• Software as a Service ("SaaS") - Enablement of SaaS to the ISV community. Services include SaaS starter kits and services specific to the needs of ISVs who offer their software in an on-demand or subscription model.

• Co-location - Physical space offered in a data center. In addition to providing the physical space, NaviSite offers environmental support, specified power with back-up power generation and network connectivity options.

Application Services
• ERP Application and Messaging Management Services - Customer defined services for specific packaged applications.

• Applications include:

• Oracle e-Business Suite

• PeopleSoft Enterprise

• Siebel

• JD Edwards

• Hyperion

• Lawson

• Kronos

• Microsoft Dynamics

• Microsoft Exchange

• Lotus Notes

Services include implementation, upgrade support, monitoring, diagnostics, problem resolution and functional end-user support.
• ERP Professional Services - Planning, implementation, optimization, enhancement and upgrade support for third party ERP applications we support.

• Custom Development Services - Planning, implementation, optimization and enhancement for custom applications that we or our customers have developed.

We provide these services to a range of vertical industries, including financial services, healthcare and pharmaceutical, manufacturing and distribution, publishing, media and communications, business services and public sector and software, through both our own sales force and sales channel relationships.
Our managed application and hosting services are facilitated by our proprietary NaviViewTM collaborative infrastructure and application management platform. Our NaviViewTM platform enables us to provide highly efficient, effective and customized management of enterprise applications and hosted infrastructure. Comprised of a suite of third-party and proprietary products, NaviViewTM provides tools designed specifically to meet the needs of customers who outsource their IT needs.
Supporting both our managed hosting services and applications services is a range of hardware and software technologies designed for the specific needs of our customers. NaviSite is a leader in using virtualized processing, storage and networking as a platform to optimize services for performance, cost and operational efficiency. Utilizing both hardware and software based virtualization strategies; NaviSite continues to innovate as technology develops.
We believe that the combination of NaviViewTM, our dedicated and virtual platform, with our physical infrastructure and technical staff gives us a unique ability to provide complex enterprise hosting and application services for mid-market customers. NaviViewTM is application and operating system neutral. Designed to enable enterprise hosting and software applications to be monitored and managed, the NaviViewTM technology allows us to offer new solutions to our software vendors and new products to our current customers.
We provide our services from a global platform of 14 data centers in the United States, two in the United Kingdom and a Network Operations Center ("NOC") in India. We believe that our data centers and infrastructure have the capacity necessary to expand our business for the foreseeable future. Further, trends in hardware virtualization and the density of computing resources, which reduce footprint in the data center, are favorable to NaviSite's services-oriented offerings as compared with traditional co-location or managed hosting providers. Our services combine our developed infrastructure with established processes and procedures for delivering hosting and application management services. Our high availability infrastructure, high performance monitoring systems, and proactive and collaborative problem resolution and change management processes are designed to identify and address potentially crippling problems before they disrupt our customers' operations.

We currently service over 1,400 customers. Our hosted customers typically enter into service agreements for a term of one to five years, which provide for monthly payment installments, providing us with a base of recurring revenue. Our revenue growth comes from adding new customers or delivering additional services to existing customers. Our recurring revenue base is affected by new customers, renewals and terminations of agreements with existing customers.
During fiscal 2008 and in past years, we have grown through business acquisitions and have restructured our operations. Specifically, in December 2002, we completed a common control merger with ClearBlue Technologies Management, Inc.; in February 2003, we acquired Avasta, Inc.; in April 2003, we acquired Conxion Corporation; in May 2003, we acquired assets of Interliant, Inc. in August 2003 and April 2004, we completed a common control merger with certain subsidiaries of ClearBlue Technologies, Inc.; and in June 2004, we acquired substantially all of the assets and liabilities of Surebridge (now known as Waythere, Inc.). In January 2005, we formed NaviSite India Private Limited ("NaviSite India"), a New Delhi-based operation which is intended to expand our international capability. NaviSite India provides a range of software services, including design and development of custom and E-commerce solutions, application management, problem resolution management and the deployment and management of IT networks, customer specific infrastructure and data center infrastructure. We expect to make additional acquisitions to take advantage of our available capacity, which will have significant effects on our financial results in the future.
In August 2007, we acquired the assets of Alabanza, LLC and Hosting Ventures, LLC (collectively "Alabanza") and all of the issued and outstanding stock of Jupiter Hosting, Inc. ("Jupiter"). These acquisitions provided additional managed hosting customers, proprietary software for provisioning and additional data center space in the Bay Area market. In September 2007, we acquired netASPx, Inc. ("netASPx"), an application management service provider, and in October 2007, we acquired the assets of iCommerce, Inc., a re-seller of dedicated hosting services.
Results of Operations for the Three and Six Months Ended January 31, 2009 and 2008
The following table sets forth the percentage relationships of certain items from our Condensed Consolidated Statements of Operations as a percentage of total revenue for the periods indicated.

