ENGAGE TECHNOLOGIES INC, 10-Q/A, 2000-03-17

ENGAGE TECHNOLOGIES INC
10-Q/A, 2000-03-17
BUSINESS SERVICES, NEC

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<PAGE> 1

================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

----------

FORM 10-Q/A

Amendment No. 1

[X] QUARTERLY Report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2000

[ ] Transition Report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

FOR THE TRANSITION PERIOD FROM ___ TO ____

----------

COMMISSION FILE NUMBER 000-26671

ENGAGE TECHNOLOGIES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)

DELAWARE 04-3281378
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

100 BRICKSTONE SQUARE, ANDOVER, MASSACHUSETTS 01810
(Address of principal executive offices) (Zip Code)

(978) 684-3884
(Registrant's telephone number, including area code)

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

The number of shares outstanding of the registrant's Common Stock as of March 1,
2000 was 54,176,543.

================================================================================

<PAGE> 2
ENGAGE TECHNOLOGIES, INC.

FORM 10-Q

FOR THE QUARTER ENDED JANUARY 31, 2000

----------

INDEX

PAGE
----
PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

a) Consolidated Balance Sheets as of July 31, 1999 and
January 31, 2000 (unaudited) ................................. 3

b) Consolidated Statements of Operations (unaudited) for
the three and six months ended January 31, 1999
and 2000 ..................................................... 4

c) Consolidated Statements of Cash Flows (unaudited) for
the six months ended January 31, 1999 and 2000 ............... 5

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

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk ........ 20

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.................................................. 21

Item 2. Changes in Securities and Use of Proceeds ......................... 21

Item 4. Submission of Matters to a Vote of Security Holders ............... 21

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

SIGNATURES

EXHIBIT INDEX

<PAGE> 3
ENGAGE TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT PAR VALUE)

<TABLE>
<CAPTION>
JULY 31, JANUARY 31,
1999 2000
-------- ---------
(UNAUDITED)
<S> <C> <C>

ASSETS
Current assets:
Cash and cash equivalents ................................ $112,034 $ 44,010
Available-for-sale securities ............................ 1,067 44,678
Accounts receivable, less allowance for doubtful
accounts of $986 and $1,621 at July 31, 1999 and
January 31, 2000, respectively ......................... 5,632 12,861
Prepaid expenses ......................................... 595 1,978
-------- --------
Total current assets .................................. 119,328 103,527
-------- --------

Property and equipment, net ................................ 1,801 7,168
Investment in joint venture ................................ 1,047 415
Intangible assets, net of accumulated amortization
of $7,903 and $22,191 at July 31, 1999 and
January 31, 2000, respectively ......................... 41,401 193,765
Restricted cash ............................................ -- 1,661
Other assets ............................................... 371 3,010
-------- --------
Total assets .......................................... $163,948 $309,546
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ........................ $ -- $ 2,028
Obligation under capital lease ........................... 302 1,041
Due to CMGI and affiliates ............................... 131 1,878
Accounts payable ......................................... 1,002 3,118
Accrued expenses and other current liabilities ........... 10,047 19,751
Deferred revenue ......................................... 4,293 5,162
-------- --------
Total current liabilities ............................. 15,775 32,978
-------- --------

Deferred revenue ........................................... 1,508 1,067
Long-term debt, net of current portion ..................... -- 2,812
Obligation under capital lease, net of current portion ..... 367 1,768
Other long-term liabilities ................................ -- 443

Commitments and contingencies

Stockholders' equity:
Preferred Stock, $.01 par value, 5,000 shares
authorized, 0 issued and outstanding .................. -- --
Common Stock, $.01 par value, 150,000 shares
authorized, 97,349 and 108,153 shares issued
and outstanding at July 31, 1999 and
January 31, 2000, respectively ........................ 973 1,082
Additional paid-in capital ............................... 208,183 367,361
Deferred compensation .................................... (4,024) (2,025)
Accumulated other comprehensive (loss) income ............ (353) 442
Accumulated deficit ...................................... (58,481) (96,382)
-------- --------
Total stockholders' equity ............................ 146,298 270,478
-------- --------
Total liabilities and stockholders' equity ............ $163,948 $309,546
======== ========

</TABLE>

See accompanying notes to consolidated financial statements.

3
<PAGE> 4
ENGAGE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, JANUARY 31,
-------------------- -------------------
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>

Revenue:
Product revenue .................................... $ 1,599 $ 11,088 $ 2,744 $ 16,322
Product revenue, related parties ................... 658 463 844 2,045
Services and support revenue ....................... 393 1,115 627 2,283
Services and support revenue, related parties ...... 29 103 50 421
-------- -------- -------- --------
Total revenue .................................. 2,679 12,769 4,265 21,071
-------- -------- -------- --------
Cost of revenue:
Cost of product revenue ............................ 961 7,434 1,543 10,622
Cost of services and support revenue ............... 892 1,749 1,517 2,911
-------- -------- -------- --------
Total cost of revenue .......................... 1,853 9,183 3,060 13,533
-------- -------- -------- --------
Gross profit ................................... 826 3,586 1,205 7,538
-------- -------- -------- --------
Operating expenses:
In-process research and development ................ -- 2,317 -- 2,317
Research and development ........................... 1,828 4,592 3,788 7,885
Selling and marketing .............................. 1,846 10,040 3,704 18,071
General and administrative ......................... 629 3,170 1,316 4,985
Amortization of goodwill and other intangibles ..... 1,043 11,445 2,086 13,728
Stock compensation ................................. 195 224 391 326
-------- -------- -------- --------
Total operating expenses ....................... 5,541 31,788 11,285 47,312
-------- -------- -------- --------
Loss from operations .................................... (4,715) (28,202) (10,080) (39,774)

Other income (expense):
Equity in loss of joint venture .................... (150) (374) (160) (700)
Other expense ...................................... -- (33) -- (25)
Interest income .................................... -- 1,421 -- 2,777
Interest expense ................................... (179) (167) (339) (179)
-------- -------- -------- --------

Net loss ................................................ $ (5,044) $(27,355) $(10,579) $(37,901)
======== ======== ======== ========

Basic and diluted net loss per share .................... $ (0.26) $ (0.38)
======== ========
Weighted average number of basic and diluted
shares outstanding ................................... 104,489 100,935
======== ========
Pro forma basic and diluted net loss per share .......... $ (0.07) $ (0.16)
======== ========
Pro forma weighted average number of basic and
diluted shares outstanding ........................... 67,550 67,297
======== ========

</TABLE>

See accompanying notes to consolidated financial statements.

