Edgar Filing: ENGAGE INC

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2002

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ___ TO ____

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

COMMISSION FILE NUMBER 000-26671

ENGAGE, INC.
(Exact Name of Registrant as Specified in Its Charter)

DELAWARE 04-3281378
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

100 BRICKSTONE SQUARE, ANDOVER, MASSACHUSETTS 01810
(Address of Principal Executive Offices) (Zip Code)

(978) 684-3884
(Registrant's Telephone Number, Including Area Code)

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 that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes [X] No [ ]

The number of shares outstanding of the registrant's Common Stock as of
March 12, 2002 was 196,638,636.

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ENGAGE, INC.

FORM 10-Q

FOR THE QUARTER ENDED JANUARY 31, 2002

INDEX
PAGE

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

a) Consolidated Balance Sheets as of July 31, 2001 and
January 31, 2002 (unaudited)................................. 3

b) Consolidated Statements of Operations (unaudited) for the
three and six months ended January 31, 2001 and 2002......... 4

c) Consolidated Statements of Cash Flows (unaudited) for the
six months ended January 31, 2001 and 2002................... 5

d) Notes to Interim Consolidated Financial Statements........... 6

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 13

Item 3. Quantitative and Qualitative Disclosures About Market Risk... 21

PART II. OTHER INFORMATION

Item 1. Legal Proceedings............................................ 22

Item 2. Changes in Securities and Use of Proceeds.................... 22

Item 6. Exhibits and Reports on Form 8-K............................. 22

SIGNATURES

EXHIBIT INDEX

ENGAGE, INC.
CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT PAR VALUE)

JULY 31, JANUARY 31,
2001 2002
--------- ----------
(UNAUDITED)

ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 33,261 $ 24,301
Accounts receivable, less allowance for doubtful accounts of $1,782 and $1,394 at
July 31, 2001 and January 31, 2002, respectively...................................... 8,357 4,628
Prepaid expenses........................................................................ 1,221 1,681
Current assets of discontinued operations............................................... 13,016 2,349
----------- -----------
Total current assets.................................................................. 55,855 32,959
----------- -----------

Property and equipment, net............................................................... 7,094 5,580
Intangible assets, net of accumulated amortization of $83,180 and $97,829 at
July 31, 2001 and January 31, 2002, respectively........................................ 61,389 46,740
Other assets.............................................................................. 7,258 673
Non-current assets of discontinued operations............................................. 1,241 556
----------- -----------
Total assets.......................................................................... $ 132,837 $ 86,508
=========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of obligation under capital lease....................................... $ 2,806 $ 663
Current portion of long-term debt....................................................... 1,693 4
Debt to CMGI............................................................................ -- 56,266
Accounts payable........................................................................ 5,903 2,243
Due to CMGI affiliates.................................................................. 1,699 3,293
Accrued expenses........................................................................ 38,396 11,452
Deferred revenue........................................................................ 6,365 2,889
----------- -----------
Total current liabilities............................................................. 56,862 76,810
----------- -----------
Due to CMGI............................................................................... 39,821 --
Deferred revenue.......................................................................... 24 --
Obligation under capital lease,net of current portion..................................... 759 219
Long-term debt, net of current portion.................................................... 266 --
Other long-term liabilities............................................................... 396 390
----------- -----------
Total liabilities..................................................................... 98,128 77,419
----------- -----------

Minority interest......................................................................... 6,755 --

Commitments and contingencies

Stockholders' equity:
Preferred stock, $.01 par value, 5,000 shares authorized, 0 shares issued and
outstanding at July 31, 2001 and January 31, 2002, respectively....................... -- --
Common stock, $.01 par value, 350,000 shares authorized, 196,539 and 196,438 shares
issued and outstanding at July 31, 2001 and January 31, 2002, respectively............ 1,965 1,964
Additional paid-in capital.............................................................. 3,774,494 3,713,442
Deferred compensation................................................................... (4,337) (1,832)
Accumulated other comprehensive income.................................................. 558 947
Accumulated deficit..................................................................... (3,744,726) (3,705,432)
----------- -----------
Total stockholders' equity............................................................ 27,954 9,089
----------- -----------
Total liabilities and stockholders' equity............................................ $ 132,837 $ 86,508
=========== ===========

See accompanying notes to interim consolidated financial statements.

ENGAGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JANUARY 31, 2001 AND 2002
(UNAUDITED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, JANUARY 31,
-------------------------- -----------------------
2001 2002 2001 2002
----------- ------------ ---------- ----------

Revenue:
Product revenue........................................... $ 1,379 $ 2,340 $ 9,083 $ 3,326
Product revenue, related parties.......................... 740 -- 1,560 26
Services and support revenue.............................. 5,745 3,570 10,438 8,950
Services and support revenue, related parties............. 444 165 637 431
---------- ----------- -------- ----------
Total revenue........................................... 8,308 6,075 21,718 12,733
---------- ----------- -------- ----------

Cost of revenue:
Cost of product revenue................................... 68 60 93 (82)
Cost of services and support revenue...................... 5,757 3,509 11,127 8,330
Amortization of developed technology...................... 1,458 1,459 2,242 2,917
---------- ----------- --------- ----------
Total cost of revenue................................... 7,283 5,028 13,462 11,165
---------- ----------- --------- ----------

Gross profit.......................................... 1,025 1,047 8,256 1,568
---------- ----------- --------- ----------
Operating expenses:
In-process research and development....................... -- -- 700 --
Research and development.................................. 3,008 1,883 5,544 4,302
Selling and marketing..................................... 12,849 2,890 28,193 6,154
General and administrative................................ 6,081 2,137 10,616 4,773
Amortization and impairment of goodwill and other
intangibles............................................. 18,680 5,866 29,404 11,732
Restructuring costs....................................... 857 -- 1,716 975
Stock compensation........................................ 475 294 830 656
---------- ----------- --------- ----------

Total operating expenses.............................. 41,950 13,070 77,003 28,592
---------- ----------- --------- ----------

Operating loss...................................... (40,925) (12,023) (68,747) (27,024)

Other income (expense):
Interest income........................................... 1,572 137 3,469 380
Interest expense.......................................... (2) (1,042) (29) (1,448)
Minority interest......................................... 311 16 654 109
Other income (expense), net............................... (1,608) (289) (1,650) (128)
---------- ----------- --------- ----------

Loss from continuing operations..................... (40,652) (13,201) (66,303) (28,111)
---------- ----------- --------- ----------

Loss from discontinued operations.............................. (654,911) -- (803,077) --
---------- ----------- --------- ----------

Net loss....................................................... $ (695,563) $ (13,201) $(869,380) $ (28,111)
========== =========== ========= ==========

Basic and diluted loss per share data:
Continuing operations.......................................... $ (0.21) $ (0.07) $ (0.34) $ (0.14)
Discontinued operations........................................ (3.32) -- (4.17) --
---------- ----------- --------- ----------
Basic and diluted net loss per share........................... $ (3.53) $ (0.07) $ (4.51) $ (0.14)
========== =========== ========= ==========
Weighted average number of basic and diluted shares 196,774 196,574 192,756 196,595
outstanding................................................. ========== =========== ========= ==========

See accompanying notes to interim consolidated financial statements.

ENGAGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JANUARY 31, 2001 AND 2002
(UNAUDITED)

(IN THOUSANDS)

2001 2002
----------- ----------

Cash flows from operating activities:
Net loss................................................................ $ (869,380) $ (28,111)
Loss from discontinued operations....................................... (803,077) --
---------- ---------
Loss from continuing operations......................................... (66,303) (28,111)

Adjustments to reconcile net loss to net cash used for operating
activities:
Depreciation and amortization....................................... 30,715 16,405
Provision for bad debts............................................. 2,131 13
Stock compensation.................................................. 830 656
Amortization of discount on available-for-sale securities........... (6) --
Impairment loss on equity investments............................... 2,000 --
Loss on disposal of property and equipment.......................... -- 311
Minority interest................................................... (1,135) (109)
In-process research and development................................. 700 --
Changes in operating assets and liabilities, net of impact of
acquisitions:
Accounts receivable............................................ 14,427 3,716
Prepaid expenses and other assets.............................. (3,175) 5,934
Due to CMGI and affiliates..................................... 8,190 7,253
Accounts payable............................................... (23,235) (4,752)
Accrued expenses............................................... 13,182 (22,720)
Deferred revenue............................................... (212) (3,499)
---------- ---------
Net cash used for continuing operations.................... (21,891) (24,903)
Net cash provided by (used for) discontinued operations.... (36,547) 11,351
---------- ---------
Net cash used for operating activities..................... (58,438) (13,552)
---------- ---------
Cash flows from investing activities:
Proceeds from redemption of available-for-sale securities............... 16,400 --
Net cash acquired on acquisition of subsidiaries........................ 2,706 --
Purchases of property and equipment..................................... (6,050) (352)
---------- ---------
Net cash provided by (used for) investing activities....... 13,056 (352)
---------- ---------
Cash flows from financing activities:
Net change in debt to CMGI.............................................. -- 8,000
Proceeds from issuance of common stock, net of issuance costs and
repurchases........................................................... 5,529 47
Repayment of capital lease obligations.................................. (2,211) (2,401)
Repayment of long-term debt............................................. (1,042) (1,046)
---------- ---------
Net cash provided by financing activities.................. 2,276 4,600
---------- ---------

Effect of exchange rate changes on cash and cash equivalents................. 369 344
---------- ---------

Net decrease in cash and cash equivalents.................................... (42,737) (8,960)

Cash and cash equivalents, beginning of period .............................. 119,809 33,261
---------- ---------
Cash and cash equivalents, end of period..................................... $ 77,072 $ 24,301
========== =========
Supplemental disclosures of cash flow information:
Cash paid for interest............................................... $ 27 $ 64
========== =========

See accompanying notes to interim consolidated financial statements.

ENGAGE, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

A. BASIS OF PRESENTATION

The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, these unaudited consolidated financial
statements do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of our management, the accompanying consolidated financial
statements contain all adjustments, consisting only of those of a normal
recurring nature, necessary for a fair presentation of our financial position,
results of operations and cash flows at the dates and for the periods indicated.
While we believe that the disclosures presented are adequate to make the
information not misleading, these consolidated financial statements should be
read in conjunction with the audited financial statements and related notes for
the year ended July 31, 2001 which are contained in our Annual Report on Form
10-K filed with the Securities and Exchange Commission (the "SEC") on October
29, 2001. The results for the three and six-month periods ended January 31, 2002
are not necessarily indicative of the results to be expected for the full fiscal
year. Certain prior year amounts in the consolidated financial statements have
been reclassified to conform to the current year presentation.

B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

Effective August 1, 1998, we adopted the provisions of SOP 97-2, Software
Revenue Recognition. Revenue from software product licenses is generally
recognized when (i) a signed noncancelable software license or purchase order
exists, (ii) delivery has occurred, (iii) our fee is fixed or determinable, and
(iv) collectibility is probable.

For multiple element arrangements involving our software, services and
support elements, we recognize revenue in accordance with SOP 98-9, Software
Revenue Recognition with Respect to Certain Arrangements, when vendor-specific
objective evidence of fair value does not exist for the delivered element. As
required by SOP 98-9, under the residual method, the fair value of the
undelivered elements are deferred and subsequently recognized. Revenue from
agreements that require significant customizations and modifications to the
software product is deferred and recognized using the percentage of completion
method with labor hours used as a measure of progress towards completion. For
license arrangements involving significant customizations for which the amount
of customization effort cannot be reasonably estimated or when license
arrangements provide for customer acceptance, we recognize revenue under the
completed contract method of accounting.

We recognize revenue from periodic subscriptions ratably over the
subscription term, typically twelve months. We recognize revenue from
usage-based subscriptions monthly based on actual usage.

Our service and support revenue includes revenue from software maintenance
and other professional services, primarily from consulting, implementation and
training. We defer revenue from software maintenance and recognize it ratably
over the term of each maintenance agreement, which is typically twelve months.
We recognize revenue from professional services as the services are performed.

Amounts collected prior to satisfying the above revenue recognition
criteria are classified as deferred revenue.

Discontinued Operations

In April 2001, we announced the sale of certain assets of our wholly-owned
subsidiary, Internet Profiles Corporation ("I/PRO"). In September 2001, we
announced the sale of certain assets of our AdKnowledge media service and the
shutdown of our media network, both of which, combined with I/PRO, comprised our
Media segment. Our media operations ceased in October 2001. The Media segment
has been accounted for as a discontinued operation. Accordingly, the Media
segment's current and non-current assets have been segregated from continuing
operations in the accompanying consolidated balance sheet, and its operating
results have been segregated and reported as discontinued operations in the
accompanying consolidated statements of operations and cash flows, and related
notes. No material liabilities associated with discontinued operations were
assumed by a third party. Revenue from discontinued operations for the three and
six months ended January 31, 2001 was $19.8 million and $47.4 million,
respectively. Loss from discontinued operations for the three and six months
ended January 31, 2001 was $654.9 million and $803.1 million, respectively.

ENGAGE, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)

The assets identified as part of the disposition of the Media segment are
recorded as current assets of discontinued operations or non-current assets of
discontinued operations; the cash flow of the segment is reported as net cash
used for discontinued operations; and the results of operations of the segment
are reported as loss from discontinued operations. Current assets of
discontinued operations consists of the following:

JULY 31, JANUARY 31,
2001 2002
---------- ----------
(IN THOUSANDS)

Accounts receivable, net of allowance for doubtful accounts........ $ 12,008 $ 1,623
Other current assets............................................... 1,008 726
---------- --------
Total current assets of discontinued operations.......... $ 13,016 $ 2,349
========== ========

Non-current assets of discontinued operations consists of the following:

JULY 31, JANUARY 31,
2001 2002
---------- ----------
(IN THOUSANDS)

Property and equipment, net of accumulated depreciation and
amortization...................................................... $ 701 $ 386
Other assets....................................................... 540 170
---------- ---------
Total non-current assets of discontinued operations....... $ 1,241 $ 556
========== =========

Net Loss per Share

We calculate earnings per share in accordance with Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share." Basic earnings per
share is computed based on the weighted average number of common shares
outstanding during the period. The dilutive effect of common stock equivalents
are included in the calculation of diluted earnings per share only when the
effect of their inclusion would be dilutive.

At January 31, 2002, we had outstanding stock options to purchase
10,895,789 shares of common stock at a weighted average exercise price of $5.47
that could potentially dilute earnings per share, including 2,367,166 stock
options at a weighted average exercise price of $0.17 that were in-the-money.
The dilutive effect of the exercise of these options has been excluded from the
computation of diluted net loss per share, as the effect would have been
antidilutive for the periods presented. (See Note G).