                                                    Three Months Ended                 Six Months Ended
                                                       January 31,                       January 31,
                                                  2009             2008             2009             2008

Revenue, net                                       99.7 %           99.8 %           99.7 %           99.8 %
Revenue, related parties                            0.3 %            0.2 %            0.3 %            0.2 %

Total revenue                                     100.0 %          100.0 %          100.0 %          100.0 %
Cost of revenue, excluding depreciation
and amortization and restructuring charge          53.0 %           55.9 %           53.8 %           56.8 %
Depreciation and amortization                      15.0 %           13.4 %           14.7 %           12.5 %
Restructuring Charge                                  -                -              0.3 %              -

Total cost of revenue                              68.0 %           69.3 %           68.8 %           69.3 %
Gross profit                                       32.0 %           30.7 %           31.2 %           30.7 %
Operating expenses:
Selling and marketing                              12.8 %           13.1 %           13.2 %           13.7 %
General and administrative                         15.2 %           14.1 %           15.1 %           14.8 %
Restructuring charge                               (0.2 %)             -              0.2 %              -

Total operating expenses                           27.8 %           27.2 %           28.5 %           28.5 %

Income from operations                              4.2 %            3.5 %            2.7 %            2.2 %
Other income (expense):
Interest income                                     0.1 %            0.2 %            0.0 %            0.2 %
Interest expense                                  (10.0 )%          (7.7 )%          (8.8 )%          (7.6 )%
Loss on debt extinguishment                           -                -                -             (2.2 )%
Other income (expense), net                         0.6 %            0.5 %            0.9 %            0.6 %

Loss from continuing operations before
income taxes and discontinued operations           (5.1 )%          (3.5 )%          (5.2 )%          (6.8 )%
Income taxes                                       (1.3 )%          (1.3 )%          (1.3 )%          (1.2 )%

Loss from continuing operations before
discontinued operations                            (6.4 )%          (4.8 )%          (6.5 )%          (8.0 )%

Discontinued operations, net of income
taxes                                              (0.1 )%          (0.6 )%          (0.1 )%          (0.7 )%

Net loss                                           (6.5 )%          (5.4 )%          (6.6 )%          (8.7 )%
Accretion of preferred stock dividends             (2.2 )%          (1.9 )%          (2.1 )%          (1.5 )%

Net loss attributable to common
stockholders                                       (8.7 )%          (7.3 )%          (8.7 )%         (10.2 )%

Comparison of the Three and Six Months Ended January 31, 2009 and 2008 Revenue
We derive our revenue from managed IT services, including hosting, co-location and application services comprised of a variety of service offerings and professional services, to mid-market companies and organizations, including mid-sized companies, divisions of large multi-national companies and government agencies.
Total revenue for the three months ended January 31, 2009 decreased 3.2% to approximately $37.7 million from approximately $38.9 million for the three months ended January 31, 2008. The revenue decline of approximately $1.2 million in revenue was mainly due to a $3.6 million reduction in professional services revenues offset by an increase of $2.4 million in revenue from the Company's enterprise hosting and application services due to increased sales to new and existing customers which included a reduction of approximately $0.7 million due to changes in foreign currency rates. Revenue from related parties during the three months ended January 31, 2009 and 2008 totaled $111,000 and $72,000, respectively.
Total revenue for the six months ended January 31, 2009 increased 3.4% to approximately $77.5 million from approximately $75.0 million for the six months ended January 31, 2008. The overall revenue growth of approximately $2.5 million in revenue was mainly due to increased sales to new and existing NaviSite customers and the inclusion of a full six months of revenue from acquisitions made during the same period in the prior year. The Company's enterprise hosting and application services revenues increased $7.8 million due to increased sales to new and existing customers. The hosting and application services increase in the six months ending January 31, 2009 as compared to the same period in the prior year reflects a $1.1 million reduction in revenue due to changes in foreign exchange rates. Professional services revenues declined $5.3 million in the current year as compared to the prior year due to lower sales of these types of services. Revenue from related parties during the six months ended January 31, 2009 and 2008 totaled $194,000 and $147,000, respectively. Cost of Revenue and Gross Profit
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 data centers, such as rent and utilities.
Total cost of revenue for the three months ended January 31, 2009 decreased approximately 4.9% to $25.6 million during the three months ended January 31, 2009 from approximately $27.0 million during the three months ended January 31, 2008. As a percentage of revenue, total cost of revenue decreased to 68.0% during the three months ended January 31, 2009 from 69.3% during the three months ended January 31, 2008. The overall decrease of approximately of $1.4 million was primarily due to a decrease of $1.9 million in salary related expenses, including a decrease of $0.3 million of stock compensation expense, decreased third party pass through related expenses of $0.7 million, lower external consulting expenses related to lower professional services revenue of $0.4 million, decrease of $0.5 million in telecommunication and bandwidth costs, a decrease of $0.4 million of amortization expense due to an adjustment to intangible assets in the fourth quarter of fiscal year 2008,resulting from the finalization of purchase accounting, a decrease of $0.3 million of non-billable travel expenses and acquisition costs incurred in the prior year. The net decrease of $4.2 million is partially offset by increased facilities related expense including rent and utilities of approximately $1.6 million, an increase in depreciation expense of approximately $0.9 million, and increased software and hardware maintenance and licensing costs of approximately $0.3 million.
Total cost of revenue for the six months ended January 31, 2009 increased approximately 2.5% to $53.3 million during the six months ended January 31, 2009 from approximately $52.0 million during the six months ended January 31, 2008. As a percentage of revenue, total cost of revenue decreased to 68.8% during the six months ended January 31, 2008 from 69.3% during the six months ended January 31, 2008. The overall increase of approximately of $1.3 million was primarily due to increased depreciation expense of approximately $2.3 million, increased facilities related expense including rent and utilities of approximately $2.8 million, and increased software and hardware maintenance and licensing costs of approximately $0.5 million. These incremental expenses of approximately $5.6 million were partially offset by lower salary related expenses of approximately $2.3 million during the period, lower external consulting expenses related to lower professional services revenue of $0.5 million, lower telecommunication and bandwidth costs of $0.5 million, a decrease of $0.4 million of amortization expense due to an adjustment of intangible assets in the fourth quarter of fiscal year 2008, resulting from the finalization of purchase accounting and $0.6 million of non-billable travel expenses and acquisition costs incurred in the prior year.