4
<PAGE> 5
ENGAGE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

(IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED JANUARY 31,
---------------------------
1999 2000
-------- ---------
<S> <C> <C>

Cash flows from operating activities:
Net loss ............................................................ $(10,579) $ (37,901)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization ..................................... 2,488 15,328
Equity in loss of joint venture ................................... 160 721
Provision for bad debts ........................................... 41 571
Stock compensation ................................................ 391 326
Amortization of discount on available-for-sales securities ........ -- (767)
Gain on sale of available-for-sale securities ..................... -- (40)
In-process research and development ............................... -- 2,317
Changes in operating assets and liabilities, net of impact
of acquisitions:
Accounts receivable ........................................... (120) (5,778)
Prepaid expenses and other assets ............................. 13 (2,238)
Net change in due to CMGI and affiliates ...................... -- 1,782
Accounts payable .............................................. 358 122
Accrued expenses .............................................. 1,681 533
Deferred revenue .............................................. 3,472 52
-------- ---------
Net cash used for operating activities ...................... (2,095) (24,972)
-------- ---------
Cash flows from investing activities:
Purchase of available-for-sale securities ........................... -- (54,016)
Proceeds from redemption of available-for-sale securities ........... -- 11,800
Net cash acquired on acquisition of subsidiary ...................... -- 3,044
Investment in joint venture ......................................... (1,424) --
Long-term investment at cost ........................................ -- (2,000)
Purchases of property and equipment ................................. (118) (2,104)
Proceeds from sale of property and equipment ........................ -- 8
-------- ---------
Net cash used for investing activities ...................... (1,542) (43,268)
-------- ---------
Cash flows from financing activities:
Net change in debt to CMGI and affiliates ........................... 1,598 --
Proceeds from stock option exercises ................................ 9 384
Proceeds from stock issued under Employee Stock Purchase Plan ....... -- 298
Issuance of preferred stock, net of issuance costs .................. 1,934 --
Repayment of capital lease obligations .............................. -- (155)
Repayment of long-term borrowings ................................... -- (313)
-------- ---------
Net cash provided by financing activities ................... 3,541 214
-------- ---------
Effect of exchange rate changes on cash and cash equivalents ........... -- 2
-------- ---------
Net decrease in cash and cash equivalents .............................. (96) (68,024)

Cash and cash equivalents, beginning of period ......................... 96 112,034
-------- ---------
Cash and cash equivalents, end of period ............................... $ -- $ 44,010
======== =========

</TABLE>

See accompanying notes to consolidated financial statements.

5
<PAGE> 6
ENGAGE TECHNOLOGIES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

A. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been
prepared by Engage Technologies, Inc. ("Engage" or the "Company") in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, these unaudited consolidated financial statements do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, the
accompanying consolidated financial statements contain all adjustments,
consisting only of those of a normal recurring nature, necessary for a fair
presentation of the Company's financial position, results of operations and cash
flows at the dates and for the periods indicated. While the Company believes
that the disclosures presented are adequate to make the information not
misleading, these consolidated financial statements should be read in
conjunction with the audited financial statements and related notes for the year
ended July 31, 1999 which are contained in the Company's Annual Report on Form
10-K filed with the Securities and Exchange Commission ("the SEC") on October
29, 1999. The results for the three and six-month periods ended January 31, 2000
are not necessarily indicative of the results to be expected for the full fiscal
year. Certain prior year amounts in the consolidated financial statements have
been reclassified in accordance with generally accepted accounting principles to
conform with current year presentation.

B. CASH AND SHORT-TERM INVESTMENTS

Engage's cash is invested in debt instruments of financial institutions
and corporations, and in a money market mutual fund. Engage has established
guidelines relative to credit ratings, diversification, and maturities that it
believes help maintain safety and liquidity. Cash equivalents include highly
liquid investments with maturity periods of three months or less when purchased.
Short-term investments include those investments with maturities in excess of
three months but less than one year. Short-term investments and marketable
equity securities are classified as available for sale and reported at fair
value with unrealized gains and losses included within stockholders' equity as a
component of comprehensive income. Engage has not had any significant realized
or unrealized losses related to its investments.

C. EARNINGS PER SHARE

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

Pro forma basic loss per share is based upon the weighted average number
of common shares outstanding during the period. Pro forma diluted loss per share
is based upon the weighted average number of common shares outstanding during
the period plus additional weighted average common equivalent shares outstanding
during the period, computed using the "if-converted method". Common equivalent
shares have been excluded from the computation of diluted loss per share in each
period, as their effect would have been anti-dilutive in each period presented.

Conversion of all preferred stock and debt to CMGI occurred upon the
completion of the Company's initial public offering in July 1999. The pro forma
basic and diluted net loss per share information included in the accompanying
statements of operations for the three and six months ended January 31, 1999
reflect the impact on pro forma basic and diluted net loss per share of such
conversion 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
has not been presented for the three and six-month periods ended January 31,
1999 because it is irrelevant due to the change in the Company's capital
structure and resultant basic 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 basic and
diluted loss per share computation for the Company's reported net loss is as
follows:

6
<PAGE> 7
ENGAGE TECHNOLOGIES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)

BASIC AND DILUTED NET LOSS PER SHARE

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, 2000 JANUARY 31, 2000
------------------ ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>

NUMERATOR:
Net loss........................................................ $(27,355) $(37,901)
-------- --------
DENOMINATOR:
Weighted average shares outstanding............................. 104,489 100,935
-------- --------

Basic and diluted net loss per share ........................... $ (0.26) $ (0.38)
======== ========
</TABLE>

At January 31, 2000, the Company had outstanding stock options to purchase
20,668,182 shares of common stock at a weighted average exercise price of $7.30
that could potentially dilute earnings per share. 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.

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

PRO FORMA BASIC AND DILUTED NET LOSS PER SHARE

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, 1999 JANUARY 31, 1999
------------------ ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>

NUMERATOR:
Net loss....................................................... $ (5,044) $(10,579)
-------- --------
DENOMINATOR:
Weighted average shares outstanding............................ 430 416
Assumed conversion of preferred stock.......................... 60,954 60,856
Assumed conversion of debt to CMGI............................. 6,166 6,025
-------- --------

Weighted average number of diluted shares outstanding.......... 67,550 67,297
-------- --------

Pro forma basic and diluted net loss per share ................ $ (0.07) $ (0.16)
======== ========
</TABLE>

At January 31, 1999, the Company had outstanding stock options to purchase
9,709,120 shares of common stock at a weighted average exercise price of $0.82
that could potentially dilute earnings per share. 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.

D. ACQUISITION

On December 22, 1999, Engage completed its acquisition of 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. Previously, on September 23, 1999, Engage, CMGI, AK Acquisition
Corp., a wholly-owned subsidiary of CMGI, AdKnowledge, and Steve Findley, John
Mracek and Kevin Wandryk (collectively, the "Shareholder Representative")
executed an Agreement and Plan of Merger and Contribution (the "Merger
Agreement"). Upon the completion of the transactions contemplated by the Merger
Agreement, AdKnowledge became a wholly-owned subsidiary of Engage. Specifically,
the Merger Agreement contemplated:

7
<PAGE> 8
ENGAGE TECHNOLOGIES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)

First, a merger of Transitory Sub with and into AdKnowledge, with
AdKnowledge being the surviving corporation (the "Surviving Corporation"). In
this merger, all the AdKnowledge preferred shareholders received CMGI common
stock and a new class of AdKnowledge common stock ("Surviving Corporation Common
Stock"), and all common shareholders of AdKnowledge received shares of Surviving
Corporation Common Stock. Upon completion of this merger on November 30, 1999,
CMGI owned approximately 88% of the Surviving Corporation Common Stock.

Second, CMGI and other shareholders of Surviving Corporation contributed
their Surviving Corporation Common Stock to Engage in exchange for approximately
10.3 million shares of Engage common stock (the "Contribution"). Engage issued
common stock from its authorized but unissued capital stock.