C. DIVIDEND TO CMGI

In April 2000, we completed our acquisition of Adsmart Corporation
("Adsmart"), a majority-owned subsidiary of CMGI, and Flycast Communications
Corporation ("Flycast"), a wholly-owned subsidiary of CMGI, pursuant to an
Agreement and Plan of Merger and Contribution, dated as of January 19, 2000 (the
"Merger Agreement"). Under the terms of the Merger Agreement, upon the exercise
of CMGI options by former Flycast employees, CMGI is obligated to pay us the
exercise price of the related CMGI options issued to the former Flycast
employees as part of CMGI's acquisition of Flycast. Additionally, in the event
that former Flycast employees terminate their employment with us, their
unexercised CMGI options are cancelled and CMGI is obligated to return Engage
common shares to us based on the number of CMGI options cancelled multiplied by
the exchange ratio as defined in the Merger Agreement. Engage common shares
returned to us are valued based upon the per share value originally used to
record the non-cash dividend to CMGI. Any cash or Engage common shares returned
to us are treated as a reduction to the previously recorded dividend to CMGI. A
reconciliation of the net dividend to CMGI recorded as a component of
accumulated deficit for the six months ended January 31, 2002 is as follows:

(IN THOUSANDS)

Net cumulative dividend to CMGI recorded as of July 31, 2001..... $ 2,005,138
Value of Engage common shares due from CMGI for option
cancellations for the period August 1, 2001 through
January 31, 2002................................................ (67,404)
Cash consideration for exercise price of CMGI stock options
exercised from August 1, 2001 through January 31, 2002.......... (1)
------------
Cumulative net dividend to CMGI as of January 31, 2002...... $ 1,937,733
============

ENGAGE, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)

D. COMPREHENSIVE LOSS

The components of comprehensive loss include net loss, the net change in
foreign currency translation adjustments and unrealized holding gains and losses
on available-for-sale securities.

The components of comprehensive loss, net of income taxes, are as follows:

THREE MONTHS ENDED JANUARY 31, SIX MONTHS ENDED JANUARY 31,
------------------------------ ------------------------------
2001 2002 2001 2002
---------- --------- ---------- ----------
(IN THOUSANDS)

Net loss................................................ $(695,563) $ (13,201) $ (869,380) $ (28,111)
Foreign currency adjustments............................ (307) 513 (182) 399
Net unrealized holding gain arising during the period... -- 35 34 (10)
--------- --------- ---------- ----------
Comprehensive loss................................. $(695,870) $ (12,653) $ (869,528) $ (27,722)
========= ========= ========== ==========

E. NON-CASH TRANSACTIONS

During both the six months ended January 31, 2001 and 2002, as the result
of the termination of employment of certain employees prior to the vesting of
their stock options, unvested stock options for which deferred compensation
costs had been recorded in a prior period were cancelled. As a result of these
cancellations, we have recorded a reduction of $2,829,000 and $507,000 in both
deferred compensation and additional paid-in capital in the six months ended
January 31, 2001 and 2002, respectively.

During the six months ended January 31, 2001, Engage acquired MediaBridge
through the issuance of shares of Engage common stock.

During the six months ended January 31, 2001 and 2002, as a result of the
termination of employment of former Flycast employees, non-cash financing
activities included the return of shares of Engage common stock previously
issued to CMGI as part of our acquisition of Flycast. As a result, we have
recorded a reduction of additional paid-in capital and dividend to CMGI
(included within accumulated deficit) of approximately $98.8 million and $67.4
million in the six months ended January 31, 2001 and 2002, respectively.

During the six months ended January 31, 2002, approximately $48.3 million
in amounts payable to CMGI were formally converted to secured debt to CMGI (see
Note G).

During the six months ended January 31, 2002, we increased our ownership
percentage in Engage Japan, Inc. from 66.6% to 94.0% through the issuance of one
million shares of our common stock to Sumitomo Corporation, the minority
stockholder in Engage Japan, Inc. Additionally, we began actions to close Engage
Japan, Inc. Accordingly, we have converted the minority interest of Engage Japan
to additional paid-in capital due to the subsidiary's net deficit position and
the resulting determination that there are no additional liabilities to minority
shareholders.

F. STOCK COMPENSATION

Had we recorded stock compensation expense within the functional
departments of the employee or director, stock compensation would have been
allocated as follows:

THREE MONTHS ENDED JANUARY 31, SIX MONTHS ENDED JANUARY 31,
------------------------------ -----------------------------
2001 2002 2001 2002
---------- ------- ---------- ----------
(IN THOUSANDS)

Cost of revenue.......................................... $ 128 $ 94 $ 215 $ 205
Research and development................................. 104 91 169 194
Selling and marketing.................................... 72 97 239 227
General and administrative............................... 171 12 207 30
---------- ------- -------- --------
Total $ 475 $ 294 $ 830 $ 656
========== ======= ========= =========

ENGAGE, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)

G. DEBT TO CMGI

In October 2001, CMGI agreed to loan us $8.0 million under a secured
convertible demand note payable bearing interest at 7.5%. Under the terms of the
note payable, principal and interest will become due and payable on demand any
time on or after August 1, 2002 or earlier upon the occurrence of an event of
default as defined in the note. The principal and/or interest is convertible, at
CMGI's election, into our common stock at a conversion price of $0.25 per share.
In addition, the note contains an anti-dilution provision whereby the conversion
price may be adjusted downward if we were to issue any shares of common stock in
the future at a price per share less than the then current market price. The
note is collateralized by substantially all of our assets.

In February 2002, the terms of these notes were amended (see Note M).

H. LEASES

We have entered into noncancelable operating leases covering certain of our
office facilities and equipment which expire through 2005. We also pay CMGI for
office facilities used as our headquarters for which we are charged based upon
an allocation of the total costs for the facilities at estimated market rates.

We lease certain property and equipment directly from CMGI. Under the
arrangements, CMGI negotiates the terms and conditions of the leases and obtains
the assets to be leased. CMGI bears all liability for payment, and we are not
financially obligated under the leases. We are charged the actual lease fees
paid by CMGI, plus an additional administrative charge that approximates the
fair value of the services received.

Minimum annual rental commitments, including amounts due to CMGI, are as
follows at January 31, 2002:

OPERATING
LEASES
--------------
(IN THOUSANDS)

2002 (remaining six months)................................. $ 2,490
2003........................................................ 3,255
2004........................................................ 2,910
2005........................................................ 2,317
2006........................................................ 1,887
Thereafter.................................................. 2,133
-------
$14,992
=======

I. RELATED PARTY TRANSACTIONS

We outsourced data center operations from companies in which CMGI has a
significant ownership interest. Total cost of revenue, included within both
continuing and discontinued operations, related to outsourcing from related
parties for the three months ended January 31, 2001 and 2002 and the six months
ended January 31, 2001 and 2002 was approximately $3.1 million, $(143,000), $6.3
million and $507,000, respectively.

ENGAGE, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)

In March 2002, we settled all outstanding liabilities (including future
lease costs that were included in our restructuring accrual and accrual for
discontinued operations) with a CMGI subsidiary. As a result of the settlement
prior to the release of these financial statements, we recognized a gain of
approximately $1.1 million, of which approximately $98,000 is included as a
reduction of cost of revenue in the three months ended January 31, 2002, and the
remaining $1.0 million is included as a reduction in losses of discontinued
operations that were accrued in July 2001.

J. RESTRUCTURING

In the first fiscal quarter of fiscal 2001, we implemented a restructuring
plan designed to bring costs more in line with revenue and strengthen our
financial performance. The restructuring plan included a reduction of our
workforce by approximately 170 persons or approximately 12% of our worldwide
headcount. All of these actions were completed prior to October 31, 2000. As a
result of the reduction in headcount, we undertook plans to close two office
locations and consolidate operations. In connection with this restructuring
plan, we incurred severance costs for terminated employees, accrued future lease
costs and wrote off unamortized leasehold improvements for office locations
being closed.

