<PAGE>

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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                             ---------------------

                                   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, 2002



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



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

                                  ENGAGE, INC.

<Table>
<S>                                             <C>
                   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)
</Table>

                                 (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)
                             ---------------------
     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 31, 2002 was
approximately $4,437,815.

     The number of shares outstanding of the registrant's Common Stock as of
October 31, 2002 was 48,237,119.

                      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,
2002 are incorporated by reference in Items 10, 11, 12 and 13 of Part III of
this Report.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

                                  ENGAGE, INC.

                    FISCAL YEAR 2002 FORM 10-K ANNUAL REPORT

                               TABLE OF CONTENTS

<Table>
<Caption>
                                                                         PAGE
                                                                         ----
<S>        <C>                                                           <C>
PART I.
Item 1.    Business....................................................    2
Item 2.    Properties..................................................    6
Item 3.    Legal Proceedings...........................................    6
Item 4.    Submission of Matters to a Vote of Security Holders.........    7

PART II.
Item 5.    Market for the Registrant's Common Equity and Related
           Stockholder Matters.........................................    8
Item 6.    Selected Financial Data.....................................    9
Item 7.    Management's Discussion and Analysis of Financial Condition
           and Results of Operations...................................   10
Item 7A.   Quantitative and Qualitative Disclosures About Market
           Risk........................................................   30
Item 8.    Financial Statements and Supplementary Data.................   31
Item 9.    Changes in and Disagreements with Accountants on Accounting
           and Financial Disclosure....................................   69

PART III.
Item 10.   Directors and Executive Officers of the Registrant..........   69
Item 11.   Executive Compensation......................................   69
Item 12.   Security Ownership of Certain Beneficial Owners and
           Management..................................................   69
Item 13.   Certain Relationships and Related Transactions..............   69

PART IV.
Part 14.   Exhibits, Financial Statement Schedules and Reports on Form
           8-K.........................................................   69
           Signatures..................................................   71
           Certifications..............................................   72
</Table>

                                        1
<PAGE>

                                    PART 1.

ITEM 1.  BUSINESS

OVERVIEW

     Engage is a leading provider of Advertising, Marketing and Promotion
Management ("AMP") software solutions for retailers, newspapers, agencies and
Fortune 1000 corporations. Our solutions combine workflow automation with
digital asset management technology to streamline the creation, approval,
production and re-purposing of advertising and other marketing material. We have
delivered software solutions to a range of customers from major retailers and
catalogers to G2000 marketers and newspaper display ad production departments,
all of whom recognized the need to more efficiently manage digitized product
content in order to produce advertising and promotional materials quicker than
ever before, more cost-effectively, and in greater quantities without
sacrificing quality.

     In the past two years, we have undertaken a number of restructuring
activities and implemented significant cost saving measures in an effort to
bring costs in line with revenue and strengthen our financial performance. Since
August 1, 2000, we have reduced our employee headcount from 1,116 to 172 at July
31, 2002. We have discontinued the operations of our Media segment, sold the
assets of our internet advertising business, have closed several of our offices,
terminated leases and consolidated operations as our on-going business needs
have allowed. As a result of these efforts we have incurred restructuring
charges from continuing operations of approximately $2.4 million and $2.3
million for the fiscal years ended July 31, 2001 and 2002, respectively.

     In September 2002, we completed a transaction with CMGI, Inc. ("CMGI")
pursuant to which all outstanding debt to CMGI (approximately $65 million) was
cancelled and all of CMGI's equity holdings in Engage (approximately 148,417,801
shares of common stock) were transferred back to Engage and cancelled. In
exchange, we paid $2.5 million in cash to CMGI, signed a $2.0 million
non-interest bearing secured promissory note due in September 2006 that is
secured by the assets of the Company, and issued a warrant to CMGI to purchase
up to 9.9% of our outstanding common stock at the time of exercise at an
exercise price of $.045 per share. Additionally, we agreed to pay CMGI up to an
additional $6.0 million in future earn-out payments based upon our quarterly
operating income (defined as Engage's operating income/loss plus the sum of (i)
amortization expense and impairment charges and (ii) amortization of stock-based
compensation, as reported in our financial statements for the fiscal quarter in
question included in the applicable quarterly or annual (as applicable) report
filed with the Securities and Exchange Commission for such quarter) starting
with the first quarter of fiscal 2004 (the quarter ending October 31, 2003).
Under the terms of the earn-out payment and promissory note, if payments under
the earn-out agreement exceed $4.0 million, amounts due under the $2.0 million
promissory note will be cancelled for each dollar of earn-out over the $4.0
million, such that if total earn-out payments reach $6.0 million, the promissory
note will be cancelled in full.

     In October 2002, we consummated a transaction whereby we sold substantially
all of the assets of our Internet advertising business to Accipiter Solutions,
Inc., a company formed by certain former employees of our Internet advertising
business unit. As part of the transaction, Accipiter Solutions issued us a
warrant to purchase up to 10% of the shares of Accipiter Solutions' common stock
outstanding at the time of exercise at a purchase price of $.001 per share
assumed certain liabilities of ours and agreed to pay us up to $500,000 in the
form of future earn-out payments. We do not anticipate the resulting gain or
loss from this transaction will have a material impact on our financial
condition or results of operations.

OUR SOLUTIONS

     Statistics show that retailers can achieve greater overall revenue from
customers that are able to interact with the retailers through various channels.
Accordingly, we believe that retailers will benefit if they are able to conduct
personalized communications and transactions with customers across multiple
sales channels. Channels such as the Internet give the marketer the opportunity
to address ever-smaller groups, ultimately down to an individual. But while
these new channels provide greater opportunities, outdated advertising

                                        2
<PAGE>

production processes have stifled marketers' ability to produce the necessary
promotional market versions quickly enough to take advantage of them.
Traditionally, more versions meant longer lead times.

     The advertising market has become more competitive than ever and a growing
number of promotions through print, electronic and Internet media are competing
for consumer attention. To beat the competition, the retailer not only has to
deliver more targeted promotions, but also needs to deliver them at a rapid
pace. Time to market can make or break the success of a campaign.

     We believe the key to success in this challenging environment is to build
an infrastructure that is capable of supplying the promotional content to the
right market in a timely manner. Engage's advertising production solutions
combine digital asset management with automated workflows to streamline the
production of advertising and promotional materials.

     The Engage solutions are built on our flagship ContentServer platform first
introduced in 1994. This production-proven platform is now in its seventh
iteration with the introduction, this year, of ContentServer 7.0. This latest
platform version allows us to offer packaged versions of our solutions, thus
making the technology accessible to a wider audience than ever before.

PRODUCTS AND SERVICES

     Our revenue is currently derived from two principal sources: software
products and professional services. Engage currently offers four packaged
vertical software solutions:

     - Engage for Retailers

     - Engage for Newspapers

     - Engage for Agencies

     - Engage for Corporations

     Our solutions support business system integrations, workflows, asset types,
reports, and deadline alerts that are specific to each industry. Our solutions
contain additional features such as: Internet-based approvals that allow
previously time-consuming paper-based processes to be carried out in real time;
promotional planning that bridges the gap between the merchandiser's promotional
planning process and the marketer's production planning and delivery, allowing
retailers to deliver more market versions, faster; and digital pre-flighting
that automates the once time-consuming manual process for newspapers to accept
digital ads, check for inconsistencies and match the ad to the booking order.

     Engage's solutions are built using industry-standard components from the
leading technology suppliers to ensure interoperability and compatibility with
existing IT infrastructures. Oracle and Sybase databases, together with Sun
Microsystems hardware, allows for scalability from a small workgroup
configuration to a fully redundant enterprise system with several hundred users.
Client support is available on both Macintosh and Windows platforms or via the
Web.

     Our systems are tightly integrated with leading graphical arts applications
such as Quark Xpress and Adobe InDesign. An Engage solution does not replace
these tools; it improves the process and provides an infrastructure that allows
operators using those tools to be more productive.