During the six months ended January 31, 2009, the Company initiated the restructuring of its professional services organization in an effort to realign resources. As a result of this initiative, the Company terminated several employees resulting in a restructuring charge for severance and related costs of $0.4 million, of which approximately $0.2 million was included in Cost of Revenue.
Gross profit of approximately $12.0 million for the three months ended January 31, 2009 remained relatively flat in comparison to the same period in the prior year. However gross profit increased to 32.0% of total revenue for the three months ended January 31, 2009 as compared to 30.7% of total revenue for the three months ended January 31, 2008. Gross profit was positively impacted during the three months ended January 31, 2009 as compared to the three months ended January 31, 2008, mainly due to the cost reductions noted above.
Gross profit of approximately $24.2 million for the six months ended January 31, 2009 increased approximately $1.2 million, or 5.4%, from a gross profit of approximately $23.0 million for the six months ended January 31, 2008. Gross profit for the six months ended January 31, 2009 represented 31.2% of total revenue, compared to 30.7% of total revenue for the six months ended January 31, 2008. Gross profit was positively impacted during the six months ended January 31, 2009 as compared to the six months ended January 31, 2008, mainly due to the increased revenues noted above. Operating Expenses
Selling and Marketing. Selling and marketing expense consists primarily of salaries and related benefits, commissions and marketing expenses such as traveling, advertising, product literature, trade show, and marketing and direct mail programs.
Selling and marketing expense decreased 5.7% to approximately $4.8 million, or 12.8% of total revenue, during the three months ended January 31, 2009 from approximately $5.1 million, or 13.1% of total revenue, during the three months ended January 31, 2008. The decrease of approximately $0.3 million resulted primarily from a decline in salary and related headcount expenses of $0.4 million, decreased marketing and advertising related expenses of $0.2 million and a decrease of $0.1 million in travel expense offset by increased commission and partner referral fees of approximately $0.4 million.
Selling and marketing expense remained relatively constant at approximately $10.3 million, during the six months ended January 31, 2009 as compared to the six months ended January 31, 2008. Increases of approximately $0.3 million in commission expense and $0.2 million in partner referral fees were offset by a decrease of approximately $0.3 million in salary and related headcount expenses and a decrease of approximately $0.2 million marketing and advertising related expenses.
General and Administrative. General and administrative expense includes the costs of financial, human resources, IT and administrative personnel, professional services, bad debt and corporate overhead.
General and administrative expense increased 4.2% to approximately $5.7 million, or 15.2% of total revenue, during the three months ended January 31, 2009 from approximately $5.5 million, or 14.1% of total revenue, during the three months ended January 31, 2008. The increase of approximately $0.2 million was primarily attributable to an increase in legal fees of approximately $0.2 million, an increase in utilities expense of approximately $0.1 million, an increase in board fees of $0.1 million and recruiting fees of $0.1 million. The increase of $0.5 million was partially offset by lower salary related expenses of approximately $0.3 million.