In the second fiscal quarter of fiscal 2001, we implemented a restructuring
plan designed to further increase operational efficiencies and bring costs in
line with revenue. The restructuring, which was approved by our Board of
Directors on December 7, 2000, included a reduction in workforce by
approximately 275 persons or 26% of our worldwide headcount, with the employee
reduction completed prior to April 30, 2001. Employees affected by the
restructuring were notified both through direct personal contact and by written
notification. In addition to headcount reductions, we undertook plans to close
various offices. In connection with the restructuring, we incurred severance
costs for terminated employees, accrued future lease costs and wrote off
unamortized leasehold improvements and furniture and fixtures for office
locations being closed.

In the first fiscal quarter of fiscal 2002, we implemented a restructuring
plan designed to reduce corporate overhead costs by reducing the size of the
company's finance and marketing staffs, as well as several senior management
positions. In addition, the plan included a reduction in the Company's research
and development, operations and professional services groups. As a result, our
total workforce was reduced by approximately 60 persons or approximately 22% of
our worldwide headcount. The reduction in corporate overhead costs and research
and development staffs reflected a decrease in staffing needs due to the closing
of our Media segment during the first quarter of fiscal 2002. The reduction in
our operations and professional services groups reflected a downsizing due to
expectations about the continued weakness in demand for our products and
services in the immediate future.

The following table sets forth a summary of these restructuring costs and
related charges (in thousands):

THREE MONTHS ENDED JANUARY 31, SIX MONTHS ENDED JANUARY 31,
------------------------------ -----------------------------
2001 2002 2001 2002
------------ ----------- ---------- ----------
(IN THOUSANDS)

Severance and applicable payroll taxes................... $ 2,493 $ -- $ 4,345 $ 975
Write-off of fixed assets................................ 6,820 -- 7,316 --
Accrual for future lease costs........................... 7,478 -- 9,260 --
------------ ---------- ---------- ----------
Total $ 16,791 $ -- $ 20,921 $ 975
============ ========== ========== ==========

Included in the $4,130,000 restructuring charge incurred in the first
fiscal quarter of fiscal 2001 are $3,633,000 of cash costs and $497,000 in
non-cash related costs. Included in the $16,791,000 restructuring charge
incurred in the second fiscal quarter of fiscal 2001 are $9,731,000 of cash
costs and $7,060,000 in non-cash related costs. All charges incurred in the
first fiscal quarter of fiscal 2002 were cash charges.

Of the $4,130,000 of charges in the first quarter of fiscal 2001, $859,000
was included in continuing operations with the remaining $3,271,000 included in
loss from discontinued operations. Of the $16,791,000 of charges in the second
quarter of fiscal 2001, $857,000 was included in continuing operations with the
remaining $15,934,000 included in loss from discontinued operations.

As of January 31, 2002, approximately $30.7 million of all restructuring
charges recorded during fiscal 2001 and the first quarter of fiscal 2002 have
been paid or otherwise utilized and the remaining $1.2 million of unpaid costs
are expected to be paid through June 2004.

ENGAGE, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)

K. INVESTMENT IN SUBSIDIARY

In November 2001, we increased our ownership percentage in Engage Japan,
Inc. from 66.6% to 94.0% through the issuance of 1 million shares of common
stock valued at $250,000 to Sumitomo Corporation, the minority stockholder in
Engage Japan, Inc. In conjunction with this transaction, we recorded a
reclassification of $6.8 million from minority interest to additional paid-in
capital to reflect the incremental change in ownership interest. In January
2002, we had substantially ceased the operations of Engage Japan, Inc. and had
initiated our plan to liquidate our Japanese subsidiary. We anticipate that all
operations will cease prior to April 30, 2002 and we do not anticipate incurring
any significant costs associated with the closure. We intend to service the
Jananese market through both our US and foreign subsidiaries.

L. LEGAL PROCEEDINGS

On or about September 6, 2001, the first of several putative class action
complaints was filed in the United States District Court for the Southern
District of New York naming us, several of our present and former officers and
directors and the underwriters for our July 19, 1999 initial public offering as
defendants. Purportedly filed on behalf of those persons who purchased our
common stock between July 19, 1999 and December 6, 2000, the complaints allege
violations of the Securities Act of 1933 and the Securities Exchange Act of
1934.

Specifically, the complaints each allege that the defendants failed to
disclose "excessive commissions" purportedly solicited by and paid to the
underwriter defendants in exchange for allocating shares of the Company's stock
to preferred customers and alleged agreements among the underwriter defendants
and preferred customers tying the allocation of IPO shares to agreements to make
additional aftermarket purchases at pre-determined prices. Plaintiffs claim that
the failure to disclose these alleged arrangements made our prospectus
incorporated in our registration statement on Form S-1 filed with the SEC in
July 1999 materially false and misleading. Plaintiffs seek unspecified damages.

We believe that the allegations are without merit and we intend to
vigorously defend against the plaintiffs' claims. As the litigation is in an
initial stage, we are not able at this time to estimate the possibility of loss
or range of loss, if any, that might result.

On February 26, 2002, a putative class action lawsuit was filed in the
Court of Chancery of the State of Delaware in New Castle County naming Engage,
each member of our Board of Directors, and CMGI, our majority stockholder, as
defendants. The suit alleges that CMGI manipulated Engage to enter into
transactions that unfairly favor CMGI and that CMGI and Engage's directors have
breached their respective fiduciary duties to Engage and Engage's minority
stockholders by: (i) approving and entering into certain secured convertible
notes that Engage issued to CMGI in October 2001 (the "Notes") on terms that
were unfair to Engage and Engage's minority stockholders; (ii) approving and
recommending to Engage stockholders the approval of a proposal in Engage's Proxy
Statement dated February 20, 2002 (the "Proxy Statement") relating to the
potential issuance of our common stock in connection with conversion of the
Notes; and (iii) approving and soliciting the approval of Engage stockholders of
the proposals in the Proxy Statement relating to three proposed reverse stock
splits of our common stock in order to avoid delisting from Nasdaq. The suit
also alleges that certain disclosures in the Proxy Statement with respect to the
foregoing proposals were materially misleading and incomplete.

Plaintiffs seek injunctive relief with respect to the Notes and the
proposed reverse stock splits, rescission of the issuance of the Notes and
proposed reverse stock splits, disgorgement of alleged profits and benefits
obtained by the defendants, rescissory and/or compensatory damages, reasonable
attorneys' fees and expenses, and other unspecified damages. In addition, the
plaintiffs also sought an injunction to prevent approval of the foregoing
proposals at our Annual Meeting of Stockholders originally scheduled for March
15, 2002 (and later postponed until March 29, 2002). On February 28, 2002, the
Delaware Court of Chancery denied plaintiffs' requests for a preliminary
injunction hearing and permission to allow expedited discovery in the lawsuit
prior to the Annual Meeting.

We believe that the allegations are without merit, and we intend to
vigorously defend against the lawsuit. As the litigation is in its initial
stages, we are not able at this time to estimate the possibility of loss or
range of loss, if any, that might result.

We are currently party to various legal proceedings and claims which arise
in the ordinary course of business. While the outcome of these claims cannot be
predicted with certainty, we do not believe that the outcome of any of these
legal matters will have a material adverse effect on our consolidated financial
position, results of operations or cash flows.