     We provide an extensive range of professional services to help our
customers get the most from their Engage solution -- from initial design through
ongoing implementation. Our extensive experience with digital asset management
and workflow automation solutions enables us to help our clients achieve high
levels of efficiency, performance and satisfaction in today's sophisticated
enterprise environments. Engage professional services provide design and
implementation, training, and project management services. They also help
customers integrate our products into the customer's existing technology
infrastructure. We also provide maintenance and support services to software
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.
                                        3
<PAGE>

     For the fiscal years ended July 31, 2000, 2001 and 2002, revenue from
software products and professional services was $46.8 million, $43.3 million and
$21.4 million, respectively. For the fiscal years ended July 31, 2000, 2001 and
2002 we spent $11.3 million, $11.8 million and $8.3 million, respectively, on
research and development.

SALES AND MARKETING

     As of July 31, 2002, our sales and marketing organization consisted of 50
employees. We sell our software products primarily through a direct sales force
operating out of our Andover, Massachusetts headquarters and our London-based
U.K. subsidiary. We employ both sales representatives and sales engineers. Sales
representatives handle incoming calls, help generate qualified leads and
generally advance the sales process. Sales 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 territory.

     An important element of our sales strategy is to build business
relationships with third parties to assist us in marketing and selling our
products. In April 2002, we hired an experienced strategic alliance executive in
a newly created position of Vice President of Partnerships and Alliances to head
a team tasked with strengthening and growing our third party relationships. 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 marketing programs, including public relations, direct marketing
campaigns, online advertisements, seminars, trade shows, webinars and ongoing
customer communication programs.

OPERATING INFRASTRUCTURE

     Our data center operations are 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 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 digital asset management and automated workflow solutions 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 solution. We compete primarily on the basis of product
features and performance, quantifiable return on investment, level of service
and, to a lesser extent, on price. Our belief is that the combination of digital
asset management, workflow and vertical applications is the basis of our
competitive advantage. The primary competitors to our advertising production
solutions are digital asset management software, digital pre-press services,
"boutique" promotion solutions companies and catalog management software.

                                        4
<PAGE>

     A number of our current competitors have longer operating histories,
greater name recognition and substantially greater financial, technical and
financial resources than we do. Some of 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.

CORPORATE HISTORY

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

     From our initial public offering in July 1999 through September 9, 2002, we
operated as a majority-owned subsidiary of CMGI. In September 2002, we completed
a transaction with CMGI pursuant to which all outstanding debt to CMGI
(approximately $65 million) was cancelled and all of CMGI's equity holdings in
Engage (approximately 148,417,801 shares of common stock) were transferred back
to the Company and cancelled.

RECENT PRODUCT DEVELOPMENTS

     We made the following recent product announcements:

     - In February 2002, we announced the release of ApprovalServer 1.2, a new
       version that provides enhancements for a more automated and streamlined
       online approval process.

     - In April 2002, we rolled out ContentServer 7.0, the enterprise platform
       version that enabled us to offer packaged, market version solutions for
       retailers, newspapers, agencies and Fortune 1000 corporations.

     - In June 2002, we announced our new packaged industry solutions; Engage
       for Retailers, Engage for Newspapers, Engage for Agencies, and Engage for
       Corporations.

     - In September 2002, we unveiled PromoPlanner 2.0. PromoPlanner is an
       integral component of the Engage for Retailers advertising production
       system.

EMPLOYEES

     As of July 31, 2002, we had 172 employees; of these employees, 43 were in
research and development, 59 were in customer support and operations, 50 were in
selling and marketing, and 20 were in administration. Of these 172 employees,
125 employees were located in the United States and 47 employees were located
internationally.

     We believe that our future success depends on our ability to attract and
retain 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 also utilize offshore software developers, which gives us access
to 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.

SEASONALITY

     We believe that our business is subject to minor seasonal fluctuations. In
the third calendar quarter, potential customers in retail marketing focus their
attention on holiday advertising planning. And, in the fourth calendar quarter,
potential customers within the newspaper industry typically focus their
attention on holiday advertising. As a result, few sales opportunities occur in
the newspaper industry in the fourth calendar quarter of the year. Our revenue
could be materially reduced by a decline in the economic prospects of marketers
or in

                                        5
<PAGE>

the economy in general, which could alter current or prospective customers'
spending priorities or budget cycles or extend our sales cycle.

ITEM 2. PROPERTIES

     Our properties consist of leased office facilities for sales and marketing,
research and development, consulting, and administrative personnel. Through
September 2002, our properties included approximately 103,000 square feet of
space located in Andover, Massachusetts that we sublet from CMGI and used as our
corporate offices. The sublease was to expire in October 2007. In September
2002, in connection with our transaction with CMGI, we amended the sublease, to
reduce the space to 36,000 square feet and change the termination date to
December 31, 2002 with an option to renew until June 2003. Currently we are
attempting to lease space for our corporate offices beginning in January 2003.
We expect to be able to find sufficient space on commercially reasonable terms.

     We also lease other office facilities in various locations in the United
States and abroad. We believe that our facilities exceed our current needs and
we are working to reduce our facility obligations to better match our expected
future staffing levels. See note 9 of notes to our consolidated financial
statements for information regarding our lease obligations.

ITEM 3. LEGAL PROCEEDINGS

     On or about September 6, 2001, the first of several putative class action
complaints was filed in the United States District Court for the Southern
District of New York naming us, several of our present and former officers and
directors and the underwriters for our July 20, 1999 initial public offering as
defendants. Purportedly filed on behalf of those persons who purchased our
common stock between July 19, 1999 and December 6, 2000, the complaints allege
violations of the Securities Act of 1933 and the Securities Exchange Act of
1934.

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

     By order dated January 15, 2002, the District Court consolidated the
foregoing actions. On April 19, 2002, the plaintiffs filed a Consolidated
Amended Class Action Complaint.

     Motions to dismiss the Consolidated Class Action Complaint have been filed
on behalf of the underwriter defendants and the issuer defendants.

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

     On February 26, 2002, a putative class action lawsuit was filed in the
Court of Chancery of the State of Delaware in New Castle County naming Engage,
each member of our Board of Directors, and CMGI, our majority stockholder, as
defendants. The suit alleges that CMGI manipulated Engage to enter into
transactions that unfairly favor CMGI and that CMGI and Engage's directors have
breached their respective fiduciary duties to Engage and Engage's minority
stockholders by: (i) approving and entering into certain secured convertible
notes that Engage issued to CMGI in October 2001 on terms that were unfair to
Engage and Engage's minority stockholders; (ii) approving and recommending to
Engage stockholders the approval of a proposal in our Proxy Statement dated
February 20, 2002 (the "Proxy Statement") relating to the potential issuance of
our common stock in connection with conversion of these notes; and (iii)
approving and soliciting the approval of Engage stockholders of the proposals in
the Proxy Statement relating to three proposed reverse stock splits of our
common stock in order to avoid delisting from Nasdaq. The suit also alleges that
certain
                                        6
<PAGE>

disclosures in the Proxy Statement with respect to the foregoing proposals were
materially misleading and incomplete.

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

     On May 22, 2002, plaintiffs filed an Amended Complaint reiterating the
claims previously alleged and adding an additional allegation that a merger
proposal announced on May 21, 2002 whereby CMGI would acquire all outstanding
shares of Engage common stock not already owned by CMGI is a coercive
transaction that allegedly does not satisfy the entire fairness standard under
Delaware law.

     On May 21, 2002, two related putative class action lawsuits were filed in
the Court of Chancery for the State of Delaware, challenging the fairness of the
CMGI-Engage merger proposal announced on May 21, 2002. The suits seek injunctive
relief and/or rescission, disgorgement of any profits received by defendants,
attorneys' fees and other unspecified damages.

     The foregoing actions subsequently were consolidated. On or about October
18, 2002, the parties to the litigation filed a Stipulation and Order of
Dismissal, dismissing the consolidated action with prejudice. In connection with
the stipulation of dismissal, the parties are negotiating the reimbursement of a
portion of plaintiff's counsel's fees. We do not believe that the resolution of
this issue will have a material impact on our financial condition.

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

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, 2002.

                                        7
<PAGE>

                                    PART II.

