ENGAGE INC, 10-K, 2000-10-30

ENGAGE INC
10-K, 2000-10-30
BUSINESS SERVICES, NEC

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
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FORM 10-K

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

FOR THE FISCAL YEAR ENDED JULY 31, 2000

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

FOR THE TRANSITION PERIOD FROM TO .
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COMMISSION FILE NUMBER 000-26671

ENGAGE, INC.

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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)
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(978) 684-3884
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE PER SHARE
(TITLE OF CLASS)

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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 [ ]

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

The aggregate market value of the Common Stock held by non-affiliates of
the registrant (without admitting that any person whose shares are not included
in determining such value is an affiliate) as of October 13, 2000 was
approximately $203,243,000.

The number of shares outstanding of the registrant's Common Stock as of
October 13, 2000 was 196,221,066.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement to be delivered to stockholders
in connection with the Annual Meeting of Stockholders to be held on December 20,
2000 are incorporated by reference in Items 10, 11, 12 and 13 of Part III of
this Report.
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ENGAGE, INC.

FISCAL YEAR 2000 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

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PART I.
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 11
Item 3. Legal Proceedings........................................... 11
Item 4. Submission of Matters to a Vote of Security Holders......... 11

PART II.
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters......................................... 11
Item 6. Selected Financial Data..................................... 14
Item 7. Management's Discussion and Analysis of Financial Position
and Results of Operations................................... 15
Item 7A Quantitative and Qualitative Disclosures About Market
Risk........................................................ 31
Item 8. Financial Statements and Supplementary Data................. 32
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 64

PART III.
Item 10. Directors and Executive Officers of the Registrant.......... 64
Item 11. Executive Compensation...................................... 64
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 64
Item 13. Certain Relationships and Related Transactions.............. 64

PART IV.
Part 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 64
Signatures.................................................. 66
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PART 1.

SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION

Certain statements contained in this Annual Report on Form 10-K, including
information with respect to our future business plans, constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes," "plans," "expects" and similar expressions are intended to
identify forward-looking statements. 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 forth in Part II
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Factors that May Affect Future Results and Market Price of Stock."

ITEM 1. BUSINESS

OVERVIEW

We are a leading provider of online marketing solutions. Our broad offering
of products and services enable marketers, Web sites and e-commerce merchants to
use the Internet as well as other interactive media to recruit and retain
customers. Our products and services allow marketers to get better results from
their marketing campaigns and allow Web sites to more effectively monetize their
audiences.

At the core of our solution is our Engage Knowledge database. Engage
Knowledge is a database that contains over 84 million user profiles collected
from participating Web sites across the Internet. An Engage global profile is an
anonymous collection of information about an individual Web user's consumer
interests, demographic characteristics and geographic location. These profiles
are developed through a combination of a user's browsing behavior on
participating sites on the Internet and information the user has voluntarily
declared at these sites, such as information provided on an online registration
form. Each anonymous profile omits information that would permit the personal
identification of the user, such as name, address and e-mail address. Through
the power of our database, marketers and Web sites can serve consumers
advertisements and content that matches the consumer's interests, while at the
same time respecting their right to privacy.

Our revenues are derived from three principal business segments:

Engage Media. Engage Media offers a range of products and services
designed to meet the specific needs of online marketers and Web sites around the
world. According to the June 2000 report by Media Metrix, our integrated network
of more than 4,700 Web sites currently reaches nearly 61% of the Web users in
the United States. This network enables marketers to connect with diverse
audiences through a wide choice of products and services for branding, reach,
direct response, targeting, and even campaign testing. In addition, we assist
Web sites with the sale of advertising inventory, ad delivery and related
services. We also serve the special needs of business-to-business (B2B) online
marketers and Web sites as we deliver complete solutions for reaching business
audiences through targeted Web and e-mail advertising. We have built an
extensive B2B online advertising network that includes over 265 Web sites for
the most sought after vertical audience groups, including agriculture,
automotive, building and construction, chemical, printing, food and hospitality,
healthcare, information technology, legal, small and home office, and
telecommunications. Engage Media currently has offices in the United States and
nine other countries.

Engage Media Management. Engage Media Management provides marketers and
Web sites with a full suite of analysis, tracking, management and measurement
services. Our analysis, tracking and management services enable marketers to
fully analyze the results of an online marketing or ad campaign. In addition, we
deliver results to Web site merchants and publishers by helping them understand
and verify site visitor activity and patterns at a Web site.

Engage Software and Consulting. Engage Software and Consulting provides
enterprises and Web sites with software that enables businesses to access,
store, manage and reuse promotional graphics and images across both traditional
and electronic media. In addition, we sell and outsource a powerful ad
management

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system that is a leading cross-media interactive advertising platform, enabling
Web sites to deliver integrated, targeted campaigns across multiple media types,
such as banners, streaming media, wireless text, wireless audio and off-line
devices. Our ProfileServer product is the industry's only
application-independent profiling platform which generates and delivers
complete, individual profiles of Web visitors in real time.

OUR SOLUTIONS

We deliver results-oriented solutions that enable marketers to target
messages to precise online audiences and convert prospects into buyers and
ultimately loyal customers. The primary features of our solutions are as
follows:

Connect Marketers With Online Audiences. We enable marketers to target
audience groups through anonymous, behavior-based profiles from the Engage
Knowledge database, specific clusters of Web sites with audited demographics or
by content on premium Web sites. We also employ innovative direct marketing
methodologies that allow marketers to optimize marketing campaigns in real-time
to maximize their return on investment from specific campaigns.

Improve Targeting Through Anonymous Profiles. Our Engage Knowledge
database contains user profiles collected from participating sites across the
Internet. Our database has been designed to create, refine and deliver millions
of profiles in real-time to meet the demands of multiple Web sites. When a user
visits any Web site in the Engage Media network, which we call an
"Engaged-enabled" site, we match that visitor to his or her profile in the
global profile database. We use these profiles internally to improve the
performance of media campaigns on our network and also to create recommendations
that are transmitted to customers to target advertisements, content and
e-commerce offerings to their visitors.

Deliver Response-Oriented Marketing Campaigns. Once a marketer has
selected its desired audience, our media consultants assist the marketer in
choosing the particular marketing program that is best suited for the targeted
audience. For marketers interested in direct response, Engage Media offers a
range of network services that allow marketers to design and implement different
types of campaigns for different target audiences. For marketers interested in
brand awareness or image, we offer media from well known Web sites in the Engage
Media network, as well as sponsorships and rich media campaigns typically used
for branding.

Measure and Optimize Marketing Campaigns. Through our Media Management
services, we provide a system that centrally delivers ads to 95% of Web sites
and networks capable of online advertising. This allows us to offer our clients
consistent measurement across an entire ad campaign. Absent such a system, a
marketer would need to compile a myriad of different reports that use different
counting standards, formats and terminology. Through a combination of our
services, we provide marketers with the ability to track and monitor viewers'
online responses to Internet ads across the Web and on the marketer's Web site.
These responses, commonly known as "post-click actions," may include visits,
user registrations, or purchases on the marketer's site.

"Close the Loop" With Enterprise Applications. We develop and market
software that businesses can use to create, plan, deliver and refine integrated
promotional campaigns that establish and enhance a uniform brand image across a
broad range of traditional and electronic media. Our technology achieves a
"closed-loop" solution by tracking a promotional campaign, gauging its
effectiveness and drawing on newly updated information to continually refine it
to more accurately target customers. These capabilities enable a business to
target consistent, relevant promotions to specific audiences that have expressed
an interest in identified products or services. By using our software to deploy
promotions to interested customers over the most appropriate media, we help
businesses acquire new customers and more cost-effectively retain and increase
sales to their existing customers.

Partner With Web Sites. We seek to maximize the value of a Web site's ad
inventory in a number of ways. Because we sell online media based on a variety
of targeting and business models, we can choose the method that produces the
most value for each Web site. For example, a new Web site with no consumer
recognition might initially sell inventory on a pay for performance basis, but
later as the Web site matures, it might sell profile- or demographic-targeted
inventory or even branded content inventory. We can increase the

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value of a Web site's ad inventory by anonymously profiling visitors to the Web
site and then transforming unsold or undervalued, hard-to-target ad inventory
into inventory associated with a specific desirable audience.

PRODUCTS AND SERVICES

Engage Media

Engage Media is a global media network, which helps both
business-to-consumer and business-to-business marketers find their audiences on
the Internet. Our network leads the industry in audience size with the highest
unduplicated reach in the United States. We provide a wide array of products and
services designed to help marketers make the best decisions to maximize their
online marketing results. We pay Web sites in our network a percentage of the
fees that we collect from marketers for campaigns run on our network. In
addition, we typically are responsible for tracking, billing and collecting all
fees from the advertiser and, in many instances, for serving each ad. This
allows Web sites to avoid the need to both hire an internal sales staff or
purchase sophisticated ad serving technology thereby increasing their revenue
potential. Our global expansion efforts through alliances and acquisitions have
bolstered our media properties in Australia, Asia, Canada, Europe and Japan.

Our main product and service offerings include the following:

Audience Profiles. Our Audience Profile service enables marketers to reach
viewers who match a given profile of online interests and behavior, whenever
they browse on the 4,700 Web sites in the Engage Media network. By buying ad
campaigns powered by Audience Profiles, an Internet media buyer can define and
target an audience based on demographic, geographic and other interest
categories in the Engage Knowledge database. An advertisement can then be shown
only to those Web users matching the specified criteria. Audience Profiles are
designed to enable a marketer to pay only for those advertisements that reach
its target audience, and to enable Web sites to increase the value of their
advertising inventory by augmenting existing advertising sales with the sale of
underutilized advertising inventory at higher CPM (cost per thousand) rates.

Optimized Run of Network. Our Optimized Run of Network product offers
marketers a broader reach than many of the big Web portals. We aggregate
advertising inventory from thousands of Web sites that meet minimum size and
quality requirements. Many small and medium-size Web sites that are unable to
support their own sales forces list all of their ad inventory with us. Other Web
sites that maintain either a direct or outsourced sales force, but that are
unable to sell all of their inventory, list the unsold portion on our network.
Thus, marketers are able to advertise to a wide cross-section of visitors.

Engage Echo. Engage Echo is our recently introduced solution designed to
enable marketers to retarget their prospects and customers with banner
advertising anywhere on the Engage Media network. Engage Echo works by
collecting anonymous behavioral profile information about prospects and
customers at the marketer's site and then leveraging the Engage Knowledge
database of 84 million anonymous behavioral profiles to retarget those same
customers with banner ads and promotional offers across the Internet on the
Engage Media Network. Advertisers can retarget based on two overarching
criteria: those visitors who have browsed on a marketer's Web site and those who
actually made purchases. Advertisers can then focus their targeting by
approaching users who visited the site within 30, 60 and 90 days and users who
visited a particular product or subject area. Engage Echo can help ensure that
relevant messages are delivered based on recent consumer behavior, resulting in
potential increased conversion rates and revenues, decreased customer
acquisition costs and improved customer retention.

Targeted Content. We sell a certain amount of ad inventory on our network
through our Targeted Audience Group (TAG) program. Marketers can run campaigns
on Web sites that have similar content. Engage Media analyzes and audits the
audiences of hundreds of Web sites and groups them within certain categories
according to demographics and lifestyles.

Premium Sites. Marketers can also choose to advertise on highly branded
sites with leading content. Many of the Web sites in our network feature leading
brands, such as Fast Company and U.S. News Online.

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CPC. In December 1999, we introduced CPCNet, a new cost-per-click
advertising network. CPCNet meets the needs of both marketers and Web sites who
prefer to operate within a pay-for-performance environment. For advertisers who
are interested in cost-per-click campaigns as part of their online media
strategy, CPCNet provides a vehicle for online direct marketing. For Web sites,
CPCNet allows smaller Web sites to join a Web advertising network, create new
revenue streams and reach new advertisers.

B2B Web Advertising Network. We offer marketers in the
business-to-business e-commerce market the opportunity to advertise by vertical
audience groups. This approach enables marketers to reach specific industry
audiences, such as agriculture, hospitality, information technology, legal and
small business services. We also offer marketers the ability to reach a
qualified general business audience by running campaigns across the B2B network.
As of July 31, 2000, the B2B network consisted of 265 sites in 12 distinct
vertical markets.

LocalNet. In addition to direct sales of advertising space, Engage Media
also packages and sells online ad space and related media services on a
wholesale basis to value-added resellers. To develop an indirect channel for the
offering, we recently initiated relationships with 12 resellers, including
BellSouth Corporation, SBC Communications Inc., U. S. West, R.H. Donnelley and
British Telecom. Under these agreements, Engage Media will deliver local Web
advertising inventory and supporting services to the resellers' sales forces for
resale to local advertisers.

Email. In August 1999, we announced the commercial launch of our
Newsletter Network, which provides marketers with the opportunity to deliver
messages to opt-in readers of online newsletters. The Newsletter Network
provides a one-stop option for advertisers to run banner and text advertisements
across multiple newsletters with a single media buy.

For the fiscal years ended July 31, 1998, 1999 and 2000, revenue resulting
from the sale of Engage Media's products and services was $354,000, $10.8
million and $105.7 million, respectively.

Engage Media Management

Our media management solutions are designed to help marketers execute,
measure and optimize their Internet marketing campaigns. Our mission is to put
marketers in control of their outbound Web marketing programs and maximize their
return on investment.

Engage Media Management is the web ad management partner to over 200
advertisers, including traditional and interactive agencies such as Carat
Freeman, Organic Media, Young & Rubicam, i-traffic, K2 Design and i-frontier.
Some agency clients include: Microsoft, IBM, Amazon, Bell Atlantic, Macy's,
Infoseek, Hotmail, Schwab and Hewlett-Packard. Our customers also include
leading Web marketers such as eBay, PlanetRx, Sparks.com, Healthshop.com,
Cooking.com and SportsLine USA.

Our main product and service offerings include the following:

The AdKnowledge System. The AdKnowledge System is comprised of four
Web-based modules, seamlessly integrated into one, easy-to-use system. The
Planning Module is a comprehensive media planning tool and searchable database
that allows for cross-site comparisons based on a multitude of criteria. The
Campaign Management Module is an Internet marketing "control panel" that
streamlines the management process of building Internet advertising campaigns.
The Ad Serving Module is an Internet ad serving system, and the Reporting Module
is a flexible online interface for basic performance reporting.

eAnalytics. In conjunction with the AdKnowledge System, our clients can
use eAnalytics to go beyond basic reporting and measurement to gain deeper
insights into the effectiveness of their advertising campaigns and consumers'
underlying brand awareness and purchase behavior. eAnalytics provides the
information necessary to make strategic decisions about how to execute an
effective marketing campaign on the Web. eAnalytics consists of three services:
"Advisor" enables clients to determine which ad and Web site characteristics
generate the most cost-efficient actions in their Web advertising campaigns.
"Voyager" provides detailed profiles of the audience exposed to Web campaigns or
to advertisers' Web sites using demographic profile data. "DNA" provides a
series of data mining services designed to reveal the underlying drivers of
awareness and response from an Internet advertising campaign.

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Additionally, we offer services that provide Web site traffic measurement,
analysis and verification of site traffic and advertising results, as well as
customized research services to better understand site traffic patterns.

For the years ended July 31, 1998, 1999 and 2000, revenue resulting from
the sale of Engage Media Management's products and services was $0, $2.6 million
and $24.3 million, respectively.

Engage Software and Consulting

We offer a range of software and services that enable marketers, Web sites
and merchants to manage promotional and advertising campaigns across traditional
and electronic media, and to target and deliver advertisements, content and
e-commerce offerings to their audiences.

Our main product and service offerings include the following:

ContentServer. ContentServer provides a single repository for all of a
client's rich media assets, including product and customer data, and provides
software to automate promotion workflow. ContentServer enables businesses to
store and manage rich media content, including associated graphics, images and
text. Using ContentServer, this content can be formatted and configured quickly
and easily. The advanced workflow component of ContentServer monitors planning,
creative input, and production. ContentServer reduces the time it takes to
create a promotion, particularly when a business markets over the Internet and
conducts targeted marketing. ContentServer reduces duplication errors and waste
because it allows content to be stored once in a centralized accessible location
for repeated use in multiple formats.

PromoPlanner. PromoPlanner gives clients visually interactive planning
views of their marketing campaigns and ad pages. PromoPlanner enables businesses
to initiate, develop and refine targeted promotions across different types of
media. Using simple desktop tools, users are able to organize and browse
products, set prices and approve images, copy and ad layouts. PromoPlanner
provides a single point for planning and managing the use of the following
information:

product data, including price and key product descriptions such as SKUs;

marketing information including sound, images and text in multiple
languages;

promotional information including media type and timing; and

rules and style information controlling choice and delivery of targeted
promotions.

PromoPlanner enables a client to manage the use of product knowledge, rich
media content, customer profile data and decision support tools to create
effective promotions for print, the Internet, mobile devices and e-mail.

ProfileServer. ProfileServer collects Web visitor behavior data at the
customer's Web site and declared user information reported voluntarily by a
visitor to create and deliver profiles of individual Web site visitors. The
system enables customers to create their own local profile database, which is
maintained at the customer's site, and enables customers to use these local
profiles to target advertisements, content and e-commerce offerings to their
visitors. The ProfileServer system permits customers to customize the interest
categories in the local profiles so that they track preferences specific to the
customer's market. For example, a clothing retailer could create size and style
subcategories. Customers can also use the system to collect proprietary user
data, including identifying information supplied voluntarily by visitors to
their sites. The local databases created with ProfileServer, which do not become
part of the Engage Knowledge global profile database, can be used by customers
either alone or in conjunction with Engage Knowledge profiles.

AdManager. AdManager automates online advertising management for Web sites
by scheduling and targeting ads, automatically rotating ad inventory and
generating up-to-the-minute, customized reports. AdManager tracks all active
advertising campaigns and Web site visitors and optimizes scheduling of
advertisements in real-time to ensure that each campaign is delivered on
schedule to qualified visitors or to the specified content areas of a site.
AdManager allows sites to deliver relevant advertising to individual visitors
using a wide range of targeting criteria, including Engage profiles, the area of
content that a visitor is viewing, geographic location of users, key-word or
key-phrase searches and time of day or day of week.
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AdBureau. AdBureau is our turnkey, outsourced advertisement management
service based on AdManager technology. By subscribing to AdBureau, a customer
can obtain the advertisement management capabilities of AdManager without the
need to invest in on-site and management hardware, server and administrative
software or databases. AdBureau is marketed primarily to start-up and mid-sized
Web sites, as well as advertising networks. AdBureau is offered to customers
under annual service agreements providing for fees based on the number of
advertisements served.

Professional Services. We have a team of service professionals who provide
our customers with consulting services, project implementation and integration
services and training. These professionals assist customers with strategic site
assessments and deployment planning in order to optimize each customer's use of
our products. They also help customers implement our products and integrate them
into the customer's existing technology infrastructure.

Maintenance and Support Services. We provide maintenance and support
services to customers pursuant to annual maintenance agreements. These services
include software version updates, as well as telephone and on-site support. We
offer a variety of support services, including a customer call center and a
dedicated technical support Web site on a 24 hours per day, seven days per week
basis. Our maintenance and support activities are supplemented by training
programs for customers, including introductory training courses for new users
and custom designed seminars for experienced users of our products.

For the fiscal years ended July 31, 1998, 1999 and 2000, revenue generated
by our Software and Consulting segment was $2.2 million, $13.4 million and $46.8
million, respectively. We acquired MediaBridge Technologies, Inc. after the
close of the fiscal year ended July 31, 2000. As a result, ContentServer and
PromoServer, products of MediaBridge, did not contribute to the foregoing
revenues.

SALES AND MARKETING

United States

As of July 31, 2000, our sales and marketing organization consisted of 553
employees. Engage Media and Media Management sells its products and services
primarily through its direct sales force and also sells impressions on a
wholesale basis to selected value-added resellers. Engage Software and
Consulting employs both sales representatives and system engineers. Sales
representatives handle incoming calls, help generate qualified leads and
generally advance the sale process. Systems engineers provide comprehensive
pre-sales technical services and support, including creating and delivering
technical and architectural presentations, product demonstrations and product
training, as well as post-sales support. A single account manager is assigned to
each account within each business segment.

An important element of our sales strategy is to form business
relationships with third parties to assist us in marketing and selling our
products. We have entered into and will continue to enter into reseller and
original equipment manufacturer relationships where our partners resell and
possibly customize our products for sale. We have also entered into co-marketing
arrangements, in which we work together with our partners to promote and
generate sales referrals for each other's respective products.

To support our sales efforts and actively promote the Engage brand, we
conduct comprehensive marketing programs, including public relations, print
advertisements, online advertisements, seminars, trade shows and ongoing
customer communications programs.

International

We currently maintain 18 sales offices throughout the world and we intend
to continue to expand our operations outside the United States.

PRIVACY

The Web offers the potential for privacy by allowing parties to communicate
one-to-one without knowing each other's identity. However, Web users are
increasingly concerned about privacy and the ability of third

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parties to gather personal data about them from their activities on the Web. For
this reason, the Engage Knowledge global database of profiles does not store
personal information of individual users such as name, home or e-mail address,
IP address or domain name.

We maintain this level of privacy through a proprietary methodology known
as "dual blind" identification. We assign an anonymous numerical identifier to
each Web visitor and match this "blind" identifier only with information
relating to online usage of a specific computer and do not store or otherwise
use any personally identifying information. This identifier is currently stored
as a browser cookie on the Web user's computer. Each Web visitor also is
assigned a different identifier for each Engage-enabled Web site visited. This
technique is known as "dual blind" identification because a Web site does not
have access to the Engage Knowledge identifier and cannot correlate the
information it may have with information from other Web sites. Conversely, we do
not maintain any information identifying particular users that a Web site may
have correlated with a visitor's local Web site identifier.

Since October 1998, Engage has contractually required all contributors to
Engage Knowledge to post a privacy policy statement on their Web sites
disclosing that the site provides non-personally identifiable information to
Engage. The policy statement must include a link to our Web site where a Web
user may opt out of the Engage Knowledge database by clicking on a link that
automatically adds an "opt-out" cookie to their system. We believe that these
protections and our dual blind identification technology are essential to allow
sites to responsibly use global anonymous profiles for their own enterprise
applications.

We actively participate in the development of privacy standards for the
Internet and are a key contributor to industry groups that are developing
industry standards for privacy. For example, we are a co-author of several of
the specifications of the World Wide Web Consortium's Platform for Privacy
Preferences Project, supported by AOL/Netscape, AT&T, IBM, Microsoft and others,
which seeks to develop an industry standard that will allow Web users to express
their privacy preferences about the type and amount of information they are
willing to share with Web applications. We believe our products will support the
standards that are ultimately produced by this project. We have also authored a
proposed protocol for the distribution of privacy labels for Web cookies as part
of the Platform for Privacy Preferences Project. We are a participant on the
board of advisors of TRUSTe, of which we are a corporate sponsor. TRUSTe is a
non-profit organization with the goal of promoting the adoption of fair
information practices on the Web through a program which permits Web sites to
display a seal representing compliance with TRUSTe privacy guidelines. We are
also a member of the Online Privacy Alliance, which is an organization dedicated
to improving the protection of individuals' privacy online through self
regulatory efforts, and the Network Advertising Initiative, which is a coalition
of third-party Internet ad networks that also is dedicated to improving the
protection of individuals' privacy online through self regulatory efforts. We
actively monitor proposed privacy laws and regulations and seek to comply with
all applicable privacy requirements, both in the United States and throughout
the world.