ENGAGE, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)

M. SUBSEQUENT EVENT

In February 2002, we restructured the terms of our debt to CMGI (see Note
G) to amend the manner in which interest is compounded and in which the related
interest is convertible. Under the new agreements the interest on our $8.0
million secured convertible demand note and our $42.7 million secured promissory
note is compounded and payable quarterly in arrears. Interest on our
intercompany debt under the secured convertible promissory note is compounded
monthly and payable quarterly in arrears.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

At January 31, 2002, we were an approximately 76% owned subsidiary of CMGI,
Inc. We are a provider of content management software for multichannel
marketing. Our solutions are used by marketers, publishers, printers, direct
mailers, Web sites and agencies to improve the performance and efficiency of
their marketing efforts across multiple forms of media. Our solutions combine
workflow automation and digital asset management functions and enable delivery
of the resulting marketing programs across both traditional and new media
channels. Whether the final product is print advertising, catalogs, direct mail,
circulars, Web site promotions, or online advertising, we believe our solutions
streamline our customers' planning, management, and delivery of multichannel
marketing programs and materials, improving brand consistency and reducing
production costs. Our solutions support collaboration across workgroups
including colleagues, clients, partners and vendors and are designed to
integrate easily into an organization's overall business workflow allowing
marketing to share plans, schedules, costs and historical product and campaign
performance with finance, planning, accounting, and merchandising.

In September 2001, we announced the sale of certain assets of our
AdKnowledge media service and the shutdown of our media network. As a result,
for all periods presented, the Media segment has been accounted for as a
discontinued operation. Accordingly, the Media segment's current and non-current
assets have been segregated from continuing operations in the accompanying
consolidated balance sheets, and its operating results have been segregated and
reported as discontinued operations in the accompanying consolidated statements
of operations and cash flows, and related notes to interim consolidated
financial statements for all periods presented.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States
requires management to make judgments, assumptions and estimates that affect the
amounts reported in the Consolidated Financial Statements and accompanying
notes. Note 2 to the Consolidated Financial Statements in the Annual Report on
Form 10-K for the fiscal year ended July 31, 2001 describes the significant
accounting policies and methods used in the preparation of the Consolidated
Financial Statements. Estimates are used for, but not limited to, the accounting
for the allowance for doubtful accounts, goodwill impairments, contingencies,
and restructuring costs. Actual results could differ from these estimates. The
following critical accounting policies are impacted significantly by judgments,
assumptions and estimates used in the preparation of the Consolidated Financial
Statements. Additionally, we consider revenue recognition to be a critical
accounting policy.

The allowance for doubtful accounts is based on our assessment of the
collectibility of specific customer accounts and the aging of the accounts
receivable. If there is a deterioration of a significant customer's credit
worthiness or actual defaults are higher than our historical experience, our
estimates of the recoverability of amounts due us could be adversely affected.

We will perform goodwill impairment tests as a result of management's
ongoing business review and impairment analysis performed under our existing
policy regarding impairment of long-lived assets. In response to changes in
industry and market conditions, we may strategically realign our resources and
consider restructuring, disposing of, or otherwise exiting businesses, which
could result in an impairment of goodwill.

We are subject to the possibility of various loss contingencies arising in
the ordinary course of business. We consider the likelihood of the loss or
impairment of an asset or the incurrence of a liability as well as our ability
to reasonably estimate the amount of loss in determining loss contingencies. An
estimated loss contingency is accrued when it is probable that a liability has
been incurred or an asset has been impaired and the amount of loss can be
reasonably estimated. We regularly evaluate current information available to us
to determine whether such accruals should be adjusted.

The accrual of restructuring costs is based on our assessment of costs that
will be incurred to complete planned restructuring activities. Accruals are made
at the time the plan is approved, with additional assessments made on a
quarterly basis to determine if the accrual is properly stated based upon
current facts. Any adjustments to restructuring accruals are made when facts
indicate that costs will be either more or less than previously estimated.

We recognize revenue from periodic subscriptions ratably over the
subscription term, typically twelve months. We recognize revenue from
usage-based subscriptions monthly based on actual usage.

Amounts collected prior to satisfying the above revenue recognition
criteria are classified as deferred revenue.

COMPARISON OF THE THREE MONTHS ENDED JANUARY 31, 2001 AND JANUARY 31, 2002

Revenue, Cost of Revenue and Gross Margin

Revenue is derived primarily through the sale of software licenses and
related software and consulting services. Service revenue includes fees charged
for AdBureau, our outsourced advertising management service, as well as
training, installation, software support and maintenance and actual consulting
for customer specific requirements. Cost of revenue consists primarily of fees
paid for outsourced data center operations needed to support our AdBureau
product as well as payroll, royalties, amortization of developed technology
intangible asset, benefits and allocated overhead of our support and consulting
groups.

Product revenue increased from $2.1 million in the three months ended
January 31, 2001 to $2.3 million in the three months ended January 31, 2002, a
10% increase. The increase in product revenue was due primarily to an increase
in license revenue related to our AdManager and ContentServer products,
partially offset by a decrease in license revenue for our ProfileServer product.
Service revenue decreased from $6.2 million in the three months ended January
31, 2001 to $3.7 million in the three months ended January 31, 2002, a 40%
decrease. During the quarter ended January 31, 2001 we recognized service
revenue from two significant consulting projects. These projects were not fully
replaced with similar projects for the quarter ended January 31, 2002, resulting
in the decline in service revenue quarter over quarter.

Product gross margin increased from 28% in the three months ended January
31, 2001 to 35% in the three months ended January 31, 2002. The increase in
product gross margin is due to increased product revenue, resulting in a larger
revenue base to absorb relatively fixed product costs. Product revenue
represented $2.1 million or 26% of total revenue in the three months ended
January 31, 2001 as compared to $2.3 million or 39% of total revenue in the
three months ended January 31, 2002.

Services gross margin decreased from 7% in the three months ended January
31, 2001 to 6% in the three months ended January 31, 2002. The slight decrease
in services gross margin is due to a decrease in services revenue in the three
months ended January 31, 2002 as compared to the three months ended January 31,
2001, offset by reduced expenses in the three months ended January 31, 2002 as
compared to the three months ended January 31, 2001 due to headcount reductions.

We anticipate that revenue may increase over the next two to three quarters
due primarily to expected license sales increases of our ContentServer software.
If license revenue increases as expected, our gross margin should increase as
well due to a higher gross margin associated with license revenue.

Operating Expenses

Research and Development. Research and development expenses consist
primarily of payroll and related costs, consulting and contractor fees,
facility-related costs, such as rent and computer and network services, and
depreciation expense. Our research and development expenses decreased from $3.0
million in the three months ended January 31, 2001 to $1.9 million in the three
months ended January 31, 2002, a 37% decrease. This decrease was primarily due
to savings related to restructuring activities during the last three fiscal
quarters of 2001 and the first fiscal quarter of 2002. Our research and
development staff decreased 30% from January 31, 2001 to January 31, 2002.
Research and development expenses were 36% of revenue for the three months ended
January 31, 2001 compared to 31% of revenue for the three months ended January
31, 2002.

Selling and Marketing. Selling and marketing expenses consist primarily of
payroll and related costs, consulting and professional fees, advertising
expenses, costs of attending trade shows, employee travel and depreciation
expense. Selling and marketing expenses decreased from $12.8 million in the
three months ended January 31, 2001 to $2.9 million in the three months ended
January 31, 2002, a 78% decrease. This decrease was primarily due to savings
related to restructuring activities during the last three fiscal quarters of
2001 and the first fiscal quarter of 2002. Overall, our sales and marketing
staff decreased 66% from January 31, 2001 to January 31, 2002. Sales and
marketing expenses were 155% of revenue for three months ended January 31, 2001
compared to 48% of revenue for the three months ended January 31, 2002.