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

MARKET INFORMATION

     From our initial public offering in July 1999 through August 14, 2002 our
common stock was traded on the Nasdaq National Market under the symbol "ENGA."
On August 15, 2002, our common stock was delisted from the Nasdaq National
Market and began trading on the Over-the-Counter Bulletin Board ("OTCBB"), under
the symbol "ENGA." We appealed the delisting decision to the Nasdaq Listing and
Hearing Review Council, but on October 28, 2002, we received the Listing
Council's decision affirming the delisting decision. The following table sets
forth, for the periods indicated, the high and low sale prices per share for our
common stock, as reported by the Nasdaq National Market and the OTCBB, for each
quarterly period within our two most recent fiscal years.

<Table>
<Caption>
                                                               HIGH     LOW
                                                              ------   -----
<S>                                                           <C>      <C>
Fiscal 2001:
  Quarter ended October 31, 2000............................  $15.00   $3.19
  Quarter ended January 31, 2001............................    4.69    0.63
  Quarter ended April 30, 2001..............................    2.06    0.44
  Quarter ended July 31, 2001...............................    1.50    0.31

Fiscal 2002:
  Quarter ended October 31, 2001............................  $ 0.55   $0.16
  Quarter ended January 31, 2002............................    0.85    0.20
  Quarter ended April 30, 2002..............................    0.40    0.20
  Quarter ended July 31, 2002...............................    0.24    0.04
</Table>

STOCKHOLDERS

     As of November 8, 2002, there were approximately 1,060 stockholders of
record of our common stock and, according to our estimates, approximately 19,000
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.

     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.

RECENT SALES OF UNREGISTERED SECURITIES

     In September 2002, in connection with the transaction with CMGI in which
CMGI cancelled all debt we owed to CMGI and CMGI transferred all equity in
Engage owned by CMGI back to Engage, we issued to CMGI a warrant to purchase up
to 9.9% of our outstanding common stock as of the time of exercise. The warrant
is exercisable at an exercise price of $.045 per share. No person acted as an
underwriter with respect to this transaction. We relied on Section 4(2) of the
Securities Act of 1933, as amended, as no public offering was involved.

                                        8
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

     The following table sets forth our selected consolidated condensed
financial information for the five years in the period ended July 31, 2002. The
following selected consolidated condensed financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and notes
to those statements included elsewhere in this report. The following
consolidated condensed financial data includes the results of operations of
prior acquisitions. In 1998, we acquired Accipiter and in 2000, we acquired
MediaBridge. The acquisition of Accipiter has been accounted for as a
combination of entities under common control (i.e. "as-if pooling").
Accordingly, the results of operations of Accipiter have been included in our
consolidated results of operations beginning on the date it was acquired by
CMGI, April 1998. See note 4 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>
                                                         YEAR ENDED JULY 31,
                                      ---------------------------------------------------------
                                        1998       1999        2000         2001         2002
                                      --------   --------   ----------   -----------   --------
                                                (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                   <C>        <C>        <C>          <C>           <C>
Revenue.............................  $  2,217   $ 13,397   $   46,808   $    43,348   $ 21,407
Cost of revenue.....................     2,238      7,173       10,363        28,523     27,818
Operating loss......................   (22,905)   (21,302)     (29,178)     (238,977)   (90,351)
Loss from continuing operations.....   (13,837)   (22,465)     (25,022)     (235,028)   (92,350)
Loss from discontinued operations...    (6,687)   (24,162)    (352,848)   (1,025,268)      (602)
Gain (loss) from disposal of
  discontinued operations...........        --         --           --       (16,707)     1,056
Net loss............................   (20,524)   (46,627)    (377,870)   (1,277,003)   (91,896)

BASIC AND DILUTED NET LOSS PER SHARE
  DATA:
Continuing operations...............        --         --           --         (1.21)     (0.47)
Discontinued operations.............        --         --           --         (5.26)        --
Disposal of discontinued
  operations........................        --         --           --         (0.09)        --

PRO FORMA BASIC AND DILUTED LOSS PER
  SHARE DATA:
Continuing operations...............     (0.40)     (0.29)       (0.17)           --         --
Discontinued operations.............     (0.20)     (0.32)       (2.44)           --         --

Total assets........................    24,452    207,041    1,132,897       132,837     27,147
Short-term debt.....................    12,328     45,156        6,660         4,499     61,986
Long-term obligations...............        12      1,944       32,315        41,266        417
Stockholders' (deficit) equity......     7,190    127,783    1,018,328        27,954    (56,022)
</Table>

                                        9
<PAGE>

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

OVERVIEW

     Engage sells software that enables publishers, advertisers and merchants to
streamline the creation, approval, production and re-purposing of advertising
and other marketing material.

     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.

     In the past two years, we have undertaken a number of restructuring
activities and implemented significant cost saving measures in an effort to
bring costs in line with revenue and strengthen our financial performance. Since
August 1, 2000, we have reduced our employee headcount from 1,116 to 172 at July
31, 2002. We have discontinued the operations of our Media segment, sold the
assets of our Internet advertising business, have closed several of our offices,
terminated leases and consolidated operations as our on-going business needs
have allowed. As a result of these efforts, we have incurred restructuring
charges from continuing operations of approximately $2.4 million and $2.3
million for the fiscal years ended July 31, 2001 and 2002, respectively.

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

     In September 2002, we completed a transaction with CMGI pursuant to which
all outstanding debt to CMGI (approximately $65 million) was cancelled and all
of CMGI's equity holdings in Engage (approximately 148,417,801 shares of common
stock) were transferred back to Engage and cancelled. In exchange, we paid $2.5
million in cash to CMGI, signed a $2.0 million non-interest bearing secured
promissory note due in September 2006 that is secured by the assets of the
Company, and issued a warrant to CMGI to purchase up to 9.9% of our outstanding
common stock at the time of exercise at an exercise price of $.045 per share.
Additionally, we agreed to pay CMGI up to an additional $6.0 million in future
earn-out payments based upon our quarterly operating income (defined as Engage's
operating income/loss plus the sum of (i) amortization expense and impairment
charges and (ii) amortization of stock-based compensation, as reported in our
financial statements for the fiscal quarter in question included in the
applicable quarterly or annual (as applicable) report filed with the Securities
and Exchange Commission for such quarter) starting with the first quarter of
fiscal 2004 (the quarter ending October 31, 2003). Under the terms of the
earn-out payment and promissory note, if payments under the earn-out agreement
exceed $4.0 million, amounts due under the $2.0 million promissory note will be
cancelled for each dollar of earn-out over the $4.0 million, such that if total
earn-out payments reach $6.0 million, the promissory note will be cancelled in
full.

     In October 2002, we consummated a transaction whereby we sold substantially
all of the assets of our Internet advertising business to Accipiter Solutions,
Inc., a company formed by certain former employees of our Internet advertising
business unit. As part of the transaction, Accipiter Solutions issued us a
warrant to purchase up to 10% of the shares of Accipiter Solutions' common stock
outstanding at the time of exercise at an exercise price of $.001 per share,
assumed certain liabilities of ours and agreed to pay us up to $500,000 in the
form of future earn-out payments. We do not anticipate the resulting gain or
loss from this transaction will have a material impact on our financial
condition or results of operations.

                                        10
<PAGE>

ACQUISITIONS AND DISCONTINUED OPERATIONS

     The following acquisitions were closed during fiscal 2000 and 2001. No
acquisitions were closed during fiscal 2002:

     In June 2000, we acquired a majority ownership position in Engage
Technologies Japan, KK, our joint venture with Sumitomo Corporation. In November
2001, we increased our ownership percentage in Engage Technologies Japan, KK
from 66.6% to 94.0% through the issuance of 1 million shares of common stock
valued at $250,000 to Sumitomo Corporation, a minority stockholder in Engage
Japan, Inc. As of April 2002, we had ceased the operations of Engage Japan, Inc.
We intend to service the Japanese market through both our US and foreign
subsidiaries.

     In September 2000, we acquired MediaBridge Technologies, Inc. a leading
software provider of cross-media, closed loop targeted marketing systems for
total purchase consideration of approximately $219.1 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.

     The following summarizes acquisitions and discontinued operations within
our discontinued Media segment:

     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.

     In April 2000, we acquired Adsmart, an online advertising network, and
Flycast Communications Corporation, a majority-owned subsidiary of CMGI and a
leading provider of Internet direct response advertising solutions for total
purchase consideration of approximately $3.24 billion.

     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.