Third, Engage consummated a California short-form merger (the "Short-Form
Merger") between Surviving Corporation and a wholly-owned subsidiary of Engage
("Engage Sub"), pursuant to which Engage Sub merged with and into Surviving
Corporation, with Surviving Corporation being the surviving corporation in such
merger. Any remaining holders of Surviving Corporation Common Stock received
Engage common stock in this merger.

Total purchase consideration was valued at approximately $161 million, net
of cash acquired of $3.0 million. Included in the purchase consideration was
$3.8 million in direct acquisition costs. In connection with the contribution
and the Short-Form Merger, Engage issued approximately 9.8 million shares of its
common stock to CMGI for CMGI's 88% interest in Surviving Corporation and
approximately 506,000 shares of its common stock directly to shareholders of
Surviving Corporation, valued at approximately $142.4 million in the aggregate.
Additionally, stock options to acquire Engage's common stock issued in the
contribution, valued at approximately $18 million, 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. Engage issued approximately 1,116,000 of its 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 Escrow Shares are
released to the AdKnowledge shareholders, Engage 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 Engage 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 Engage and CMGI, in the event that any Escrow
Shares are returned to CMGI, CMGI shall pay Engage, in cash or other property, a
sum equal to the value of the returned Escrow Shares.

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 $2,317,000, or
approximately 1.2% of the total purchase price. At the acquisition date,
AdKnowledge's major in-process projects were: (1) the development of the
AdKnowledge System Architecture Upgrade, which was intended to scale its
software to handle more customers, internationalize the AdKnowledge System, and
help AdKnowledge deploy new features more rapidly; (2) the development of the
AdServer Network Capacity Upgrade, which was intended to allow the AdKnowledge
System to handle more volume; (3) the AdServer Network Operating System Change,
which was intended to improve the managing of AdKnowledge's advertising
campaigns; (4) the development of the Optimal Global Domain Name Service, which
was intended to optimize traffic flow, deliver advertisements faster, and
improve the performance of the AdKnowledge System; and (5) the development of QA
Automation Procedures, which was intended to allow AdKnowledge to release
features on the AdKnowledge System more quickly and with better quality.

At the date of the acquisition, management estimated that completion of
the Architecture Upgrade technology would be accomplished by August 2000. The
initial development effort had commenced in November 1998. At the acquisition
date, technological feasibility of the Architecture Upgrade had not been
reached. At the time of the AdKnowledge purchase, the Architecture Upgrade
project was approximately 57% complete.

8
<PAGE> 9
ENGAGE TECHNOLOGIES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)

At the date of the acquisition, management estimated that completion of
the Capacity Upgrade technology would be accomplished by January 2000. The
initial development effort had commenced in October 1999. At the acquisition
date, technological feasibility of the Capacity Upgrade had not been reached. At
the time of the AdKnowledge purchase, the Capacity Upgrade project was
approximately 65% complete.

At the date of the acquisition, management estimated that completion of
the Operating System technology would be accomplished by March 2000. The initial
development effort had commenced in October 1999. At the acquisition date,
technological feasibility of the Operating System Change had not been reached.
At the time of the AdKnowledge purchase, the Operating System Change project was
approximately 28% complete.

At the date of the acquisition, management estimated that completion of
the Optimal Global Domain Name Service technology would be accomplished by June
2000. The initial development effort had commenced in September 1999. At the
acquisition date, technological feasibility of the Optimal Global Domain Name
Service had not been reached. At the time of the AdKnowledge purchase, the
Optimal Global Domain Name Service project was approximately 23% complete.

At the date of the acquisition, management estimated that completion of
the QA Automation Procedures technology would be accomplished by June 2000. The
initial development effort had commenced in June 1999. At the acquisition date,
technological feasibility of the QA Automation Procedures had not been reached.
At the time of the AdKnowledge purchase, the QA Automation Procedures project
was approximately 75% complete.

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, trade names/trademarks, database, 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 rates used for in-process
research and development range from 25% to 30%, reflecting a 10% to 15% premium
over the estimated weighted-average cost of capital of 15%. These different
discount rates reflect the relative risk of the technologies, and their stage of
completion.

The resulting net cash flows to which the discount rates were applied are
based on Engage management's estimates of revenues, cost of revenues, research
and development costs, selling and marketing costs, general and administrative
costs, and income taxes from such acquired technologies. These estimates are
based on the assumptions set forth below.

Management projected average annual revenue increases for the forecast
period based on its assessment of future market potential and the ability of
AdKnowledge to successfully implement its in-process research and development
projects. These growth rates were based on the expected growth of Internet users
and online activity and the impact such growth would have on Internet
advertising. Revenues related to each of the in-process research and development
projects were identified.

AdKnowledge's estimated cost of sales as a percentage of revenue is
expected to decrease on a stand-alone basis, as efficiencies due to economies of
scale are realized. The estimated cost of sales as a percentage of revenue is
expected to decrease to a low of 30% in the third forecast year.

AdKnowledge's estimated selling and marketing expenses are expected to be
30% as a percentage of revenues for the entire forecast period. Similarly,
general and administrative expenses remained constant at 10%, as a percentage of
revenues, for the entire forecast period.

The acquisition of AdKnowledge 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. The amount of the purchase price allocated to goodwill, developed
technology and other identifiable intangible assets is being amortized on a
straight-line basis over three years. Amortization of developed technology is
charged to cost of product revenue, while amortization of goodwill and other
identifiable intangible assets is reflected as a separate component within
operating expenses.

9
<PAGE> 10
ENGAGE TECHNOLOGIES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)

The purchase price of the AdKnowledge acquisition was allocated as
follows:

<TABLE>
(IN THOUSANDS)
<S> <C>

Working capital deficit, net of cash acquired of $3,044........... $ (7,954)
Property and equipment............................................ 4,311
Other assets...................................................... 515
In-process research and development............................... 2,317
Long-term obligations............................................. (4,809)
Goodwill.......................................................... 160,144
Developed technology.............................................. 1,763
Other identifiable intangible assets.............................. 4,745
--------
Purchase price, net of cash acquired.............................. $161,032
========
</TABLE>

The following table represents the unaudited pro forma results of
operations of the Company for the six months ended January 31, 1999 and 2000 as
if the AdKnowledge acquisition had occurred on August 1, 1998. These pro forma
results include adjustments for the amortization of goodwill and other
intangibles and deferred compensation and the elimination of amounts expensed
for in-process research and development. 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.