OPERATING INFRASTRUCTURE

Our operating infrastructure has been designed to support the combined
volumes of our largest Web site customers. Our data center operations are
primarily provided by third parties. Our infrastructure is designed for maximum
reliability, including redundant network access, backup power pools and advanced
network security. These third parties provide comprehensive facilities
management services, including monitoring and support 24 hours per day, seven
days per week.

PROPRIETARY RIGHTS

We have filed for patents covering our profiling algorithm, our dual-blind
methodology for protecting end-user privacy and our ad serving technologies. The
profiling algorithm patent application covers the process and algorithm for
creating user interest profiles from behavioral data. The dual-blind methodology
patent application covers the process of identifying visitors uniquely at each
Web site while maintaining a central database of cross-referenceable identifiers
and allowing Web sites to access globally-derived data only via their local
identifier. The ad serving technologies patent applications cover various unique
elements of our ad

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serving systems. There can be no assurance that any of our patent applications
will be granted. Even if they are granted, these patents may be successfully
challenged by others or invalidated.

The Engage Knowledge database contains information about millions of
anonymous Web browsers. We believe we have rights to this database's entire data
content, all records and all derived information from the database as a whole,
all updating routines and quality assurance processes and all underlying data
warehousing technology. However, there can be no assurance that any patent,
trade secret or other intellectual property protection will be available for
such information.

We rely upon a combination of patent, trade secret, copyright and trademark
laws to protect our intellectual property. We also limit access to and
distribution of our proprietary information. However, the steps we take to
protect our intellectual property may not be adequate to deter misappropriation
of our proprietary information. In addition, we may be unable to detect
unauthorized uses of and take appropriate steps to enforce our intellectual
property rights.

Although we believe that our services and products do not infringe on the
intellectual property rights of others, we are subject to the risk that such a
claim may be asserted against us in the future.

COMPETITION

The market for Internet marketing solutions, including consumer profiling,
online advertising services and systems, and Web site traffic analysis is new,
rapidly evolving and intensely competitive. We expect competition to increase
both from existing competitors and new market entrants for various components of
our services. We compete primarily on the basis of our product features and
performance, level of service and, to a lesser extent, on price.

Engage Media competes with other Internet advertising networks, including
DoubleClick and 24/7 Media. We also compete with large Web sites and Web
portals, such as America Online, Excite@Home, Microsoft and Yahoo for Internet
advertising revenues. In addition, we compete with traditional media, such as
television, radio, cable and print for a share of advertisers' total advertising
budgets. Additionally, MyPoints and other businesses that offer cash or other
incentives to users to voluntarily provide profile data have indicated their
intent to compete in the global profiling solutions market. We also compete with
companies such as DoubleClick and MatchLogic that have the ability to aggregate
large quantities of customer behavior data across the Web.

Our Media Management segment primarily competes with other analysis,
measurement and content aggregation companies. Our traffic measurement and
analysis services compete with software offered by Accrue, Andromedia,
net.Genesis and Webtrends. Our audit services compete with ABC Interactive, BPA
and PricewaterhouseCoopers. The principal competitors of our AdKnowledge
solution are DoubleClick and Matchlogic.

Our Software and Consulting unit competes directly with providers of
profiling technology, such as Personify, and indirectly with applications that
include more limited profiling capability integrated into their solution, such
as BroadVision and Vignette. The primary competitors to our ad serving software
are providers of ad serving systems, such as those offered by DoubleClick and
Real Media. In addition, our promotional campaign software competes with content
management and "boutique" promotion solution companies, "digital pre-press"
services developed by certain large printing companies, and Internet companies
providing solutions for electronic media.

Many of our current competitors, as well as a number of potential new
competitors, have longer operating histories, greater name recognition and
substantially greater financial, technical and marketing resources than we do.
Our current and potential competitors also may have more extensive customer
bases and larger proprietary databases. In addition, current and potential
competitors have established or may establish cooperative relationships among
themselves or with third parties to more effectively distribute their products
or to enhance their product and service offerings.

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<PAGE> 11

CORPORATE HISTORY, RECENT DEVELOPMENTS AND ACQUISITIONS

We were incorporated in Delaware on July 18, 1995 as Engage Technologies,
Inc. On April 28, 2000, we changed our name to Engage, Inc. We are a
majority-owned operating subsidiary of CMGI, Inc. and our principal executive
offices are located at 100 Brickstone Square, Andover, Massachusetts 01810. Our
telephone number is (978) 684-3884.

On July 23, 1999, we completed our initial public offering of common stock,
receiving net proceeds of approximately $94.8 million. On June 22, 2000, we sold
shares of our common stock in a private placement to CMGI and CPQ Holdings, Inc.
and raised net proceeds of approximately $74.2 million.

We have completed the following acquisitions:

In April 1998, we acquired Accipiter, Inc., a developer of advertising
delivery and promotion software.

In March 1999 Adsmart acquired 2Can Media, an online advertising
representation firm.

In April 1999, we acquired Internet Profiles Corporation ("I/PRO"), which
provides Web site traffic measurement and audit services.

In December 1999, we acquired AdKnowledge Inc., a provider of products and
services which allow online marketers and ad agencies to plan, target, serve,
track and analyze advertising campaigns.

In April 2000, we acquired both Adsmart Corporation, an online advertising
network, and Flycast Communications Corporation, a leading provider of Internet
direct response advertising solutions.

In June 2000, we acquired substantially all of the assets of the Virtual
Billboard Network ("VBN"), one of the largest ad networks in Canada.

In June 2000, we acquired a majority ownership position in Engage
Technologies Japan, KK, our joint venture with Sumitomo Corporation. Also, in
June 2000, we acquired Interactive Solutions Inc. ("ISI"), a Japanese online
advertising company previously owned by Sumitomo Corporation.

In August 2000, we acquired Space Media Holdings Limited, a leading
independent Internet marketing network in Asia.

In September 2000, we acquired MediaBridge Technologies, Inc., a leading
provider of cross-media closed loop targeted marketing systems.

SEASONALITY

We believe that our Media and Media Management businesses are subject to
seasonal fluctuations. Advertisers generally place fewer advertisements during
the first and third calendar quarters of each year. In addition, expenditures by
marketers tend to vary in cycles that reflect overall economic conditions as
well as budgeting and buying patterns. Further, Internet user traffic typically
drops during the summer months, which reduces the amount of advertising to sell
and deliver. Our revenue could be materially reduced by a decline in the
economic prospects of marketers or in the economy in general, which could alter
current or prospective marketers' spending priorities or budget cycles or extend
our sales cycle.

EMPLOYEES

As of July 31, 2000, we had 1,116 employees of which 259 were in research
and development, 188 in customer support and operations, 553 in selling and
marketing, and 116 in administration. Of these, 1,016 employees were located in
the United States and 100 internationally.

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<PAGE> 12

In September 2000, we announced a reduction of our workforce to eliminate
redundant positions. We reduced our workforce by 175 employees worldwide. In
connection with this reduction, we anticipate taking a charge of approximately
$3.5-$4.0 million in our first fiscal quarter ending October 31, 2000.

We believe that our future success is dependent on attracting and retaining
highly skilled engineering, sales and marketing, and senior management
personnel. Competition for such personnel is intense, and there can be no
assurance that we will continue to be able to attract and retain high-caliber
employees. We believe that the use of offshore developers gives us access to
scarce technical talent at a favorable cost.

We are not subject to any collective bargaining agreements and believe that
our relationship with our employees is good.

ITEM 2. PROPERTIES

Our properties consist of leased office facilities for sales and marketing,
research and development, consulting, and administrative personnel. Our
properties consist of approximately 103,000 square feet of corporate offices
located in Andover, Massachusetts and 70,000 square feet at our primary west
coast facility in San Francisco, California. We also lease other office
facilities in various locations in the United States and abroad.

We believe that our facilities are adequate for our current needs and that
suitable additional or substitute space will be available as needed to
accommodate expansion of our operations. See note 9 of Notes to Consolidated
Financial Statements for information regarding our lease obligations.

ITEM 3. LEGAL PROCEEDINGS

On March 16, 2000, a derivative action was filed in the Court of Chancery
of the State of Delaware against Edward A. Bennett, Christopher A. Evans, Craig
D. Goldman, Andrew J. Hajducky, III, Fredric D. Rosen, Paul L. Schaut, David S.
Wetherell, members of our Board of Directors, CMGI, Inc., the majority
stockholder of Engage and Engage, as nominal defendant. The complaint had
alleged that, in connection with the sale by CMGI of Flycast Communications
Corporation and Adsmart Corporation to us, CMGI and the individual defendants
had violated their fiduciary duties. This derivative action has been dismissed.

We are not a party to any other material legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of our security holders during the
quarter ended July 31, 2000.

PART II.

ITEM 5. MARKET OF REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

Our common stock is traded on the Nasdaq National Market under the symbol
"ENGA". The following table sets forth, for the periods indicated, the high and
low closing prices per share for our common stock, as

11
<PAGE> 13

reported by the Nasdaq National Market, since our common stock commenced public
trading on July 20, 1999. These prices reflect the two-for-one stock split
distributed on April 3, 2000.

<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Fiscal 1999:
Fourth Quarter (beginning July 20, 1999)................. $23.50 $11.56
Fiscal 2000:
Quarter ended October 31, 1999........................... $21.00 $11.88
Quarter ended January 31, 2000........................... $85.00 $17.66
Quarter ended April 30, 2000............................. $94.50 $18.25
Quarter ended July 31, 2000.............................. $29.75 $ 8.78
</TABLE>

STOCKHOLDERS

As of October 13, 2000, there were approximately 794 stockholders of record
of our common stock and, according to the Company's estimates, approximately
30,450 beneficial owners of our common stock.

DIVIDENDS

We have never declared or paid cash dividends on our common stock. We
currently do not anticipate paying any cash dividends in the foreseeable future.
Any payment of future dividends will be at the discretion of our Board of
Directors and will depend upon, among other things, our earnings, financial
condition, capital requirements, level of indebtedness, contractual restrictions
with respect to the payment of dividends and other factors that our Board of
Directors deems relevant.

USE OF PROCEEDS OF INITIAL PUBLIC OFFERING

In connection with our initial public offering in July 1999, we received
net proceeds of approximately $94.8 million reflecting gross proceeds of $103.5
million net of underwriter commissions of approximately $7.2 million and other
estimated offering costs of approximately $1.5 million. On July 19, 1999, the
Securities and Exchange Commission declared our Registration Statement on Form
S-1 (File No. 333-78015) effective.

The following table sets forth our cumulative use of proceeds as of July
31, 2000:

<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Construction of plant, buildings and facilities........ --
Purchase and installation of machinery and equipment... $ 9,563
Purchase of Real Estate................................ --
Acquisition of other businesses........................ --
Repayment of indebtedness.............................. --
Working Capital........................................ $29,212
Temporary Investments:
Cash and cash equivalents............................ --
Available for sale securities........................ $54,016
Other................................................ $ 2,000
All other purposes..................................... --
</TABLE>

The foregoing use of net offering proceeds does not represent a material
change in the use of proceeds described in our Registration Statement on Form
S-1.

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<PAGE> 14

RECENT SALES OF UNREGISTERED SECURITIES

Virtual Billboard Network

On June 9, 2000, in connection with our acquisition of substantially all of
the assets of the Virtual Billboard Network pursuant to an Asset Purchase
Agreement that we entered into with Engage Canada Company, a subsidiary of ours,
Gallop & Gallop Advertising Inc., 1261094 Ontario Limited, Marie-Paul Gallop,
Peter Gallop and Tom Rothfels, we issued 248,962 shares of our common stock to
Gallop & Gallop Advertising Inc.

No underwriters were involved in the foregoing offer and sale of
securities. Such offer and sale was made in reliance upon an exemption from the
registration provisions of the Securities Act set forth in Section 4(2) thereof
relative to sales by an issuer not involving any public offering or the rules
and regulations thereunder. The offer and sale was made only to an "accredited
investor" as that term is defined in Regulation D under the Securities Act and
we did not engage in a general solicitation or advertisement of the offer and
sale of the shares. The shares issued to Gallop & Gallop Advertising Inc. are
restricted securities under the Securities Act.

Joint Venture with Sumitomo Corporation

In connection with our assumption of a majority ownership position in
Engage Technologies Japan, KK, on June 20, 2000, we issued 219,350 shares of our
common stock to Sumitomo Corporation.

No underwriters were involved in the foregoing offer and sale of
securities. Such offer and sale was made in reliance upon an exemption from the
registration provisions of the Securities Act set forth in Section 4(2) thereof
relative to sales by an issuer not involving any public offering or the rules
and regulations thereunder. The offer and sale was made only to an "accredited
investor" as that term is defined in Regulation D under the Securities Act and
we did not engage in a general solicitation or advertisement of the offer and
sale of the shares. The shares issued to Sumitomo Corporation are restricted
securities under the Securities Act.

Private Placement

On June 22, 2000, we sold 3,330,557 and 1,665,278 shares of our common
stock, in a private placement, to CMGI, Inc. and CPQ Holdings, Inc.,
respectively, for net proceeds of approximately $74.2 million.

No underwriters were involved in the foregoing offer and sale of
securities. Such offer and sale was made in reliance upon an exemption from the
registration provisions of the Securities Act set forth in Section 4(2) thereof
relative to sales by an issuer not involving any public offering or the rules
and regulations thereunder. The offer and sale was made only to "accredited
investors" as that term is defined in Regulation D under the Securities Act and
we did not engage in a general solicitation or advertisement of the offer and
sale of the shares. The shares issued to CMGI, Inc. and CPQ Holdings, Inc. are
restricted securities under the Securities Act.

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<PAGE> 15

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth our selected consolidated financial
information for the four years in the period ended July 31, 2000 and the period
from July 18, 1995 to July 31, 1996. The following selected consolidated
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Position and Results of Operations" and our consolidated
financial statements and notes to those statements included elsewhere in this
report. The following consolidated financial data includes the results of
operations of our 1998 acquisition of Accipiter, Inc., the fiscal 1999
acquisitions of 2CAN and I/PRO, and the fiscal 2000 acquisitions of AdKnowledge,
Flycast, AdSmart and three other companies. The acquisitions of Accipiter,
Flycast and Adsmart have been accounted for as a combination of entities under
common control (i.e. "as-if pooling"). Accordingly, the results of operations of
Accipiter and Flycast have been included in our consolidated results of
operations beginning on the dates they were acquired by CMGI, April 1998 and
January 2000, respectively. The results of operations of Adsmart have been
included in our consolidated results of operations since April 1, 1996, the date
CMGI founded Adsmart. The results of operations of all other acquisitions have
been included in our consolidated results of operations from the date of
acquisition. See Note 6 to our consolidated financial statements for further
information concerning these acquisitions. The historical results presented
herein are not necessarily indicative of future results.

<TABLE>
<CAPTION>
JULY 18, 1995 YEAR ENDED JULY 31,
TO JULY 31, --------------------------------------------
1996 1997 1998 1999 2000
------------- -------- -------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenue................................. $ -- $ 40 $ 2,571 $ 26,833 $ 176,785
Operating loss.......................... (2,571) (14,913) (29,497) (44,851) (380,145)
Net loss................................ (2,571) (14,913) (20,524) (46,627) (377,870)
Earnings per share -- pro forma basic
and diluted........................... (0.60) (0.61) (2.61)
Total assets............................ 2,462 2,137 24,452 207,041 1,132,897
Short-term debt......................... 3,708 18,619 12,328 45,156 6,660
Long-term obligations................... -- 24 12 1,944 15,054
Stockholders' (deficit) equity.......... (2,491) (17,462) 7,190 127,783 1,018,328
</TABLE>

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<PAGE> 16

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

We are a leading provider of marketing solutions. At July 31, 2000, we were
an approximately 86% owned subsidiary of CMGI, Inc. Our broad offering of
products and services enable marketers, Web sites and e-commerce merchants to
use the Internet as well as other interactive media to recruit and retain
customers. Our products and services allow marketers to get better results from
their marketing campaigns and allow Web sites to more effectively monetize their
audiences. We have generated most of our revenue to date through sales of
advertising management software and outsourced services and sales of media and
media management services. As a result of our recent acquisitions, our services
and products are grouped into three segments: Media, Media Management and
Software and Consulting.

Our Media segment offers a range of products and services that enable Web
marketers to target and deliver marketing campaigns to their desired audience.
This segment is primarily made up of the former AudienceNet, Flycast and Adsmart
networks, and our recently launched business-to-business network. Our Media
Management segment offers products and services that allow Web marketers to
execute, analyze, measure and optimize the effectiveness of their online media
campaigns as well as to measure web site traffic. This segment of our business
is primarily made up of our wholly-owned subsidiaries, AdKnowledge and Internet
Profiles Corporation (I/PRO). Our Software and Consulting segment offers
customers a host of enterprise marketing software and services, including
software to automate online advertising management, create and deliver web-site
specific local profiles of Web users and create, plan, deliver and refine
integrated promotional campaigns.

In February 2000, our Board of Directors approved a two-for-one common
stock split, effected in the form of a 100% stock dividend. The stock dividend
was paid on April 3, 2000 to stockholders of record at the close of business on
March 20, 2000. Accordingly, the consolidated financial statements have been
retroactively adjusted for all periods presented to reflect this event. Unless
otherwise indicated, all share information in this Management's Discussion and
Analysis of Financial Condition and Results of Operations reflect the
two-for-one stock split.

ACQUISITIONS

The acquisitions closed during fiscal 1998, 1999 and 2000 are as follows:

In April 1998, CMGI acquired Accipiter, which sells Internet advertising
management solutions for total purchase consideration of approximately $31.3
million. In August 1998, Accipiter was merged with us in a stock-for-stock
merger in which shares of our Series A convertible preferred stock were issued
to CMGI. We have reflected the acquisition of Accipiter in our consolidated
financial statements as if it occurred in April 1998.

In March 1999, Adsmart Corporation acquired 2Can Media, an online
advertising representation firm for total purchase consideration of
approximately $33.7 million, inclusive of contingent consideration paid
subsequent to the closing date. The acquisition has been accounted for using the
purchase method of accounting and, accordingly, the purchase price has been
allocated to the assets purchased and liabilities assumed based upon their fair
values at the date of acquisition.

In April 1999, we acquired I/PRO, which provides Web site traffic
measurement and audit services for total purchase consideration of approximately
$32.7 million. The acquisition has been accounted for using the purchase method,
and accordingly, the purchase price has been allocated to the assets purchased
and liabilities assumed based upon their fair values at the date of acquisition.

In December 1999, we acquired AdKnowledge Inc., a provider of products and
services which allow online marketers and ad agencies to plan, target, serve,
track and analyze advertising campaigns for total purchase consideration of
approximately $161.0 million. The acquisition has been accounted for using the
purchase method, and accordingly, the purchase price has been allocated to the
assets purchased and liabilities assumed based upon their fair values at the
date of acquisition.

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<PAGE> 17

In April 2000, we acquired Adsmart, an online advertising network, and
Flycast Communications Corporation, a leading provider of Internet direct
response advertising solutions for total purchase consideration of approximately
$3.24 billion. The acquisitions have been accounted for as a combination of
entities under common control (i.e., "as if pooling"). Our results of operations
reflect the results of operations of Adsmart beginning April 1, 1996, 2Can Media
beginning March 11, 1999 and Flycast beginning January 13, 2000.

In June 2000, we acquired substantially all of the assets of the Virtual
Billboard Network for total purchase consideration of approximately $4.7 million
and Interactive Solutions Inc. for total purchase consideration of approximately
$4.8 million. The acquisitions have been accounted for using the purchase
method, and accordingly, the purchase prices have been allocated to the assets
purchased and liabilities assumed based upon their fair values at the date of
acquisition.

In addition, in June 2000, we acquired a majority ownership position in
Engage Technologies Japan, KK, our joint venture with Sumitomo Corporation.

COMPARISON OF FISCAL 1999 TO FISCAL 2000

Revenue, Cost of Revenue and Gross Margin

Media. Revenue from our Media segment is derived primarily from the
delivery of advertisements across our network of over 4,700 Web sites. Pricing
of advertising is generally based on cost per advertising impression and varies
depending on whether the advertising is run across the network, across specific
categories or on individual Web sites. In addition, revenue is also realized
from advertising sold on a cost per click-through basis, whereby the
marketer/advertiser pays us only when a user clicks on an advertising banner.
Cost of revenue consists primarily of amounts paid to each Web site in the
network based on an agreed upon percentage of the revenue generated by
advertisements run on each site as well as both internal and external ad serving
costs.

Revenue for our Media segment increased from $10.8 million in the year
ended July 31, 1999 to $105.7 million in the year ended July 31, 2000, an 878%
increase. Gross margin for the Media segment increased from a deficit of (35%)
in the year ended July 31, 1999 to 8% in the year ended July 31, 2000. The
increase in revenue is primarily due to our acquisition of Flycast which is
primarily reflected in our third and fourth quarters of 2000 and, to a lesser
extent, an increase in both the number of advertisers purchasing advertisements
and the number of ad impressions delivered on the network. Additionally, in
response to increased marketer demand for performance based pricing, revenue
from our cost per click-through business, as a percent of total revenue,
increased in the year ended July 31, 2000 as compared to the year ended July 31,
1999. Total impressions delivered in the year ended July 31, 2000 increased to
over 63 billion as compared to approximately 6 billion impressions in the year
ended July 31, 1999, primarily due to our acquisition of Flycast. Effective CPM
rates decreased approximately 9% in the year ended July 31, 2000 as compared to
the year ended July 31, 1999. The increase in the gross margin percentage for
the year ended July 31, 2000 was primarily due to lower average Web site
payments and ad serving costs.

We expect that revenue growth within our Media segment will continue to
weaken throughout much of the next fiscal year. We expect that excess media
inventory in the market, combined with slowing demand due to reduced spending by
"dot com" companies, will result in flat or reduced media revenue for the next
two to three quarters. We believe that traditional marketers will increase their
online advertising spending throughout the next fiscal year and that late in the
next fiscal year our Media segment revenue will then begin to grow at a modest
rate.

Media Management. Revenue from our Media Management segment is derived
primarily from services that enable marketers to run and evaluate the
effectiveness of marketing programs both within and outside our advertising
network. Additionally, this segment also provides Web site traffic measurement
and analysis data and verification of site traffic and advertising results.

Revenue for our Media Management segment increased from $2.6 million in the
year ended July 31, 1999 to $24.3 million in the year ended July 31, 2000, an
823% increase. Gross margin for the Media

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<PAGE> 18

Management segment increased from 33% in the year ended July 31, 1999 to 43% in
the year ended July 31, 2000. The increase in revenue was primarily due to our
acquisitions of both I/PRO and AdKnowledge, and to a lesser extent, an increase
in I/PRO's customer base and growth in AdKnowledge's revenue subsequent to our
acquisition of AdKnowledge. The increase in the gross margin percentage for the
year ended July 31, 2000 was a result of the significant increase in revenue
without a related increase in cost of revenue as a large portion of our Media
Management segment's cost of revenue is fixed, infrastructure related costs.

We expect that revenue from our Media Management segment will decline in
the first fiscal quarter of 2001 as compared to the fourth fiscal quarter of
2000. As advertisers and marketers reduce their spending on media, we anticipate
that they also may reduce their spending to a lesser extent on related
analytical and measurement services that our Media Management segment provides.
For the year ended July 31, 2001 as compared to the year ended July 31, 2000, we
expect that Media Management revenue from our existing businesses may increase
due to the fact that our fiscal 2001 results will include a full twelve months
of AdKnowledge revenue as compared to only nine months of AdKnowledge revenue in
fiscal 2000.