General and Administrative. General and administrative expenses consist
principally of payroll and related costs, consulting and professional fees, bad
debt, facility and related costs and depreciation expense. General and
administrative expenses decreased from $6.1 million in the three months ended
January 31, 2001 to $2.1 million in the three months ended January 31, 2002, a
65% decrease. The decrease in costs was primarily due to decreases in payroll
and related costs, as well as a decrease in bad debt expense in the quarter
ended January 31, 2002. Overall, our general and administrative staff decreased
61% from January 31, 2001 to January 31, 2002. General and administrative costs
were 73% of revenue for the three months ended January 31, 2001 compared to 35%
of revenue for the three months ended January 31, 2002. This decrease is
primarily due to the significant decrease in expenses in the three months ended
January 31, 2002 as compared to the three months ended January 31, 2001.

Amortization and Impairment of Goodwill and Other Intangibles. Amortization
and impairment of goodwill and other intangibles decreased from $18.7 million in
the three months ended January 31, 2001 to $5.9 million in the three months
ended January 31, 2002, a 69% decrease. The decrease was due to a decrease in
the amount of goodwill and other intangibles to be amortized in the three months
ended January 31, 2002 as compared to the three months ended January 31, 2001.
In the quarter ended July 31, 2001, we recorded a $109.0 million impairment
charge which reduced the goodwill and other intangible asset base that needed to
be amortized in the three months ended January 31, 2002.

We record impairment charges as a result of management's ongoing business
review and impairment analysis performed under its existing policy regarding
impairment of long-lived assets. Where impairment indicators were identified,
management determined the amount of the impairment charge by comparing the
carrying value of long-lived assets to their estimated fair value. Management
estimates fair value of goodwill and certain other intangible assets based on a
combination of the discounted cash flow methodology, which is based upon
converting expected cash flows to present value, and the market approach, which
includes analysis of market price multiples of companies engaged in lines of
business similar to us. The market price multiples are selected and applied to
us based on the relative performance, future prospects and risk profile of
Engage in comparison to the guideline companies.

Restructuring Costs. Restructuring expense was $857,000 in the three months
ended January 31, 2001, consisting of severance and related costs as well as
future lease and related costs associated with the closing of one office
location.

Stock Compensation. Stock compensation expense decreased from $475,000 in
the three months ended January 31, 2001 to $294,000 in the three months ended
January 31, 2002, a 38% decrease. The decrease is related to the termination of
employment of certain individuals for whom stock compensation costs were being
incurred.

Other Income (Expense)

Interest Income. Interest income decreased from $1.6 million in the three
months ended January 31, 2001 to $137,000 in the three months ended January 31,
2002, a 91% decrease. The decrease in interest income was primarily due to lower
cash equivalents and short-term investment balances during fiscal 2002 compared
to fiscal 2001 as well as a significant reduction in the rate of return on those
investments.

Interest Expense. Interest expense increased from $2,000 in the three
months ended January 31, 2001 to $1.0 million in the three months ended January
31, 2002. The increase in interest expense was the direct result of our
converting all amounts we owed to CMGI into debt in October 2001 and related
interest on that debt for the quarter ended January 31, 2002.

Minority Interest. Minority interest decreased from $311,000 for the three
months ended January 31, 2001 to $16,000 for the three months ended January 31,
2002, a 95% decrease. Minority interest reflects the minority shareholders'
share of the losses of Engage Japan, Inc.

Other Income (Expense), Net. Other income (expense), net decreased from an
expense of $1.6 million for the three months ended January 31, 2001 to an
expense of $289,000 for the three months ended January 31, 2002, an 82%
decrease. The change in other income (expense), net was primarily due to losses
incurred during the three months ended January 31, 2001 related primarily to an
impairment write-down of an equity investment.

Discontinued Operations

Loss From Discontinued Operations. Loss from discontinued operations was
$654.9 million in the three months ended January 31, 2001. Loss from
discontinued operations represents the net operating results for our media
operations which have been classified within discontinued operations as a result
of a decision made in September 2001 to exit the Media segment. The loss from
discontinued operations relates principally to our acquisition of AdKnowledge
and Flycast, and to a lesser extent, the net loss for I/PRO in the three months
ended January 31, 2001.

COMPARISON OF THE SIX MONTHS ENDED JANUARY 31, 2001 AND JANUARY 31, 2002

Revenue, Cost of Revenue and Gross Margin

Product revenue decreased from $10.6 million in the six months ended
January 31, 2001 to $3.4 million in the six months ended January 31, 2002, a 69%
decrease. The decrease in product revenue was due primarily to a decrease in
license revenue related to our AdManager software and to a lesser extent,
decreases in license revenue for our ProfileServer and ContentServer products.
In the six months ended January 31, 2001, we recorded approximately $4.5 million
of product revenue from an AdManager source code sale. Service revenue decreased
from $11.1 million in the six months ended January 31, 2001 to $9.4 million in
the six months ended January 31, 2002, a 15% decrease. During the six months
ended January 31, 2001 we recognized service revenue from two significant
consulting projects. These projects were not fully replaced with similar
projects for the six months ended January 31, 2002, resulting in the decline in
service revenue from the six months ended January 31, 2001 versus the six months
ended January 31, 2002.

Product gross margin decreased from 78% in the six months ended January 31,
2001 to 15% in the six months ended January 31, 2002. The decrease in product
gross margin is due to the significant decline in product revenue and the
relatively fixed nature of amortization of developed technology. Product revenue
represented $10.6 million or 49% of total revenue in the six months ended
January 31, 2001 as compared to $3.4 million or 26% of total revenue in the six
months ended January 31, 2002.

Services gross margin increased from breakeven in the six months ended
January 31, 2001 to 11% in the six months ended January 31, 2002. The
improvement in services gross margin is due to better utilization of our service
and support staff in the six months ended January 31, 2002 as compared to the
six months ended January 31, 2001 and reduced expenses in the six months ended
January 31, 2002 as compared to the six months ended January 31, 2001 due to
headcount reductions.

We anticipate that revenue may increase over the next two to three quarters
due primarily to expected license sales increases of our ContentServer software.
If license revenue increases as expected, our gross margin should increase as
well due to higher gross margin associated with license revenue.

Operating Expenses

In-Process Research and Development. In-process research and development
expense was $700,000 for the six months ended January 31, 2001, resulting from
the MediaBridge acquisition in September 2001.

Research and Development. Our research and development expenses decreased
from $5.5 million in the six months ended January 31, 2001 to $4.3 million in
the six months ended January 31, 2002, a 22% decrease. This decrease was
primarily due to

savings related to restructuring activities in the latter half of fiscal 2001
and the first quarter of fiscal 2002, offset by the inclusion of the
MediaBridge results in the full six-month period ended January 31, 2002. Our
research and development staff decreased 30% from January 31, 2001 to January
31, 2002. Research and development expenses were 26% of revenue for the six
months ended January 31, 2001 compared to 34% of revenue for the six months
ended January 31, 2002.

Selling and Marketing. Selling and marketing expenses decreased from $28.2
million in the six months ended January 31, 2001 to $6.2 million in the six
months ended January 31, 2002, a 78% decrease. The decrease in costs was
primarily due to reductions in travel and consulting expenses resulting from
cost control measures and a general reduction in our size during the second half
of the six months ended January 31, 2002, as well as a decrease in advertising
and trade show expenses, offset by increased costs resulting from our
acquisition of MediaBridge. Overall, our sales and marketing staff decreased 66%
from January 31, 2001 to January 31, 2002. Sales and marketing expenses were
130% of revenue for the six months ended January 31, 2001 compared to 48% of
revenue for the six months ended January 31, 2002.

