suppression.

      Bandwidth — NaviSite’s data centers are carrier-neutral facilities, providing connectivity via a wide range of separate carriers, and offering competitive Internet access and bandwidth pricing.

      Security — NaviSite offers industry standard security service offerings, including managed firewalls, intrusion detection, denial of service attack prevention and exposure analysis. We utilize commercial equipment products such as Netscreen, Checkpoint and Cisco PIX.

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      Disaster Recovery — Features of NaviSite’s disaster recovery program include a spare cabinet of equipment, redundant data centers for physical separation, tape back-up and archiving off-site, storage on-demand, load balancing, fully mirrored content, remote access and professional consulting services.

      NaviSite’s Content Distribution Network (CDN) business allows customers to accelerate the distribution of all types of Internet-based data to users while reducing costs typically associated with this function. Currently, there are two primary areas of focus within this business, our caching services, Cache on Demand and Delta Edge, and our enterprise software distribution services, Conxion FTL.

      NaviSite’s caching services are specifically designed to bring (or cache) Web content, both static and dynamic, closer to the end user, which results in a decrease in overall bandwidth usage for the customer as well as an increase in overall performance regardless of the access type or connection the user is using.

      NaviSite’s software distribution services allow software manufacturers to securely and reliably distribute patches, updates, and even large new versions of their software products to its user base. This service allows them to largely bypass traditional distribution processes of physical compact disc (CD) creation, packaging and shipping resulting in a dramatic decrease in their software distribution costs as well as an increase in their ability to distribute updates quickly and accurately to their user base.

      NaviSite’s M-Services manage messaging applications such as Microsoft Exchange, Lotus Domino and other collaborative technologies.

      M-Services consist of:

	•	Messaging Application Management: NaviSite provides fully managed Lotus Notes and Microsoft Exchange services;
	•	IM and Collaboration: NaviSite’s instant messaging service provides turnkey access to all of the benefits of secure, real-time chat; and
	•	Spam Filtering: NaviSite provides services that allow customers to keep spam and viruses out of email systems.

Sales and Marketing

      NaviSite’s sales and marketing strategy is to cost effectively penetrate mid-sized enterprises, divisions of large multi-national companies, government agencies and other businesses through a combination of direct sales and channel partnerships.

      Direct Sales — Our direct sales professionals are organized geographically into groups located in Massachusetts, New York, California, Virginia and the United Kingdom. We utilize a sales model that consists of meetings with customers to understand and identify their individual business requirements. Our sales teams then translate those requirements into tailored business solutions. There is significant, ongoing revenue opportunity with customers as they grow and change their networks and we believe our sales model is designed to capitalize on that opportunity. To date, most of our sales have been realized through our direct sales force.

      Channel Partnerships — Our current partners include IBM, Progress Software and Accenture. In fiscal 2003, we worked to increase the number of channel partners that match our market vision, including establishing key relationships with independent software vendors and system integrators. For systems integrators, NaviSite’s flexibility and cost-effectiveness bolsters their application development and management service. For independent software vendors, NaviSite provides the ability and easy means to offer their software as a managed service.

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      NaviSite’s marketing organization is responsible for defining the overall market strategy for NaviSite. A primary focus is on identifying key market opportunities and customer segments which will best match the NaviSite service portfolio and creating marketing programs which target those segments. We are actively building general awareness of NaviSite and its strategy through public relations, marketing communications and product marketing. The marketing organization supports direct sales and business development, as well as defines and enhances channel partner relationships.

Customers

      Our customers range from small, privately-held companies to mid-sized enterprises, divisions of large multi-national companies and government agencies. Our customers operate in a wide variety of industries, such as technology, manufacturing, retail, business services and government agencies.

      Through a combination of factors, including acquisitions, an increase in our product offering portfolio and market demand, we had approximately 700 customers as of July 31, 2003. This represents a significant increase from 145 customers as of July 31, 2002.

      We derived approximately 2%, 31% and 35% of our revenue from CMGI and CMGI affiliates for the fiscal years ended July 31, 2003, 2002 and 2001, respectively. We derived approximately 26%, 0% and 0% of our revenue from the New York State Department of Labor for the fiscal years ended July 31, 2003, 2002 and 2001, respectively. The contract with the New York State Department of Labor is scheduled to expire in June 2005, provided, however, the New York State Department of Labor has the right to terminate the contract at any time by providing us with 60 days notice. Other than CMGI, CMGI affiliates and the New York State Department of Labor, no other customer represented 10% or more of our revenue for the fiscal years ended July 31, 2003, 2002 and 2001. Substantially all of our revenues are derived from, and substantially all of our plant, property and equipment are located in, the United States. Our customers include the following companies for each type of service offered by us:

Competition

      NaviSite competes in the hosting and application management services market, the managed infrastructure services market, and the managed messaging solutions market. These markets are fragmented, highly competitive and likely to be characterized by industry consolidation.