     In August 2000, we acquired Space Media Holdings Limited, an Internet
marketing network in Asia, for total purchase consideration of approximately
$35.8 million.

     In April 2001, we sold certain assets and liabilities of our I/PRO
subsidiary, recorded a loss of approximately $2.3 million and ceased providing
the I/PRO media services.

     In September 2001, we sold our AdKnowledge customer list and certain
intellectual property to Bluestreak, Inc., a marketing technology company, and
announced our intent to exit our Media segment and terminate all media-related
employees.

     We have classified all Media operations as discontinued operations for all
periods presented.

COMPARISON OF FISCAL 2001 TO FISCAL 2002

 REVENUE, COST OF REVENUE AND GROSS MARGIN

     Revenue is derived primarily through the sale of software licenses and
related software and consulting services. Services and support revenue includes
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, royalties, amortization of developed
technology intangible asset, benefits and allocated overhead of our support and
consulting groups.

     Product revenue decreased from $17.9 million in the year ended July 31,
2001 to $5.8 million in the year ended July 31, 2002, a 68% decrease. The
decrease in product revenue was due primarily to a decrease in license revenue
related to our Internet advertising products, which include our AdManager and
ProfileServer software. Services and support revenue decreased from $25.4
million in the year ended July 31, 2001 to
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<PAGE>

$15.6 million in the year ended July 31, 2002, a 38% decrease. During fiscal
2001, we recognized services and support revenue on two significant consulting
projects. These projects were not fully replaced in fiscal 2002, resulting in
the decline in services and support revenue from fiscal 2001 to fiscal 2002.
Product revenue generated from sales of our Internet advertising products
amounted to $15.1 million and $3.8 million for the years ended July 31, 2001 and
2002, respectively. Services and support revenue generated from sales of our
Internet advertising products amounted to $10.2 million and $6.8 million for the
years ended July 31, 2001 and 2002, respectively. In October 2002, we sold
substantially all of the assets of our Internet advertising business.
Accordingly, revenue from these Internet advertising products, services and
support will cease beginning with the second quarter of our fiscal 2003.

     Product gross margin decreased from 74% in the year ended July 31, 2001 to
(121)% in the year ended July 31, 2002. The decrease in product gross margin is
due to the significant decline in product revenue, the relatively fixed nature
of amortization of developed technology, and an impairment charge of $6.5
million on developed technology recorded during the final quarter of the year
ended July 31, 2002. Additionally, during the year ended July 31, 2001, we
reversed approximately $900,000 in royalties recorded in prior periods upon
settlement of the related obligations. Product gross margin for the fourth
quarter of the year ended July 31, 2002 were negatively impacted by the
impairment charge addressed above. Product revenue represented $17.9 million or
41% of total revenue in the year ended July 31, 2001 as compared to $5.8 million
or 27% of total revenue in the year ended July 31, 2002.

     Services and support gross margin decreased from 6% in the year ended July
31, 2001 to 4% in the year ended July 31, 2002. The decline in services and
support gross margin is due to a decline in services and support revenue during
the year ended July 31, 2002, which was not fully offset by our reduction in
payroll and related costs within our services and support department.
Additionally, service and support gross margin during the final quarter of the
year ended July 31, 2002, as well as for the year ended July 31, 2002 was
negatively impacted by underutilization of our professional services staff due
to a decline in consulting and related projects.

     Sales to two customers accounted for 13% and 12% of our total revenue for
the year ended July 31, 2001. No single customer accounted for more than 10% of
our total revenue for the year ended July 31, 2002. Our customer base consists
of geographically diverse customers concentrated primarily in the newspaper and
retail industries.

     We anticipate that our overall gross margin may increase through moderate
license sales and higher service margins achieved primarily through better
utilization of our professional services staff. In addition, we will no longer
recognize amortization of developed technology due to the impairment in fiscal
2002. Overall, our business strategy is to concentrate our efforts more on the
licensing of our software products, which generally provide higher gross
margins, and to utilize partnership arrangements with various service
organizations that will be trained to provide both services and support on our
installed software base. While we do not anticipate a decline in our services
and support revenue, we would expect to see higher overall margins due to a
greater proportion of our total revenue being generated by license sales.

 OPERATING EXPENSES

     Research and Development.  Research and development expenses consist
primarily of payroll and related costs, consulting and contractor fees,
facility-related costs, such as rent and computer and network services, and
depreciation expense. Our research and development expenses decreased from $11.8
million in the year ended July 31, 2001 to $8.3 million in the year ended July
31, 2002, a 30% decrease. This decrease was primarily due to savings related to
restructuring activities in the latter half of fiscal 2001 and the first quarter
of fiscal 2002, offset somewhat by the inclusion of the MediaBridge results in
the full year ended July 31, 2002. Our average research and development staff
decreased 38% for the year ended July 31, 2002 as compared to the year ended
July 31, 2001. Research and development expenses were 27% of revenue for the
year ended July 31, 2001 compared to 39% of revenue for the year ended July 31,
2002. The increase in research and development expenses as a percentage of
revenue is the result of the decrease in revenue without proportionate savings
in expenses, a reflection of our continued efforts to further develop our
products.

                                        12
<PAGE>

     Selling and Marketing.  Selling and marketing expenses consist primarily of
payroll and related costs, consulting and professional fees, advertising
expenses, costs of attending trade shows, employee travel and depreciation
expense. Selling and marketing expenses decreased from $41.5 million in the year
ended July 31, 2001 to $12.8 million in the year ended July 31, 2002, a 69%
decrease. The decrease was primarily due a decrease in spending on marketing
initiatives, reductions in travel and consulting expenses resulting from cost
control measures and a general reduction in our size during the year ended July
31, 2002, offset by increased costs resulting from our acquisition of
MediaBridge in September 2001. Overall, our average sales and marketing staff
decreased 61% for the year ended July 31, 2002 compared to the year ended July
31, 2001. Sales and marketing expenses were 96% of revenue for the year ended
July 31, 2001 compared to 60% of revenue for the year ended July 31, 2002. The
decrease in sales and marketing costs as a percentage of revenue are the result
of our efforts to cut costs, including payroll costs and marketing expenses, due
to our declining revenues for the year ended July 31, 2002.

     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 decreased from $19.1 million in the year ended July
31, 2001 to $10.6 million in the year ended July 31, 2002, a 44% decrease. The
decrease was primarily due to decreases in payroll and related costs, as well as
a decrease in bad debt expense resulting from $1.8 million of expenses recorded
during the year ended July 31, 2001, compared to a net recovery of $19,000
recorded during the year ended July 31, 2002. These savings were partially
offset by an accrual of approximately $2.6 million related to future estimated
net lease and occupancy costs for certain facilities leased from an affiliate
that are no longer occupied by the company. The accrual is based upon total
future lease costs under the facility lease, less estimated proceeds from
possible subleasing arrangements that the Company may be able to enter into
during future periods. Overall, our average general and administrative staff
decreased 55% for the year ended July 31, 2002 as compared to the year ended
July 31, 2001. General and administrative costs were 44% of revenue for the year
ended July 31, 2001 compared to 50% of revenue for the year ended July 31, 2002.
The increase in general and administrative expenses as a percentage of revenue
was the result of the $2.6 million in accrued facility costs, offset somewhat by
the change in bad debt expense and a decrease in payroll related costs resulting
from efforts to cut costs in light of declining revenues.