Net revenues............................................ $ 5,615 $ 24,250
Net loss................................................ (42,677) (64,884)
Net loss per share...................................... (0.55) (0.60)

</TABLE>

E. COMPREHENSIVE LOSS

The components of comprehensive loss for the Company 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>
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, JANUARY 31,
------------------ --------------------
1999 2000 1999 2000
------- -------- -------- --------
<S> <C> <C> <C> <C>

Net loss................................... $(5,044) $(27,355) $(10,579) $(37,901)
Foreign currency adjustments............... 2 (18) 345 91
Net unrealized holding gain arising
during the period....................... 945 698 1,113 704
------- -------- -------- --------
Comprehensive loss......................... $(4,097) $(26,675) $ (9,121) $(37,106)
======= ======== ======== ========
</TABLE>

F. INVESTMENTS

The fair value of investments has been determined through information
obtained from market sources. Engage uses a specific identification cost method
to determine the gross realized gains and losses on the sale of securities.
During the three months ended January 31, 2000, the Company sold its investment
in Informix, Inc. The Company's cash and cash equivalents and available-for-sale
securities at January 31, 2000 were as follows:

10
<PAGE> 11
ENGAGE TECHNOLOGIES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)

<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>

Cash and money market mutual fund ...... $21,247 $ -- $ -- $21,247
Commercial paper ....................... 62,442 12 -- 62,454
Certificate of deposit ................. 4,991 -- (4) 4,987
------- ---- ---- -------
Total investments .................. $88,680 $ 12 $ (4) $88,688
======= ==== ==== =======

AMOUNTS INCLUDED IN:
Cash and cash equivalents .............. $44,010 $ -- $ -- $44,010
Available-for-sale securities .......... 44,670 12 (4) 44,678
------- ---- ---- -------
Total .............................. $88,680 $ 12 $ (4) $88,688
======= ==== ==== =======

</TABLE>

At July 31, 1999, the Company had available-for sale securities recorded
at amortized cost totaling $1,067,000.

G. NON-CASH TRANSACTIONS

During the six months ended January 31, 2000, as the result of the
termination of employment of certain employees prior to the vesting of their
stock options, unvested stock options for which deferred compensation costs had
been recorded in a prior period were cancelled. As a result of these
cancellations, the Company has recorded a reduction of $1,673,000 in both
deferred compensation and additional paid-in capital.

During the six months ended January 31, 2000, the Company acquired
AdKnowledge through the issuance of common stock. See Note D.

H. PENDING ACQUISITIONS

On January 19, 2000, Engage and CMGI, the majority stockholder of the
Engage, executed an Agreement and Plan of Merger and Contribution (the
"Agreement") pursuant to which Engage will acquire Adsmart Corporation
("Adsmart") and Flycast Communications Corporation ("Flycast"). Under the terms
of the Agreement, Engage will acquire Flycast and Adsmart from CMGI and will
issue to CMGI approximately 65 million shares of common stock of Engage. The
transaction will be accounted for as a combination of entities under common
control (i.e., "as if pooling"), and is subject to customary conditions,
including the approval of Engage's stockholders. CMGI has agreed to vote the
shares of common stock of Engage held by it in favor of the transaction. The
fair value of Engage's purchase consideration to be issued to CMGI in excess of
CMGI's carrying values of the net assets of Flycast and Adsmart on the
consummation date will be charged to equity. The transaction is expected to be
completed in April or May 2000. Direct costs of the Adsmart and Flycast
acquisition, consisting primarily of investment banker, legal and accounting
fees, approximating $4.7 million will be expensed upon the closing of the
acquisitions.

The following table represents the unaudited pro forma results of
operations of the Company for the six months ended January 31, 1999 and 2000 as
if the completed AdKnowledge acquisition and the probable Flycast and Adsmart
acquisitions had all occurred on August 1, 1998. These pro forma results include
adjustments for the amortization of goodwill and other intangibles and deferred
compensation and the elimination of amounts expensed for in-process research and
development. The accompanying pro forma results are based on Flycast results for
the six months ended December 31, 1998 and 1999. Additionally, the results of
Adsmart used in the accompanying unaudited pro forma results are based upon
estimates. Net loss and pro forma basic and diluted net loss per share exclude
the actual and estimated impact of in-process research and development charges.
In addition, pro forma basic and diluted net loss per share excludes the impact
of the fair value of Engage's estimated purchase consideration issued to CMGI in
excess of CMGI's carrying values of the net assets of Flycast and Adsmart to be
charged to equity; such excess will be charged to equity in the period in which
the pending acquisitions close. The estimated charge to equity is approximately
$2.3 billion, and is subject to change upon the finalization of purchase
accounting.

11
<PAGE> 12

1999 2000
--------- ---------

Net revenues...................................... $ 12,174 $ 86,231
Net loss.......................................... (193,844) (235,300)
Net loss per share................................ (1.36) (1.36)

I. NEW ACCOUNTING PRONOUNCEMENTS

In December 1999, the SEC issued SAB No. 101, "Revenue Recognition in
Financial Statements." SAB No. 101 expresses the view of the SEC staff in
applying generally accepted accounting principles to certain revenue recognition
issues. Although the Company is still in process of analyzing the impact of SAB
No. 101, if any, on its consolidated statements and related disclosures, the
Company expects that there will be no material impact on its financial position
or its results of operations.

J. SUBSEQUENT EVENT

In February 2000, the Company's Board of Directors approved a two-for-one
stock split of the Company's common stock, effected in the form of a stock
dividend of one share of common stock for each share of common stock
outstanding. The stock dividend is 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 this event.

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, Frederic D. Rosen, Paul L. Schaut, David S.
Wetherell, members of the Company's Board of Directors, CMGI, Inc., the majority
stockholder of the Company and the Company, as nominal defendant. The complaint
alleges that, in connection with the proposed sale by CMGI of Flycast
Communications Corporation and Adsmart Corporation to the Company, CMGI and the
individual defendants have violated their fiduciary duties. The Company believes
that the complaint is without merit and expects that the Company's Board of
Directors will contest the claims vigorously.

K. RECLASSIFICATIONS

Certain reclassification have been made to the prior year financial
statements to conform to the current period presentation.

<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Certain statements contained in this Quarterly Report on Form 10-Q,
including information with respect to the Company's future business plans, the
Company's expectation that it will continue to expand its services and support
staff, the Company's belief that costs will continue to exceed revenues for
several more quarters, the Company's liquidity, the Company's Year 2000
readiness and the Company's disclosure about market risk, constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the 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 the results of the Company to differ materially from those indicated by
such forward-looking statements. These factors include those set forth in this
section, the "Risk Factors" section included in the Company's Annual Report on
Form 10-K filed with the SEC on October 29, 1999, and the risk factors discussed
in the Company's other filings with the SEC.

RESULTS OF OPERATIONS

Engage is a leading provider of profile-based Internet marketing
solutions. At January 31, 2000, Engage was an approximately 81% owned subsidiary
of CMGI, Inc ("CMGI"). The Company offers a range of products and services that
enable Web publishers, advertisers and merchants to target the delivery of
advertisements, content and e-commerce offerings to their audiences and to
measure their effectiveness. Engage has generated most of its revenue to date
through sales of its local profiling and advertising management software and
outsourced services, as well as its services for measuring and analyzing Web
site traffic. In July 1999, Engage commercially introduced its Engage Knowledge
data service to customers. Engage Knowledge provides real-time access to
Engage's database of more than 52 million anonymous profiles of Web users for
more effective targeting of online advertising, promotions and content. In
October 1999, Engage introduced Engage AudienceNet, the first Web-wide profile
driven advertising and marketing network that uses Engage's anonymous, behavior
based profiles to deliver substantial benefits to media buyers, Web sites and ad
networks.

In February 2000, the Company's Board of Directors approved a two-for-one
common stock split, effected in the form of a stock dividend of one share of
common stock for each share of common stock outstanding. The stock dividend is
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 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.