General and administrative expense increased 5.2% to approximately $11.7 million, or 15.1% of total revenue, during the six months ended January 31, 2009 from approximately $11.1 million, or 14.8% of total revenue, during the six months ended January 31, 2008. The mix of expenses changed such that there was an increase in legal fees of approximately $0.5 million, an increase in utilities expense of approximately $0.3 million, increased bank related fees of $0.2 million and increased bad debt expense of $0.1 million. The increased expenses of $1.1 million were partially offset by lower salary related expenses of approximately $0.5 million.
Operating Expenses - Restructuring Charge During the six months ended January 31, 2009, the Company initiated the restructuring of its professional services organization in an effort to realign resources. As a result of this initiative, the Company terminated several employees resulting in a restructuring charge for severance and related costs of $0.4 million, of which approximately $0.3 million was included in Operating Expenses. During the three months ending January 31, 2009 the restructuring charge was reduced by $87,000 to reflect a subsequent reduction of the initial obligation.
No impairment, restructuring, or other charges were recorded during the six months ended January 31, 2008.
Interest Income
During the three and six months ended January 31, 2009, interest income decreased approximately $42,000 and $152,000, respectively, as compared to the three and six months ended January 31, 2008. The decreases were mainly due to lower levels of average cash balances during the three and six months ended January 31, 2009 compared to the same periods in the prior year. Interest Expense
During the three and six months ended January 31, 2009, interest expense increased approximately $0.7 million and $1.1 million, respectively, as compared to the three and six months ended January 31, 2008. The increases were primarily due to increased rate of interest and high average outstanding term loan balances during the three and six months ended January 31, 2009 compared to the three and six months ended January 31, 2008. Loss on debt extinguishment
During the six months ended January 31, 2008, the Company recorded a loss on debt extinguishment of approximately $1.7 million in connection with the refinancing of its Amended Credit Agreement completed in September 2007. The total amount of the loss on debt extinguishment consisted of unamortized transaction fees and expenses related to the prior refinancing of the Company's long-term debt in June 2007.
Other Income (Expense), Net
Other income (expense), net was approximately $232,000 during the three months ended January 31, 2009, compared to Other income (expense), net of approximately $202,000 during the three months ended January 31, 2008. The Other income (expense), net recorded during the three months ended January 31, 2009 is primarily attributable to sublease income and gains and losses from our interest rate cap protection related to our long-term debt and a gain due to the resolution of an acquired liability during the three months ended January 31, 2009.
Other income (expense), net was approximately $693,000 during the six months ended January 31, 2009, compared to Other income (expense), net of approximately $477,000 during the six months ended January 31, 2008. The Other income (expense), net recorded during the six months ended January 31, 2009 is primarily attributable to sublease income and gains and losses from our interest rate cap protection related to our long-term debt, a gain due to the resolution of an acquired liability and a gain of $0.3 million in foreign currency fluctuation during the six months ended January 31, 2009.

Income Tax Expense
The Company recorded $0.5 million and $0.5 million of deferred income tax expense during the three months ended January 31, 2009 and 2008, respectively. The Company recorded $1.0 million and $0.9 million of deferred income tax expense during the six months ended January 31, 2009 and 2008, respectively. No income tax benefit was recorded for the losses incurred due to a valuation allowance recognized against deferred tax assets. The deferred tax expense primarily resulted from tax goodwill amortization related to the acquisitions of Surebridge and Alabanza, the acquisition of AppliedTheory Corporation by ClearBlue Technologies Management, Inc. and the carry-over amortization of goodwill resulting from the acquisition of netASPx. Acquired goodwill for these acquisitions is amortizable for tax purposes over fifteen years. For financial statement purposes, goodwill is not amortized but is tested for impairment when evidence of impairment may exist, but at least annually. Tax amortization of goodwill results in a taxable temporary difference, which will not reverse until the goodwill is impaired, written off or the underlying assets are sold by the Company. The resulting taxable temporary difference may not be offset by deductible temporary differences currently available, such as net operating loss carryforwards which expire within a definite period. Discontinued Operations
The discontinued operations relates to the Company's employment services operation called America's Job Exchange ("AJE"). During fiscal year 2008, the Company made the determination that AJE was not core to our business and is actively looking to dispose of this asset.
During the three and six months ended January 31, 2009 the Company's loss from discontinued operations was $50,000 and $67,000, respectively, as compared to a loss of $237,000 and $551,000 for the three and six months ended January 31, 2008. The loss from discontinued operations decrease during the period was due to increased revenue attributed to AJE. . . .