Software and Consulting. Revenue from our Software and Consulting segment
is derived primarily through the sale of software licenses and outsourced
advertising management solutions utilizing our software and consulting services.
Consulting services include fees charged for 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, benefits and allocated overhead of our support and consulting groups.

Revenue for our Software and Consulting segment increased from $13.4
million in the year ended July 31, 1999 to $46.8 million in the year ended July
31, 2000, a 249% increase. Gross margin for this segment increased from 46% in
the year ended July 31, 1999 to 78% in the year ended July 31, 2000. The
increase in revenue was due to an increase in the number of new customers in
both domestic and international markets and a larger quantity of high dollar
license arrangements during the year ended July 31, 2000. We also realized a
significant increase in revenue as a result of developing our channel programs
with resellers and original equipment manufacturers. In the fourth fiscal
quarter of 2000, we recorded $13.2 million of software revenue from a license
agreement with Compaq Computer Corporation, a reseller that is also an
affiliate. Additionally, our fiscal fourth quarter software revenue was
positively impacted by two large sales of ProfileServer and AdManager products
aggregating approximately $7.3 million. As we do not expect to enter into
similar transactions in future periods, our software license revenue will be
expected to be below the level attained in the fourth quarter of fiscal 2000
during at least the first quarter of fiscal 2001. Lastly, as a result of a
growing customer base, consulting and support revenue has increased
substantially in the year ended July 31, 2000 as compared to the year ended July
31, 1999. The increase in gross margin is due to an increase in revenue that
exceeded the increase in costs due to an expanded customer base and a larger
percentage of product license arrangements.

We anticipate that revenue for our Software and Consulting segment may
increase significantly in the year ended July 31, 2001 as compared to the year
ended July 3, 2000. Although we do not anticipate recurring large software
license arrangements in the year ended July 31, 2001 similar to the Compaq
arrangement, we expect that revenue from our ProfileServer and AdManager
products, as well as software and consulting revenue from our recent MediaBridge
acquisition, will grow steadily in both domestic and international markets.

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 increased from $8.7
million in the year ended July 31, 1999 to $28.2 million in the year ended July
31, 2000, a 224% increase. This increase was primarily due to our acquisitions
of I/PRO, AdKnowledge and Flycast and to a lesser extent, the expansion of our
research and development activities. Including acquisitions, our research and
development staff increased 236% from July 31, 1999 to July 31, 2000. Research
and development expenses were 32% of revenue for the

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<PAGE> 19

year ended July 31, 1999 compared to 16% of revenue for the year ended July 31,
2000. This decrease is the direct result of the increase in year over year
revenue.

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 increased from $19.4 million in the year
ended July 31, 1999 to $97.2 million in the year ended July 31, 2000, a 402%
increase. The increase in costs was primarily due to the I/PRO, AdKnowledge and
Flycast acquisitions, the continuing expansion of our sales force and costs
incurred to brand the Engage name and build market awareness of our consolidated
product offerings resulting from recent acquisitions. In addition, a portion of
the increase is due to continued expansion in international markets and the cost
of maintaining sales and marketing efforts in foreign markets. Overall,
including acquisitions, our sales and marketing staff increased 184% from July
31, 1999 to July 31, 2000. Sales and marketing expenses were 72% of revenue for
year ended July 31, 1999 compared to 55% of revenue for the year ended July 31,
2000.

General and Administrative. General and administrative expenses consist
principally of payroll and related costs, consulting and professional fees,
facility and related costs, bad debt expense and depreciation expense. General
and administrative expenses increased from $5.2 million in the year ended July
31, 1999 to $29.1 million in the year ended July 31, 2000, a 457% increase. The
increase was primarily due to our acquisitions of I/PRO, AdKnowledge, and
Flycast and, to a lesser extent, an increase in payroll and related costs
associated with developing an administrative infrastructure to support growing
operations and increases in bad debt expense resulting from the significant
increase in revenues. General and administrative costs were 19% of revenue for
year ended July 31, 1999 compared to 16% of revenue for the year ended July 31,
2000. This decrease is the direct result of the increase in year over year
revenue.

Amortization of Goodwill and Other Intangibles. Amortization of intangible
assets increased from $8.9 million in the year ended July 31, 1999 to $207.1
million in the year ended July 31, 2000, a 2,216% increase. The increase was due
to amortization expense resulting from Adsmart's acquisition of 2Can in March
1999, and our acquisitions of I/PRO in April 1999, AdKnowledge in December 1999,
Flycast in April 2000 and VBN, ISI, and Engage Japan all in June 2000.
Intangible assets from the 2Can acquisition are being amortized over five years.
Intangible assets from the I/PRO acquisition are being amortized over three to
five years, while intangible assets from the AdKnowledge, Flycast, VBN, ISI and
EngageTechnologies Japan acquisitions are being amortized over three years. All
of our intangible assets are being amortized under the straight-line method. As
a result of the MediaBridge and Space Asia acquisitions that were consummated in
fiscal 2001, a large part of the purchase price will be recorded as goodwill and
other intangible assets. Thus, amortization of goodwill and other intangibles
will increase significantly in fiscal 2001 and thereafter. We expect to amortize
the MediaBridge and Space Asia goodwill and intangible assets over three years.

We assess the need to record impairment losses on long-lived assets used in
operations when indicators of impairment are present. On an on-going basis,
management reviews the value and period of amortization or depreciation of
long-lived assets, including costs in excess of net assets of companies
acquired. During this review, the significant assumptions used in determining
the original cost of long-lived assets are reevaluated. Although the assumptions
may vary from transaction to transaction, they generally include revenue growth,
operating results, cash flows and other indicators of value. Management then
determines whether there has been a permanent impairment of the value of
long-lived assets. It is reasonably possible that the impairment factors
evaluated by management will change in subsequent periods, given that we operate
in a volatile business environment. This could result in material impairment
charges in future periods.

Stock Compensation. Stock compensation expense increased from $1.5 million
in the year ended July 31, 1999 to $37.4 million in the year ended July 31,
2000, a 2,470% increase. Approximately $36.6 million of the increase in stock
compensation expense was related to stock compensation expense recorded for the
acceleration of the vesting of approximately 323,000 CMGI stock options
previously issued to four former executives of Flycast under pre-existing
severance agreements. Additionally, we began to recognize stock compensation
expense as a result of stock options granted during fiscal 1999 with exercise
prices below the estimated fair market value of the common stock at the date of
grant.

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As a result of our acquisition of Space Asia and MediaBridge, we expect to
record approximately $20 to $25 million as deferred compensation relating to
options exchanged and certain employee retention agreements. The deferred
compensation will be amortized as stock compensation expense over periods
ranging from one to three years.

Equity In Loss of Joint Venture

Equity in loss of joint venture represents our share of our Japanese joint
venture's losses up until June 2000, the month in which we acquired a majority
ownership position of Engage Technologies Japan and accordingly, began
consolidating the results of operations of Engage Technologies Japan. As a
result of acquiring additional ownership in Engage Technologies Japan in June
2000, our ownership increased from 46.3% to 66.6%. Equity in loss of joint
venture was $723,000 in the year ended July 31, 1999, compared to $1.1 million
in the year ended July 31, 2000. The increase in our share of losses in the
joint venture represents the joint venture's increase in staff and its continued
investment in expanding its sales and marketing presence within its market.

Interest Income

Interest income increased from $134,000 in the year ended July 31, 1999 to
$6.3 million in the year ended July 31, 2000, a 4,587% increase. During the year
ended July 31, 2000, interest income was primarily earned from investing the
proceeds of our initial public offering completed in July 1999 and from cash and
investments we acquired in connection with our acquisition of Flycast.

Interest Expense

Interest expense increased from $1.0 million in the year ended July 31,
1999 to $2.9 million in the year ended July 31, 2000, a 184% increase. In fiscal
1998, Adsmart and Engage entered into arrangements with CMGI which required the
accrual of interest on intercompany debt at a rate of 7% per annum. During the
year ended July 31, 1999, interest expense was recorded on this debt. The
Adsmart debt was converted into equity in connection with the closing of our
acquisition of Adsmart in April 2000. The Engage debt was converted into equity
during both fiscal 1998 and 1999. Interest expense related to long-term debt and
capital lease obligations increased in the year ended July 31, 2000 over the
year ended July 31, 1999 due to debt and capital lease obligation balances we
assumed as part of the I/PRO, AdKnowledge and Flycast acquisitions, and to a
lesser extent, interest expense incurred by Adsmart on its debt to CMGI.

COMPARISON OF FISCAL 1999 TO FISCAL 1998

Revenue and Cost of Revenue

Media. Revenue for our Media segment increased from $354,000 in the year
ended July 31, 1998 to $10.8 million in the year ended July 31, 1999, a 2,954%
increase. Gross margin (deficit) for the segment improved from (617%) in the
year ended July 31, 1998 to (35%) in the year ended July 31, 1999. The increase
in revenue is primarily due to the 2Can acquisition, as well as an increase in
both the number of advertisers purchasing advertisements and the number of ad
impressions delivered on our network. The increase in gross margin is the result
of the significant increase in revenue in the year ended July 31, 1999 as
compared to the year ended July 31, 1998.

Media Management. Revenue for our Media Management segment increased from
$0 in the year ended July 31, 1998 to $2.6 million in the year ended July 31,
1999. Gross margin for the segment was 33% in the year ended July 31, 1999. The
increase in revenue was due to our acquisition of I/PRO in April 1999.

Software and Consulting. Revenue for our Software and Consulting segment
increased from $2.2 million in the year ended July 31, 1998 to $13.4 million in
the year ended July 31, 1999, a 504% increase. Gross margin increased from 4% in
the year ended July 31, 1998 to 46% in the year ended July 31, 1999. The
increase in revenue was due to an increase in the number of new customers in
both domestic and international markets and a larger quantity of high dollar
license arrangements during the year ended July 31, 1999. In addition, as a
result of a growing customer base, consulting and support revenue increased
substantially in the year ended July 31, 1999 as compared to the year ended July
31, 1998.

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Operating Expenses

Research and Development. Research and development expenses increased from
$6.8 million in the year ended July 31, 1998 to $8.7 million in the year ended
July 31, 1999, a 28% increase. This increase was due to the inclusion of
Accipiter's operations for the entire year ended July 31, 1999, the inclusion of
IPRO's operations for four months in the year ended July 31, 1999, and to a
lesser extent, the expansion of our research and development activities.
Research and development expenses were 265% of revenue for the year ended July
31, 1998 compared to 32% of revenue for the year ended July 31, 1999. This
decrease is the direct result of the increase in year over year revenue from
July 31, 1998 to July 31,1999.

Selling and Marketing. Selling and marketing expenses increased from $6.3
million in the year ended July 31, 1998 to $19.4 million in the year ended July
31, 1999, a 206% increase. The increase was primarily due to an increase in
costs related to our acquisition of I/PRO. Additionally, the continuing
expansion of our sales force contributed to the increase. Overall, including the
acquisition of I/PRO our sales and marketing staff increased 388% from July 31,
1998 to July 31, 1999. Sales and marketing expenses were 246% of revenue for the
year ended July 31, 1998 compared to 72% of revenue for the year ended July 31,
1999. The decrease as a percentage of revenue is the result of the increase in
revenue during the period, offset somewhat by costs incurred in an effort to
begin the re-branding of Engage.

General and Administrative. General and administrative expenses increased
from $3.1 million in the year ended July 31, 1998 to $5.2 million in the year
ended July 31, 1999, a 67% increase. The increase was primarily due to an
increase in payroll and related costs associated with the support of growing
operations and from the inclusion of I/PRO's operations for a portion of the
year ended July 31, 1999. General and administrative costs were 122% of revenue
for the year ended July 31, 1998 compared to 19% of revenue for the year ended
July 31, 1999. The decrease as a percentage of revenue is the result of
spreading fixed costs over a larger revenue base.

Amortization of Goodwill and Other Intangibles. Amortization of intangible
assets increased from $1.5 million in the year ended July 31, 1998 to $8.9
million in the year ended July 31, 1999, a 497% increase. The increase was due
to our acquisitions of Accipiter in April 1998 and I/PRO in April 1999.
Intangible assets from the Accipiter and I/PRO acquisitions are being amortized
over three to five years, all under the straight-line method.

Stock Compensation. Stock compensation expense increased from $426,000 in
the year ended July 31, 1998 to $1.5 million in the year ended July 31, 1999, a
242% increase. Beginning in April 1998, we commenced the recognition of
compensation expense relating to shares of CMGI common stock held in escrow to
be issued to employee stockholders of Accipiter who satisfy a two-year
employment continuation provision. Additionally, stock compensation costs of
$330,000 were recorded during fiscal 1999 as a result of stock options granted
during 1999 with exercise prices below the estimated fair market value of the
common stock at the date of grant.

Equity In Loss of Joint Venture

Equity in loss of joint venture was $723,000 in the year ended July 31,
1999. In August 1998, we acquired 49% of the shares of Engage Technologies
Japan, a joint venture with Sumitomo Corporation in Japan. Our ownership
interest was subsequently reduced to 46.3% after the issuance of additional
equity to a new investor in the joint venture. In the year ended July 31, 1999,
the joint venture was accounted for under the equity method whereby our portion
of the joint venture's losses were included in our results of operations.

Interest Income

Interest income was $134,000 in the year ended July 31, 1999. During the
year ended July 31, 1999, interest income was earned from investing the proceeds
of our initial public offering completed in July 1999.

Interest Expense

Interest expense increased from $267,000 in the year ended July 31, 1998 to
$1.0 million in the year ended July 31, 1999, a 283% increase. During fiscal
1998, we entered into an arrangement with CMGI that

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required us to accrue interest on intercompany debt at a rate of 7% per annum.
During the year ended July 31, 1999, interest expense was recorded on this debt,
all of which was converted into equity in connection with our initial public
offering in July 1999. During 1998, Adsmart also entered into a similar
financing arrangement with CMGI. All of Adsmart's debt with CMGI was converted
into Adsmart equity and then Engage common stock in connection with our
acquisition of Adsmart in April 2000.

LIQUIDITY AND CAPITAL RESOURCES

Our cash and cash equivalents increased from $112.0 million at July 31,
1999 to $119.8 million at July 31, 2000. Net cash used in operating activities
was $130.9 million for the year ended July 31, 2000. Cash used in operating
activities resulted primarily from net losses and an increase in accounts
receivable and a decrease in accrued expenses and other current liabilities,
which were partially offset by an increase in both accounts payable and due to
CMGI and affiliates. Net cash provided by investing activities was $36.0 million
for the year ended July 31, 2000. During the year ended July 31, 2000 we
purchased $54.3 million in marketable securities and acquired $16.8 million of
equipment to support growth and expansion. These uses were offset by $87.2
million in proceeds from the redemption of marketable securities and $22.0
million in cash acquired in acquisitions. Net cash provided by financing
activities was $106.6 million and consisted primarily of $30.2 million of
proceeds received from CMGI to fund the operations of Adsmart prior to our
acquiring Adsmart on April 28, 2000, and $84.0 million received from both the
sale of common stock in a private placement and stock option exercises.

As of July 31, 2000, we had $136.0 million of cash and cash equivalents and
marketable securities. Although we have no material commitments for capital
expenditures, we anticipate that expenditures may continue to increase for the
foreseeable future as we accelerate the growth of our business. Additionally, we
will continue to evaluate investment opportunities in businesses that management
believes will complement our marketing strategies.

We currently anticipate that our available cash resources will be
sufficient to meet our anticipated needs for working capital and capital
expenditures for the near-term future. In addition, CMGI has committed to make
available to us up to $50 million in the form of debt, equity or a combination
thereof to fund our working capital requirements, subject to negotiation of
mutually acceptable terms and conditions and approval of both companies'
respective Boards of Directors. We believe that additional external financing
will be available through strategic partnerships, sales of additional equity or
other debt instruments. If additional funds are raised through the issuance of
equity or convertible debt securities, the percentage ownership of our
stockholders will be reduced and our stockholders may experience 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, to fund our
expansion, take advantage of unanticipated opportunities, develop or enhance
services or products or otherwise respond to competitive pressures may be
significantly limited.

IN-PROCESS RESEARCH AND DEVELOPMENT ("IPRD")

We allocated part of the purchase price of our Accipiter, I/PRO,
AdKnowledge and Flycast acquisitions to IPRD as part of our allocation of the
purchase price of each allocation. See note 6 of Notes to Consolidated Financial
Statements for additional disclosure related to amounts allocated to IPRD.

FOREIGN OPERATIONS

The results of our international operations are subject to currency
fluctuations. As of July 31, 2000, we had subsidiaries in the United Kingdom,
Germany, France, Sweden, Italy and Australia, Canada and Japan. To date, our
financial condition and results of operations have not been materially affected
by exchange rate fluctuations. However, as these operations continue to grow,
and operations are commenced in additional countries, there can be no guarantee
that our financial condition and results of operations will not be adversely
affected by exchange rate fluctuations.

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SUBSEQUENT EVENTS

On August 31, 2000, we completed our acquisition of Space Media Holdings
Limited, a leading independent Internet marketing network in Asia, in an
all-stock transaction. In connection with the acquisition, we issued
approximately 6,103,300 shares of our common stock. Approximately 915,490 shares
are being held in escrow for a period of at least one year. These shares held in
escrow are intended to secure the obligations of the former Space Media
stockholders to indemnify us under the acquisition agreement. In addition,
1,403,750 shares are being held in escrow to ensure the satisfaction of certain
performance objectives by Space Media.

On September 11, 2000, we completed our acquisition of MediaBridge
Technologies, Inc., a leading provider of cross-media closed loop targeted
marketing systems. The acquisition was completed pursuant to an Agreement and
Plan of Merger, dated as of June 11, 2000 that we entered into with Engage
Subsidiary, Inc., a Delaware corporation and a wholly owned subsidiary of ours,
and MediaBridge. In connection with the acquisition, we issued approximately
11,741,000 shares of our common stock ("Merger Shares"). Additionally, we have
reserved approximately 2,504,000 shares of our common stock for issuance upon
exercise of stock options to purchase shares of our common stock (which stock
options option holders received in exchange for stock options to purchase
MediaBridge common stock). Of the Merger Shares issued at the closing of the
acquisition, approximately 1,450,000 shares are being held in escrow for a
period of at least one year. These shares held in escrow are intended to secure
the obligations of the former MediaBridge stockholders to indemnify us under the
Merger Agreement. By virtue of the merger of MediaBridge and Engage Subsidiary,
Inc., MediaBridge became a wholly owned subsidiary of Engage. The transaction is
intended to be tax-free under Section 368(a) of the Internal Revenue Code of
1986, as amended, and will be accounted for as a purchase.

FACTORS THAT MAY AFFECT FUTURE RESULTS AND
MARKET PRICE OF STOCK

We have incurred substantial losses and anticipate incurring continued losses.

We have never been profitable. We have incurred net losses totaling $462.5
million from inception to July 31, 2000. While we do not expect to increase our
spending significantly, we do expect to continue to incur losses for the
foreseeable future.

We will need to generate significant additional revenue to achieve
profitability. We may not achieve profitability. If our revenue grows more
slowly than we currently anticipate or if our operating expenses either increase
more than we expect or cannot be reduced in light of lower revenue, our
business, results of operations and financial condition will be materially and
adversely affected.

We may have difficulty managing our expanding operations.

We have recently experienced a period of rapid growth. This growth has
placed a significant strain on our managerial, operational and financial
resources. Our total revenue increased from $2.6 million in the fiscal year
ended July 31, 1998, to $26.8 million in the fiscal year ended July 31, 1999 to
$176.8 million for the fiscal year ended July 31, 2000. Our number of employees
increased from 106 as of July 31, 1997 to 1,116 as of July 31, 2000. In
addition, our acquisitions of AdKnowledge, Adsmart, Flycast and MediaBridge have
placed additional strain on our resources. To accommodate this growth, we must
implement new or upgraded operating and financial systems, procedures and
controls throughout many different locations. We may not succeed in these
efforts. Failure to expand and integrate these areas in an efficient manner
could have a material adverse effect on our business, financial condition and
results of operations. If we continue to grow, we will need to recruit, train
and retain a significant number of employees, particularly employees with
technical, marketing and sales backgrounds. These individuals are in high
demand. We may not be able to attract the staff we need.

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The acceptance and effectiveness of Internet advertising is not yet fully
established.

Our future success is dependent in part on an increase in the use of the
Internet as an advertising medium. The Internet advertising market is new and
rapidly evolving, and it cannot yet be compared with traditional advertising
media to gauge its effectiveness. As a result, demand for and market acceptance
of Internet advertising solutions are uncertain. In addition, there are software
programs that limit or prevent advertising from being delivered to a user's
computer. Web users' widespread adoption of such software would significantly
undermine the commercial viability of Internet advertising. If the market for
Internet advertising fails to develop or develops more slowly than we expect,
our business could be materially and adversely affected.

There are currently no generally accepted standards for the measurement of
the effectiveness of Internet advertising and standard measurements may need to
be developed to support and promote Internet advertising as a significant
advertising medium. Our advertising customers may challenge or refuse to accept
our or third-party measurements of advertisement delivery requests from the Web
sites of Web publishers using our solutions.

The acceptance and effectiveness of the Internet as a medium for consumer
transactions is not yet fully established.

Our future success is dependent in part on an increase in the use of the
Internet for business transactions with consumers. The electronic commerce
market is new and rapidly evolving and the extent of consumer acceptance of the
Internet is uncertain. If a sufficiently broad base of consumers does not accept
the use of the Internet for transacting business, our business, financial
condition and results of operations could be materially and adversely affected.

Our revenues could be affected by the loss of clients in the internet and
e-commerce industries.

A substantial portion of our revenue is generated from clients in the
internet and e-commerce industries. Due to recent volatility in the financial
markets, several firms in the internet and e-commerce industries have failed and
several more may fail in the near term future. If one or more of our customers
ceases to exist, discontinues or reduces the use of our services, our business,
financial condition and results of operations could materially suffer. We cannot
assure you that our clients will have the financial resources to continue to use
our services in the future. In addition, because a substantial portion of our
revenue is generated from a limited number of customers, the non-payment or late
payment of amounts due from these customers could have a material adverse effect
on our business, financial condition and results of operations.

We may not be successful in acquiring and integrating new technologies or
businesses.

We have acquired ten companies since our inception, and we intend in the
future to continue to acquire or make investments in complementary businesses,
products, services or technologies. We may not be successful in integrating and
managing the operations of the businesses we have acquired or may acquire and,
accordingly may not realize the expected benefits from such businesses. We could
have difficulty in assimilating acquired products, services or technologies into
our operations. In addition, we may have difficulty marketing and selling our
new products and services from our recent acquisitions in a timely and efficient
manner. These difficulties could disrupt our ongoing business, distract our
management and employees, increase our expenses and adversely affect our results
of operations. If we do not successfully integrate any acquired business or if
the benefits of any acquisition do not meet the expectations of financial or
industry analysts, the market price of our common stock may decline.
Furthermore, we may incur debt or issue equity securities to pay for any future
acquisitions. The issuance of equity securities could dilute our existing
stockholders.

We have recorded substantial amounts of goodwill and related amortization
expense related to our past acquisitions, and we will incur additional future
amortization as a result of the MediaBridge and Space Media acquisitions that
were completed after the fiscal year ended July 31, 2000. If the benefits of the
acquisitions do not exceed the costs associated with them, including any
dilution to our stockholders resulting from the
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issuance of shares in connection with the acquisitions, our financial results
and common stock price could be adversely affected.