In April 1999, Engage acquired Internet Profiles Corporation ("I/PRO"),
which provides Web site traffic measurement and audit services. 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, Engage 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. 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 January 2000, Engage and CMGI executed an Agreement and Plan of Merger
and Contribution (the "Agreement") pursuant to which Engage will acquire Adsmart
Corporation ("Adsmart") and Flycast Communications Corporation ("Flycast").
Under the terms of the Agreement, Engage will acquire Flycast and Adsmart from
CMGI and will issue to CMGI approximately 65 million shares of common stock of
Engage. The transaction will be accounted for as a combination of entities under
common control (i.e., "as if pooling"), and is subject to customary conditions,
including the approval of Engage's stockholders. CMGI has agreed to vote the
shares of common stock of Engage held by it in favor of the transaction. The
transaction is expected to be completed in April or May 2000.

13.
<PAGE> 14

BASIS OF PRESENTATION

Certain amounts for prior periods in the accompanying consolidated
financial statements, and in the discussion below have been reclassified to
conform with current period presentations.

COMPARISON OF THE THREE MONTHS ENDED JANUARY 31, 1999 AND JANUARY 31, 2000

REVENUE

Total revenue increased from $2.7 million for the three months ended
January 31, 1999 to $12.8 million for the three months ended January 31, 2000.
Revenue from the Company's product offerings accounted for approximately 84% of
total revenue for the three months ended January 31, 1999, compared to 90% of
total revenue for the three months ended January 31, 2000. Approximately 49% of
the increase in total revenue was the result of inclusion of I/PRO's and
AdKnowledge's revenue in product revenue for the quarter ended January 31, 2000.
The remainder of the increase in total revenue was the result of an increase in
revenue from products available in both periods, and to a lesser extent, from
new product releases and an increase in services and support revenue.

Product revenue increased from $2.3 million for the three months ended
January 31, 1999 to $11.6 million for the three months ended January 31, 2000.
Approximately 53% of this increase was the result of inclusion of I/PRO's and
AdKnowledge's revenue in the quarter ended January 31, 2000. The remainder of
the increase was the result of an increase in revenues from products available
in both periods, and to a lesser extent, from new product releases.

Service and support revenue increased from $422,000 for the three months
ended January 31, 1999 to $1.2 million for the three months ended January 31,
2000. The 189% increase quarter-over-quarter was the result of increased
software support and maintenance revenue resulting from increased product
revenue and a large consulting arrangement during the three months ended January
31, 2000.

COST OF REVENUE

Cost of product revenue includes royalties paid to various parties for the
incorporation of their technology into Engage's products, costs associated with
the I/PRO, AdKnowledge, Engage Knowledge and AudienceNet product offerings, as
well as fees paid for outsourced data center operations and the amortization of
developed technology acquired in the Accipiter, I/PRO and AdKnowledge
acquisitions. Cost of support and services revenue is primarily comprised of
payroll and benefits, and allocated overhead costs associated with Engage's
customer support and consulting groups.

Cost of product revenue increased from $961,000 for the three months ended
January 31, 1999 to $7.4 million for the three months ended January 31, 2000. Of
the total dollar increase, approximately $5.3 million was due to the I/PRO and
AdKnowledge acquisitions and the resultant three months and two months,
respectively, of incremental operational costs associated with I/PRO's and
AdKnowledge's product offerings. In addition, a significant portion of the
increase was associated with Engage's AdBureau, Engage Knowledge and AudienceNet
products. Finally, a portion of the increase was the result of increased
amortization costs resulting from the amortization of developed technology
acquired in the I/PRO and AdKnowledge acquisitions. Cost of product revenue was
43% of product revenue for the three months ended January 31, 1999, compared to
64% of product revenue for the three months ended January 31, 2000. The increase
in cost of product revenue as a percentage of product revenue was the result of
the inclusion of costs and revenues from I/PRO and AdKnowledge for the quarter
ended January 31, 2000. The decrease in margins was primarily impacted by lower
margins associated with AdKnowledge product sales.

Cost of service and support revenue increased from $892,000 for the three
months ended January 31, 1999 to $1.7 million for the three months ended January
31, 2000. Cost of service and support revenue was 211% of service and support
revenue for the three months ended January 31, 1999, compared to 144% of service
and support revenue for the three months ended January 31, 2000. Cost of service
and support revenue for the three months ended January 31, 1999 and 2000
exceeded the related revenue due to Engage's continued investment in service and
support staff in advance of anticipated product sales. Overall, including the
acquisition of I/PRO and AdKnowledge, Engage's service and support staff
increased 220% from January 31, 1999 to January 31, 2000. Engage expects to
continue to expand its service and support staff and anticipates that costs may
exceed revenue for several more

14.
<PAGE> 15
quarters. As a percentage of service and support revenue, the improvement in
costs reflects the continued growth of the Company's service and support
business and the spreading of fixed costs over a growing revenue base.

OPERATING EXPENSES

IN-PROCESS RESEARCH AND DEVELOPMENT. In-process research and development
expense was $2.3 million for the three months ended January 31, 2000, resulting
from the AdKnowledge acquisition.

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. Research and development expenses increased from $1.8
million for the three months ended January 31, 1999 to $4.6 million for the
three months ended January 31, 2000, a 151% increase. This increase was
primarily due to the I/PRO and AdKnowledge acquisitions and the inclusion of
their operations for the quarter ended January 31, 2000, and to a lesser extent,
the expansion of the Company's research and development activities. Overall,
including the acquisition of I/PRO and AdKnowledge, Engage's research and
development staff increased 425% from January 31, 1999 to January 31, 2000.
These increases were offset somewhat by a decrease in spending on the
translation of Engage's products into certain foreign languages, projects which
were substantially completed during fiscal 1999. Research and development
expenses were 68% of total revenue for the three months ended January 31, 1999,
compared to 36% of total revenue for the three months ended January 31, 2000.
This decrease is the direct result of the increase in quarter over quarter
revenue.

SELLING AND MARKETING. Selling and marketing expenses consist primarily of
payroll and related costs, consulting and professional fees and advertising
expenses. Selling and marketing expenses increased from $1.8 million for the
three months ended January 31, 1999 to $10.0 million for the three months ended
January 31, 2000, a 444% increase. The increase in costs was primarily due to
increases in product advertising costs resulting from the release of several new
products subsequent to January 31, 1999. In addition, a portion of the increase
was related to the continuing expansion of Engage's sales force, as well as
approximately $2.6 million resulting from the I/PRO and AdKnowledge acquisitions
and the inclusion of their operations for the quarter ended January 31, 2000.
Finally, a portion of the increase is due to continued expansion in
international markets and the costs of maintaining sales and marketing efforts
in foreign markets. Overall, including the acquisition of I/PRO and AdKnowledge,
Engage's sales and marketing staff increased 392% from January 31, 1999 to
January 31, 2000. Sales and marketing expenses were 69% of total revenues for
the three months ended January 31, 1999, compared to 79% for the three months
ended January 31, 2000. The increase as a percentage of revenue is the result of
the Company's continued efforts to increase market awareness of the Company's
product lines.

GENERAL AND ADMINISTRATIVE. General and administrative costs consist
principally of payroll and related costs, consulting and professional fees,
facility and related costs and depreciation expense. General and administrative
expenses increased from $629,000 for the three months ended January 31, 1999 to
$3.2 million for the three months ended January 31, 2000, a 404% increase. The
increase was primarily due to an increase in payroll and related costs
associated with developing an administrative infrastructure to support growing
operations in advance of anticipated revenues and from the inclusion of I/PRO's
and AdKnowledge's operations for the quarter ended January 31, 2000. General and
administrative costs were 23% of total revenue for the three months ended
January 31, 1999, compared to 25% for the three months ended January 31, 2000.

AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of intangible
assets increased from $1.0 million for the three months ended January 31, 1999
to $11.4 million for the three months ended January 31, 2000. The increase was
due to the acquisition of I/PRO in April 1999 and AdKnowledge in December 1999.
Intangible assets from the I/PRO acquisition are being amortized over three to
five years, while intangible assets from the AdKnowledge acquisition are being
amortized over three years.

STOCK COMPENSATION. Stock compensation costs increased from $195,000 for
the three months ended January 31, 1999 to $224,000 for the three months ended
January 31, 2000. Beginning in April 1998, Engage commenced the recognition of
compensation expense relating to approximately 346,160 shares of CMGI common
stock held in escrow to be issued to the employee stockholders of Accipiter who
satisfy a two-year employment continuation provision. Additionally, beginning in
February 1999, Engage began to recognize stock compensation costs 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. During the
first quarter of fiscal 2000, as the result of the termination of

15.
<PAGE> 16
employment of certain employees prior to the vesting of their stock options, the
Company reversed $122,000 of stock compensation expense that had been recorded
in prior quarters and ceased monthly stock compensation expense recognition
related to the terminated employees.

EQUITY IN LOSS OF JOINT VENTURE

Equity in loss of Engage's 46% interest in a Japanese joint venture was
$150,000 for the three months ended January 31, 1999, compared to $374,000 for
the three months ended January 31, 2000. The increase in Engage's share of
losses in the joint venture represents the joint venture's continued investment
in expanding its sales and marketing presence within its market.

INTEREST INCOME

Interest income was $1.4 million for the three months ended January 31,
2000. During the three months ended January 31, 2000, interest income was
primarily earned from investing the proceeds of the Company's initial public
offering completed in July 1999.

INTEREST EXPENSE

Interest expense was $179,000 for the three months ended January 31, 1999,
compared to $167,000 for the three months ended January 31, 2000. During fiscal
1998, Engage entered into an arrangement with CMGI which required Engage to
accrue interest on intercompany debt at a rate of 7% per annum. During the three
months ended January 31, 1999, interest expense was recorded on this debt, all
of which was converted into equity in connection with Engage's initial public
offering in July 1999. During the three months ended January 31, 2000, interest
expense was recorded on the Company's long-term debt and capital lease
obligations. Interest expense for the three months ended January 31, 2000 was
primarily related to interest paid on long-term debt and capital lease
obligations maintained by AdKnowledge.

COMPARISON OF THE SIX MONTHS ENDED JANUARY 31, 1999 AND JANUARY 31, 2000

REVENUE

Total revenue increased from $4.3 million for the six months ended January
31, 1999 to $21.1 million for the six months ended January 31, 2000. Revenue
from the Company's product offerings accounted for approximately 84% of total
revenue for the six months ended January 31, 1999, compared to 87% of total
revenue for the six months ended January 31, 2000. Approximately 44% of the
increase in total revenue was the result of inclusion of I/PRO's and
AdKnowledge's revenue in product revenue for the six months ended January 31,
2000. The remainder of the increase in total revenue was the result of an
increase in revenues from products available in both periods, and to a lesser
extent, from new product releases and an increase in services and support
revenue.

Product revenue increased from $3.6 million for the six months ended
January 31, 1999 to $18.4 million for the six months ended January 31, 2000.
Approximately 50% of this increase was the result of inclusion of I/PRO's and
AdKnowledge's revenue in the quarter ended January 31, 2000. The remainder of
the increase was the result of an increase in revenues from products available
in both periods, and to a lesser extent, from new product releases.

Service and support revenue increased from $677,000 for the six months
ended January 31, 1999 to $2.7 million for the six months ended January 31,
2000. The 299% increase in year to date revenue was the result of increased
software support and maintenance revenue resulting from increased product
revenue and two large consulting arrangements during the six months ended
January 31, 2000.

COST OF REVENUE

Cost of product revenue increased from $1.5 million for the six months
ended January 31, 1999 to $10.6 million for the six months ended January 31,
2000. Of the total dollar increase, $5.2 million was due to the I/PRO and
AdKnowledge acquisitions and the resultant six and two months, respectively, of
incremental operational costs associated with I/PRO's and AdKnowledge's product
offerings. In addition, a significant portion of the increase was associated
with Engage's AdBureau, Engage Knowledge and AudienceNet products. Finally, a
portion of the

16.

<PAGE> 17
increase was the result of increased amortization costs resulting from the
amortization of developed technology acquired in the I/PRO and AdKnowledge
acquisitions. Cost of product revenue was 43% of product revenue for the six
months ended January 31, 1999, compared to 58% of product revenue for the six
months ended January 31, 2000. The increase in cost of product revenue as a
percentage of product revenue was the result of the inclusion of costs and
revenues from I/PRO and AdKnowledge. The decrease in margins was primarily
impacted by lower margins associated with AdKnowledge product sales.

Cost of service and support revenue increased from $1.5 million for the
six months ended January 31, 1999 to $2.9 million for the six months ended
January 31, 2000. Cost of service and support revenue was 224% of service and
support revenue for the six months ended January 31, 1999, compared to 108% of
service and support revenue for the six months ended January 31, 2000. Cost of
service and support revenue for the six months ended January 31, 1999 and 2000
exceeded the related revenue due to Engage's continued investment in service and
support staff in advance of anticipated product sales. As a percentage of
service and support revenue, the improvement in costs reflects the continued
growth of the Company's service and support business and the spreading of
fixed costs over a growing revenue base.

OPERATING EXPENSES

IN-PROCESS RESEARCH AND DEVELOPMENT. In-process research and development
expense was $2.3 million for the six months ended January 31, 2000, resulting
from the AdKnowledge acquisition.

RESEARCH AND DEVELOPMENT. Research and development expenses increased from
$3.8 million for the six months ended January 31, 1999 to $7.9 million for the
six months ended January 31, 2000, a 108% increase. This increase was due to the
I/PRO and AdKnowledge acquisitions and the inclusion of their operations for the
six months ended January 31, 2000, and to a lesser extent, the expansion of the
Company's research and development activities. These increases were offset
somewhat by a decrease in spending on the translation of Engage's products into
certain foreign languages, projects which were substantially completed during
fiscal 1999. Research and development expenses were 89% of total revenue for the
six months ended January 31, 1999, compared to 37% of total revenue for the six
months ended January 31, 2000. This decrease is the direct result of the
increase in year to date revenue.