     Amortization and Impairment of Goodwill and Other Intangibles. Amortization
and impairment of goodwill and other intangibles decreased from $176.3 million
in the year ended July 31, 2001 to $48.7 million in the year ended July 31,
2002, a 72% decrease. The decrease was due to a decrease in the amount of
goodwill and other intangibles to be amortized in the year ended July 31, 2002
as compared to the year ended July 31, 2001. During the year ended July 31,
2001, we experienced negative revenue growth due to worsening general
macroeconomic conditions and a decrease in both the size and quantity of orders
for our ad serving and content management software solutions. As a result,
during management's quarterly and year-end reviews of the value and periods of
amortization of both goodwill and other intangible assets, it was determined
that the carrying value of goodwill and certain other intangible assets,
including those established through our MediaBridge acquisition in September
2000, were not fully recoverable. Accordingly, in the quarter ended July 31,
2001, we recorded a $109.0 million impairment charge which reduced the goodwill
and other intangible asset base that needed to be amortized in the year ended
July 31, 2002. During the year ended July 31, 2002, we continued to experience
negative revenue growth due to a decrease in the size and quantity of orders for
both our ad serving and content management solutions. Additionally, in the
fourth quarter of the year ended July 31, 2002, CMGI rescinded their offer to
acquire all of the outstanding shares of the Company, leaving doubt about our
ability to raise additional financing to fund operations. As a result of these
factors, during management's quarterly and year end reviews of the value and
periods of amortization of both goodwill and other intangible assets, it was
determined that the carrying value of goodwill and certain other intangible
assets within our Software segment were fully impaired. Accordingly, in the
quarter ended July 31, 2002, we recorded an additional impairment charge of
$25.6 million, which eliminated all goodwill and other intangibles recorded in
prior acquisitions. As a result, we do not anticipate future amortization and
impairment expenses.

     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

                                        13
<PAGE>

depreciation of long-lived assets, including costs in excess of net assets of
companies acquired. During these reviews, 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.

     Restructuring Costs, net.  Restructuring expense decreased from $2.4
million for the year ended July 31, 2001 to $2.3 million in the year ended July
31, 2002. Restructuring expense during the year ended July 31, 2001 consisted of
approximately $2.0 million of severance and approximately $433,000 for
facilities we exited due to centralizing MediaBridge personnel in our corporate
offices. Restructuring expense during the year ended July 31, 2002 consisted of
approximately $2.1 million of severance and approximately $80,000 for facilities
and other leases we exited due to closing certain International offices.

     Stock Compensation.  Stock compensation expense decreased from $1.9 million
in the year ended July 31, 2001 to $1.2 million in the year ended July 31, 2002,
a 39% decrease. The decrease relates to the termination of employment of certain
individuals for whom stock compensation costs were being recognized prior to the
employees termination.

  OTHER INCOME (EXPENSE)

     Interest Income.  Interest income decreased from $4.9 million in the year
ended July 31, 2001 to $584,000 in the year ended July 31, 2002, a 88% decrease.
The decrease in interest income was primarily due to lower cash equivalents and
short-term investment balances during fiscal 2002 compared to fiscal 2001. We
anticipate that interest income will decrease in the year ended July 31, 2003 as
compared July 31, 2002 as a result of both lower rates of return and a reduced
balance in cash and short-term investments.

     Interest Expense.  Interest expense increased from $50,000 in the year
ended July 31, 2001 to $3.6 million in the year ended July 31, 2002, a 7,098%
increase. The increase was a result of converting amounts we owed to CMGI into
debt in October 2001 and the related interest on that debt from October 2001 to
July 2002. We anticipate that interest expense will decrease in the year ended
July 31, 2003 as compared to the year ended July 31, 2002 as a result of the
settlement of the amounts owed to CMGI in September 2002.

     Minority Interest.  Minority interest decreased from $1.1 million for the
year ended July 31, 2001 to $109,000 for the year ended July 31, 2002, a 90%
decrease. Minority interest reflects the minority shareholders' share of the
losses of Engage Technologies Japan. This subsidiary was closed during the
second quarter of fiscal 2002, resulting in the decrease in minority interest in
the year ended July 31, 2002 as compared to the year ended July 31, 2001.

     Other Income (Expense), net.  Other income (expense), net increased from
$2.1 million expense for the year ended July 31, 2001 to $907,000 income for the
year ended July 31, 2002. Other expense for the year ended July 31, 2001
included approximately $2.0 million related to an impairment write-off of an
equity investment in a non-public company. Other income for the year ended July
31, 2002 was primarily related to net exchange gains realized, offset somewhat
by losses on the impairment write-down of an equity investment.

  DISCONTINUED OPERATIONS

     Loss From Discontinued Operations.  Loss from discontinued operations
decreased from $1.03 billion in the year ended July 31, 2001 to $602,000 in the
year ended July 31, 2002. Loss on discontinued operations in the year ended July
31, 2002 represents the net losses for our media operations in excess of prior
estimates recorded during the year ended July 31, 2001 as a result of a decision
made in September 2001 to exit the Media segment.

     Gain (Loss) From Disposal of Discontinued Operations.  Loss from disposal
of discontinued operations was $16.7 million in the year ended July 31, 2001,
compared to a gain of $1.1 million in the year ended July 31, 2002. The loss
from disposal of discontinued operations for the year ended July 31, 2001
consisted of $8.9 million related to the write-down of media fixed assets to
their estimated net realizable value, $3.3 million related to estimated losses
for the period August 1, 2001 through the date that media operations cease and
                                        14
<PAGE>

$4.5 million related to costs directly associated with the decision to divest,
including post-divestiture reorganization costs. The gain from disposal of
discontinued operations for the year ended July 31, 2002 is the result of a
difference between our estimated disposal costs at July 31, 2001 as compared to
actual disposal costs, related primarily to better than anticipated results in
negotiating the termination of several equipment leases.

COMPARISON OF FISCAL 2000 TO FISCAL 2001

  REVENUE, COST OF REVENUE AND GROSS MARGIN

     Product revenue decreased from $37.5 million in the year ended July 31,
2000 to $17.9 million in the year ended July 31, 2001, a 52% decrease. The
decrease in product revenue was due primarily to a decrease in license revenue
related to our ProfileServer software. 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 was an affiliate, and two large sales of
ProfileServer and AdManager products aggregating approximately $7.3 million.
Service revenue increased from $9.3 million in the year ended July 31, 2001 to
$25.4 million in the year ended July 31, 2001, a 173% increase. The increase in
service revenue is the direct result of our September 2000 acquisition of
MediaBridge and to a lesser extent, an increase in maintenance revenue resulting
from the large license arrangements completed in the fourth fiscal quarter of
2000. License arrangements from products acquired from MediaBridge typically
include a large amount of consulting services as compared to fiscal 2000 license
arrangements that were substantially comprised of license fees and included only
a small amount of consulting services. Product revenue generated from the sales
of our Internet advertising products amounted to $37.5 million and $15.1 million
for the years ended July 31, 2000 and 2001, respectively. Services and support
revenue generated from sales of our Internet advertising products amounted to
$9.3 million and $10.2 million for the years ended July 31, 2000 and 2001,
respectively.

     Gross margin decreased from 78% in the year ended July 31, 2000 to 34% in
the year ended July 31, 2001. The decrease in gross margin was the result of
reduced, high margin product revenue and an increase in lower margin service
revenue in the year ended July 31, 2001 as compared to the year ended July 31,
2000. Product revenue represented $37.5 million or 80% of total revenue in the
year ended July 31, 2000 as compared to $17.9 million or 41% of total revenue in
the year ended July 31, 2001. Cost of revenue increased primarily due to our
acquisition of MediaBridge, which derived a substantial portion of its revenue
from consulting services. Margins in fiscal 2001 were also negatively impacted
by approximately $5.2 million of amortization charges related to developed
technology acquired in the MediaBridge acquisition. Including acquisitions, our
service staff increased 27% from July 31, 2000 to July 31, 2001. Additionally,
in the year ended July 31, 2001, we settled a previously accrued royalty
obligation resulting in a benefit to product cost of sales of $892,000.

     Sales to two customers accounted for 28% and 11% of our total revenue for
the year ended July 31, 2000. Sales to two customers accounted for 13% and 12%
of our total revenue for the year ended July 31, 2001. Accounts receivable due
from two customers accounted for 55% and 17% of total accounts receivable at
July 31, 2000.

  OPERATING EXPENSES

     Research and Development.  Our research and development expenses increased
from $11.3 million in the year ended July 31, 2000 to $11.8 million in the year
ended July 31, 2001, a 5% increase. This increase was primarily due to the
inclusion of the MediaBridge results in the year ended July 31, 2001, offset by
savings related to restructuring activities in the year ended July 31, 2001.
Including acquisitions, our research and development staff decreased 46% from
July 31, 2000 to July 31, 2001. Research and development expenses were 24% of
revenue for the year ended July 31, 2000 compared to 27% of revenue for the year
ended July 31, 2001.