Our profile-based solutions have been commercially available for only a limited
period of time, and it is uncertain whether these solutions will achieve
widespread customer acceptance.

In July 1999, we released our Engage Knowledge data service for sale to
customers. In October 1999, we introduced our profile-based Audience Profiles
(formerly named AudienceNet) network for advertisers on the Web. The profiling
capabilities used to create and maintain the Engage Knowledge data service serve
as the platform for most of our planned profile-based products and services. We
expect that a significant portion of our future revenue will depend on sales of
products and services incorporating our profiling technology. To date, however,
only a small portion of our revenue is attributable to profile-based products
and services. There can be no assurance that products and services based on the
Engage Knowledge database, or its profiling approach for the creation of
anonymous profiles, will achieve widespread customer acceptance, and any failure
to do so would impair our revenues and our business, results of operations and
financial condition would be materially and adversely affected.

Profile-based targeting may not achieve its intended benefits and our revenue
therefore may not grow as expected.

Our products and services are designed to enable Web advertisers, merchants
and sites to target their intended audiences more effectively. Because our
profiling technology is new, we cannot be sure that the use of our anonymous
profiles will result in more effective targeting of advertisements or other
marketing and promotional activities. Our revenue will be adversely affected if
advertisers and merchants do not perceive that the use of profiles will improve
the effectiveness of their marketing campaigns or if our customers are otherwise
unable to generate a sufficient return on investment from the use of our
profiles. If the use of our profile-based products and services does not
demonstrably improve the responsiveness of Web visitors, then we would have
difficulty selling our profile-based products, and our business, results of
operations and financial condition will be materially and adversely affected.

The value of our Engage Knowledge database depends on continued contributions of
data from Web sites.

Decisions by Web sites and networks not to contribute their data to the
Engage Knowledge database would hinder the quality and growth of the Engage
Knowledge database and could severely impair the effectiveness and value of
Engage Audience Profiles and future profile-based products. To participate in
Audience Profiles, Web sites must agree to contribute user data to the Engage
Knowledge database, and there can be no assurance that Web sites will not
decline to participate in Audience Profiles or other Engage-enabled networks due
to concerns relating to sharing proprietary information about their users and
perceived privacy concerns.

Our quarterly operating results are subject to significant fluctuations, and you
should not rely on them as an indication of our future results.

Our revenue and operating results may vary significantly from quarter to
quarter due to a number of factors, not all of which are in our control. Future
revenue is difficult to forecast and for the foreseeable future will be
influenced by the timing and amount of sales to new customers, as well as user
traffic levels and advertising and electronic commerce activity on our
customers' Web sites.

The market for online marketing products and services is new. As a result,
we must educate potential customers on the use and benefits of our products and
services. In addition, the implementation of the Engage Knowledge data service
requires a significant commitment of resources by participating Web sites and
networks. It can, in some cases, take our sales organization several months to
finalize a sale. This makes it difficult for us to predict the quarter in which
a sale may occur.

In addition, we believe that our revenue will be subject to seasonal
fluctuations because advertisers generally place fewer advertisements during the
first and third calendar quarters of each year. In addition,
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expenditures by advertisers tend to be cyclical, reflecting overall economic
conditions as well as budgeting and buying patterns. A decline in the economic
prospects of advertisers or the economy generally, which could alter current or
prospective advertisers' spending priorities or the time periods in which they
determine their budgets, could cause our business, results of operations and
financial condition to be materially and adversely affected.

Many of our expenses, particularly personnel costs and rent, are relatively
fixed, and are incurred in part based on expectations of future revenue. We may
be unable to adjust spending quickly enough to offset any unexpected revenue
shortfall. Accordingly, any shortfall in revenue may cause significant variation
in operating results in any quarter.

Because of these factors, you should not rely on quarter-to-quarter
comparisons of our results of operations as an indication of our future
performance. It is possible that, in future periods, our results of operations
may be below the expectations of public market analysts and investors. This
could cause the trading price of our common stock to decline.

We have only been in business for a short period of time.

We began commercial shipments of our first software products in early 1998,
and we face risks, expenses and uncertainties as an early stage company,
particularly in the new and rapidly evolving Internet market. Because we only
recently commenced commercial sales, our past results and rates of growth may
not be meaningful, and you should not rely upon them as an indication of our
future performance.

We anticipate that we will continue to be controlled by CMGI, whose interests
may differ from other stockholders.

CMGI currently beneficially owns approximately 77% of the outstanding
shares of our common stock. Accordingly, CMGI has and will continue to have the
power to elect our entire Board of Directors and to approve or disapprove any
corporate transaction or other matter submitted to our stockholders for
approval, including the approval of mergers or other significant corporate
transactions. The interests of CMGI may differ from the interests of the other
stockholders. Future decisions by CMGI as to the disposition of any or all of
its ownership position in Engage could be influenced by the possible need of
CMGI to maintain control of us in order for CMGI to avoid becoming a registered
investment company. Registration as an investment company would subject CMGI to
numerous regulatory requirements with which CMGI would have difficulty
complying. As a result, CMGI may be motivated to maintain at least a majority
ownership position of Engage, even if its other stockholders might consider a
sale of control to be in their best interests. As long as it is a majority
stockholder, CMGI has contractual rights to purchase shares in any financing we
undertake sufficient to maintain its majority ownership position. CMGI's
ownership may have the effect of delaying or preventing a change in control of
Engage or discouraging a potential acquirer from attempting to obtain control of
us, which in turn could adversely affect the market price of our common stock.

A material portion of our growth to date has been attributable to sales to CMGI
affiliates.

In fiscal 2000, 34 of our customers were either affiliates of ours or
affiliates of CMGI. In fiscal 2000, sales of products and services to affiliates
of CMGI and to our affiliates accounted for approximately $22.6 million, or
approximately 12.8%, of our total revenue. To the extent that our growth in
revenue has been attributable to sales of products and services to these
affiliates, there can be no assurance that our historical rate of growth is an
indication of our future prospects.

The terms of our sales to CMGI affiliates could change.

While we believe that the transactions between Engage and other affiliates
of CMGI have been on arms'-length terms, it is possible that we might have
received more favorable terms than we would have if we were not an affiliate of
CMGI. In addition, the terms of our sales to affiliated customers could change
if these customers cease to be affiliates of CMGI in the future. CMGI has been
and continues to be instrumental in

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introducing us to customers and other business partners. If the relationship
between Engage and CMGI ended or was fundamentally altered, our business could
be materially adversely affected.

We do not have a history of financial reporting for Engage and all our recent
acquisitions as a combined entity.

In the year ended July 31, 2000 we completed six acquisitions. In December
1999, we acquired AdKnowledge Inc., a provider of products and services which
allow online marketers and agencies to plan, target, serve track and analyze
advertising campaigns. In April 2000, we acquired both Adsmart Corporation, an
online advertising network and Flycast Communications Corporation, a leading
provider of Internet direct response advertising solutions. In June 2000, we
acquired substantially all of the assets of the Virtual Billboard Network, one
of the largest ad networks of Canada. In June 2000, we also acquired a majority
ownership position in Engage Technologies Japan KK, our joint venture with
Sumitomo Corporation and we acquired Interactive Solutions Inc., a Japanese
online advertising company previously owned by Sumitomo Corporation. Our
financial statements reflect the results of Adsmart back to April 1, 1996 and of
Flycast back to January 13, 2000 since the acquisitions are being accounted for
as an "as-if pooling". Otherwise, our financial statements do not reflect the
pre-acquisition results of these acquisitions on a pro forma basis for fiscal
2000. Some comparisons between fiscal 1999 and fiscal 2000, particularly
increases in revenue and operating expenses, may be greater than they would have
been had the comparisons been done on a pro forma basis. For this reason, our
future reported financial results may not be comparable to our historically
reported financial results. If our future financial results are not comparable
to our historical financial results our business, results of operations and
financial condition could be materially and adversely affected.

Growing concerns about the use of "cookies" and data collection may limit our
ability to develop user profiles.

Web sites typically place small files of information commonly known as
"cookies" on a user's hard drive, generally without the user's knowledge or
consent. Cookie information is passed to the Web site through the Internet
user's browser software. Our technology currently uses cookies to collect
information about an Internet user's movement through the Internet. Most
currently available Internet browsers allow users to modify their browser
settings to prevent cookies from being stored on their hard drive, and a small
minority of users are currently choosing to do so. Users can also delete cookies
from their hard drive at any time.

Some Internet commentators and privacy advocates have suggested limiting or
eliminating the use of cookies. The effectiveness of our technology could be
limited by any reduction or limitation in the use of cookies.

Recently, Microsoft Corporation announced that it intends to change the
design and instrumentation of its Web browser in such a way as to give users the
option to accept or reject third party cookies. Giving users the option to
decline such cookies could result in a reduction of the number of Internet users
we are capable of profiling anonymously. Such changes also could adversely
affect our ability to determine the reach of advertising campaigns run by our
Engage Media division and the frequency with which users of sites in the Engage
Media network see the same advertisement. A change, such as that announced by
Microsoft, would primarily affect third-party ad networks like Engage,
potentially making portal web sites such as Yahoo.com and MSN.com a relatively
more attractive advertising venue.

If the use or effectiveness of cookies is limited, we would likely have to
switch to other technology that would allow us to gather demographic and
behavioral information. While such technology currently exists, it is
substantially less effective than cookies. Replacement of cookies could require
significant reengineering time and resources, might not be completed in time to
avoid negative consequences to our business, financial condition or results of
operations, and might not be commercially feasible.

In addition, privacy concerns may cause some Web users to be less likely to
visit Web sites that contribute data to the Engage Knowledge database. If enough
Web users choose not to visit sites providing information to the Engage
Knowledge database, our ability to attract participants to Engage Audience
Profiles would be adversely affected. This would, in turn, have a material
adverse effect on our financial condition.

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Legislation or regulations may be adopted that could affect our ability to
generate or use information for profiles and may hinder our ability to conduct
business.

The legal and regulatory environment governing the Internet and the use of
information about Web users is uncertain and may change. United States
legislators in the past have introduced a number of bills aimed at regulating
the collection and use of personal data from Internet users and additional
similar bills are being considered during the current congressional session. One
bill, as currently drafted, would require Internet users to affirmatively
consent before a cookie is set on their browser for any purpose, with certain
limited exceptions. If passed into law without modification, this bill would
have a material adverse effect on our business. The European Union has recently
adopted a directive addressing data privacy that may result in limitations on
the collection and use of specific personal information regarding Internet
users. In addition, Germany has imposed its own laws protecting data that can
become personally identifiable through subsequent processing. Other countries
may also enact limitations on the use of personal data.

To date, these regulations have not materially restricted the use of our
products. However, legislation or regulations may in the future be adopted which
may limit our ability to target advertising or collect and use information in
one or more countries, and growing public concerns about Internet privacy could
encourage legislators and regulators and government agencies to adopt such laws
and regulations. Any legislation, regulation or other legal action that limits
our ability to target advertising or collect and use information about Internet
users could hinder our ability to sell some of our products and could materially
and adversely affect our business.

In addition, a number of laws and regulations have been and may be adopted
covering issues such as pricing, acceptable content, taxation and quality of
products and services on the Internet. Such legislation could dampen the growth
in use of the Internet generally and decrease the acceptance of the Internet as
a communications and commercial medium. In addition, due to the global nature of
the Internet, it is possible that multiple federal, state or foreign
jurisdictions might inconsistently regulate our activities and customers. Any of
the foregoing developments could have a material adverse effect on our business,
results of operations and financial condition.

We have many competitors and may not be able to compete effectively.

The markets for Internet advertising, user targeting and Web site
assessment tools are intensely competitive. We compete directly with providers
of profiling technology, such as Personify, and indirectly with applications
that include more limited profiling capability integrated into their solutions,
such as BroadVision and Vignette. We also compete with companies such as
DoubleClick, 24/7 Media and MatchLogic that have the ability to aggregate large
quantities of customer behavior data across their networks.

The primary competitors to our advertising management software are systems
provided by NetGravity, a subsidiary of DoubleClick, and Real Media. In the
outsourced ad serving market, we compete with providers of ad serving services,
including AdForce, which CMGI acquired in January 2000, and DoubleClick. In the
advertising sales market, our primary competitors are DoubleClick and 24/7
Media. Our traffic measurement and analysis services and software compete with
software offered by Accrue, Andromedia, net.Genesis and WebTrends, and our audit
services compete with ABC Interactive, BPA and PricewaterhouseCoopers. We also
encounter competition from a number of other sources, including content
aggregation companies, companies operating advertising sales networks,
advertising agencies and other companies that facilitate Internet advertising
and electronic commerce.

With respect to our enterprise software that is used to create, plan,
deliver and refine integrated promotional campaigns, we experience competition
from many competitors, in both the traditional marketing sector as well as the
emerging Internet promotions sector.

The principal competitors of the Engage Media Network are DoubleClick, 24/7
Media and ValueClick. The principal competitor of our AdKnowledge solution is
DoubleClick's DART for Agencies product. In the ad serving product market, the
primary competitors of our AdManager software are NetGravity, a subsidiary

27
<PAGE> 29

of DoubleClick, and Real Media. In the outsourced ad serving market, our
AdBureau service competes with providers of ad serving services, such as those
offered by AdForce and DoubleClick.

Many of our existing competitors, as well as a number of potential new
competitors, have longer operating histories, greater name recognition, larger
customer bases and significantly greater financial, technical and marketing
resources than we do. Such competitors may also engage in more extensive
research and development, undertake more far-reaching marketing campaigns, adopt
more aggressive pricing policies and make more attractive offers to existing and
potential employees, strategic partners, advertisers and Web publishers. Our
competitors may develop products or services that are equal or superior to our
solutions or that achieve greater market acceptance than our solutions. In
addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties. Increased
competition is likely to result in price reductions, reduced gross margins and
loss of market share. We may not be able to compete successfully or competitive
pressures may materially and adversely affect our business, financial condition
and results of operations.

Companies doing business on the Internet, including Engage, must also
compete with television, radio, cable and print media for a share of
advertisers' total advertising budgets.

Our systems may fail or experience slowdowns and we could lose key data used in
our user profiles.

All of our communications hardware and other data center operations are
provided internally and through multiple hosting services firms on the East and
West Coasts. Fire, floods, earthquakes, power loss, telecommunications failures,
break-ins and similar events could damage these systems, including loss of data
used to create our user profiles. Our business could be materially and adversely
affected if our systems were affected by any of these occurrences or if any data
used in the Engage Knowledge database were lost. Our insurance policies may not
adequately compensate us for any losses that may occur due to any failures or
interruptions in our systems or loss of data.

Our future success depends in part on the efficient performance of our ad
serving systems, as well as the efficient performance of the systems of third
parties, such as our Internet service providers. An increase in the volume of
advertising delivered through our servers could strain the capacity of the
software or hardware that we have deployed, which could lead to slower response
times or system failures and adversely affect the availability of
advertisements, the number of advertising views received by advertisers and our
revenue. To the extent that we do not effectively address any capacity
constraints or system failures, our customers may choose competing services and
as a result our business may be materially adversely affected.

Our software products may contain defects, which could result in delayed or lost
revenue, expensive corrections, liability to our customers and claims against
us.

We design, develop and sell complex ad serving, profiling and promotional
marketing software that are crucial to the operation of the businesses of our
customers. Defects in the solutions we develop could result in delayed or lost
revenue, adverse customer reaction and negative publicity about Engage or our
products and services or require expensive corrections. In addition, third party
technology that is included in our products could contain errors or defects.
Customers who are not satisfied with our products or services could bring claims
against us for substantial damages, which, even if unsuccessful, would likely be
time consuming and could result in costly litigation and payment of damages.
Such claims could have a material adverse effect on our business, financial
condition and results of operations.

If we cannot deliver satisfactory support and maintenance services to our
clients, our revenues may be harmed.

Following installation, our products generally require continuing support
and maintenance services. If demand for post-implementation support and
maintenance is higher than we expect, we may not have sufficient personnel to
deliver these services in a timely and effective manner to our customers. In
addition, implementation of our solution may result in problems with our
customer's information technology systems over which we have no control. If our
support and maintenance services personnel cannot resolve these problems or
otherwise satisfy our customers' demands for services, they may not purchase
additional product
28
<PAGE> 30

upgrades to existing products or services from us. In addition, our reputation
with potential customers may be damaged. Any inability to deliver satisfactory
support and maintenance services to our clients could harm our revenues. Our
recently acquired subsidiary, MediaBridge Technologies, has in the past faced
situations in which it was unable to provide product support and maintenance
services of the level expected by particular customers, and there may be future
circumstances in which it is also unable to do so.

If we fail to establish, maintain or expand third party reseller and
implementation relationships, our ability to penetrate the market will be
limited.

We distribute our products and services, in part, through reseller and
implementation relationships. We have a limited number of third party reseller
and implementation relationships, and we may not be able to increase the number
or scope of our reseller and implementation relationships or maintain our
existing relationships. Our failure to increase the number of our reseller and
implementation relationships or maintain our existing relationships may limit
our ability to penetrate the market. Our distribution relationships generally do
not prevent third party resellers and implementation providers from selling
products of other companies, including products that may compete with our
products. These distributors could give higher priority to the products of other
companies or to their own products, than they give to our products. As a result,
the loss of, or a significant reduction in sales volume to our current or future
resellers or implementation providers could seriously harm our revenue and
operating results. In addition, a significant increase in sales through these
channels could also negatively impact our gross margins, as sales through these
channels generally have lower revenue per unit than direct sales. Moreover, if
these firms fail to implement our products successfully for their customers, we
may not have the resources to implement our products on the schedule required by
these customers, which could have a material adverse effect on our ability to
generate increased revenue.

We may need additional financing which could be difficult to obtain.

We intend to grow our business rapidly and expect to incur operating losses
for the foreseeable future. Therefore, we may require external financing in the
future. Obtaining additional financing will be subject to a number of factors,
including:

- market conditions

- our operating performance

- investor sentiment, particularly for Internet-related companies

These factors may make the timing, amount, terms and conditions of
additional financing unattractive for us. If we are unable to raise capital to
fund our growth, we would not be able to execute our business plan and our
financial condition would be materially and adversely affected.

Technological change may render our products and services obsolete.

The Internet market is characterized by rapidly changing technology,
evolving industry standards, frequent new product announcements and enhancements
and changing customer demands. The introduction of new products and services
embodying new technologies and the emergence of new industry standards can
render existing products and services obsolete. Our success depends on our
ability to adapt to rapidly changing technologies and to improve the
performance, features and reliability of our services and products in response
to changing customer and industry demands. Furthermore, we may experience
difficulties that could delay or prevent the successful design, development,
testing, introduction or marketing of services. New services or enhancements to
existing services may not adequately meet the requirements of our current and
prospective customers or achieve any degree of significant market acceptance.

We face risks associated with our international operations and plans for
expansion.

We have operations in a number of international markets. We intend to
continue to expand our international operations and international sales and
marketing efforts. To date, we have limited experience in developing localized
versions of our solutions and in marketing, selling and distributing our
solutions
29
<PAGE> 31

internationally. We have established direct sales offices in the United Kingdom,
France, Italy, Sweden, Canada, Australia, Germany, Hong Kong, Korea, Malaysia,
Thailand and Japan. We intend to enter other international markets primarily by
partnering with locally based third parties, including entering into joint
ventures and distribution arrangements. Our success in such markets is directly
dependent on the success of our business partners and their dedication of
sufficient resources to the relationship.

International operations are subject to other inherent risks, including:

- compliance with the laws and regulations of different countries

- difficulties in enforcing contractual obligations and intellectual
property rights in some countries

- difficulties and costs of staffing and managing foreign operations

- fluctuations in currency exchange rates

These risks may materially and adversely affect our results of operations.

We depend on the continued viability of the Internet infrastructure.

Our success depends upon the development and maintenance of a viable
Internet infrastructure. The current Internet infrastructure may be unable to
support an increased number of users. The timely development and acceptance of
products such as high-speed modems and communications equipment will be
necessary to continue reliable Web access. Furthermore, the Web has experienced
outages and delays as a result of damage to portions of its infrastructure. Such
outages and delays, could adversely affect Web sites and the level of traffic on
our customers' sites. The effectiveness of the Web may decline due to delays in
the development or adoption of new standards and protocols designed to support
increased levels of activity. If such new infrastructure, standards or protocols
are developed, we may be required to incur substantial expenditures to adapt our
products to the new technologies.

Our business may suffer if we cannot protect our intellectual property.

Our success and ability to compete are substantially dependent on our
internally developed technologies and trademarks, which we seek to protect
through a combination of patent, copyright, trade secret and trademark law. We
cannot assure you that any of our patent applications or trademark registrations
will be approved, or even if approved, would not be successfully challenged by
others or invalidated. In addition, we cannot assure you that we will be able to
prevent misappropriation of our solutions or technologies, particularly in
foreign countries where laws or law enforcement practices may not protect our
proprietary rights as fully as in the United States.

Our profiling technology collects and utilizes data derived from user
activity on our customers' Web sites. This data is used for advertising and
content targeting. Although we believe that we have the right to use such data
and the compilation of such data in our database, we cannot assure you that any
trade secret, copyright or other protection will be available for such
information. In addition, others may claim rights to such information.

Our business will suffer if we are unable to retain key personnel.

We depend on the services of our senior management and key technical
personnel. In particular, our success depends on the continued efforts of our
President and Chief Executive Officer, Paul L. Schaut; our Group President of
Engage Media, Deborah McWhinney; and our Chief Technology Officer, Daniel Jaye,
with whom we do not have employment agreements. The loss of the services of any
key employee could have a material adverse effect on our business.

We will continue to rely on CMGI for various administrative services, and
conflicts of interest could arise in the provision of such services.

We have entered into a facilities and administrative support agreement with
CMGI under which CMGI will continue to make available space at its headquarters
in Massachusetts and will provide various services to

30
<PAGE> 32

us, including facilities, computer and information systems, telecommunications,
utilities and employee benefits administration. We also occupy facilities that
are leased by CMGI, whereby CMGI charges us for our share of rent and related
facility costs through an allocation based upon the our headcount in relation to
total headcount for all CMGI companies located on the premises. We have not
independently determined the market value for these services and may be paying
more than fair market value for them if this allocation method does not fairly
reflect our use of these services or if CMGI were obtaining them at rates
greater than their fair market value. This agreement may be amended by agreement
of CMGI and Engage. It is possible that personnel of CMGI providing these
services may encounter conflicts of interests such as demands on their time by
CMGI that might detract from their level of availability or service to us. In
addition, our reliance on these services could result in higher costs than would
be incurred if we were to obtain such services from an unrelated third party.

Our stock price is likely to be highly volatile.

The price at which our common stock will trade has been and is likely to
continue to be highly volatile and may fluctuate substantially due to a number
of factors, including:

- actual or anticipated fluctuations in our results of operations

- changes in or our failure to meet securities analysts' expectations

- technological innovations

- increased competition

- conditions and trends in the Internet and other technology industries

- general market conditions

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The carrying values of financial instruments including cash and cash
equivalents, accounts receivable, accounts payable 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. As 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.

31
<PAGE> 33

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ 33
Consolidated Balance Sheets as of July 31, 1999 and 2000.... 34
Consolidated Statements of Operations for the three years
ended July 31, 2000....................................... 35
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) for the three years ended July 31, 2000......... 36
Consolidated Statements of Cash Flows for the three years
ended July 31, 2000....................................... 37
Notes to Consolidated Financial Statements.................. 38
</TABLE>

32
<PAGE> 34

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Engage, Inc.:

We have audited the accompanying consolidated balance sheets of Engage,
Inc. and subsidiaries as of July 31, 1999 and 2000, and the related consolidated
statements of operations, changes in stockholders' equity (deficit), and cash
flows for each of the years in the three-year period ended July 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Engage, Inc.
and subsidiaries as of July 31, 1999 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended July 31, 2000, in conformity with accounting principles generally accepted
in the United States of America.