SELLING AND MARKETING. Selling and marketing expenses increased from $3.7
million for the six months ended January 31, 1999 to $18.1 million for the six
months ended January 31, 2000, a 388% increase. The increase in costs was
primarily due to increases in product advertising costs resulting from the
release of several new products subsequent to January 31, 1999. In addition, a
portion of the increase was related to the continuing expansion of Engage's
sales force, as well as approximately $4.3 million resulting from the I/PRO and
AdKnowledge acquisitions, and the inclusion of their operations for the six and
two months, respectively. Finally, a portion of the increase is due to continued
expansion in international markets and the costs of maintaining sales and
marketing efforts in foreign markets. Overall, including the acquisition of
I/PRO and AdKnowledge, Engage's sales and marketing staff increased 392% from
January 31, 1999 to January 31, 2000. Sales and marketing expenses were 87% of
total revenues for the six months ended January 31, 1999, compared to 86% for
the six months ended January 31, 2000. The decrease as a percentage of revenue
is the result of the increase in revenue during the period, offset somewhat by
costs incurred in the Company's continued efforts to increase market awareness
of the Company's products.

GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $1.3 million for the six months ended January 31, 1999 to $5.0 million for
the six months ended January 31, 2000, a 279% 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 and
AdKnowledge's operations for the six months ended January 31, 2000. General and
administrative costs were 31% of total revenue for the six months ended January
31, 1999, compared to 24% for the six months ended January 31, 2000. The
decrease as a percentage of total revenue is the result of spreading fixed costs
over a larger revenue base.

17.

<PAGE> 18

AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of intangible
assets increased from $2.1 million for the six months ended January 31, 1999 to
$13.7 million for the six months ended January 31, 2000. The increase was due to
the acquisition of I/PRO in April 1999 and AdKnowledge in December 1999.
Intangible assets from the I/PRO acquisition are being amortized over three to
five years, while intangible assets from the AdKnowledge acquisition are being
amortized over three years.

STOCK COMPENSATION. Stock compensation costs decreased from $391,000 for
the six months ended January 31, 1999 to $326,000 for the six months ended
January 31, 2000. During the six months ended January 31, 2000, as the result of
the termination of employment of certain employees prior to the vesting of their
stock options, the Company reversed $122,000 of stock compensation expense that
had been recorded in prior quarters. As such, for the six months ended January
31, 2000, the increase in stock compensation costs resulting from the stock
options issued in February 1999 was somewhat offset by the reversal of
compensation costs recorded in prior periods.

EQUITY IN LOSS OF JOINT VENTURE

Equity in loss of Engage's 46% interest in a Japanese joint venture was
$160,000 for the six months ended January 31, 1999, compared to $700,000 for the
six months ended January 31, 2000. The increase in Engage's share of losses in
the joint venture represents the joint venture's continued investment in
expanding its sales and marketing presence within its market.

INTEREST INCOME

Interest income was $2.8 million for the six months ended January 31,
2000. During the six months ended January 31, 2000, interest income was
primarily earned from investing the proceeds of the Company's initial public
offering completed in July 1999.

INTEREST EXPENSE

Interest expense was $339,000 for the six months ended January 31, 1999,
compared to $179,000 for the six months ended January 31, 2000. During fiscal
1998, Engage entered into an arrangement with CMGI which required Engage to
accrue interest on intercompany debt at a rate of 7% per annum. During the six
months ended January 31, 1999, interest expense was recorded on this debt, all
of which was converted into equity in connection with Engage's initial public
offering in July 1999. During the six months ended January 31, 2000, interest
expense was recorded on the Company's long-term debt and capital lease
obligations. Interest expense for the six months ended January 31, 2000 was
primarily related to interest paid on long-term debt and capital lease
obligations maintained by AdKnowledge.

LIQUIDITY AND CAPITAL RESOURCES

The Company's cash and cash equivalents decreased from $112.0 million at
July 31, 2000 to $44.0 million at January 31, 2000, primarily the result of
investing $42.2 million in available-for-sale securities and investing $2.0
million in a strategic partner of the Company. The Company recorded the $2.0
million investment at cost, and has classified the investment within Other
Assets. In addition, a portion of the decrease is the result of $25.0 million
used to fund operating activities and $2.1 used to acquire property and
equipment. Historically, the Company has funded its operations and capital
expenditures through funds received from CMGI and since its initial public
offering in July 1999, from the proceeds of the initial public offering.

The Company has experienced a substantial increase in its expenditures
since inception consistent with its growth in operations and staffing. The
Company anticipates that expenditures will continue to increase for the
foreseeable future as the Company accelerates the growth of its business.
Additionally, the Company will continue to evaluate investment opportunities in
businesses that management believes will complement its technologies and
marketing strategies.

Assuming the closing of the acquisitions of Adsmart and Flycast, the
Company currently anticipates that its available cash resources will only be
sufficient to meet its anticipated needs for working capital and capital
expenditures for approximately the next 3-4 quarters. Included in this estimate
is the payment of approximately $4.7 million of fees associated with the
acquisitions of Adsmart and Flycast. Therefore, the Company will need to raise
additional funds in order to fund operations. In addition, the Company may
require additional funding in order to fund more rapid

18.

<PAGE> 19
expansion, to develop new or enhance existing services or products, to respond
to competitive pressures or to acquire complementary products, businesses or
technologies. The Company believes that additional external financing will be
available through credit facilities or 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 the Company's
stockholders will be reduced and its stockholders may experience dilution of
their interest in the Company. If adequate funds are not available or are not
available on acceptable terms, the Company's ability to continue as a going
concern, to fund its expansion, take advantage of unanticipated opportunities,
develop or enhance services or products or otherwise respond to competitive
pressures may be significantly limited.

FOREIGN OPERATIONS

The results of the Company's international operations are subject to
currency fluctuations. As of January 31, 2000, the Company had subsidiaries in
the United Kingdom, Germany and Australia, and had a joint venture in Japan. To
date, the Company's 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 the Company's financial condition and results of
operations will not be adversely affected by exchange rate fluctuations.

YEAR 2000 COMPLIANCE

Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, many companies' software and computer systems
may need to be upgraded or replaced in order to comply with these "Year 2000"
requirements or risk system failure or miscalculations causing disruptions of
normal business activities. The Company has not experienced any material Year
2000 problems or disruptions.

STATE OF READINESS

The Company completed its assessment of the Year 2000 readiness of its
operating, financial and administrative systems, including the hardware and
software that support the Company's systems.

For its currently marketed software products, the Company has completed
its Year 2000 compliance testing efforts and believes that its products are Year
2000 compliant in all material respects. The Company also conducted less
extensive testing of older versions of its products. While the Company is not
aware of any material respect in which its older products are not Year 2000
compliant, it has offered customers using older products the option to upgrade
to current versions at no additional charge. The Company also tested its
internal and third party provided systems that are used to deliver customer
services.

COSTS

At January 31, 2000, the Company had spent approximately $1.5 million on
Year 2000 compliance issues and does not expect to incur any significant
additional expenses in connection with identifying, evaluating and addressing
any future Year 2000 compliance issues. Most of the Company's expenses were
related to the operating costs associated with time spent by employees and
consultants in the evaluation process and Year 2000 compliance matters and costs
to replace non-compliant equipment.

19.
<PAGE> 20

RISKS

The Company is not currently aware of any Year 2000 compliance problems
relating to its products or systems that would have a material adverse effect on
its business, financial condition and results of operations, without taking into
account the Company's efforts to avoid or fix such problems. There can be no
assurance that the Company will not discover Year 2000 compliance problems in
its products or systems that will require substantial revision. In addition,
there can be no assurance that third-party software, hardware or services
incorporated into the Company's material systems will not need to be revised or
replaced, all of which could be time-consuming and expensive. The failure of the
Company to fix or replace its internally developed proprietary software or
third-party software, hardware or services on a timely basis could result in
lost revenue, increased operating costs, the loss of customers and other
business interruptions, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations. Moreover, the
failure to adequately address Year 2000 compliance issues in its internally
developed proprietary software could result in claims of mismanagement,
misrepresentation or breach of contract and related litigation, which could be
costly and time-consuming to defend.