General and Administrative. General and administrative expenses decreased
from $10.6 million in the six months ended January 31, 2001 to $4.8 million in
the six months ended January 31, 2002, a 55% decrease. The decrease in costs was
primarily due to decreases in payroll and related costs, as well as a decrease
in bad debt expense in the six months ended January 31, 2002. Overall, our
general and administrative staff decreased 61% from January 31, 2001 to January
31, 2002. General and administrative costs were 49% of revenue for the six
months ended January 31, 2001 compared to 37% of revenue for the six months
ended January 31, 2002. This decrease is primarily due to the significant
decrease in expenses in the six months ended January 31, 2002 as compared to the
six months ended January 31, 2001.

Amortization and Impairment of Goodwill and Other Intangibles. Amortization
and impairment of goodwill and other intangibles decreased from $29.4 million in
the six months ended January 31, 2001 to $11.7 million in the six months ended
January 31, 2002, a 60% decrease. The decrease was due to a decrease in the
amount of goodwill and other intangibles to be amortized in the six months ended
January 31, 2002 as compared to the six months ended January 31, 2001. In the
quarter ended July 31, 2001, we recorded a $109.0 million impairment charge
which reduced the goodwill and other intangible asset base that needed to be
amortized in the six months ended January 31, 2002.

Restructuring Costs. Restructuring expense decreased from $1.7 million in
the six months ended January 31, 2001 to $975,000 in the six months ended
January 31, 2002, a 43% decrease. During the six months ended January 31, 2001
and 2002, restructuring expense within continuing operations consisted of
severance and related costs as well as future lease and related costs associated
with the closing of one office location.

Stock Compensation. Stock compensation expense decreased from $830,000 in
the six months ended January 31, 2001 to $656,000 in the six months ended
January 31, 2002, a 21% decrease. The decrease is related to the termination of
employment of certain individuals for whom stock compensation costs were being
incurred.

Other Income (Expense)

Interest Income. Interest income decreased from $3.5 million in the six
months ended January 31, 2001 to $380,000 in the six months ended January 31,
2002, an 89% decrease. The decrease in interest income was primarily due to
lower cash equivalents and short-term investment balances during fiscal 2002
compared to fiscal 2001 as well as a significant reduction in the rate of return
on those investments.

Interest Expense. Interest expense increased from $29,000 in the six months
ended January 31, 2001 to $1.4 million in the six months ended January 31, 2002,
a 4,893% increase. The increase in interest expense was the direct result of
converting all amounts we owed to CMGI into debt in October 2001 and related
interest on that debt from October 2001 through January 2002.

Minority Interest. Minority interest decreased from $654,000 for the six
months ended January 31, 2001 to $109,000 for the six months ended January 31,
2002, an 83% decrease. Minority interest reflects the minority shareholders'
share of the losses of Engage Japan, Inc.

Other Income (Expense), Net. Other income (expense), net decreased from an
expense of $1.7 million for the six months ended January 31, 2001 to an expense
of $128,000 for the six months ended January 31, 2002, a 92% decrease. The
change in other income (expense), net was related primarily to an impairment
write-down of an equity investment.

Discontinued Operations

Loss From Discontinued Operations. Loss from discontinued operations was
$803.1 million in the six months ended January 31, 2001. Loss from discontinued
operations represents the net operating results for our media operations which
have been classified within discontinued operations as a result of a decision
made in September 2001 to exit the Media segment. The loss from discontinued
operations relates principally to our acquisition of AdKnowledge and Flycast,
and to a lesser extent, the net loss for I/PRO in the six months ended January
31, 2001.

LIQUIDITY AND CAPITAL RESOURCES

Our cash and cash equivalents decreased from $33.3 million at July 31, 2001
to $24.3 million at January 31, 2002. Net cash used in operating activities was
$13.6 million for the six months ended January 31, 2002. Cash used in operating
activities resulted primarily from net losses and decreases in accounts payable
and accrued expenses, which was partially offset by decreases in accounts
receivable and prepaid expenses and an increase in amounts due to CMGI and
affiliates. Net cash used for investing activities was $352,000 for the six
months ended January 31, 2002. Net cash provided by financing activities was
$4.6 million and consisted primarily of the proceeds of the $8.0 million CMGI
borrowing, partially offset by repayments of capital leases and notes payable.

We anticipate that operating expenses will decrease modestly during the
next two quarters due to continued cost control measures. In addition, due to
the settlement of several facility and equipment leases we would anticipate a
decrease in our cash utilization as compared to the first six months of fiscal
2002.

In October 2001, CMGI agreed to loan us $8.0 million under a secured
convertible demand note payable bearing interest at 7.5%. Under the terms of the
note payable, principal will become due and payable on demand any time on or
after August 1, 2002 or earlier upon the occurrence of an event of default as
defined in the note. Interest is compounded and payable quarterly in arrears on
October 31, January 31, April 30 and July 31 of each year until the note is paid
in full. Interest payments for the quarters ending October 31, 2001, January 31,
2002, April 30, 2002 and July 31, 2002 are deferred and become payable on August
1, 2002. The note plus accrued interest is convertible, at CMGI's election, into
our common stock at a conversion price of $0.25 per share. In addition, the note
contains an anti-dilution provision whereby the conversion price may be adjusted
downward if we were to issue any shares of common stock in the future at a price
per share less than the then current market price. By written consent, dated
February 28, 2002, CMGI, our majority stockholder, has approved the issuance of
our common stock that may be issued upon the conversion of this note. The note
is collateralized by substantially all of our assets. The note is collateralized
by substantially all of our assets.

In October 2001, we also restructured our outstanding amounts payable to
CMGI into a secured promissory note payable in the amount of $42.7 million
bearing interest at 7.5%. Under the terms of the note payable, principal will
become due and payable on demand any time on or after August 1, 2002 or earlier
upon the occurrence of an event of default as defined in the note. The note is
collateralized by substantially all of our assets. Interest is compounded and
payable quarterly in arrears on October 31, January 31, April 30 and July 31 of
each year until the note is paid in full. Interest payments for the quarters
ending October 31, 2001, January 31, 2002, April 30, 2002 and July 31, 2002 are
deferred and become payable on August 1, 2002.

In October 2001, CMGI and Engage agreed to structure any intercompany debt
incurred by us subsequent to October 1, 2001 through July 31, 2002 under a
secured convertible promissory note bearing interest at 7.5%. Under the terms of
the promissory note, principal will become due and payable on demand any time on
or after August 1, 2002 or earlier upon the occurrence of an event of default as
defined in the note. Interest is compounded monthly and payable in arrears on
October 31, January 31, April 30 and July 31 of each year until the note is paid
in full. Interest payments for the quarters ending October 31, 2001, January 31,
2002, April 30, 2002 and July 31, 2002 are deferred and become payable on
August 1, 2002. The principal and/or interest of the intercompany debt incurred
each calendar month under the note will be convertible, at CMGI's election, into
our common stock at a conversion price equal to the closing price of our common
stock on the last trading day of such calendar month. In addition, the note
contains an anti-dilution provision whereby the conversion price may be adjusted
downward if we were to issue any shares of common stock in the future at a price
per share less than the then current market price. By written consent, dated
February 28, 2002, CMGI, our majority stockholder, has approved the issuance of
our common stock that may be issued upon the conversion of this note. The note
is collateralized by substantially all of our assets. The note is collateralized
by substantially all of our assets. Debt incurred under this agreement was
approximately $5.6 million as of January 31, 2002.