KPMG LLP

September 20, 2000
Boston, Massachusetts

33
<PAGE> 35

ENGAGE, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JULY 31, 1999 AND 2000

<TABLE>
<CAPTION>
JULY 31,
-------------------------
1999 2000
-------- -----------
(IN THOUSANDS,
EXCEPT PAR VALUE)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $112,034 $ 119,809
Available-for-sale securities............................. 1,067 16,147
Accounts receivable, less allowance for doubtful accounts
of $1,790 and $11,703 at July 31, 1999 and 2000,
respectively........................................... 16,463 79,799
Prepaid expenses.......................................... 727 2,570
-------- -----------
Total current assets.............................. 130,291 218,325
-------- -----------
Property and equipment, net................................. 1,997 31,334
Investment in joint venture................................. 1,047 --
Intangible assets, net of accumulated amortization of
$10,492 and $217,454 at July 31, 1999 and 2000,
respectively.............................................. 73,335 873,323
Other assets................................................ 371 9,915
-------- -----------
Total assets...................................... $207,041 $ 1,132,897
======== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Debt to CMGI.............................................. $ 44,829 $ --
Obligation under capital lease............................ 327 4,650
Current portion of long-term debt......................... -- 2,010
Accounts payable.......................................... 12,614 33,365
Due to CMGI............................................... -- 27,287
Accrued expenses.......................................... 15,251 24,599
Deferred revenue.......................................... 4,293 7,604
-------- -----------
Total current liabilities......................... 77,314 99,515
-------- -----------
Deferred revenue............................................ 1,508 651
Obligation under capital lease, net of current portion...... 436 2,905
Long-term debt, net of current portion...................... -- 1,843
Other long-term liabilities................................. -- 843
Minority interest........................................... -- 8,812

Commitments and contingencies

Stockholders' equity:
Series A Preferred Stock -- Engage, $.01 par value, 1,500
shares authorized, 0 shares issued and outstanding at
July 31, 1999 and 2000, respectively................... -- --
Series A Preferred Stock -- Adsmart, $.01 par value, 69
shares authorized, 69 and 0 shares issued and
outstanding at July 31, 1999
and 2000, respectively................................. 1 --
Series B Preferred Stock, $.01 par value, 239 shares
authorized, 0 shares issued and outstanding at July 31,
1999 and 2000.......................................... -- --
Series C Preferred Stock, $.01 par value, 2,000 shares
authorized, 0 shares issued and outstanding at July 31,
1999 and 2000.......................................... -- --
Common Stock, $.01 par value, 350,000 shares authorized,
97,353 and 178,860 shares issued and outstanding at
July 31, 1999 and 2000, respectively................... 973 1,789
Additional paid-in capital................................ 215,901 3,650,059
Deferred compensation..................................... (4,024) (1,234)
Accumulated other comprehensive loss...................... (353) (260)
Accumulated deficit....................................... (84,715) (2,632,026)
-------- -----------
Total stockholders' equity........................ 127,783 1,018,328
-------- -----------
Total liabilities and stockholders' equity........ $207,041 $ 1,132,897
======== ===========
</TABLE>

See accompanying notes to consolidated financial statements.
34
<PAGE> 36

ENGAGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JULY 31, 1998, 1999 AND 2000

<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
---------------------------------------
1998 1999 2000
---------- ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenue................................................... $ 2,336 $ 25,040 $ 154,220
Revenue, related parties.................................. 235 1,793 22,565
-------- -------- ---------
Total revenue................................... 2,571 26,833 176,785
-------- -------- ---------
Cost of revenue........................................... 4,668 23,503 121,465
-------- -------- ---------
Gross (loss) profit............................. (2,097) 3,330 55,320
-------- -------- ---------
Operating expenses:
In-process research and development..................... 9,200 4,500 31,617
Research and development................................ 6,819 8,699 28,157
Selling and marketing................................... 6,333 19,369 97,219
General and administrative.............................. 3,124 5,219 29,062
Amortization of goodwill and other intangibles.......... 1,498 8,939 207,059
Stock compensation...................................... 426 1,455 37,400
Acquisition costs....................................... -- -- 4,951
-------- -------- ---------
Total operating expenses........................ 27,400 48,181 435,465
-------- -------- ---------
Loss from operations...................................... (29,497) (44,851) (380,145)

Other income (expense):
Interest income......................................... -- 134 6,281
Interest expense........................................ (267) (1,022) (2,901)
Equity in loss of joint venture......................... -- (723) (1,118)
Minority interest....................................... -- -- 227
Gain on sale of product rights.......................... 9,240 -- --
Other expense........................................... -- (165) (214)
-------- -------- ---------
Net loss.................................................. $(20,524) $(46,627) $(377,870)
======== ======== =========
Pro forma basic and diluted net loss per share............ $ (0.60) $ (0.61) $ (2.61)
======== ======== =========
Pro forma weighted average number of basic and diluted
shares outstanding...................................... 34,336 76,399 145,044
======== ======== =========
</TABLE>

See accompanying notes to consolidated financial statements.
35
<PAGE> 37

ENGAGE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JULY 31, 1998, 1999 AND 2000
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------- --------------- --------------- ---------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ------ ------ ------ ------ ------ ------- ------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at July 31, 1997.......... -- $ -- -- $-- -- $-- 33,070 $ 331 $ (149)
Reorganization................... 869 9 -- -- -- -- (32,694) (327) 14,238
Acquisition of Accipiter......... 700 7 -- -- -- -- -- -- 33,667
Amortization of deferred
compensation................... -- -- -- -- -- -- -- -- --
Exercise of stock options........ -- -- -- -- -- -- 8 -- --
Unrealized loss on
available-for-sale
securities..................... -- -- -- -- -- -- -- -- --
Net loss......................... -- -- -- -- -- -- -- --
------ ---- ---- -- ---- -- ------- ------ ----------
Balance at July 31, 1998.......... 1,569 16 -- -- -- -- 384 4 47,756
Issuance of preferred stock, net
of issuance costs of $66....... -- -- 239 2 -- -- -- -- 1,932
Acquisition of I/PRO............. -- -- -- -- -- -- 2,020 20 10,161
Deferred compensation on stock
option issuances............... -- -- -- -- -- -- -- -- 4,174
Issuance of stock options........ -- -- -- -- -- -- -- -- 1,639
Conversion of debt to CMGI....... -- -- -- -- 414 4 711 7 42,765
Issuance of common stock, net of
issuance costs of $50.......... -- -- -- -- -- -- 1,876 19 13,063
Initial public offering, net of
issuance costs of $1,500, and
conversion of preferred
stock.......................... (1,500) (15) (239) (2) (414) (4) 91,296 913 93,863
Foreign currency translation
adjustment..................... -- -- -- -- -- -- -- -- --
Amortization of deferred
compensation................... -- -- -- -- -- -- -- -- --
Exercise of stock options........ -- -- -- -- -- -- 1,066 10 548
Unrealized gain on
available-for-sale
securities..................... -- -- -- -- -- -- -- -- --
Net loss......................... -- -- -- -- -- -- -- -- --
------ ---- ---- -- ---- -- ------- ------ ----------
Balance at July 31, 1999.......... 69 $ 1 -- $-- -- $-- 97,353 $ 973 $ 215,901
Acquisitions..................... -- -- -- -- -- -- 64,217 642 1,077,552
Conversion of Adsmart preferred
stock.......................... (69) (1) -- -- -- -- 694 7 (6)
Private placement of common
stock, net of issuance costs of
$825........................... -- -- -- -- -- -- 4,996 50 74,125
Conversion of debt to CMGI....... -- -- -- -- -- -- 10,179 102 74,827
Foreign currency translation
adjustment..................... -- -- -- -- -- -- -- -- --
Amortization of deferred
compensation................... -- -- -- -- -- -- -- -- --
Exercise of stock options........ -- -- -- -- -- -- 2,980 30 3,610
Sale of common stock under
Employee Stock Purchase Plan... -- -- -- -- -- -- 75 1 764
Reversal of deferred compensation
on forfeited stock options..... -- -- -- -- -- -- -- -- (2,154)
Unrealized gain on
available-for-sale
securities..................... -- -- -- -- -- -- -- -- --
Repurchase of unvested stock
options........................ -- -- -- -- -- -- (19) -- (8)
Acceleration of unvested stock
options........................ -- -- -- -- -- -- -- -- 36,764
Dividend to CMGI................. -- -- -- -- -- -- (1,615) (16) 2,168,684
Net loss......................... -- -- -- -- -- -- -- -- --
------ ---- ---- -- ---- -- ------- ------ ----------
Balance at July 31, 2000.......... -- $ -- -- $-- -- $-- 178,860 $1,789 $3,650,059
====== ==== ==== == ==== == ======= ====== ==========

<CAPTION>
ACCUMULATED
OTHER
DEFERRED COMPREHENSIVE ACCUMULATED
COMPENSATION INCOME (LOSS) DEFICIT TOTAL
------------ ------------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at July 31, 1997.......... $ -- $ -- $ (17,564) $ (17,382)
Reorganization................... -- -- -- 13,920
Acquisition of Accipiter......... (1,731) -- -- 31,943
Amortization of deferred
compensation................... 426 -- -- 426
Exercise of stock options........ -- -- -- --
Unrealized loss on
available-for-sale
securities..................... -- (1,193) -- (1,193)
Net loss......................... -- -- (20,524) (20,524)
------- ------- ----------- ----------
Balance at July 31, 1998.......... (1,305) (1,193) (38,088) 7,190
Issuance of preferred stock, net
of issuance costs of $66....... -- -- -- 1,934
Acquisition of I/PRO............. -- -- -- 10,181
Deferred compensation on stock
option issuances............... (4,174) -- -- --
Issuance of stock options........ -- -- -- 1,639
Conversion of debt to CMGI....... -- -- -- 42,776
Issuance of common stock, net of
issuance costs of $50.......... -- -- -- 13,082
Initial public offering, net of
issuance costs of $1,500, and
conversion of preferred
stock.......................... -- -- -- 94,755
Foreign currency translation
adjustment..................... -- 340 -- 340
Amortization of deferred
compensation................... 1,455 -- -- 1,455
Exercise of stock options........ -- -- -- 558
Unrealized gain on
available-for-sale
securities..................... -- 500 -- 500
Net loss......................... -- -- (46,627) (46,627)
------- ------- ----------- ----------
Balance at July 31, 1999.......... $(4,024) $ (353) $ (84,715) $ 127,783
Acquisitions..................... -- -- -- 1,078,194
Conversion of Adsmart preferred
stock.......................... -- -- -- --
Private placement of common
stock, net of issuance costs of
$825........................... -- -- -- 74,175
Conversion of debt to CMGI....... -- -- -- 74,929
Foreign currency translation
adjustment..................... -- (565) -- (565)
Amortization of deferred
compensation................... 636 -- -- 636
Exercise of stock options........ -- -- -- 3,640
Sale of common stock under
Employee Stock Purchase Plan... -- -- -- 765
Reversal of deferred compensation
on forfeited stock options..... 2,154 -- -- --
Unrealized gain on
available-for-sale
securities..................... -- 658 -- 658
Repurchase of unvested stock
options........................ -- -- -- (8)
Acceleration of unvested stock
options........................ -- -- -- 36,764
Dividend to CMGI................. -- -- (2,169,441) (773)
Net loss......................... -- -- (377,870) (377,870)
------- ------- ----------- ----------
Balance at July 31, 2000.......... $(1,234) $ (260) $(2,632,026) $1,018,328
======= ======= =========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.

36
<PAGE> 38

ENGAGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, 1998, 1999 AND 2000

<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
---------------------------------
1998 1999 2000
-------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................ $(20,524) $(46,627) $(377,870)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization........................ 2,344 9,780 213,269
Equity in loss of joint venture...................... -- 723 1,136
Provision for bad debts.............................. 283 635 8,998
Stock compensation................................... 426 1,455 37,400
Amortization of discount on available-for-sale
securities......................................... -- -- (1,183)
Gain on sale of available-for-sale securities........ -- -- (40)
Gain on sale of product rights....................... (9,240) -- --
(Gain) loss on disposal of property and equipment.... -- 165 (8)
Minority interest.................................... -- -- (227)
In-process research and development.................. 9,200 4,500 31,617
Changes in operating assets and liabilities, net of
impact of acquisitions:
Accounts receivable................................ (1,804) (11,782) (48,856)
Prepaid expenses and other assets.................. (170) (213) (2,385)
Due to CMGI and affiliates......................... -- -- 29,362
Accounts payable................................... 646 7,376 5,117
Accrued expenses................................... 1,450 9,643 (28,326)
Deferred revenue................................... 1,117 4,324 1,094
-------- -------- ---------
Net cash used for operating activities.......... (16,272) (20,021) (130,902)
-------- -------- ---------
Cash flows from investing activities:
Purchase of available-for-sale securities............... -- -- (54,263)
Proceeds from redemption of available-for-sale
securities........................................... -- -- 87,163
Net cash acquired on acquisition of subsidiaries........ 689 707 21,963
Purchases of property and equipment..................... (402) (388) (16,842)
Other................................................... -- (1,416) (1,992)
-------- -------- ---------
Net cash (used for) provided by investing
activities.................................... 287 (1,097) 36,029
-------- -------- ---------
Cash flows from financing activities:
Net change in debt to CMGI and affiliates............... 16,091 24,230 30,198
Proceeds from issuance of common stock, net of issuance
costs and repurchases................................ 1 108,395 83,994
Issuance of preferred stock, net of issuance costs...... -- 1,934 --
Repayment of capital lease obligations.................. (11) (210) (3,173)
Repayment of long-term debt............................. -- (1,287) (4,465)
-------- -------- ---------
Net cash provided by financing activities....... 16,081 133,062 106,554
-------- -------- ---------
Effect of exchange rate changes on cash and cash
equivalents............................................. -- (6) (3,906)
-------- -------- ---------
Net increase in cash and cash equivalents................. 96 111,938 7,775

Cash and cash equivalents, beginning of period............ -- 96 112,034
-------- -------- ---------
Cash and cash equivalents, end of period.................. $ 96 $112,034 $ 119,809
======== ======== =========
Supplemental disclosures of cash flow information:
Cash paid for interest.................................. $ -- $ 41 $ 1,353
======== ======== =========
</TABLE>

See accompanying notes to consolidated financial statements
37
<PAGE> 39

ENGAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) DESCRIPTION OF BUSINESS

We provide Web-based advertising solutions that enable advertisers and
agencies to effectively plan, manage and analyze Web advertising in order to
optimize Web-based campaign spending. In addition, we sell software that enables
Web publishers, advertisers and merchants to target and deliver advertisements,
content and e-commerce offerings to their audiences.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

We are a majority owned subsidiary of CMGI, Inc. ("CMGI"). The accompanying
consolidated financial statements, which have been prepared as if we had
operated as a separate stand-alone entity for all periods presented, include
only revenue and expenses attributable to us since we commenced operations in
September 1995.

On April 28, 2000, we completed the acquisition of Adsmart Corporation
("Adsmart"), also 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 an Contribution, dated as of January
19, 2000. This transaction has been accounted for as a combination of entities
under common control (i.e, "as-if pooling"). Accordingly, our consolidated
financial statements have been restated for all periods prior to the business
combination to include the financial results back to the date on which CMGI
founded Adsmart (April 1, 1996) and the date on which CMGI acquired Flycast
(January 13, 2000). All financial information has been accounted for using
CMGI's historical basis in Adsmart and Flycast, including CMGI's application of
purchase accounting to the assets acquired and liabilities assumed of Flycast.
The consolidated balance sheets as of July 31, 1999 and 2000 and the
consolidated statement of operations for the three years ended July 31, 2000
reflect the combined consolidated financial position and results of operations
of Engage and Adsmart for those periods. The consolidated balance sheet as of
July 31, 2000 and the consolidated statements of operations for the year ended
July 31, 2000 also reflect the combined financial position and results of
operations of Flycast at July 31, 2000 and since January 13, 2000.

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

Principles of Consolidation

The accompanying consolidated financial statements include our accounts and
the accounts of our subsidiaries. All significant intercompany account balances
and transactions between the companies have been eliminated.

Use of Estimates

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

38
<PAGE> 40
ENGAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Revenue Recognition

Effective August 1, 1998, we adopted the provisions of SOP 97-2, Software
Revenue Recognition. For transactions after August 1, 1998, revenues from
software product licenses, Knowledge database services and web-site traffic
audit reports are generally recognized when (i) a signed noncancelable software
license exists, (ii) delivery has occurred, (iii) our fee is fixed or
determinable, and (iv) collectibility is probable. Revenue from license
agreements that have significant customizations and modifications of the
software product is deferred and recognized using the percentage of completion
method. There was no material change to our accounting for revenue as a result
of the adoption of SOP 97-2.

Revenue from periodic subscriptions is recognized ratably over the
subscription term, typically twelve months. Revenue from usage-based
subscriptions is recognized monthly based on actual usage.

Service and support revenue includes software maintenance and other
professional services revenues, primarily from consulting, implementation and
training. Revenue from software maintenance is deferred and recognized ratably
over the term of each maintenance agreement, typically twelve months. Revenue
from professional services is recognized as the services are performed,
collectibility is probable and such revenues are contractually non-refundable.

Substantially all of our Media and Media Management revenue is recognized
on a gross basis and amounts paid to web sites are recorded as cost of revenue.
Revenue is generally recorded at gross in arrangements in which we act as
principal in the transaction. Revenue is recognized net of the related web site
expense in arrangements in which we act primarily as a sales agent.

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

Cash and Cash Equivalents

Cash and cash equivalents consist of highly liquid investments with
original maturities of 90 days or less from the date of purchase. Investments
with maturities of greater than 90 days and less than twelve months are
considered short-term investments. Cash equivalents at July 31, 1999 consisted
of a money market mutual fund. Cash equivalents at July 31, 2000 consisted of
money market mutual funds and commercial paper.

Non-cash Transactions

During fiscal 1998, non-cash investing activities included the sale of data
warehouse product rights in exchange for available-for-sale securities and the
reduction of approximately $8,400,000 of debt due to CMGI. In addition, non-cash
investing activities also include our acquisition of Accipiter in exchange for
700,000 shares of our Series A Convertible Preferred Stock.

During fiscal 1998, non-cash financing activities included the issuance of
869,382 shares of our Series A Convertible Preferred Stock in exchange for
32,693,816 shares of our common stock and a $13,920,000 reduction in the debt to
CMGI.

During fiscal 1999, non-cash investing activities include the acquisition
of I/PRO (see note 6) in exchange for 2,020,368 shares of our common stock, and
additional debt to CMGI totaling $22,086,000, as well as the acquisition of 2Can
Media, Inc. ("2Can") (see note 6) in exchange for additional debt to CMGI
totaling $28,483,000.

During fiscal 1999, non-cash financing activities included the issuance of
413,564 shares of our Series C Preferred Stock as repayment of approximately
$37,447,000 of debt to CMGI. In addition, non-cash financing activities included
the issuance of 710,514 shares of our common stock as repayment of approximately
$5,329,000 of debt to CMGI.

39
<PAGE> 41
ENGAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

During fiscal 2000, non-cash financing activities included the issuance of
approximately 10,179,000 shares of our common stock as repayment of
approximately $74,929,000 of debt to CMGI.

During fiscal 2000, as the result of the termination of employment of
certain employees prior to the vesting of their stock options, unvested stock
options of 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 $2,154,000 in both deferred compensation and additional paid-in-capital.

During fiscal 2000, we acquired AdKnowledge, Flycast the Virtual Billboard
Network and additional ownership in Engage Technologies Japan through the
issuance of an aggregate of approximately 64,217,000 shares of common stock (see
note 6).

During fiscal 2000, non-cash investing activities included the recording of
additional purchase price in the 2Can acquisition of $5,232,000 resulting from
the satisfaction of certain contingencies (see note 6). The contingent
consideration was paid by CMGI in fiscal 2000 and recorded as a capital
contribution by us.

During fiscal 2000, non-cash financing activities included the repayment of
approximately $2,074,000 of amounts due to CMGI by offsetting amounts due from
CMGI for the exercise price of stock options exercised by former Flycast
employees.

Fair Value of Financial Instruments

The carrying value for cash and cash equivalents, accounts receivable, debt
to CMGI, accounts payable and notes payable approximates fair value because of
the short term nature of these instruments. The carrying value of long-term debt
and capital lease obligations approximate their fair values, as estimated by
using discounted future cash flows based on our current incremental borrowing
rates for similar types of borrowing arrangements.

Marketable Securities

The appropriate classification of marketable securities is determined at
the time of acquisition and reevaluated at each balance sheet date. Marketable
securities have been classified as available-for-sale and are carried at fair
value, based on quoted market prices, with unrealized gains and losses included
in accumulated other comprehensive income (loss) on the consolidated balance
sheets. We recognize gains and losses when securities are sold using the
specific identification method.

Property and Equipment

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

Intangibles

Goodwill and other intangible assets are being amortized on a straight-line
basis over two to five years, depending on the periods expected to be benefited.

Accounting for Impairment of Long-Lived Assets

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Although the assumptions may vary from transaction to transaction, they
generally include revenue growth, operating results, cash flows and other
indicators of value. Management then determines whether there has been a
permanent impairment of the value of long-lived assets by comparing future
estimated undiscounted cash flows to the asset's carrying value. If the carrying
value of the asset exceeds the estimated future undiscounted cash flows, a loss
is recorded as the excess of the asset's carrying value over fair value.

Research and Development Costs and Software Costs

Expenditures related to the development of new products and processes,
including significant improvements and refinements to existing products and the
development of software, are expensed as incurred, unless they are required to
be capitalized. Software development costs are required to be capitalized when a
product's technological feasibility has been established by completion of a
detailed program design or working model of the product, and ending when a
product is available for general release to customers. To date, the
establishment of technological feasibility and general release have
substantially coincided. As a result, there have been no capitalized software
development costs to date. Additionally, at the date of acquisition or
investment, the components of the purchase price of each acquisition or
investment are evaluated to identify amounts allocated to in-process research
and development. Upon completion of acquisition accounting and valuation, such
amounts are charged to expense if technological feasibility had not been reached
at the acquisition date.

Foreign Currency Translation

The functional currency of a foreign operation is deemed to be the local
country's currency. The financial statements of operations outside the United
States are translated into United States dollars using period-end exchange rates
for assets and liabilities and average exchange rates during the period for
revenues and expenses. The resulting translation adjustments are included in
accumulated other comprehensive income (loss) on the consolidated balance
sheets. Net gains and losses resulting from foreign currency transactions
arising from exchange rate fluctuations on transactions denominated in
currencies other than the functional currencies are included in the consolidated
statements of operations and were immaterial for all periods presented.

Income Taxes

We account for income taxes under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. We
were greater than 80% owned by CMGI up through the date of the initial public
offering, and as such, CMGI realized the full benefit of all federal and part of
the state net operating losses that had been incurred by us up through the
initial public offering. Therefore, our net operating losses incurred prior to
our initial public offering will have no future benefit to us. Subsequent to the
initial public offering, CMGI owned approximately 79% of us and thus we will
have available to us the full benefit of all Federal and state net operating
losses incurred subsequent to the date of our initial public offering, although
CMGI will continue to realize the benefit of the federal and state losses
incurred by Adsmart.