     Selling and Marketing.  Selling and marketing expenses increased from $38.3
million in the year ended July 31, 2000 to $41.5 million in the year ended July
31, 2001, an 8% increase. The increase in costs was primarily due to our
acquisition of MediaBridge and an increase in advertising and trade show
expenses, offset by reductions in travel and consulting expenses resulting from
cost control measures and a general reduction in

                                        15
<PAGE>

our size during the second half of the year ended July 31, 2001. Overall,
including acquisitions, our sales and marketing staff decreased 61% from July
31, 2000 to July 31, 2001. Sales and marketing expenses were 82% of revenue for
year ended July 31, 2000 compared to 96% of revenue for the year ended July 31,
2001.

     General and Administrative.  General and administrative expenses increased
from $11.0 million in the year ended July 31, 2000 to $19.1 million in the year
ended July 31, 2001, a 74% increase. The increase in costs was primarily due to
increases in payroll and related costs, accounting and legal fees, franchise
taxes and a small increase in bad debt expense. In response to having a smaller
organization structure and centralizing all domestic finance functions in our
corporate office, our general and administrative headcount was reduced by 35%
from July 31, 2000 to July 31, 2001. General and administrative costs were 23%
of revenue for the year ended July 31, 2000 compared to 44% of revenue for the
year ended July 31, 2001. This increase is the direct result of the decrease in
revenue in the year ended July 31, 2001 and the existence of a general and
administrative infrastructure that was developed to support an organization that
was expected to grow in the year ended July 31, 2001.

     Amortization and Impairment of Goodwill and Other Intangibles. Amortization
and impairment of goodwill and other intangibles increased from $4.7 million in
the year ended July 31, 2000 to $176.3 million in the year ended July 31, 2001,
a 3,651% increase. The increase was due to our acquisition of MediaBridge and
amortization expense resulting from our recording $226.9 million of goodwill and
other identifiable intangibles. Additionally, in the fourth fiscal quarter of
2001, we recorded $109.0 million of impairment related to our Software segment.
During the year ended July 31, 2001, our Software segment experienced negative
revenue growth due to worsening general macroeconomic conditions and a decrease
in both the size and quantity of orders for our ad serving and content
management software solutions. As a result, during management's quarterly and
year-end reviews of the value and periods of amortization of both goodwill and
other intangible assets, it was determined that the carrying value of goodwill
and certain other intangible assets within our software segment, including those
established through our MediaBridge acquisition in September 2000, were not
fully recoverable.

     Restructuring Costs, net.  Restructuring expense was $2.4 million in the
year ended July 31, 2001. We did not record any restructuring expense in the
year ended July 31, 2000. Restructuring expense within continuing operations
consisted of approximately $2.0 million of severance and approximately $433,000
for facilities we exited due to centralizing MediaBridge personnel in our
corporate offices.

     Stock Compensation.  Stock compensation expense increased from $347,000 in
the year ended July 31, 2000 to $1.9 million in the year ended July 31, 2001, a
459% increase. Substantially all of the increase relates to amortization of
deferred compensation related to stock options issued in our acquisition of
MediaBridge in September 2000. We recorded approximately $7.0 million of
deferred compensation related to the intrinsic value of stock options issued to
MediaBridge employees. The amount recorded as deferred compensation for
MediaBridge is being amortized to expense over three years, the remaining
vesting period of the related stock options.

  OTHER INCOME (EXPENSE)

     Interest Income.  Interest income decreased from $5.2 million in the year
ended July 31, 2000 to $4.9 million in the year ended July 31, 2001, a 5%
decrease. The decrease in interest income was primarily due to lower cash
equivalents and short-term investment balances during fiscal 2001 compared to
fiscal 2000.

     Interest Expense.  Interest expense increased from $15,000 in the year
ended July 31, 2000 to $50,000 in the year ended July 31, 2001, a 233% increase.
The increase was a result of interest expense incurred on capital lease
obligations we assumed from our MediaBridge acquisition.

     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

                                        16
<PAGE>

2000, our ownership increased from 46.3% to 66.6%. Equity in loss of joint
venture was $1.1 million in the year ended July 31, 2000.

     Minority Interest.  Minority interest increased from $227,000 for the year
ended July 31, 2000 to $1.1 million for the year ended July 31, 2001, a 399%
increase. In June 2000, we acquired a majority ownership position in Engage
Technologies Japan, and, accordingly, began consolidating the results of
operations of Engage Technologies Japan. Minority interest reflects the minority
shareholders' share of the losses of Engage Technologies Japan for June and July
of fiscal 2000 and all of fiscal 2001.

     Other Income (Expense), net.  Other expense increased from $111,000 for the
year ended July 31, 2000 to $2.1 million for the year ended July 31, 2001. Other
expense for the period ended July 31, 2001 included approximately $2.0 million
related to an impairment write-off of an equity investment in a non-public
company.

  DISCONTINUED OPERATIONS

     Loss From Discontinued Operations.  Loss from discontinued operations
increased from $352.8 million in the year ended July 31, 2000 to $1.03 billion
in the year ended July 31, 2001, a 191% increase. Loss on discontinued
operations represents the net operating results for our media operations which
have been classified within discontinued operations as a result of a decision
made in September 2001 to exit the media segment. The increase in loss from
discontinued operations relates principally to our acquisition of AdKnowledge
and Flycast, and to a lesser extent, an increase in the net loss for I/PRO in
the year ended July 31, 2001 as compared to the year ended July 31, 2000.
Included within loss from discontinued operations for the year ended July 31,
2001 are media impairment charges totaling $675.8 million.

     Gain (Loss) From Disposal of Discontinued Operations.  Loss from disposal
of discontinued operations was $16.7 million in the year ended July 31, 2001.
The loss from disposal of discontinued operations consisted of $8.9 million
related to the write-down of media fixed assets to their estimated net
realizable value, $3.3 million related to estimated losses for the period August
1, 2001 through the date that media operations cease and $4.5 million related to
costs directly associated with the decision to divest, including
post-divestiture reorganization costs.

CRITICAL ACCOUNTING POLICIES

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

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

     We assess the impairment of long-lived assets on an ongoing basis and
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable based upon an estimate of future undiscounted cash flows.
Factors we consider that could trigger an impairment review include the
following:

     - significant underperformance relative to expected historical or projected
       future operating results;

     - significant changes in the manner of our use of the acquired assets or
       the strategy for our overall business;

                                        17
<PAGE>

     - significant negative industry or economic trends;

     - significant decline in our stock price for a sustained period; and

     - our market capitalization relative to net book value

     When we determine that the carrying value of any long-lived asset may not
be recoverable based upon the existence of one or more of the above indicators
of impairment, we measure impairment based on the difference between an asset's
carrying value and an estimate of fair value, which may be determined based upon
quotes or a projected discounted cash flow, using a discount rate determined by
our management to be commensurate with our cost of capital and the risk inherent
in our current business model, and other measures of fair value.

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

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

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

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

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

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

     Revenue recognized on transactions whereby we exchange products and/or
services in return for equity instruments is valued when a contract is signed,
signaling a mutual understanding of the terms of the equity based compensation
and a commitment of performance on our behalf to earn the equity instruments.
Revenue under such arrangements is recognized in accordance with the revenue
recognition policies stated above.

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

                                        18
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

     Our cash and cash equivalents decreased from $33.3 million at July 31, 2001
to $17.7 million at July 31, 2002. Net cash used in operating activities was
$18.0 million for the year ended July 31, 2002, consisting of $32.5 million used
for continuing operations and $14.6 million provided by discontinued operations
(principally collection of accounts receivable from our Media segment). Cash
used for continuing operations resulted primarily from net losses and a decrease
in accounts payable, accrued expenses and deferred revenue, which were partially
offset by a decrease in accounts receivable, prepaid expenses, other current
assets and other assets, and an increase in due to CMGI and affiliates. Net cash
used for investing activities was $698,000 for the year ended July 31, 2002,
related to the purchase of property and equipment. Net cash provided by
financing activities was $4.4 million, consisting primarily of $8.0 million
received from CMGI through their issuance of an $8.0 million note in October
2001, partially offset by repayments of long term debt and capital lease
obligations totaling $3.7 million.