In March 2002, we settled all outstanding liabilities (including future
lease costs that were included in our restructuring accrual and accrual for
discontinued operations) with a CMGI subsidiary. As a result of the settlement
prior to the release of these financial statements, we recognized a gain of
approximately $1.1 million, of which approximately $98,000 is included as a
reduction of cost of revenue in the three months ended January 31, 2002, and the
remaining $1.0 million is included as a reduction in losses from discontinued
operations that were accrued in July 2001. The settlement requires us to make
payments totaling $3.6 million in three installments during the remainder of
fiscal 2002.

The following summarizes anticipated cash requirements for operating leases
and amounts due to CMGI and subsidiaries under the above notes and the
aforementioned settlement during each of the fiscal years ended July 31:

CMGI DEBT
OPERATING REPAYMENT(a) AND
LEASES SUBSIDIARY SETTLEMENT TOTAL
--------- --------------------- --------
(IN THOUSANDS)

2002 (remaining six months)........ $ 2,490 $ 3,600 $ 6,090
2003............................... 3,255 56,266 59,521
2004............................... 2,910 -- 2,910
2005............................... 2,317 -- 2,317
2006............................... 1,887 -- 1,887
Thereafter......................... 2,133 -- 2,133
------- ------- --------
$14,992 $59,866 $ 74,858
======= ======= ========

(a) Amounts due to CMGI totaling $56.3 million are due on demand any time
subsequent to August 1, 2002 or earlier upon the occurrence of an event of
default.

We currently anticipate that our available cash resources will be
sufficient to meet our anticipated needs for working capital and capital
expenditures for the remainder of the fiscal year ending July 31, 2002. As of
January 31, 2002, we owe CMGI $56.3 million which will become due and payable on
demand on or after August 1, 2002. As a result, if CMGI demands repayment of
such amount owed, we will need to obtain additional financing prior to August 1,
2002 or renegotiate amounts owed to CMGI so that repayment is extended beyond
August 1, 2002. If additional funds are raised through the issuance of equity or
convertible debt securities, or if CMGI elects to convert our debt into our
common shares, the percentage ownership of our stockholders will be reduced and
our stockholders will experience dilution of their interest in us. If adequate
funds are not available or are not available on acceptable terms, our ability to
continue as a going concern, develop or enhance services or products or
otherwise respond to competitive pressures may be significantly limited.

On February 14, 2002, we received a notice from the Nasdaq National Market
that our common stock had failed to maintain the required minimum closing bid
price of $1.00 for a period of 30 consecutive trading days. As a result, Nasdaq
provided us 90 calendar days, or until May 15, 2002, to regain compliance with
this requirement or face delisting from trading on Nasdaq. If we are unable to
regain compliance with this requirement, our common stock may be delisted from
trading on the Nasdaq National Market. If our common stock was delisted, trading
in our common stock would decrease substantially, or cease altogether, the
market price of the common stock may decline further, potentially to zero, and
stockholders may lose some or all of their investment. By written consent,
dated February 28, 2002, CMGI, our majority stockholder, has authorized our
Board of Directors, in its sole discretion, to amend our charter to effect
either a 1-for-5, 1-for-10 or 1-for-15 reverse stock split without any further
approval or authorization required by our stockholders for the purpose of
raising our stock price to regain compliance with Nasdaq's minimum bid price
requirement. This action will become effective 20 days after we mail to our
stockholders an information statement pursuant to the requirements of Rule
14c-2 of the Securities Exchange Act of 1934. After the action becomes
effective, we intend to effect the split with a ratio that will most closely
approximate a market value of $4.00 per share for our common stock. We cannot
assure you, however, that the market price of our common stock immediately
after a reverse stock split will be maintained for any period of time.
Moreover, there can be no assurance that the market price of our common stock
after a reverse stock split will adjust to reflect the exchange ratio or that
the market price following a reverse stock split will either exceed or remain
in excess of the current market price. There can also be no assurance that we
will be able to maintain the listing of our common stock on Nasdaq even if a
reverse stock split results in a bid price for the our common stock that
exceeds $1.00 per share.

FOREIGN OPERATIONS

The results of our international operations are subject to currency
fluctuations. As of January 31, 2002, we had subsidiaries in Europe and a
subsidiary in Japan. To date, our financial condition and results of operations
have not been materially affected by exchange rate fluctuations. However, there
can be no guarantee that our financial condition and results of operations will
not be adversely affected by exchange rate fluctuations in the future.

In January 2002, we had substantially ceased the operations of Engage
Japan, Inc. and had initiated our plan to liquidate our Japanese subsidiary.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this Quarterly Report on Form 10-Q
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act. Statements
contained herein that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, the words
"anticipates," "believes," "plans," "expects" and similar expressions are
intended to identify forward-looking statements. Such statements are based on
management's current expectations and are subject to a number of factors and
uncertainties that could cause actual results or outcomes to differ materially
from those described or implied in such forward-looking statements. These
statements address or may address the following subjects:

- that we anticipate that revenue may increase over the next two to
three quarters due primarily to expected sales increase of
ContentServer software;

- that if license revenue increases as expected, our gross margin
will increase;

- that impairment factors evaluated by management may change resulting
in material impairment charges in future periods;

- that we anticipate operating expenses will decrease modestly during
the next two quarters;

- that we currently anticipate that our available cash resources will be
sufficient to meet our anticipated needs for working capital and
capital expenditures for the remainder of the fiscal year ending
July 31, 2002;

- that we anticipate a decrease in our cash utilization;

- our belief that our solutions streamline our customers' planning,
management and delivery of multi-channel marketing programs and
materials thereby improving brand consistency and reducing production
costs; and

- that by effecting a reverse stock split we will be able to avoid
delisting from Nasdaq.

We caution investors that there are a number of important factors that
could cause our results to differ materially from those indicated by such
forward-looking statements. These factors include those set in our Annual Report
on Form 10-K filed with the SEC on October 29, 2001 in the section titled
"Factors that May Affect Future Results and Market Price of Stock," and the
risks discussed in our other filings with the SEC and elsewhere throughout this
report. We do not intend to update any forward-looking statements after the date
of this Form 10-Q except as required by law.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The carrying values of financial instruments including cash and cash
equivalents, accounts receivable, accounts payable, debt to CMGI and notes
payable, approximate fair value because of the short maturity of these
instruments.

We have historically had very low exposure to changes in foreign currency
exchange rates, and as such, have not used derivative financial instruments to
manage foreign currency fluctuation risk. If we expand globally, the risk of
foreign currency exchange rate fluctuation may increase. Therefore, in the
future, we may consider utilizing derivative instruments to mitigate such risks.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

In November 2001, as consideration for increasing our percentage
ownership interest in Engage Japan, Inc., we issued 1,000,000 shares of our
common stock to Sumitomo Corporation. No underwriters were involved in the
foregoing off and sale of securities. Such offer and sale was made in reliance
upon an exemption from the registration provisions of the Securities Act of
1933, as amended, set forth in Section 4(2) thereof.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

No exhibits to be filed

(b) Reports on Form 8-K

No reports on Form 8-K were filed during the quarter ended January 31,
2002.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in Andover, Massachusetts on March
18, 2002.

By: /s/ Christopher M. Cuddy
-------------------------------
Christopher M. Cuddy
Chief Executive Officer,
President and Director
(Principal Executive Officer)

By: /s/ Robert W. Bartlett
-------------------------------
Robert W. Bartlett
Executive V.P., Chief
Financial Officer and Treasurer
(Principal Accounting and
Financial Officer of the
Registrant)