As a result of our common stock issued to CMGI in the AdKnowledge
acquisition, CMGI's ownership interest increased to more than 80%. As a result,
beginning on December 22, 1999, CMGI again realized the full benefit of all of
our Federal and state net operating losses. The tax sharing agreement between
CMGI and us requires us to reimburse CMGI to the extent it contributes to the
consolidated tax liability of the CMGI

41
<PAGE> 43
ENGAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

group; however, under the policy, CMGI is not obligated to reimburse us for any
losses utilized in the consolidated CMGI group.

Advertising Costs

We expense advertising costs as incurred. Advertising expense was
approximately $213,000, $1,929,000 and $12,074,000 for the fiscal years ended
July 31, 1998, 1999 and 2000, respectively.

Accounting for Stock-Based Compensation

We have adopted SFAS No. 123, Accounting for Stock-Based Compensation
("SFAS 123"). As permitted by SFAS 123, we measure compensation cost in
accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees ("APB No. 25"), and related interpretations. The pro forma
impact on earnings has been disclosed in the notes to the consolidated financial
statements as required by SFAS 123 (see note 12). In March 2000, the FASB issued
Interpretation No. 44 ("FIN 44"), Accounting for Certain Transactions Involving
Stock Compensation, an Interpretation of APB Opinion No. 25. FIN 44 clarifies
the application of APB 25 for certain issues, including the definition of an
employee, the treatment of the acceleration of stock options and the accounting
treatment for options assumed in business combinations. FIN 44 became effective
on July 1, 2000, but is applicable for certain transactions dating back to
December 1998. The adoption of FIN 44 did not have a material impact on the
Company's financial position or results of operations.

We account for non-employee stock-based compensation awards in which goods
or services are the consideration received for the equity instruments issued
based on the fair value of the consideration received or the fair value of the
equity instruments issued, whichever is more reliably measurable.

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 the common stock
equivalents is included in the calculation of diluted earnings per share only
when the effect of the their inclusion would be dilutive.

Pro forma basic and diluted loss per share reflects the issuance of shares
in the Flycast acquisition on January 13, 2000 and the impact of the conversion
of debt to CMGI and preferred stock for both Engage and Adsmart, after
adjustment for the Engage exchange ratio, as of the date of the beginning of
each period, or date of issuance, if later, using the "if-converted method".

As described in note 11, conversion of all Engage preferred stock and debt
to CMGI occurred upon the completion of our initial public offering in July
1999. Adsmart had a formal borrowing arrangement with CMGI under which advances
made by CMGI to Adsmart, and the related accrued interest, may be converted at
the option of CMGI into shares of convertible preferred stock. CMGI elected to
convert all advances and accrued interest outstanding on April 28, 2000 into
shares of Adsmart convertible preferred stock. CMGI then elected to convert all
shares of Adsmart convertible preferred stock into shares of Adsmart common
stock. Conversion of all of Adsmart's common stock into our common stock
occurred upon the completion of our acquisition of Adsmart (see note 8). The pro
forma basic and diluted net loss per share information included in the
accompanying statements of operations for the years ended July 31, 1998, 1999,
and 2000 reflects the impact on pro forma basic and diluted net loss per share
of such conversions as of the beginning of each period or date of issuance, if
later, using the if-converted method.

Historical basic and diluted net loss per share have not been presented on
the face of the income statement because they are irrelevant due to the
significant change in our capital structure and resultant basic
42
<PAGE> 44
ENGAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and diluted loss per share that resulted upon conversion of the convertible
preferred stock and debt to CMGI. Pro forma basic and diluted net loss per share
has been presented for comparative purposes.

The reconciliation of the numerators and denominators of the pro forma
basic and pro forma diluted loss per share computation for our reported net loss
is as follows:

PRO FORMA BASIC AND DILUTED LOSS PER SHARE

<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
---------------------------------------
1998 1999 2000
---------- ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Numerator:
Net loss.......................................... $(20,524) $(46,627) $(377,870)
-------- -------- ---------
Denominator:
Weighted average shares outstanding............... 31,266 3,941 137,615
Assumed conversion of preferred stock............. 1,804 59,762 514
Assumed conversion of debt to CMGI................ 1,266 12,696 6,915
-------- -------- ---------
Weighted average number of diluted shares
outstanding..................................... 34,336 76,399 145,044
-------- -------- ---------
Pro forma basic and diluted loss per share........ $ (0.60) $ (0.61) $ (2.61)
======== ======== =========
</TABLE>

Had we presented the historical basic and diluted net loss per share, the
reconciliation of the numerators and denominators of the historical basic and
diluted net loss per share would have been as follows:

HISTORICAL BASIC AND DILUTED NET LOSS PER SHARE

<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
---------------------------------------
1998 1999 2000
---------- ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Numerator:
Net loss.......................................... $(20,524) $(46,627) $(377,870)
-------- -------- ---------
Denominator:
Weighted average shares outstanding............... 31,266 3,941 137,615
-------- -------- ---------
Basic and diluted loss per share.................. $ (0.66) $ (11.83) $ (2.75)
======== ======== =========
</TABLE>

At July 31, 2000, we had outstanding stock options to purchase 24,210,316
shares of common stock at a weighted average exercise price of $16.38 that could
potentially dilute earnings. 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.

Comprehensive Income

We have adopted SFAS No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of comparative
general-purpose financial statements. SFAS requires net unrealized holding
gains, which prior to adoption were reported separately in stockholders' equity,
to be included in other comprehensive income (expense).

New Accounting Pronouncements

In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("AcSEC"), issued Statement of
Position 98-1, "Accounting for the Cost of Computer

43
<PAGE> 45
ENGAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires
the capitalization of certain internal costs related to the implementation of
computer software obtained for internal use. We adopted this standard in the
first quarter of fiscal 2000, and such adoption of SOP 98-1 did not have a
material impact on our financial position or our results of operations.

In April 1998, the AcSEC issued Statement of Position 98-5, "Reporting
Costs of Start-Up Activities" ("SOP 98-5"). Under SOP 98-5, the cost of start-up
activities should be expensed as incurred. Start-up activities are broadly
defined as those one-time activities related to opening a new facility,
introducing a new product or service, conducting business in a new territory,
conducting business with a new class of customer, commencing some new operation
or organizing a new entity. We adopted this standard in fiscal 2000, and such
adoption of SOP 98-5 did not have a material impact on our financial position or
our results of operations.

In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. SFAS 133
requires the recognition of all derivatives as either assets or liabilities in
the statement of financial position and the measurement of those instruments at
fair value. SFAS 133 was amended by SFAS 138 in June 2000. We are required to
adopt this standard in the first quarter of fiscal year 2001 pursuant to SFAS
No. 137 (issued in June 1999), which delays the adoption of SFAS 133 until that
time. We expect that the adoption of SFAS 133 and 138 will not have a material
impact on our financial position or our results of operations.

In December 1999, the SEC issued Staff Accounting Bulletin No. 101 "Revenue
Recognition in Financial Statements" ("SAB No. 101"). SAB No. 101 expresses the
view of the SEC staff in applying generally accepted accounting principles to
certain revenue recognition issues. Although we are still in the process of
analyzing the impact of SAB No. 101, if any, on our consolidated statements and
related disclosures, we expect that there will be no material impact on our
financial position or our results of operations upon adoption in the first
quarter of fiscal 2001.

(3) COMBINING FINANCIAL INFORMATION

The acquisitions of Flycast and Adsmart have been accounted for as an
"as-if-pooling" and accordingly, our historical consolidated financial
statements have been restated to include the accounts and results of operations
of Flycast back to January 13, 2000, the date CMGI completed its acquisition of
Flycast and of Adsmart back to April 1, 1996, the date CMGI founded Adsmart. The
results of operations previously reported by the separate businesses and the
combined amounts presented in the accompanying consolidated financial statements
are presented below.

<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
---------------------------------
1998 1999 2000
-------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenue:
Engage.......................................... $ 2,217 $ 16,023 $ 103,964
Flycast......................................... -- -- 29,132
Adsmart......................................... 354 11,069 45,291
Eliminations.................................... -- (259) (1,602)
-------- -------- ---------
Total revenue........................... $ 2,571 $ 26,833 $ 176,785
======== ======== =========
</TABLE>

44
<PAGE> 46
ENGAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
---------------------------------
1998 1999 2000
-------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Net loss:
Engage.......................................... $(13,837) $(32,003) $(230,016)
Flycast......................................... -- -- (123,797)
Adsmart......................................... (6,687) (14,624) (24,057)
-------- -------- ---------
Total net loss.......................... $(20,524) $(46,627) $(377,870)
======== ======== =========
</TABLE>

(4) AVAILABLE-FOR-SALE SECURITIES

A $500,000 unrealized holding gain was recorded on the securities held at
July 31, 1999, based on the change in market value since the date of
acquisition. The unrealized holding loss is presented in the equity section of
our consolidated balance sheet as a component of accumulated other comprehensive
loss. We sold these securities in fiscal 2000 for an immaterial gain. At July
31, 1999 and 2000, the fair value of investments in marketable securities
approximated cost and the unrealized holding gains or losses were not material.
The fair value of available-for-sale securities at July 31, 1999 and 2000 were
as follows:

<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-------------------
1999 2000
------- --------
(IN THOUSANDS)
<S> <C> <C>
Corporate bonds........................................... $ -- $15,696
Certificates of deposit................................... -- 451
Corporate securities...................................... 1,067 --
------ -------
Total available for-sale-securities............. $1,067 $16,147
====== =======
</TABLE>

(5) PROPERTY AND EQUIPMENT

<TABLE>
<CAPTION>
JULY 31,
ESTIMATED ------------------
USEFUL LIFE 1999 2000
------------------------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Office furniture and computer
equipment.............................. 3-5 years $ 3,006 $33,102
Software licenses........................ 3 years 584 4,436
Leasehold improvements................... 4 years or life-of-lease 251 1,870
------- -------
Total.......................... 3,841 39,408
Less: Accumulated depreciation and
amortization........................... (1,844) (8,074)
------- -------
Property and equipment, net.............. $ 1,997 $31,334
======= =======
</TABLE>

Property and equipment recorded under capital leases amounted to
approximately $793,000 and $6,362,000 at July 31, 1999 and 2000, respectively.
Total accumulated amortization related to these assets under capital lease
amounted to approximately $212,000 and $4,160,000 at July 31, 1999 and 2000
respectively.

45
<PAGE> 47
ENGAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(6) ACQUISITIONS

Fiscal 1998

Accipiter

In April 1998, CMGI acquired Accipiter, Inc. ("Accipiter"), a company
specializing in Internet advertising management solutions, in exchange for
10,109,536 shares of CMGI common stock (which number reflects four CMGI
two-for-one stock splits between April 1998 and the date of these financial
statements). In August 1998, Accipiter was legally merged with us in a
stock-for-stock merger in which consideration of 700,000 shares of our Series A
Convertible Preferred Stock were issued to CMGI. We have reflected in our
consolidated financial statements the acquisition of Accipiter as if it occurred
in April 1998. The total purchase price for Accipiter was valued at $31,253,000,
including acquisition costs of $198,000 and net of cash acquired of
approximately $689,000. The value of the CMGI shares included in the purchase
price was recorded net of a weighted average 10% market value discount to
reflect the restrictions on transferability.

Management is primarily responsible for estimating the fair value of
purchased in-process research and development. The portion of the purchase price
allocated to in-process research and development was $9,200,000, or
approximately 29% of the total purchase price. At the acquisition date,
Accipiter's major in-process project was the development of AdManager version
4.0, which was intended to provide the ad serving functionality that customers
were requiring as the use of the Internet rapidly increased and customer Web
sites became more complex.

At the date of the acquisition, management estimated that completion of the
AdManager version 4.0 technology would be accomplished by June 1998. We began
testing AdManager version 4.0 at a customer's site (beta testing) in June 1998
and commercially released the product in August 1998. The initial development
effort had commenced in late 1997. At the acquisition date, the new AdManager
technology had not reached a completed prototype stage and beta testing had not
yet commenced. At the time of the Accipiter purchase, the AdManager version 4.0
project was approximately 71% complete. The AdManager version 4.0 project was
substantially completed within the time originally estimated.

The value of in-process research and development was determined using an
income approach. This approach takes into consideration earnings remaining after
deducting from cash flows related to the in-process technology, the market rates
of return on contributory assets, including developed technology, assembled
workforce, working capital and fixed assets. The cash flows are then discounted
to present value at an appropriate rate. Discount rates are determined by an
analysis of the risks associated with each of the identified intangible assets.
The discount rate used for in-process research and development was 24.5%, a
slight premium over the estimated weighted-average cost of capital of 24%, and
the discount rate used for developed technology was 21%.

Approximately $1,700,000 of deferred compensation was recorded during
fiscal 1998 relating to approximately 173,080 shares of CMGI common stock issued
to the then employee stockholders of Accipiter, which are being held in escrow.
These shares were subject to forfeiture upon termination of employment over a
two-year period. Compensation expense was being recognized over the two-year
service period beginning April 1, 1998.

Fiscal 1999

In March 1999, CMGI acquired 2Can, an online advertising representation
firm in exchange for purchase consideration valued at $28,483,000, including
bridge notes receivable of $1,500,000. The acquisition has been accounted for
using the purchase method of accounting and, accordingly, the purchase price has
been allocated to the assets purchased and liabilities assumed based upon their
fair values at the date of acquisition.

46
<PAGE> 48
ENGAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Concurrent with CMGI's closing of the 2Can acquisition, CMGI contributed 2Can to
Adsmart in exchange for additional debt to CMGI of $28,483,000. This transaction
was accounted for as a transfer of entities under common control where Adsmart
recorded assets and liabilities of 2Can at CMGI's recorded basis. As discussed
in Note 2, we acquired Adsmart on April 28, 2000 in a merger treated as a
pooling of interests. The results of operations of 2Can have been included in
our consolidated financial statements since March 11, 1999. In April 2000, in
accordance with the Agreement and Plan of merger with 2Can, we recorded
additional purchase consideration in the 2Can acquisition of $5,232,000
resulting from contingent consideration due based on earnings targets being met.
This additional consideration was paid directly by CMGI based on the provisions
of the 2Can merger agreement. We have recorded this as an increase in both
goodwill and additional paid-in capital.

In April 1999, we acquired I/PRO, a provider of Web-site traffic
measurement and audit services, for approximately $32,651,000, including
acquisition costs of $244,000 and net of cash acquired of approximately
$347,000. The purchase price consisted of $1,563,000 in net cash, $20,907,000 in
CMGI common shares and $10,181,000 in Engage common shares and options. The per
share value of the CMGI shares included in the purchase price was $28.99, net of
a 9% weighted average market value discount to reflect the restriction on
transferability. The per share value of the our common shares included in the
purchase price was $3.29 per share.

The portion of the purchase price allocated to in-process research and
development for I/PRO was $4.5 million, or approximately 14% of the total
purchase price. At the acquisition date, I/PRO's major in-process project was
the development of a new data processing system, project name Normandy, which is
intended to provide improved functionality. In general, the existing data
processing system did not provide sufficient fault tolerance, scalability and
data processing efficiency to meet future customer needs.

At the date of the acquisition, management estimated that completion of the
Normandy technology would be accomplished by August 1999. The initial
development effort had commenced in late 1998. At the acquisition date, the new
Normandy technology had not reached a completed prototype stage and beta testing
had not yet commenced. At the time of the I/PRO purchase, the Normandy project
was approximately 64% complete. The Normandy project was substantially completed
within the time originally estimated.

The value of in-process research and development was determined using an
income approach. This approach takes into consideration earnings remaining after
deducting from cash flows related to the in-process technology, the market rates
of return on contributory assets, including core developed technology, assembled
workforce, working capital and fixed assets. The cash flows are then discounted
to present value at an appropriate rate. Discount rates are determined by an
analysis of the risks associated with each of the identified intangible assets.
The discount rate used for in-process research and development was 30%, a
premium over the estimated weighted-average cost of capital of 25%, and the
discount rate used for core-developed technology was 22%.

Fiscal 2000

In December 1999, we acquired AdKnowledge, Inc. ("AdKnowledge"), a provider
of products and services which allow online marketers and ad agencies to plan,
target, serve, track and analyze advertising campaigns, for approximately
$161,000,000, including acquisition costs of $3,800,000 and net of cash acquired
of approximately $3,000,000. In November 1999, CMGI acquired approximately 88%
of AdKnowledge. Second, CMGI and other AdKnowledge shareholders contributed or
sold the remaining AdKnowledge shares to us in exchange for approximately
10,336,000 total shares of our common stock with approximately 9,830,000 shares
issued to CMGI for its interest and approximately 506,000 shares issued to other

47
<PAGE> 49
ENGAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

shareholders. Additionally, stock options to acquire our common stock issued in
the contribution, valued at approximately $18,000,000, have been included in the
purchase consideration.

Contingent consideration, comprised of approximately 414,000 shares of CMGI
common stock (adjusted for stock splits), has been placed in escrow (the "Escrow
Shares") to satisfy certain performance goals and indemnifications. The value of
the Escrow Shares has not been reflected in the aggregate purchase consideration
and will be recorded as additional purchase price at the then-fair value upon
the attainment of certain performance goals measured through November 30, 2000.
We put in escrow approximately 1,116,000 of our common shares to CMGI in
consideration for the Escrow Shares. No value has been ascribed to the value of
these shares. If the performance goals are met and the CMGI Escrow Shares are
released to the AdKnowledge shareholders, we will record the fair value of the
CMGI shares issued to AdKnowledge shareholders on the release date as additional
purchase price. Any difference in the fair value of our shares at the release
date compared to the value of the Escrow Shares will be recorded as a capital
transaction between entities under common control. Under the terms of an
Intercompany Agreement between us and CMGI, in the event that any Escrow Shares
are returned to CMGI, CMGI shall pay us, in cash or other property, a sum equal
to the value of the returned Escrow Shares.

In April 2000, we completed our acquisitions of Adsmart and Flycast. This
transaction has been accounted for as a combination of entities under common
control (i.e., "as-if pooling"). First Adsmart was merged with and into Engage.
In this merger, all the Adsmart stockholders received Engage common stock in
exchange for their respective shares of Adsmart common stock. All outstanding
Adsmart stock options were converted into options to acquire our common stock.
Second, CMGI contributed all of the outstanding shares of common stock of
Flycast in exchange for shares of our common stock. Former employees of Flycast
had the option to convert CMGI options into options to acquire our common stock.
Approximately 361,000 Engage stock options were granted as a result of the
former Flycast employees' electing to convert certain CMGI options. Under the
terms of the merger, we reduced the number of our common shares payable to CMGI
for the 361,000 converted Engage stock options that were granted to Flycast
employees. Total purchase consideration was valued at $3.24 billion (based on
the closing average per share price of our common stock for the five days before
and after January 20, 2000, the date we publicly announced that we had entered
into the Merger Agreement), net of cash acquired of $7,600,000. In connection
with the merger and contribution, we issued approximately 10,877,000 shares of
our common stock for all of the outstanding capital stock of Adsmart, of which
approximately 10,812,000 shares were issued directly to CMGI for CMGI's 96%
interest in Adsmart, and approximately 53,413,000 shares of our common stock
directly to CMGI for CMGI's 100% interest in Flycast, valued at approximately
$3.22 billion in the aggregate. Additionally, included in the purchase
consideration were approximately 707,000 stock options to acquire our common
stock exchanged in the merger and contribution and valued at approximately
$24,365,000. A non-cash dividend to CMGI was recorded for the excess fair value
of the our common shares issued to CMGI and Engage stock options exchanged for
Adsmart and Flycast stock options in excess of CMGI's historical cost basis in
Adsmart and Flycast. Direct acquisition costs consisting primarily of legal,
accounting and banker fees approximated $4,951,000 as a result of these
acquisitions and were expensed in fiscal 2000.

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 unvested 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

48
<PAGE> 50
ENGAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

reconciliation of the net dividend to CMGI recorded as a component of
accumulated deficit for the year ended July 31, 2000, is as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Dividend to CMGI recorded upon consummation of the Flycast
and Adsmart acquisition................................... $2,257,865(1)
Value of Engage common shares due from CMGI as of July 31,
2000 for option cancellations............................. (80,927)
Cash consideration for exercise price of CMGI stock
options................................................... (7,497)
----------
Net dividend to CMGI................................... $2,169,441
==========
</TABLE>

(1) Reflects an increase in the dividend originally recorded due to a reduction
in the Flycast purchase price of approximately $8.3 million resulting from a
reduction in estimated investment banker fees accrued at the date of
acquisition.

The portion of the purchase price allocated to IPRD in the Flycast
acquisition was $29,300,000, or approximately 3.3% of CMGI's original total
purchase price. The value allocated to projects identified as IPRD was charged
to expense in the quarter ended April 30, 2000.

As of the acquisition date, Flycast was in the process of developing
technology which would add functionality and features and was also in the
process of developing a new platform for its product. This technology had not
yet reached technological feasibility and had no alternative uses. This
technology under development may not achieve commercial viability. The
technological feasibility of the in-process product is established when the
enterprise has completed all planning, designing, coding, and testing activities
that are necessary to establish that the product can be produced to meet its
design specifications including functions, features, and technical performance
requirements.

At the date of the acquisition, management estimated that completion of the
Flycast IPRD would be accomplished in May 2000 while the initial development
effort had commenced in late April through November 1999. At the valuation date,
the new technology had not reached a completed prototype stage, although some
beta testing on portions of the technology had begun. At the acquisition date,
the IPRD was approximately 65% complete, based on development costs incurred
through the acquisition date versus the total costs estimated to complete the
project. The Flycast IPRD project was substantially completed within the time
originally estimated.

The value of IPRD was determined using an income approach. This approach
takes into consideration earnings remaining after deducting from cash flows
related to the in-process technology, the market rates of return on contributory
assets, including assembled workforce, working capital and fixed assets. The
cash flows are then discounted to present value at an appropriate rate. Discount
rates are determined by an analysis of the risks associated with each of the
identified intangible assets. The discount rate used for in-process research and
development was 30%, a premium over the estimated weighted-average cost of
capital of 24%. The resulting net cash flows to which the discount rate was
applied are based on management's estimates of revenues, operating expenses and
income taxes from such acquired technology. As of June 2000 the IPRD has been
substantially completed.

In June 2000, we acquired substantially all of the assets of the Virtual
Billboard Network ("VBN"), a Canadian online advertising network, for
approximately $4,730,000, including $200,000 in acquisition costs, consisting of
approximately 249,000 shares issued upon the closing date of the deal and
approximately 28,000 shares issuable upon the one year anniversary of the
closing.

In June 2000, we also acquired Interactive Solutions Inc. ("ISI"), a
Japanese company previously owned by Sumitomo Corporation, an affiliate, for
cash consideration of approximately $4,720,000, net of cash acquired of
$189,000.

49
<PAGE> 51
ENGAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The acquisitions have been accounted for using the purchase method, and,
accordingly, the purchase prices have been allocated to the assets purchased and
liabilities assumed based upon their fair values at the dates of acquisition.
The amounts of the purchase prices allocated to goodwill and other identifiable
intangible assets are being amortized on a straight-line basis over two to five
years. Amortization of goodwill and other identifiable intangible assets is
reflected as a separate component within operating expenses. The acquired
companies are included in our consolidated financial statements from the dates
of acquisition.