      We believe that NaviSite is the only provider that is able to offer a comprehensive set of services to customers who purchase outsourced services that enable them to increase efficiency, reduce or stabilize operational expenses, and better manage their businesses by focusing on their core competency rather than their IT requirements. We also believe that we can offer these services at a competitive price point due to our internal operational efficiencies, scale of operations, and the significantly reduced cost of acquisition for our infrastructure assets.

      We believe that participants in this market must grow rapidly and achieve a significant presence to compete effectively. 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;
	•	Application hosting, infrastructure and messaging management expertise;

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	•	Fast, redundant and reliable Internet connectivity;
	•	A robust infrastructure providing availability, speed, scalability and security;
	•	Comprehensive and diverse service offerings and timely addition of value-added services;
	•	Brand recognition;
	•	Leveraging strategic relationships;
	•	Competitive pricing; and
	•	Adequate capital to permit continued investment in infrastructure, customer service and support and sales and marketing.

      Our current and prospective competitors include:

	•	Other providers of complex hosting and related services, including Digex, Inc., Globix Corp., Computer Sciences Corporation, Totality Corp., Inflow, Inc. and a large number of local and regional hosting providers;
	•	Large system integrators and information technology outsourcing firms, including Electronic Data Systems Corporation, IBM and Accenture;
	•	CDN providers, such as Akamai, Inc. and Speedera Networks, Inc.;
	•	Global telecommunications companies, including AT&T and Sprint;
	•	National and regional messaging providers, including Connectria Corp., Internoded, Inc. and USA.net, Inc.; and
	•	National and regional co-location providers, including NTT/ Verio, Rackspace, Interland, Inc. and XO Communications.

      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 hosting and application management services market.

      In addition, we believe that there will be continued consolidation within the 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 that would impede our ability to compete successfully in the hosting and application management services market.

Intellectual Property

      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 have any patents that would prevent or inhibit competitors from using technology similar to ours or entering our market. While it is our practice to require our employees, consultants and independent contractors to enter into agreements containing non-disclosure, non-competition (for employees only) 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.

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      We license or lease most technologies used in our hosting and application management 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 that may be of lower quality or performance standards or at greater cost. We expect that NaviSite and its customers increasingly will be subject to third-party infringement claims as the number of Web sites and third-party service providers for Internet-based businesses grows. We cannot assure you that third parties will not assert claims alleging the infringement of service marks and trademarks 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 costly royalty or licensing agreements.

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 Internet-based applications, such laws and regulations are being considered and 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, 2003, we had 367 employees. Of these employees, 270 were principally engaged in operations, 50 were principally engaged in sales and marketing, 14 were principally engaged in product development and 33 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 retain consultants and independent contractors on a regular basis to assist in the completion of projects.

Available Information

      We make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports available through our Web site, free of charge, as soon as reasonably practicable after we file such material with, or furnish it to the Securities and Exchange Commission. Our Internet address is http://www.navisite.com. The contents of our Web site are not part of this annual report on Form 10-K, and our Internet address is included in this document as an inactive textual reference only.

Certain Risk 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 currently deemed immaterial may also impair our business operations. If any of the following risks actually occurs, our financial condition and operating results could be materially adversely affected.

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      We have a history of losses and may never achieve profitability and may not continue as a going concern. Since our incorporation in 1998, we have experienced operating losses and negative cash flows for each quarterly and annual period. As of July 31, 2003, we had approximately $3.9 million of cash and cash equivalents, a working capital deficit of approximately $15.2 million and had incurred losses since our incorporation resulting in an accumulated deficit of approximately $407 million. During the fiscal year ended July 31, 2003, we had a net loss of approximately $69.5 million. We anticipate that we will continue to incur net losses in the future. We also have significant fixed commitments, including with respect to real estate, machinery and equipment leases. As a result, we can give no assurance that we will achieve profitability or be capable of sustaining profitable operations. If we are unable to reach and sustain profitability, we risk depleting our working capital balances and our business will be materially adversely affected.