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

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

     In October 2001, CMGI and Engage agreed to structure any intercompany debt
incurred by us subsequent to October 1, 2001 through July 31, 2002 under a
secured convertible promissory note bearing interest at 7.5%. This note was
amended in February 2002. Under the terms of the promissory note, principal
became due and payable on demand any time on or after August 1, 2002. Interest
was compounded monthly and payable quarterly in arrears. Interest payments for
the quarters ending October 31, 2001, January 31, 2002, April 30, 2002 and July
31, 2002 were deferred and became payable on August 1, 2002. The principal
and/or interest of the intercompany debt incurred each calendar month under the
note was convertible, at CMGI's election, into our common stock at a conversion
price equal to the closing price of our common stock on the last trading day of
such calendar month. The note was collateralized by substantially all of our
assets. Debt incurred under this agreement was approximately $11.0 million as of
July 31, 2002.

     In September 2002, we completed a transaction with CMGI pursuant to which
all outstanding debt to CMGI (approximately $65 million) was cancelled and all
of CMGI's equity holdings in Engage (approximately 148,417,801 shares of common
stock) were transferred back to Engage and cancelled. In exchange, we paid $2.5
million in cash to CMGI, signed a $2.0 million non-interest bearing secured
promissory note due in September 2006 that is secured by the assets of the
Company, and issued a warrant to CMGI to purchase up to 9.9% of our outstanding
common stock at the time of exercise at an exercise price of $.045 per share.
Additionally, we agreed to pay CMGI up to an additional $6.0 million in future
earn-out payments based upon our quarterly operating income (defined as Engage's
operating income/loss plus the sum of (i) amortization

                                        19
<PAGE>

expense and impairment charges and (ii) amortization of stock-based
compensation, as reported in our financial statements for the fiscal quarter in
question included in the applicable quarterly or annual (as applicable) report
filed with the Securities and Exchange Commission for such quarter) starting
with the first quarter of fiscal 2004 (the quarter ending October 31, 2003).
Under the terms of the earn-out payment and promissory note, if payments under
the earn-out agreement exceed $4.0 million, amounts due under the $2.0 million
promissory note will be cancelled for each dollar of earn-out over the $4.0
million, such that if total earn-out payments reach $6.0 million, the promissory
note will be cancelled in full.

     The following tables summarizes, on a pro forma basis, the impact on our
balance sheet had the transaction been affected on July 31, 2002 and the
resulting gain on settlement of affiliated debt had been recognized at that
time:

<Table>
<Caption>
                                                                    JULY 31, 2002
                                                              -------------------------
                                                                ACTUAL       PRO FORMA
                                                              -----------   -----------
                                                              (IN THOUSANDS, EXCEPT PAR
                                                                       VALUE)
<S>                                                           <C>           <C>
ASSETS
Cash and cash equivalents...................................  $   17,719    $   15,219
Total current assets........................................      23,060        20,560
Total assets................................................  $   27,147    $   24,647
                                                              ==========    ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Debt to CMGI................................................  $   61,691    $       --
Due to CMGI affiliates......................................       2,710           978
Accrued expenses............................................      12,364        10,211
Total current liabilities...................................      82,752        17,176
Long-term debt, net of current portion......................          --         2,000
Other long-term liabilities.................................         388            94
Total liabilities...........................................      83,169        19,299

Common stock, $.01 par value, 350,000 shares authorized,
  196,062 and 48,218 shares issued and outstanding at July
  31, 2002 and July 31, 2002
  (pro forma), respectively.................................       1,961           483
Additional paid-in capital..................................   3,684,066     3,746,914
Total stockholders' equity (deficit)........................     (56,022)        5,348
Total liabilities and stockholders' equity (deficit)........  $   27,147    $   24,647
                                                              ==========    ==========
</Table>

     As of July 31, 2002, we had $17.7 million of cash and cash equivalents. In
August and September of 2002, we made payments totaling in excess of $5.5
million in connection with the settlement of amounts owed to a CMGI affiliate,
the settlement of certain lease obligations, the payment of our annual insurance
for directors and officers, and the settlement of the transaction with CMGI.
These payments were in addition to normal operating expenditures. Aside from
these payments, we have no material commitments for capital expenditures and we
anticipate that expenditures will decrease for the immediate future as we
continue to cut costs with our efforts to size our business to our revenue base.

                                        20
<PAGE>

     The following summarizes anticipated contractual obligations for operating
leases, amounts due to CMGI under the terms of the transaction with CMGI
(excluding contingent amounts which could be owed in future earn-out payments)
and amounts owed to a CMGI subsidiary during each of the fiscal years ended July
31:

<Table>
<Caption>
                                                                CMGI TRANSACTION
                                                    OPERATING       AND CMGI
                                                     LEASES        SUBSIDIARY      TOTAL
                                                    ---------   ----------------   ------
                                                               (IN THOUSANDS)
<S>                                                 <C>         <C>                <C>
2003..............................................   $1,339          $3,500        $4,839
2004..............................................      801              --           801
2005..............................................      150              --           150
2006..............................................       --              --            --
2007..............................................       --           2,000         2,000
                                                     ------          ------        ------
                                                     $2,290          $5,500        $7,790
                                                     ======          ======        ======
</Table>

     During our most recent fiscal year, we have undergone a significant
transition, exiting the Media business and restructuring ourselves to be a
leader in providing software that enables publishers, advertisers and merchants
to streamline the creation, approval, production and re-purposing of advertising
and other marketing material. Included in this transition was a complete
turnover of our senior management team, as well as significant changes within
our Board of Directors. In conjunction with the Board of Directors, the new
management team has developed an operational plan that it believes will allow us
to strengthen existing and develop new sales channels. In addition, the
operational plan has brought our costs more in line with projected revenue
growth.

     At July 31, 2002, we had a working capital deficit of $59,692,000, an
accumulated deficit of $3.7 billion, and have reported losses from operations
since inception. We have used cash from continuing operations of $41,182,000,
$50,961,000 and $32,530,000 in the years ended July 31, 2000, 2001 and 2002,
respectively. We anticipate incurring additional losses throughout our next
fiscal year. Management has taken several actions to ensure that we continue as
a going concern through July 31, 2002, including actual and planned reductions
in operating expenses through headcount reductions, the closure of several
facilities, and the restructuring of amounts due to our former parent company,
CMGI, discussed above. Based upon our cash flow estimates, we currently
anticipate that our available cash resources will be sufficient to meet our
anticipated needs for working capital and capital expenditures for at least the
next twelve months. Our cash flow estimates are based upon attaining certain
levels of sales, maintaining budgeted levels of operating expenses, and
collections of accounts receivable for both our continuing and discontinued
operations, among other assumptions, including the improvement in the overall
macroeconomic environment. Our sales estimates include revenue from new sales
channels for which we have no historical basis to make estimates and we may be
required to further reduce expenses if budgeted sales are not attained. We may
be unsuccessful in reducing costs in proportion to any shortfall in projected
sales. Our continued collection of accounts receivable from discontinued
operations may be hindered by the old age of the outstanding balances, the
financial status of the debtors, the fact that uncollected amounts are comprised
of a large number of small balances, and the ability to continue to devote
internal resources to the collection effort.

     Additionally, we will attempt to raise funds through the issuance of equity
or convertible debt securities. However, our common stock was delisted from the
Nasdaq Stock Market effective with the open of business on August 15, 2002. Our
common stock currently is now quoted on the NASD's OTC Bulletin Board. The
continued delisting of our common stock may make our stock less attractive to
third parties, which could adversely affect our ability to enter into future
equity financing transactions or to effect an acquisition or merger with other
businesses. In addition, we can no longer rely on financing from CMGI since we
completed our transaction with CMGI in September 2002. Accordingly, we cannot
assure you that we will be able to obtain equity financing on commercially
reasonable terms, or at all.

     If 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

                                        21
<PAGE>

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 originally allocated part of the purchase price of our MediaBridge
acquisition to IPRD as part of our allocation of the purchase price of each
allocation. See note 4 of notes to our 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, 2002, we had subsidiaries in the United Kingdom and
Sweden. To date, our financial condition and results of operations have not been
materially affected by exchange rate fluctuations. As a result of the decrease
in our foreign operations, we expect that our financial condition and results of
operations will not be adversely affected by exchange rate fluctuations.