The purchase prices for the acquisitions were allocated as follows:

<TABLE>
<CAPTION>
ACCIPITER 2CAN I/PRO ADKNOWLEDGE FLYCAST ALL OTHERS
--------- -------- ------- ----------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Working capital (deficit), net of
cash acquired of $689 for
Accipiter, $360 for 2Can, $347 for
I/PRO, $3,044 for AdKnowledge,
$12,893 for Flycast and $189 for
All Others......................... $ (249) $ (6,168) $ (498) $ (7,954) $ 23,659 $ 603
Property and equipment............... 262 141 1,676 4,311 11,751 20
Other assets......................... 2 32 230 515 316 408
In-process research and
development........................ 9,200 -- 4,500 2,317 29,300 --
Long-term obligations................ -- (46) (465) (4,809) (2,834) --
Goodwill............................. 20,158 39,756 22,288 160,144 728,558 8,498
Other identifiable intangible
assets............................. 1,880 -- 4,920 6,508 93,820 --
------- -------- ------- -------- -------- ------
Purchase price, net of cash
acquired........................... $31,253 $ 33,715 $32,651 $161,032 $884,570 $9,529
======= ======== ======= ======== ======== ======
</TABLE>

The following table represents our unaudited pro forma results of
operations for the years ended July 31, 1999 and 2000, as if the 2Can, I/PRO,
AdKnowledge, Flycast, VBN, and ISI acquisitions had all occurred on August 1,
1998 and as if we owned 66.6% of Engage Technologies Japan on August 1, 1998.
These pro forma results include adjustments for the amortization of goodwill and
other intangibles and deferred compensation, acquisition related costs expensed
by Flycast prior to the date of acquisition, the elimination of amounts expensed
for in-process research and development and for the issuance of shares used in
the acquisition, and the elimination of intercompany transactions. They have
been prepared for comparative purposes only and do not purport to be indicative
of what would have occurred had the acquisitions been made at the beginning of
the periods noted or of results that may occur in the future.

<TABLE>
<CAPTION>
JULY 31,
----------------------
1999 2000
--------- ---------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Net revenues......................................... $ 54,918 $ 214,895
Net loss............................................. (429,700) (521,710)
Pro forma net loss per share......................... (2.93) (3.03)
</TABLE>

(7) CONSOLIDATION OF ENGAGE JAPAN

In August 1998, we acquired for $1.4 million in cash, 49% of the shares of
Engage Technologies Japan, a joint venture with Sumitomo Corporation in Japan,
and accounted for under the equity method of accounting. In June 2000, we
increased our ownership interest in Engage Technologies Japan to 66.6% for gross
consideration of approximately $4,858,000 consisting of approximately 219,000
shares of our common shares issued to Sumitomo, the contribution of technology
to Engage Technologies Japan, and cash consideration of approximately
$1,973,000. As such, beginning in June 2000, we began accounting for our
investment in Engage Technologies Japan under the consolidation method.

50
<PAGE> 52
ENGAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(8) DEBT TO CMGI

Engage

In May 1999, we formalized a borrowing arrangement with CMGI and executed a
secured convertible demand note with CMGI dated February 1, 1999. Advances
accrue interest at the annual rate of 7%, and advances and accrued interest may
be prepaid without penalty. Advances outstanding under this note are secured by
substantially all our assets and intellectual property. Principal and accrued
interest may be converted at the option of CMGI into shares of Series C
Preferred Stock or common stock. The number of Series C Preferred shares or
common shares to be issued upon conversion of each borrowing represented by the
note is based on our estimated fair value at the end of the period in which such
borrowing was made.

In accordance with this arrangement, CMGI elected to convert advances and
accrued interest outstanding in the amount of $37,447,000 into 413,564 shares of
Series C Preferred Stock in July 1999. An additional $5,329,000 was converted
into 710,524 shares of common stock at the initial public offering price per
common share in July 1999.

Adsmart

Commencing in February 1998, advances made by CMGI to Adsmart accrued
interest at the annual rate of 7%.

In April 1998, advances of $6,000,000 from CMGI, including accrued interest
thereon, and 693,816 shares of our common stock were converted into 69,382
shares of Series A Preferred Stock. These advances were made by CMGI to Adsmart
from April 1996 through January 1998. In April 2000, Adsmart formalized its
borrowing arrangement with CMGI and executed a secured convertible demand note
with CMGI. Advances accrue interest at the annual rate of 7%, and advances and
accrued interest may be prepaid without penalty. Advances outstanding under this
note are secured by substantially all Adsmart's assets and intellectual
property. Principal and accrued interest may be converted at the option of CMGI
into shares of Series B Preferred Stock or common stock. The number of Series B
Preferred shares or common shares to be issued upon conversion of each borrowing
represented by the note is based on the estimated fair value of Adsmart at the
end of the period in which such borrowing was made.

In accordance with this arrangement, CMGI elected to convert advances and
accrued interest outstanding in the amount of $74,929,000 into 10,117,712 shares
of our common stock upon the closing of our acquisition of Adsmart on April 28,
2000.

(9) LEASES

We lease certain computer equipment under capital leases which expire at
various dates through 2006. In addition to leasing computer equipment under
various capital leases, we have entered into noncancelable operating leases
covering certain of our office facilities and equipment which expire through
2006. 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 from both a subsidiary of CMGI and
also directly from CMGI. Under the arrangements, the related parties negotiate
the terms and conditions of the leases and obtain the assets to be leased. The
related parties bear all liability for payment, and we are not financially
obligated under the leases. We are charged the actual lease fees paid by the
related parties, plus an additional administrative charge that approximates the
fair value of the services received.

Total rent expense amounted to $1,182,000, $2,096,000 and $7,967,000 for
the years ended July 31, 1998, 1999 and 2000, respectively. Rent paid to CMGI
for office facilities amounted to approximately $363,000, $415,000 and $831,000
for the years ended July 31, 1998, 1999 and 2000, respectively. Rent expense for

51
<PAGE> 53
ENGAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

equipment paid to a subsidiary of CMGI amounted to approximately $534,000,
$735,000 and $1,108,000 for the years ended July 31, 1998, 1999 and 2000,
respectively.

Minimum annual rental commitments are as follows at July 31, 2000:

<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -------
(IN THOUSANDS)
<S> <C> <C>
2001....................................................... $12,111 $4,874
2002....................................................... 10,706 2,991
2003....................................................... 6,908 353
2004....................................................... 6,626 64
2005....................................................... 5,548 4
Thereafter................................................. 1,153 5
------- ------
$43,052 8,291
-------
Less: amount representing interest......................... 736
------
Present value of capital lease obligations................. $7,555
======
Comprised of:
Current portion.......................................... $4,650
Non-current portion...................................... 2,905
------
$7,555
======
</TABLE>

(10) INCOME TAXES

The majority of our current and prior year tax losses from operations have
been utilized by CMGI. We have recorded a full valuation allowance against our
net deferred tax assets since we believe that, after considering all the
available objective evidence, both positive and negative, historical and
prospective, with greater weight given to historical evidence, it is more likely
than not that these assets will not be realized. No income tax benefit has been
recorded for any of the periods presented because of the aforementioned
valuation allowance.

52
<PAGE> 54
ENGAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<TABLE>
<CAPTION>
JULY 31,
------------------
1999 2000
------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Research credits........................................ $ 72 $ 215
Deferred stock-based compensation....................... 669 24,197
Deferred revenue........................................ 2,337 814
Accruals and other reserves............................. 4,624 4,688
Loss carryforwards...................................... 13,981 54,059
Basis difference in available for sale securities....... 615 --
------- --------
22,298 83,973
Less: Valuation allowance................................. 21,111 48,758
------- --------
Net deferred tax assets................................... 1,187 35,215
------- --------
Deferred tax liabilities:
Financial basis in excess of income tax basis of
intangible and fixed assets.......................... (1,187) (35,215)
------- --------
$ -- $ --
======= ========
</TABLE>

Subsequently reported tax benefits relating to the valuation allowance for
deferred tax assets as of July 31, 2000 will be allocated as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Income tax benefit that would be recognized in the
consolidated statements of operations................ $15,925
Goodwill and other non-current intangible assets....... 23,523
Charge to additional paid in capital for recognition of
stock-based compensation............................. 9,310
-------
$48,758
=======
</TABLE>

The following table summarizes the significant differences between the U.S.
federal statutory tax rate and our effective tax rate for financial statement
purposes:

<TABLE>
<CAPTION>
JULY 31,
--------------------------
1998 1999 2000
------ ------ ------
<S> <C> <C> <C>
Statutory tax rate....................................... 35.00% 35.00% 35.00%
Non-deductible goodwill amortization..................... (1.30) (6.84) (17.24)
Write-off of in-process research and development......... (15.78) (3.60) (2.93)
Losses not benefited, including losses utilized by
parent................................................. (17.84) (23.31) (14.81)
Nondeductible and other permanent items.................. (0.08) (1.25) (.02)
------ ------ ------
Net effective tax rate......................... 0.00% 0.00% 0.00%
====== ====== ======
</TABLE>

We have federal net operating loss carryforwards of approximately $124.0
million as of July 31, 2000, which will expire from 2009 through 2020, of which
$91.6 million is related to the pre-acquisition periods of acquired subsidiaries
and $17.5 million resulted from employee stock option exercises. We also have
state net

53
<PAGE> 55
ENGAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

operating loss carryforwards of approximately $172.3 million, which will expire
from 2001 through 2015, of which, $67.7 million is related to the
pre-acquisition periods of acquired subsidiaries and $51.8 million resulted from
employee stock option exercises. The tax benefits related to net operating loss
carryforwards from the pre-acquisition periods of the acquired subsidiaries,
when realized, will be recorded as a decrease to goodwill and other non-current
intangible assets. The tax benefits related to net operating loss carryforwards
resulted from employee stock option exercises, when realized, will be recorded
as an increase to additional paid-in capital. The utilization of these net
operating losses may be limited pursuant to Internal Revenue Code Section 382 as
a result of prior ownership changes.

(11) STOCKHOLDERS' EQUITY

Private placements

Immediately prior to the effectiveness of our July 1999 initial public
offering, we sold 1,876,000 shares of common stock to Compaq Computer
Corporation ("Compaq") for net proceeds of approximately $13,082,000.

In June 2000, we sold an aggregate of 4,995,835 total shares of our common
stock to CMGI and Compaq for net proceeds of approximately $74,175,000. The
per-share value of our common stock was based on a five-day average closing
price of our common stock for the five trading days ending June 19, 2000.

Public Offering of Common Stock

In July 1999, we completed our initial public offering for the sale of
13,800,000 shares of common stock. We received proceeds of approximately
$94,755,000, net of underwriting discounts and expenses associated with the
offering.

Authorized Share Increase and Stock Split

In June 1999, the Board of Directors approved an increase in the number of
authorized common shares from 30,000,000 to 150,000,000. Upon approval of the
share increase, a two-for-one stock split was declared.

In February 2000, our Board of Directors approved a two-for-one stock split
of our common stock, affected in the form of a stock dividend of one share of
common stock for each share of common stock outstanding. The stock dividend was
payable on April 3, 2000 to stockholders of record at the close of business on
March 20, 2000. Accordingly, the consolidated financial statements have been
retroactively adjusted for all periods presented to reflect the stock split. In
addition, the Board of Directors approved an increase in the number of
authorized common shares from 150,000,000 to 350,000,000.

Deferred Compensation

We recorded deferred compensation of $1,731,000 in 1998 related to the
Accipiter acquisition and $4,174,000 in 1999, representing the difference
between the exercise price of stock options granted and the estimated fair
market value of the underlying common stock at the date of grant. The difference
is recorded as a reduction of stockholders' equity and is being amortized over
the vesting period of applicable options, typically four years.

During fiscal 2000, we also recorded $36,622,000 of stock compensation
expense related to the acceleration of vesting of approximately 323,000 CMGI
stock options previously issued to four former executives of Flycast under
pre-existing severance agreements.

54
<PAGE> 56
ENGAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<TABLE>
<CAPTION>
JULY 31,
-------------------------
1998 1999 2000
---- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Cost of revenue........................................... $103 $ 79 $ 111
Research and development.................................. 115 225 256
Selling and marketing..................................... 38 162 5,878
General and administrative................................ 170 989 31,155
---- ------ -------
Total........................................... $426 $1,455 $37,400
==== ====== =======
</TABLE>

Preferred Stock -- Engage

In July 1998, our shareholders authorized 5,000,000 shares of preferred
stock, of which 1,500,000 have been designated as Series A convertible preferred
stock ("Series A Preferred Stock"), 238,597 shares have been designated as
Series B convertible preferred stock ("Series B Preferred Stock"), and 2,000,000
shares have been designated as Series C Convertible Preferred Stock ("Series C
Preferred Stock").

Series A Preferred Stock -- Engage

In July 1998, the Board of Directors authorized and issued 800,000 shares
of Series A Preferred Stock in exchange for 32,000,000 shares of our common
stock and $8,000,000 in principal amount of debt to CMGI. The Series A Preferred
Stock is entitled to receive annual dividends at 7%, as and if declared. As of
and prior to July 31, 1999, no dividends had been declared or paid by us. Each
share of Series A Convertible Preferred Stock votes on an as-converted basis and
is convertible into twenty shares of common stock under certain conditions and
subject to certain adjustments. In the event of our liquidation, dissolution or
winding up, the Series A Preferred Stock has a liquidation preference of $5 per
share, plus cumulative dividends of 7% compounded annually beginning on February
1, 1998. The Series A Preferred Stock is convertible into common stock
immediately at the option of the holder.

In July 1998, the Board of Directors authorized the issuance of an
additional 700,000 shares of Series A Preferred Stock to CMGI in connection with
our acquisition of Accipiter, Inc.

All outstanding shares of Series A Preferred Stock converted to 60,000,000
shares of common stock upon the completion of our initial public offering.

Series B Preferred Stock -- Engage

In August 1998, the Board of Directors designated and issued 238,597 shares
of Series B Preferred Stock. Net proceeds from the sale were $1,934,000. Each
share of Series B Preferred Stock votes on an as-converted basis and is
convertible into two shares of common stock under certain conditions and subject
to certain adjustments. In the event of our liquidation, dissolution or winding
up, the Series B Preferred Stock has a liquidation preference of $8.38 per
share, subject to the prior payment of the liquidation preference on Series A
Preferred Stock. The Series B Preferred Stock is convertible into common stock
immediately at the option of the holder.

All outstanding shares of Series B Preferred Stock converted to 954,388
shares of common stock upon the completion of our initial public offering.

55
<PAGE> 57
ENGAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Series C Convertible Preferred Stock -- Engage

In May 1999, the Board of Directors approved the designation of 2,000,000
shares of our preferred stock as Series C Convertible Preferred Stock ("Series C
Preferred Stock"). The Series C Preferred Stock is entitled to receive
noncumulative annual dividends, payable when, as and if declared at the rate of
7% per annum. In the event of our liquidation, dissolution or winding up, the
Series C Preferred Stock ranks senior to the Series B Preferred Stock and pari
passu with the Series A Preferred Stock, and has a liquidation preference equal
to its purchase price plus dividends computed at 7% per share per annum. Each
share of Series C Preferred Stock votes on an as-converted basis and is
convertible at the option of the holder into twenty shares of common stock,
subject to certain adjustments. During fiscal 1999, we issued 413,564 shares of
Series C Preferred Stock in connection with our borrowing agreement with CMGI
(see Note 8).

All outstanding shares of Series C Preferred Stock converted to 16,542,560
shares of common stock upon the completion of our initial public offering.

Series A Preferred Stock -- Adsmart

In April 1998, the Adsmart board of directors authorized and issued 69,382
shares of Series A Preferred Stock in exchange for 693,816 shares of our common
stock and $6,000,000 in principal amount of debt to CMGI. The Series A Preferred
Stock is entitled to receive noncumulative annual dividends at 7% commencing
February 1, 1998, payable when, as and if declared by the board of directors of
Adsmart. No dividends have been declared or paid by Adsmart. The Series A
Preferred Stock is voting and is convertible into 10 shares of common stock
subject to certain adjustments. In the event of any liquidation, dissolution or
winding up of Adsmart, the Series A Preferred Stock has a liquidation preference
of $13.33 per share plus dividends of 7% compounded annually beginning on
February 1, 1998. The Series A Preferred Stock is convertible into common stock
immediately at the option of the holder and automatically converted into common
stock upon the completion of our April 2000 merger with Adsmart.

Series B Preferred Stock -- Adsmart

In December 1999, the Adsmart board of directors approved the designation
of 1,231,523 shares of Adsmart preferred stock as Series B Preferred Stock. The
Series B Preferred Stock is entitled to receive noncumulative annual dividends
at 7%, as and if declared. No dividends have been declared or paid by Adsmart.
The Series B Preferred Stock is fully participating, voting and convertible into
10 shares of common stock, subject to certain adjustments. In the event of any
liquidation, dissolution or winding up of Adsmart, the Series B Preferred Stock
ranks pari passu with the Series A Preferred Stock, and has a liquidation
preference equal to its purchase price plus dividends computed at 7% annually.
The Series B Preferred Stock is convertible into common stock immediately at the
option of the holder and automatically converted into common stock upon the
completion of our April 2000 merger with Adsmart.

(12) STOCK OPTION PLANS

Engage 1995 Equity Incentive Plan

In August 1995, our Board of Directors and Stockholders approved the 1995
Equity Incentive Plan (the "1995 Plan"). Under the 1995 Plan, as amended, up to
36,000,000 non-qualified stock options or incentive stock options may be granted
to our employees or our affiliates' employees, as defined. The Board of
Directors administers this plan, selects the individuals to whom options will be
granted, and determines the number of shares and exercise price of each option.
Options granted under the 1995 Plan typically vest over a four year period, with
25% of options granted becoming exercisable one year from the date of grant and
the remaining 75% vesting monthly for the next thirty-six (36) months.

56
<PAGE> 58
ENGAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1999 Stock Option Plan for Non-Employee Directors

The 1999 Stock Option Plan for Non-Employee Directors (the "1999 Directors
Plan") was adopted by the Board of Directors in June 1999. Under the terms of
the 1999 Directors Plan, directors who are not our employees or any subsidiary
of ours and not affiliates of an institutional investor that owns shares of our
common stock receive nonstatutory options to purchase shares of our common
stock. A total of 500,000 shares of common stock may be issued upon exercise of
options granted under the plan. The Board of Directors has discretion to
establish the terms of options granted under the plan. All options must have an
exercise price equal to the fair market value of the common stock on the date of
grant.

The following table reflects activity and historical prices of stock
options under our 1995 Plan and the 1999 Stock Option Plan for Non-Employee
Directors for the three years ended July 31, 2000:

<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
--------------------------------------------------------------------------
1998 1999 2000
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of
period............... 4,843,338 $0.12 8,357,600 $0.55 18,534,676 $ 3.37
Granted................ 6,639,961 0.73 13,267,925 4.70 10,114,024 35.07
Exercised.............. (7,536) 0.22 (1,066,796) 0.52 (2,955,344) 1.19
Cancelled.............. (3,118,163) 0.28 (2,024,053) 1.97 (2,050,285) 9.90
---------- ---------- ----------
Options outstanding,
end of period........ 8,357,600 $0.55 18,534,676 $3.37 23,643,071 $16.64
========== ===== ========== ===== ========== ======
Options exercisable,
end of period........ 1,317,474 $0.16 3,298,151 $0.41 5,356,126 $ 3.56
========== ===== ========== ===== ========== ======
Options available for
grant, end of
period............... 2,838,812 10,475,991 7,956,589
========== ========== ==========
</TABLE>

The following table summarizes information about stock options under our
1995 Plan outstanding at July 31, 2000:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------------
WEIGHTED OPTIONS EXERCISABLE
AVERAGE ----------------------------
REMAINING WEIGHTED WEIGHTED
RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE OUTSTANDING EXERCISE PRICE
--------------- ----------- ------------ -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.01 - $ 9.25 14,090,546 3.3 $ 3.88 5,297,337 $ 2.80
$ 9.25 - $18.50 1,251,051 4.6 15.79 -- --
$18.51 - $27.75 2,351,800 4.1 23.88 -- --
$27.75 - $37.00 2,851,634 4.1 29.20 -- --
$37.01 - $46.25 805,300 4.6 40.97 -- --
$46.26 - $55.50 286,000 4.6 52.87 -- --
$55.51 - $64.75 1,075,500 4.4 59.87 4,249 63.50
$64.76 - $74.00 703,800 4.5 68.65 54,540 72.50
$74.00 - $83.25 24,000 4.7 77.73 -- --
$83.26 - $92.50 186,500 4.7 90.01 -- --
---------- ---------
23,643,071 3.7 $16.65 5,356,126 $ 3.56
========== =========
</TABLE>

57
<PAGE> 59
ENGAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CMGI 1986 Stock Option Plan

Certain of our employees have been granted stock options under the CMGI
1986 Stock Option Plan (the "1986 Plan"). Options under the 1986 Plan are
granted at fair market value on the date of the grant and are generally
exercisable in equal cumulative installments over a four-to-ten year period
beginning one year after the date of grant. Outstanding options under the 1986
Plan expire through 2007. Under the 1986 Plan, non-qualified stock options or
incentive stock options may be granted to CMGI's or its subsidiaries' employees,
as defined. The Board of Directors of CMGI administers this plan, selects the
individuals to whom options will be granted, and determines the number of shares
and exercise price of each option. The following table reflects activity and
historical prices of stock options granted to our employees under CMGI's 1986
Plan for the years ended July 31, 1998, 1999 and 2000:

<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
----------------------------------------------------------------------
1998 1999 2000
-------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of period...... 362,480 $0.62 281,560 $1.05 1,019,910 $ 4.66
Granted.................... 160,000 1.16 871,200 5.31 89,650 42.75
Exercised.................. (212,584) 0.42 (124,850) 1.02 (272,534) 4.38
Cancelled.................. (28,336) 0.92 (8,000) 5.00 (20,368) 28.17
-------- --------- ---------
Options outstanding, end of
period................... 281,560 $1.05 1,019,910 $4.66 816,658 $ 8.35
======== ===== ========= ===== ========= ======
Options exercisable, end of
period................... 37,204 $0.88 33,828 $0.99 230,693 $ 4.67
======== ===== ========= ===== ========= ======
</TABLE>

The following table summarizes information about stock options under the
CMGI 1986 Stock Plan outstanding at July 31, 2000:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------------
WEIGHTED OPTIONS EXERCISABLE
AVERAGE ----------------------------
REMAINING WEIGHTED WEIGHTED
RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE OUTSTANDING EXERCISE PRICE
--------------- ----------- ------------ -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.81 - $0.97 30,126 1.3 $ 0.96 23,992 $0.96
$1.16 63,334 2.2 1.16 13,334 1.16
$1.88 1,136 0.3 1.88 1,136 1.88
$5.00 574,578 3.1 5.00 169,564 5.00
$7.22 - $10.53 70,334 3.2 7.71 22,667 8.34
$42.75 77,150 4.1 42.75 -- --
------- -------
816,658 3.1 $ 8.35 230,693 $4.67
======= =======
</TABLE>

AdKnowledge 1996 and 1998 Stock Option Plans

As part of the acquisition of AdKnowledge, we assumed the 1996 and 1998
Stock Option Plans ("1996 and 1998 Plans") of AdKnowledge. As a result, each
option to purchase AdKnowledge stock issued by AdKnowledge, not exercised prior
to the merger, was converted into an option to acquire our common stock based on
the exchange ratio defined in the AdKnowledge Merger Agreement.