The Company is heavily dependent on NaviSite, a major third party vendor
and affiliate, to provide outsourced data services. A significant Year 2000
related disruption of the outsourced data services that NaviSite provides to the
Company could cause customers to consider canceling services with the Company or
cause an unmanageable burden on the Company's technical support, which in turn
could materially and adversely affect the Company's business, financial
condition and results of operations.

To date, the Company has not experienced any significant Year 2000
disruptions and estimated Year 2000 expenses approximated the actual costs
incurred. The Company does not expect to incur any significant additional
expenses related to the Year 2000 issue. The Company continues to monitor its
systems for Year 2000 issues but is not currently aware of any material Year
2000 problems.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The carrying values of financial instruments including cash and cash
equivalents, available-for-sale securities, accounts receivable, accounts
payable and notes payable, approximate fair value because of the short maturity
of these instruments.

The Company has historically had very low exposure to changes in foreign
currency exchange rates, and as such, has not used derivative financial
instruments to manage foreign currency fluctuation risk. As the Company expands
globally, the risk of foreign currency exchange rate fluctuation may increase.
Therefore, in the future, the Company may consider utilizing derivative
instruments to mitigate such risks.

20
<PAGE> 21

<PAGE> 22

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

In November 1999, four former employees exercised options to purchase an
aggregate of 30,615 shares of the Company's Common Stock for an aggregate
purchase price of $55,285. No underwriters were involved in the foregoing offers
and sales of securities. Such offers and sales were made in reliance upon an
exemption from the registration provisions of the Securities Act of 1933, as
amended (the "Securities Act"), set forth in Rule 701 under the Securities Act.

On December 22, 1999, in connection with the Company's acquisition of
AdKnowledge Inc., the Company issued 5,168,106 shares of Common Stock as
consideration for acquiring all of the capital stock of AdKnowledge 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 Rule 3(a)(10) under the
Securities Act.

In connection with the Company's initial public offering, the Company
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 the Company's Registration
Statement on Form S-1 (File No. 333-78015) effective.

The following table sets forth the Company's cumulative use of proceeds as
of January 31, 2000:

<TABLE>
(IN THOUSANDS)
<S> <C>

Construction of plant, building and facilities $ --
Purchase and installation of machinery and equipment 2,104
Purchases of real estate --
Acquisition of other businesses --
Repayment of indebtedness --
Working capital 28,096
Temporary investments: cash and cash equivalents 8,539
Temporary investments: available for sale securities 54,016
Temporary investments: 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 the Company's Registration Statement
on Form S-1.

All of the foregoing share information in Item 2 does not reflect the
Company's recently announced two-for-one stock split, to be effected as a 100%
stock dividend. Such stock dividend is payable on April 3, 2000 to all
stockholders of record at the close of business on March 20, 2000.

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

The Company held its Annual Meeting of Stockholders on December 17, 1999,
and the following matters were voted on at that meeting:

1. The election of Edward A. Bennett, Christopher A. Evans, Craig D. Goldman,
Andrew J. Hajducky, III, Fredric D. Rosen, Paul L. Schaut and David S.
Wetherell, each to serve until the next annual meeting of stockholders or
until their successors are duly elected and qualified. The following chart
shows the number of votes cast for or against each director, as well as
the number of abstentions and broker nonvotes:

21.
<PAGE> 23
<TABLE>
<CAPTION>
BROKER
NAME FOR AGAINST ABSTAIN NONVOTE
<S> <C> <C> <C> <C>

Edward Bennett 46,907,980 18,955 N/A N/A
Christopher Evans 46,867,710 59,225 N/A N/A
Craig Goldman 46,867,710 59,225 N/A N/A
Andrew Hajducky 46,868,010 58,925 N/A N/A
Fredric Rosen 46,867,410 59,525 N/A N/A
Paul Schaut 46,867,910 59,025 N/A N/A
David Wetherell 46,868,110 58,825 N/A N/A
</TABLE>

2. The proposal to approve the interested party transaction between the
Company and CMGI, pursuant to which CMGI will receive shares of the
Company's Common Stock in connection with CMGI's contribution of stock of
AdKnowledge Inc. The following chart shows the number of votes cast for or
against the proposal, as well as the number of abstentions and broker
nonvotes:
BROKER
FOR AGAINST ABSTAIN NONVOTE

44,039,090 598,742 35,373 2,253,730

3. The proposal to ratify the selection of KPMG LLP as the Company's
independent auditors for the fiscal year ended July 31, 2000. The
following chart shows the number of votes cast for or against the
proposal, as well as the number of abstentions and broker nonvotes:

BROKER
FOR AGAINST ABSTAIN NONVOTE

46,916,199 3,225 7,511 N/A

All of the foregoing share information in Item 4 does not reflect the
Company's recently announced two-for-one stock split, to be effected as a 100%
stock dividend. Such stock dividend is payable on April 3, 2000 to all
stockholders of record at the close of business on March 20, 2000.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

10.1* Agreement and Plan of Merger and Contribution by and among
CMGI, Inc., Adsmart Corporation, Flycast Communications
Corporation, FCET Corp. and the Registrant, dated January 19,
2000.

10.2* Lease Agreement by and between TST 555/575 Market, L.L.C. as
landlord and the Registrant as tenant, dated December 22,
1999.

27.2* Financial Data Schedule

*Previously filed with the Company's Form 10-Q for the period ended
January 31, 2000 and incorporated herein by reference.

(b) Reports on Form 8-K

On January 6, 2000, the Company filed a report on
Form 8-K announcing that on December 22, 1999, the Company had
completed its acquisition of AdKnowledge Inc.

On January 25, 2000, the Company filed a report on
Form 8-K announcing that on January 19, 2000, the Company and
CMGI, the majority stockholder of the Company, executed an
Agreement and Plan of Merger and Contribution pursuant to
which the Company will acquire Adsmart Corporation and Flycast
Communications Corporation from CMGI.

22.
<PAGE> 24

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in Andover, Massachusetts
on March 16, 2000.

By: /s/ Paul L. Schaut
---------------------------------------
Paul L. Schaut
Chief Executive Officer and President

By: /s/ Stephen A. Royal
---------------------------------------
Stephen A. Royal
Chief Financial Officer and Treasurer
(Principal Accounting and Financial
Officer of the Registrant)

<PAGE> 25

EXHIBIT INDEX

EXHIBIT NO. EXHIBIT
- ----------- -------

10.1* Agreement and Plan of Merger and Contribution by and among
CMGI, Inc., Adsmart Corporation, Flycast Communications
Corporation, FCET Corp. and the Registrant dated January 19,
2000.

10.2* Lease Agreement by and between TST 555/575 Market, L.L.C. as
landlord and the Registrant as tenant, dated December 22,
1999.

27* Financial Data Schedule

*Previously filed with the Company's Form 10-Q for the period ended January
31, 2000 and incorporated herein by reference.