      Our available cash, combined with the funds available to us under the Silicon Valley Bank financing agreement, may not be sufficient to meet our needs through the end of fiscal year 2004. In addition, the financing agreement with Silicon Valley Bank includes various covenants and restrictions that may affect our ability to operate our business. To the extent that we are not able to comply with the covenants and restrictions, we may be unable to borrow additional amounts and outstanding amounts may become due on an accelerated basis, which would adversely affect our liquidity. Further, we will more than likely need to raise additional funds to remain a going concern. Our projections for cash usage are based on a number of assumptions, including: (i) our ability to retain customers in light of market uncertainties and our uncertain future; (ii) our ability to collect accounts receivables in a timely manner; (iii) our ability to effectively integrate recent acquisitions and realize forecasted cash savings synergies; and (iv) our ability to achieve expected other cash expense reductions. Further, our projected use of cash and business results could be affected by continued market uncertainties, including delays or restrictions in IT spending and any merger or acquisition activity. Accordingly, we will more than likely need to raise additional funds to continue as a going concern and such funds may not be available or may not be available on favorable terms.

      In recent years, we have generally financed our operations with proceeds from selling shares of our stock and borrowing funds. There can be no assurance that we will be able to sell any such securities or borrow funds in the future at favorable terms or at all. In addition, even if we find outside funding sources, we may be required to issue to such outside sources securities with greater rights than those currently possessed by holders of our common stock. We may also be required to take other actions, which may lessen the value of our common stock or dilute our common stockholders, including borrowing money on terms that are not favorable to us or issuing additional equity securities. If we are required to raise money in the future and we experience difficulties doing so, our business will be materially adversely affected.

      A significant portion of our revenue comes from one customer and, if we lost this customer, it would have a significant adverse impact to our business results and cash flow. The New York State Department of Labor, a customer of ClearBlue Technologies Management, Inc. (“CBTM”), one of our wholly-owned subsidiaries which, in June 2002, acquired certain assets from the bankrupt estate of AppliedTheory, Inc., represented approximately 26% of our consolidated revenue for the fiscal year ended July 31, 2003. Although the New York State Department of Labor has been a long-term customer of CBTM, we cannot guarantee that we will be able to retain this customer or to maintain the same level of services to or revenue from such customer. This contract with the New York State Department of Labor expires in June 2005, provided, however, the New York State Department of Labor has the right to terminate the contract at any time by providing us with 60 days notice. If we were to lose this customer or suffer a material reduction in the revenue generated from this customer, it would have a significant adverse impact on our business results and cash flows. The loss of a significant amount of business with this customer, or any other key customer, would have a material adverse effect on our business, financial condition and results of operations. We believe that we will continue to derive the vast majority of our operating revenue from sales to a small number of customers.

      Atlantic Investors and its affiliates, collectively, own a majority of our outstanding common stock and may have interests that conflict with the interests of our other stockholders. At September 30, 2003, Atlantic Investors and its affiliates owned, directly or indirectly, approximately 73% of the outstanding capital stock of NaviSite, as reported on Schedule 13D/A by Atlantic Investors, LLC on August 28, 2003. In addition, Atlantic Investors holds a promissory note issued by NaviSite in the principal amount of $3.0 million. In

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      Some of the members of our management group also serve as members of the management group of Atlantic Investors and its affiliates. As a result, these NaviSite officers and directors may face potential conflicts of interest. Specifically, these NaviSite officers and directors may be presented with situations in their capacity as officers or directors of NaviSite that conflict with their fiduciary obligations to Atlantic Investors or to another subsidiary or affiliate. Atlantic Investors may have interests that conflict with the interests of our other stockholders.

      Integration of acquisitions may result in disruptions to our business or distractions of our management due to difficulties in integrating and assimilating acquired personnel and operation, and such integrations may not proceed as planned. On December 31, 2002, we acquired CBTM. On February 4, 2003, we acquired Avasta. On April 2, 2003, we acquired Conxion. On May 16, 2003, we acquired the Interliant Assets. On August 8, 2003, we acquired all of the shares of six (6) wholly-owned subsidiaries of ClearBlue Technologies and the revenues and expenses of four (4) additional wholly-owned subsidiaries. In order to successfully integrate the operations, products and people of CBTM, Avasta, Conxion, certain former wholly-owned subsidiaries of ClearBlue Technologies and the Interliant Assets, we will have to devote a significant amount of management resources. Integrating and assimilating acquired operations, technologies and personnel and changes in management or other key personnel may prove difficult and may harm relationships with our customers and employees. We cannot assure you that the combined businesses, assets or technologies will generate sufficient revenue to offset the associated costs or other adverse effects. In addition, these businesses may not produce the revenues, cash savings, earnings or business synergies that we anticipated, and an acquired product, service or technology might not perform as we expected. As a result, we may incur higher costs, and realize lower revenues than we had anticipated.