58
<PAGE> 60
ENGAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Under the 1996 and 1998 Plans, non-qualified stock options or incentive
stock options were granted to certain employees, non-employee directors and
consultants. Options are exercisable immediately, subject to our right of
repurchase of unvested shares. Options under the plan were granted for periods
up to ten years at prices no less than 85% of the estimated fair value of the
shares on the date of grant and generally vest over four years. The following
table reflects, on a converted basis, the activity and historical prices of
stock options granted to employees under AdKnowledge's 1996 and 1998 Plans for
the year ended July 31, 2000:

<TABLE>
<CAPTION>
YEAR ENDED
JULY 31, 2000
--------------------
WEIGHTED
NUMBER AVERAGE
OF EXERCISE
SHARES PRICE
-------- --------
<S> <C> <C>
Options outstanding, date of acquisition................ 832,572 $4.01
Granted................................................. -- --
Exercised............................................... (24,461) 1.08
Cancelled............................................... (240,866) 0.65
Options outstanding, end of period...................... 567,245 $5.56
======== =====
Options exercisable, end of period...................... 567,245 $5.56
======== =====
</TABLE>

The following table summarizes information about stock options under the
AdKnowledge 1996 and 1998 plans outstanding at July 31, 2000:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- ----------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE OUTSTANDING EXERCISE PRICE
--------------- ----------- ------------ -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.06 125,266 8.08 $ 0.29 125,266 $ 0.29
$0.25 32,568 8.77 1.23 32,568 1.22
$0.30 150,391 8.89 1.47 150,391 1.47
$0.50 10,381 8.99 2.46 10,381 2.46
$1.00 43,459 9.05 4.91 43,459 4.91
$1.50 60,557 9.13 7.37 60,557 7.37
$2.80 40,100 9.22 13.76 40,100 13.76
$3.15 104,523 9.31 15.48 104,523 15.48
------- -------
567,245 8.85 $ 5.55 567,245 $ 5.55
======= =======
</TABLE>

The fair value of each stock option grant under the Engage 1995 Plan and
the Engage 1999 Directors' Plan has been estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions for fiscal 1998, 1999 and 2000, respectively: volatility of 90.07%,
98.49% and 130.18%; risk-free interest rate of 5.48%, 5.42% and 6.11%; expected
life of options of 3.4, 2.4 and 2.3 years; and 0% dividend yield for all years.
The weighted average fair value per share of options granted during fiscal 1998,
1999 and 2000 was $0.43, $2.69 and $21.85, respectively.

The fair value of each stock option granted under the CMGI 1986 Plan has
been estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions for fiscal 1998, 1999 and 2000,
respectively: volatility of 90.07%, 100.00% and 103.36%; risk-free interest rate
of 5.50%, 5.16% and 6.28%; expected life of options of 4.2, 2.5 and 3.0 years;
and 0% dividend yield for all years. The

59
<PAGE> 61
ENGAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

weighted average fair value per share of options granted during fiscal 1998,
1999 and 2000 was $0.79, $3.41 and $28.47, respectively.

The fair value of each option granted under the AdKnowledge 1996 and 1998
plans has been estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions for fiscal 2000:
volatility of 130.18%, risk-free interest rate of 6.11%; expected life of 2.3
years; and 0% dividend yield. The weighted average fair value per share of
options granted during fiscal 2000 was $28.47.

SFAS No. 123, sets forth a fair-value based method of recognizing
stock-based compensation expense. As permitted by SFAS 123, we have elected to
continue to apply APB No. 25 to account for our stock-based compensation plans.
Had compensation cost for awards in fiscal 1998, 1999 and 2000 under our
stock-based compensation plans been determined based on the fair value method
set forth under SFAS 123, the pro forma effect on our net loss would have been
as follows:

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, 1998 JULY 31, 1999 JULY 31, 2000
------------------------ ------------------------ ------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net loss............. $(20,524) $(20,899) $(46,627) $(50,945) $(377,870) $(410,553)
Pro forma basic and
diluted net loss
per share.......... $ (0.60) $ (0.61) $ (0.61) $ (0.67) $ (2.61) $ (2.83)
</TABLE>

1999 Employee Stock Purchase Plan

The 1999 Employee Stock Purchase Plan ("1999 ESPP") was adopted by the
Board of Directors in June 1999. The 1999 ESPP provides for the issuance of a
maximum of 1,500,000 shares of common stock and is administered by the
Compensation Committee. All of our employees whose customary employment is for
more than 20 hours per week and for more than 6 months in any calendar year are
eligible to participate in the 1999 ESPP. As of July 31, 2000, 73,596 shares
have been issued under the 1999 ESPP.

(13) COMPREHENSIVE INCOME

The components of comprehensive loss for us 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:

<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
---------------------------------
1998 1999 2000
-------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Net loss.......................................... $(20,524) $(46,627) $(377,870)
Foreign currency adjustments...................... -- 340 (565)
Net unrealized holding gain (loss) arising during
the period...................................... (1,193) 500 658
-------- -------- ---------
Comprehensive loss................................ $(21,717) $(45,787) $(377,777)
======== ======== =========
</TABLE>

60
<PAGE> 62
ENGAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The components of accumulated comprehensive income (loss) are as follows:

<TABLE>
<CAPTION>
UNREALIZED ACCUMULATED
FOREIGN GAINS OTHER
CURRENCY (LOSSES) COMPREHENSIVE
ADJUSTMENTS ON SECURITIES INCOME (LOSS)
----------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, July 31, 1998........................ $ -- $(1,193) $(1,193)
Activity, fiscal 1999......................... 340 500 840
----- ------- -------
Balance, July 31, 1999........................ 340 (693) (353)
Activity, fiscal 2000......................... (565) 658 93
----- ------- -------
Balance, July 31, 2000........................ $(225) $ (35) $ (260)
===== ======= =======
</TABLE>

(14) RELATED PARTY TRANSACTIONS

CMGI provides us with systems and related services ("enterprise services")
at amounts that approximate the fair value of services received in each of the
periods presented in these financial statements. We also occupy facilities that
are leased by CMGI, whereby CMGI charges us for our share of rent and related
facility costs through an allocation based upon our headcount in relation to
total headcount for all CMGI companies located in the premises. We also purchase
certain employee benefits (including 401(k) plan participation by our employees)
and insurance (including property and casualty insurance) through CMGI.

On our behalf during fiscal 2000, CMGI paid approximately $21,706,000 of
investment banking fees that were payable by Flycast in connection with CMGI's
acquisition of Flycast. We are obligated to repay CMGI for the investment
banking fees paid on our behalf.

The following summarizes the expenses allocated to us by CMGI for
enterprise services, rent and facilities, and human resources:

<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
----------------------
1998 1999 2000
---- ---- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Enterprise services......................................... $217 $272 $ 826
Rent and facilities......................................... $490 $529 $1,081
Human resources............................................. $ 50 $213 $ 253
</TABLE>

In addition, we outsource data center operations and ad serving services
from companies in which CMGI has a significant ownership interest. Total cost of
revenue related to outsourcing from related parties for the year ended July 31,
1998, 1999 and 2000 were $1,437,000, $3,812,000, and $15,744,000, respectively.

We lease certain property and equipment from CMGI and from a subsidiary of
CMGI. Under the arrangements, the related parties negotiate the terms and
conditions of the leases and obtain the assets to be leased. The related parties
bear all liability for payment, and we are not financially obligated under the
leases. We are charged the actual lease fees paid by the related parties, plus
an additional administrative charge that approximates the fair value of the
services received (see note 9).

Included in trade accounts receivable at July 31, 2000 is approximately
$16,067,000 due from a customer which holds an ownership interest in both us and
our majority shareholder. This account receivable was collected subsequent to
July 31, 2000.

CMGI has committed to make available to us up to $50 million in the form of
debt, equity or a combination thereof to fund our working capital requirements,
subject to negotiation of mutually acceptable terms and conditions and approval
of both companies' respective Boards of Directors.

61
<PAGE> 63
ENGAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(15) SEGMENT REPORTING

Effective December 31, 1998, we adopted Statement of Financial Accounting
Standard No. 131, "Disclosures about Segments of an Enterprise and Related
Information", (SFAS No. 131). SFAS No. 131 establishes standards for the way
public business enterprises report information about operating segments. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. During April 2000, as a result of closing
the Flycast and Adsmart acquisitions, our operations and corresponding
organizational structures were realigned into three segments: Media, Media
Management and Software and Consulting based on the type of products and
services offered. As a result of the realignment, the prior period segment
information has been restated. Media provides a comprehensive system for
planning, buying, selling, and managing Web advertising to advertisers and
agencies. Media Management delivers solutions to help advertisers execute,
measure, analyze and optimize their Internet marketing campaigns. Software and
Consulting is primarily engaged in the development and sale of software that
enables Web publishers, advertisers and merchants to target and deliver
advertisements, content and e-commerce offerings to their audiences. In
addition, consulting services includes traditional consulting as well as
installation, training, and software support.

Revenue and gross profit (loss) by segment are as follows:

<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
------------------------------
1998 1999 2000
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
MEDIA
Revenue................................................... $ 354 $10,810 $105,720
Gross profit (loss)....................................... (2,183) (3,762) 8,564
MEDIA MANAGEMENT
Revenue................................................... -- 2,627 24,257
Gross profit.............................................. -- 868 10,311
SOFTWARE AND CONSULTING
Revenue................................................... 2,217 13,396 46,808
Gross profit.............................................. 86 6,224 36,445
CONSOLIDATED SEGMENT TOTALS
Revenue................................................... 2,571 26,833 176,785
Gross profit (loss)....................................... (2,097) 3,330 55,320
</TABLE>

Asset information by operating segment is not reported since we do not
identify assets by segment.

We market our products worldwide. Revenue is grouped into three main
geographic areas; United States, Europe and Rest of world. Revenue was
distributed by geography as follows:

<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-----------------------------
1998 1999 2000
------ ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
United States............................................... $1,938 $24,051 $159,124
Europe...................................................... 71 1,199 12,141
Rest of world............................................... 562 1,583 5,520
------ ------- --------
$2,571 $26,833 $176,785
====== ======= ========
</TABLE>

Our assets located outside of the United States are immaterial to our
financial statements.

62
<PAGE> 64
ENGAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(16) SUBSEQUENT EVENTS

On August 31, 2000, we acquired Space Media Holdings Limited ("Space
Media"), a leading independent Internet marketing network in Asia, in an
all-stock transaction for approximately $64.5 million including acquisition
costs of $400,000 and net of cash acquired of $71,000. We expect to record
goodwill for substantially the entire purchase price for Space Media. Under the
terms of a stock purchase agreement, we issued approximately 6,103,300 shares of
our common stock. Approximately 915,490 shares are being held in escrow for a
period of at least one year. These shares held in escrow are intended to secure
the obligations of the former Space Media stockholders to indemnify us under the
acquisition agreement. In addition, 1,403,750 shares are being held in escrow to
ensure the satisfaction of certain performance objectives by Space Media.

On September 12, 2000 we completed our acquisition of MediaBridge
Technologies, Inc., ("MediaBridge") a leading provider of cross-media closed
loop targeted marketing systems for approximately $225.8 million including
acquisition costs of approximately $482,000 and net of cash acquired of $2.7
million. Under the terms of the merger agreement, we issued approximately
11,741,000 common shares and approximately 2,504,000 engage stock options to the
former MediaBridge employees. Ten percent of the shares issued are subject to an
escrow period of one year to secure certain indemnification obligations of the
MediaBridge shareholders. This acquisition will be accounted for using the
purchase method, and we expect the majority of the purchase price to be
allocated to goodwill and other intangible assets.

63
<PAGE> 65

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None

PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The response to this item is incorporated by reference from the discussion
responsive thereto under the captions "Management" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in our Proxy Statement for the 2000 Annual
Meeting of Stockholders.

ITEM 11. EXECUTIVE COMPENSATION

The response to this item is incorporated by reference from the discussion
responsive thereto under the caption "Executive Compensation" in our Proxy
Statement for the 2000 Annual Meeting of Stockholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The response to this item is incorporated by reference from the discussion
responsive thereto under the caption "Security Ownership of Certain Beneficial
Owners and Management" in our Proxy Statement for the 2000 Annual Meeting of
Stockholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The response to this item is incorporated by reference from the discussion
responsive thereto under the caption "Related Transactions" in our Proxy
Statement for the 2000 Annual Meeting of Stockholders.

PART IV.

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K

(a)(1) FINANCIAL STATEMENTS

The following are the consolidated financial statements of Engage, Inc.
appearing elsewhere herein:

Report of Independent Accountants

Consolidated Balance Sheets as of July 31, 1999 and 2000

Consolidated Statements of Operations for the three years ended July 31,
2000

Consolidated Statement of Changes in Stockholders' Equity (Deficit) for
the three years ended July 31, 2000

Consolidated Statements of Cash Flows for the three years ended July 31,
2000

(a)(2) FINANCIAL STATEMENT SCHEDULES

The following financial statement is filed as part of this report:

II Valuation and Qualifying Accounts

(a)(3) EXHIBITS

The Exhibits which are filed with this report or which are incorporated by
reference are set forth in the Exhibit Index hereto.

64
<PAGE> 66

(b) REPORTS ON FORM 8-K.

We filed the following Current Reports on Form 8-K during the quarter ended
July 31, 2000:

On May 11, 2000 we filed a current report on Form 8-K to announce that
we had completed our acquisition of Adsmart Corporation and Flycast
Communications Corporation on April 28, 2000.

On June 22, 2000, we filed a current report on Form 8-K to announce
that we had entered into a definitive agreement to sell shares of our
common stock to CMGI, Inc. and CPQ Holdings, Inc. in a private placement.

On June 30, 2000, we filed a current report on Form 8-K to announce
that we had entered into a definitive agreement to acquire MediaBridge
Technologies, Inc.

On July 22, 2000, we filed an amendment to our current report on Form
8-K in connection with our acquisition of Adsmart Corporation and Flycast
Communications Corporation.

65
<PAGE> 67

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
October 30, 2000.

By: /s/ROBERT W. BARTLETT, JR.
------------------------------------
Robert W. Bartlett, Jr.
Chief Financial Officer, Executive
Vice President and Treasurer
(Principal Financial and
Accounting Officer)

SIGNATURES

Pursuant to the requirements of the Securities Act of 1934, the Registrant
has duly caused this report to be signed below by the following persons on
behalf of the Registrant and capacities indicated on October 30, 2000.

<TABLE>
<CAPTION>
SIGNATURE TITLE(S)
--------- --------
<C> <S>

/s/ PAUL L. SCHAUT Chief Executive Officer, President and Director
--------------------------------------------------- (Principal Executive Officer)
Paul L. Schaut

/s/ ROBERT W. BARLTETT, JR. Chief Financial Officer, Executive Vice President
--------------------------------------------------- and Treasurer (Principal Financial and
Robert W. Bartlett, Jr. Accounting Officer)

/s/ DAVID S. WETHERELL Chairman of the Board of Directors
---------------------------------------------------
David S. Wetherell

/s/ EDWARD A. BENNETT Director
---------------------------------------------------
Edward A. Bennett

/s/ CHRISTOPHER A. EVANS Director
---------------------------------------------------
Christopher A. Evans

/s/ ANDREW J. HAJDUCKY, III Director
---------------------------------------------------
Andrew J. Hajducky, III

/s/ CRAIG D. GOLDMAN Director
---------------------------------------------------
Craig D. Goldman

/s/ FREDRIC D. ROSEN Director
---------------------------------------------------
Fredric D. Rosen
</TABLE>

66
<PAGE> 68

SCHEDULE II

ENGAGE, INC.

VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JULY 31, 1998, 1999 AND 2000
(IN THOUSANDS)

<TABLE>
<CAPTION>
BALANCE AT ADDITIONS ACQUISITIONS, DEDUCTIONS BALANCE
BEGINNING CHARGED TO DISPOSALS AND FROM AT END
DESCRIPTION OF YEAR INCOME OTHER RESERVES OF YEAR
----------- ---------- ---------- ------------- ---------- -------
<S> <C> <C> <C> <C> <C>
Year ended July 31, 1998(1):
Allowance for doubtful
accounts...................... $ -- $ 283 $ 120 $ -- $ 403
Year ended July 31, 1999(1):
Allowance for doubtful
accounts...................... $ 403 $ 635 $ 954 $(202) $ 1,790
Year ended July 31, 2000(1):
Allowance for doubtful
accounts...................... $1,790 $8,998 $1,753 $(838) $11,703
</TABLE>

---------------
(1) Adjusted for the acquisition of Adsmart which has been accounted for as an
"as-if pooling".

67
<PAGE> 69

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
------- -------
<C> <S>
3.1(2) Second Amended and Restated Certificate of Incorporation.
3.2(3) Amendment to the Second Amended and Restated Certificate of
Incorporation.
3.3(1) Amended and Restated By-laws.
4.1 Specimen Certificate for shares of Common Stock.
10.1(4) Amended and Restated 1995 Equity Incentive Plan.
10.2(1) 1999 Employee Stock Purchase Plan.
10.3(1) 1999 Stock Option Plan for Non-Employee Directors.
10.4(5) 1996 Stock Option Plan of AdKnowledge Inc.
10.5(5) AdKnowledge Inc. 1998 Stock Option/Stock Issuance Plan.
10.6(1)+ Letter Agreement by and among the Company, CMGI and Red
Brick Systems, Inc., dated October 6, 1998.
10.7(1)+ Letter Agreement by and among the Company, NaviSite Internet
Services Corporation and ServerCast Communications, L.L.C.,
dated September 16, 1998.
10.8(1)+ License Agreement between the Company and Engage
Technologies Japan, Inc., dated July 31, 1998.
10.9(1)+ International Reseller Agreement between the Company and
Engage Technologies Japan, Inc., dated July 31, 1998.
10.10(1)+ Amended and Restated Software License Agreement by and
between Red Brick Systems, Inc. and the Company, dated July
31, 1998.
10.11(1)+ DSS Server Software License Agreement by and between the
Company, including its parent company CMGI and CMGI's
majority-owned subsidiaries, dated July 31, 1998.
10.12(1)+ Exclusive Strategic Alliance Agreement between the Company
and AdSmart Corporation and Cross Beam Networks Corporation,
dated January 7, 1998.
10.13(1)+ Services and License Agreement between Lycos, Inc. and the
Company, dated October 29, 1997.
10.14(1)+ Sales and Marketing Agreement by and between Internet
Profiles Corporation and the Nielsen Media Research division
of A. C. Nielsen Company, dated September 5, 1995.
10.15 Lease Agreement By and Between EOP-Riverview/245First
Street, L.L.C. as landlord, and the Company as tenant, dated
June 19, 2000.
10.16(6) Lease Agreement by and between TST 555/575 Market, L.L.C. as
landlord and the Company as tenant, dated December 22, 1999.
10.17(3) First Amendment to the Lease Agreement by and between TST
555/575 Market, L.L.C. as landlord and the Company as
tenant, dated March 20, 2000.
10.18(7) Lease Agreement By and Between Carolina Blackhawk, LLC, as
Landlord and the Company, as Tenant, dated October 1999.
10.19(1) Capital & Counties plc and Engage Technologies Limited
underlease, dated April 27, 1999.
10.20(1) Anthony & Co. Office Lease between Milkson Associates, LLC
and Accipiter, Inc., dated April 9, 1997.
10.21(1) Amendment to Lease Agreement between Milkson Associates, LLC
and Accipiter, Inc., dated November 5, 1997.
10.22(2) Investor Rights Agreement by and between the Company and
CMGI, dated July 23, 1999.
10.23 Amendment No. 1 to Investor Rights Agreement by and between
the Company and CMGI, dated June 19, 2000.
10.24 Amended and Restated Investor Rights Agreement by and
between CPQ Holdings, Inc. and the Company, dated June 19,
2000.
10.25(2) Facilities and Administrative Support Agreement between the
Company and CMGI, dated July 23, 1999.
10.26(1) Separation Agreement by and between CMGI and Chris Evans,
dated May 3, 1999.
10.27(1) Consulting, Invention and Non-Disclosure Agreement between
the Company and Chris Evans, dated May 3, 1999 (filed as
Exhibit A to Exhibit 10.26).
</TABLE>
<PAGE> 70

<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
------- -------
<C> <S>
10.28(1) Inter-Company Agreement between CMGI and the Company, dated
April 7, 1999.
10.29(1) Secured Convertible Demand Note issued by the Company to
CMGI, dated of February 1, 1999.
10.30(1) Security Agreement by and between the Company and CMGI,
dated as of May 3, 1999.
10.31(1) Intellectual Property Security Agreement by and between the
Company and CMGI, dated as of May 3, 1999.
10.32(1) Stock Purchase Agreement among, the Company, CMGI, Internet
Profiles Corporation and the stockholders of Internet
Profiles Corporation listed on Schedule 1 attached thereto,
dated April 7, 1999.
10.33(2) Tax Allocation Agreement by and between CMGI and the
Company, dated July 23, 1999.
10.34(2)+ Strategic Development and License Agreement by and Between
the Company and Microsoft Corporation, dated July 28, 1999.
10.35(7) Inter-Company Agreement, dated September 23, 1999, by and
between the Company and CMGI, Inc.
10.36(7) Agreement and Plan of Merger and Contribution, dated
September 23, 1999, by and among the Company, CMGI, Inc., AK
Acquisition Corp., and AdKnowledge Inc. and certain
individuals as the Shareholder Representatives.
10.37(6) Agreement and Plan of Merger and Contribution, dated January
19, 2000, by and among the Company, CMGI, Inc., Adsmart
Corporation, Flycast Communications Corporation and FCET
Corp.
10.38(8) Agreement and Plan of Merger, dated June 12, 2000, by and
among the Company, Engage Subsidiary, Inc. and MediaBridge
Technologies, Inc.
10.39 Stock Purchase Agreement, dated June 19, 2000, by and among
the Company, CMGI and CPQ Holdings, Inc.
10.40 Third Party Software Distribution Agreement, dated July 26,
2000, by and between the Company and Compaq Computer
Corporation.
10.41 First Amendment to Third Party Software Distribution
Agreement, dated July 31, 2000, by and between the Company
and Compaq Computer Corporation.
21.1 Subsidiaries
23.1 Consent of KPMG LLP
23.2 Independent Auditors' Report on Financial Statement Schedule
27.1 Financial Data Schedule
</TABLE>

---------------
(1) Incorporated by reference from the exhibits filed with the Company's
registration statement (File No. 333-78015) on Form S-1 filed under the
Securities Act of 1933, as amended.

(2) Incorporated by reference from the exhibits filed with the Company's Form
10-K (File No. 000-26671) filed with the Securities and Exchange Commission
on October 29, 1999.

(3) Incorporated by reference from the exhibits filed with the Company's Form
10-Q (File No.000-26671) filed with the Securities and Exchange Commission
on June 14, 2000.

(4) Incorporated by reference from the exhibits filed with the Company's
Definitive Proxy Statement filed with the Securities and Exchange Commission
on April 7, 2000.

(5) Incorporated by reference from the exhibits filed with the Company's
registration statement (File No. 333-32202) on Form S-8 on March 10, 2000.

(6) Incorporated by reference from the exhibits filed with the Company's Form
10-Q (File No. 000-26671) filed with the Securities and Exchange Commission
on March 16, 2000.

(7) Incorporated by reference from the exhibits filed with the Company's Form
10-Q (File No. 000-26671) filed with the Securities and Exchange Commission
on December 15, 1999.

(8) Incorporated by reference from the exhibits filed with the Company's Form
8-K (File No. 000-26671) filed with the Securities and Exchange Commission
on September 26, 2000.

+ Confidential materials omitted and filed separately with the Securities and
Exchange Commission.