      Our strategy of expanding our business through acquisitions of other businesses and technologies presents special risks. We intend to continue to expand our business through the acquisition of businesses, technologies, products and services from other businesses. Acquisitions involve a number of special problems and risks, including:

	•	difficulty integrating acquired technologies, operations and personnel with the existing businesses;
	•	diversion of management’s attention in connection with both negotiating the acquisitions and integrating the businesses;
	•	strain on managerial and operational resources as management tries to oversee larger operations;
	•	inability to retain management and other key personnel of the acquired businesses;
	•	changes in management and key personnel of acquired businesses may harm relationships with the acquired businesses’ customers and employees;
	•	exposure to unforeseen liabilities of acquired companies;
	•	increased risk of costly and time-consuming litigation, including stockholder lawsuits;
	•	potential issuance of securities in connection with an acquisition with rights that are superior to the rights of holders of our common stock, or which may have a dilutive effect on the common stockholders;
	•	the need to incur additional debt or use cash; and

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	•	the requirement to record potentially significant additional future operating costs for the amortization of intangible assets.

      We may not be able to successfully address these problems. Moreover, our future operating results will depend to a significant degree on our ability to successfully integrate acquisitions and manage operations and cross-sell our service offerings while also controlling expenses and cash burn. We cannot assure you that the 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.

      If the market for Internet commerce and communication does not continue, or it decreases, there may be insufficient demand for our services and, as a result, our business strategy and objectives may fail. 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 services over the Internet is still relatively new and emerging. If acceptance and growth of the Internet as a medium for commerce and communication does not continue or decreases, our business strategy and objectives may fail because there may not be sufficient market demand for our hosting and application management services. Our growth will be substantially impaired if the market for hosting and application management services fails to continue to develop or if we cannot continue to achieve broad market acceptance.

      Our customer base includes a significant number of small start-up businesses that face increased risk of loss of funding depending upon the availability of private and/or public funding. Many of our customers are small start-up businesses that have traditionally been initially funded by venture capital firms and then through public securities offerings. If the market for small start-up 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 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.

      A failure to meet customer expectations could result in lost revenues, increased expenses, negative publicity and claims for damages. Any failure to meet customers’ specifications or expectations, could result in:

	•	delayed or lost revenue;
	•	requirements to provide additional services to a customer at reduced or no charge;
	•	negative publicity about NaviSite, which could adversely affect our ability to attract or retain customers; and
	•	claims by customers for substantial damages against NaviSite, regardless of our responsibility for such failure, which may not be covered by insurance policies and which may not be limited by contractual terms of their engagement.

      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 may experience difficulties that could delay or prevent the successful development, introduction or marketing of hosting and application management 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.

      To succeed, we must respond to the rapid changes in the technology sector. The markets for the technology-related products and services we offer are characterized by rapidly changing technology, evolving industry standards, frequent new service introductions, shifting distribution channels and changing customer

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      The market in which we operate 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 hosting and application management services 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 market 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 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 network 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 networks 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 were 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 sales and marketing of our service offerings may be unsuccessful. We believe that to penetrate the market for hosting and application 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 substitute software applications that may be 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 that meet our targeted criteria for new application introductions, we may have to discontinue or delay introduction of services relating to these applications.

      We depend on third-party software, systems and services. We rely on products and services of third-party providers in our business operations. There can be no assurance that we will not experience operational problems attributable to the installation, implementation, integration, performance, features or functionality of such third-party software, systems and services. Any interruption in the availability or usage of the products and services provided by third parties could have a material adverse effect on our business, financial condition or results of operations.

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      We purchase key components of our infrastructure from a limited number of suppliers, 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 ability 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 ability 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 no increase in, and may decrease, revenue.

      Our decision to discontinue our practice, on a prospective basis, of obtaining equipment under leases and subsequently renting the equipment to our customers may have a material adverse effect on our business, future condition and business operations. New customers and current customers seeking to renew their agreements will have to obtain equipment directly from equipment vendors. We may not be successful in attracting new customers who prefer to obtain equipment from their service providers. Current customers may not renew their agreements, but rather, may seek a hosting provider who would also rent equipment directly to them to satisfy their equipment needs. If we are unable to keep our current customers and attract new customers due to our discontinuation of obtaining equipment, our business, financial condition and results of operations could be materially adversely affected.

      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 per day, seven days per 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 telecommunications