                                        22
<PAGE>

               SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     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. Statements contained herein
that are not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, the words "anticipates," "believes,"
"plans," "expects" and similar expressions are intended to identify
forward-looking statements. Such statements are based on management's current
expectations and are subject to a number of factors and uncertainties that could
cause actual results or outcomes to differ materially from those described or
implied in such forward-looking statements. These statements address or may
address the following subjects:

     - that we expect to find sufficient office space on commercially reasonable
       terms by January 2003;

     - that we anticipate that our overall gross margins may increase;

     - that we do not anticipate a decline in service and support revenue, but
       expect higher overall margins due to a greater proportion of license
       sales;

     - that we anticipate that we will incur no future amortization and
       impairment expenses;

     - that we anticipate that interest income will decrease in fiscal 2003 as
       compared to fiscal 2002;

     - that we anticipate that interest expense will decrease in fiscal 2003 as
       compared to fiscal 2002;

     - that we anticipate that expenditures will decrease for the immediate
       future;

     - that we believe that our operational plan will allow us to develop new
       and strengthen existing sales channels;

     - that we anticipate that our available cash resources will be sufficient
       to meet our needs for working capital and capital expenditures for at
       least the next twelve months; and

     - that we expect to be able to procure services and technology from outside
       sources prior to the termination of the Transition Services Agreement
       with CMGI.

     We caution investors that there are a number of important factors that
could cause our results to differ materially from those indicated by such
forward-looking statements. These factors include those set forth below in
"Factors that May Affect Future Results and Market Price of Stock" and elsewhere
throughout this report. All information set forth in this Form 10-K is as of the
date of this Form 10-K, and we undertake no duty or obligation to update this
information, unless required by law.

                   FACTORS THAT MAY AFFECT FUTURE RESULTS AND
                             MARKET PRICE OF STOCK

WE HAVE INCURRED SUBSTANTIAL LOSSES AND ANTICIPATE INCURRING CONTINUED LOSSES
AND WE MAY NOT CONTINUE AS A GOING CONCERN.

     We have never been profitable. We have incurred net losses totaling $1.8
billion from inception to July 31, 2002. Although we have reduced expenditures
through our restructuring efforts, the elimination of our media segment, the
elimination of most of our debt and the sale of our interactive business, we
expect to continue to incur losses for at least the next four quarters. 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 or cannot be reduced in
light of lower revenue, our business, results of operations and financial
condition will be materially and adversely affected and we may not continue as a
going concern.

                                        23
<PAGE>

WE WILL LIKELY NEED ADDITIONAL FINANCING WHICH COULD BE DIFFICULT TO OBTAIN.

     To support our operations to date, we have relied upon equity financings,
cash from operations and loans from our former majority stockholder, CMGI. While
we have effected a number of restructuring efforts and are implementing a new
operating strategy in an effort to accelerate our ability to achieve
profitability, we expect to incur operating losses for at least the next four
quarters. Obtaining additional financing may be difficult and will be subject to
a number of factors, including:

     - economic and market conditions generally;

     - our operating performance; and

     - investor sentiment, particularly for companies in our industry.

     In addition, we can no longer rely upon CMGI to provide us with needed cash
and the delisting of our common stock from the Nasdaq National Market may affect
our ability to enter into future equity financing transactions. These factors
may make the timing, amount, terms and conditions of additional financing
unattractive for us. If funds are needed to fund our operating needs and we are
unable to raise such capital, we would not be able to execute our business plan
and our financial condition would be materially and adversely affected.

IF WE ARE UNABLE TO IMPLEMENT SUCCESSFULLY OUR NEW OPERATING STRATEGY OUR
BUSINESS MAY FAIL.

     Since September 2000, we have engaged in a number of restructuring efforts
and implemented a new operating strategy designed to accelerate our ability to
achieve positive operating cash flow. As part of the restructuring and
implementation of our new operating strategy, we have significantly reduced the
size of our workforce, consolidated offices, made significant expense reductions
and, most importantly, eliminated our media segment and our interactive business
in an effort to focus on the market for content management software for
multichannel marketing. As a result of these efforts, we have incurred
restructuring charges from continuing operations of approximately $2.4 million
for the fiscal year ended July 31, 2001 and $2.3 million for the fiscal year
ended July 31, 2002.

     Our restructuring efforts have placed, and will continue to place, a
significant strain on our managerial, operational, financial and other
resources. To execute successfully against our new operating strategy, we must
adhere to our expense reductions and work to achieve the revenue and gross
margin targets incorporated as underlying assumptions to our operating strategy.
If we cannot do so, we will be unable to achieve positive operating cash flow.

     Our new operating strategy reflects management's current expectations, and
is based on currently available information as well as significant assumptions
made by management regarding various revenue, gross margin and operating expense
items. We cannot guarantee that the assumptions that we have relied upon in
developing our operating strategy will be accurate, or that future events or
results will conform to our expectations or assumptions. If our assumptions are
inaccurate, or our expectations prove to be erroneous in light of future events,
we will need to implement additional restructuring efforts or raise additional
working capital before we achieve profitability. We cannot be certain that
additional financing will be available when and to the extent required, or that,
if available, it will be on acceptable terms. If adequate funds are not
available on acceptable terms, we may not be able to fund our operations and our
business could fail.

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. 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

                                        24
<PAGE>

sale may occur. In addition, a number of factors, many of which are discussed
elsewhere herein, may cause variations in our results of operations, including:

     - the success of our restructuring efforts;

     - our ability to operate without CMGI as a majority stockholder;

     - our ability to implement successfully our new operating strategy;

     - our ability to develop and introduce new and updated products;

     - the mix of our products sold; and

     - economic conditions in our industry and generally.

     Although we have reduced expenditures through our restructuring efforts,
many of our continuing expenses, particularly personnel costs, are relatively
fixed, and are incurred in part based on expectations of future revenue. We may
be unable to effect additional restructuring measures or otherwise 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.

     In addition, our business is subject to minor seasonal fluctuations. In the
third calendar quarter, potential customers in retail marketing focus their
attention on holiday advertising planning. And, in the fourth calendar quarter,
potential customers within the newspaper industry typically focus their
attention on holiday advertising. As a result, few sales opportunities occur in
the newspaper industry in the fourth calendar quarter of the year.

     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 RELIED HEAVILY ON CMGI IN THE PAST, BUT AS A RESULT OF OUR SEPTEMBER
2002 TRANSACTION WITH CMGI, WE WILL NO LONGER BE ABLE TO DO SO.

     We have been a majority-owned subsidiary of CMGI since our initial public
offering in July 1999 and have relied heavily on CMGI for provision of
administrative, financial, technology and other support and services. In
September 2002, we entered into a transaction with CMGI pursuant to which all
outstanding debt owed to CMGI (approximately $65 million) was cancelled and all
of CMGI's equity holdings in Engage (approximately 148,417,801 shares of common
stock) were transferred back to us and cancelled. In exchange, we paid $2.5
million in cash to CMGI, issued a $2.0 million non-interest bearing promissory
note due in September 2006, and issued to CMGI a warrant to purchase up to 9.9%
of our outstanding common stock as of the time of exercise at an exercise price
of $.045 per share. Additionally, we agreed to pay CMGI up to an additional $6.0
million in future earn-out payments based upon our quarterly operating income
starting with the quarter ending October 31, 2003. The aggregate amount due
under the note and the earnout payments are never to exceed $6.0 million.
Accordingly, to the extent that the earnouts payments made exceed $4.0 million
as of the date the note becomes due, the amount due under the note will be
reduced.

     As part of this transaction, the agreements pursuant to which CMGI provided
us administrative and operating support and services have been amended or
terminated. For instance, before this transaction, we sublet approximately
103,000 square feet of space for our administrative offices from CMGI pursuant
to a sublease due to expire in October 2007. Under the terms of the transaction,
this sublease was amended to reduce the space to 36,000 square feet and to
accelerate the termination to December 31, 2002. We also entered into a
Transition Services Agreement with CMGI, pursuant to which CMGI will provide us
with specified services and technology during a transition period that ends upon
the first of (i) our discontinuing the leasing of facilities from CMGI or (ii)
we notify CMGI in writing of our desire to terminate such services. We believe
that these agreements will allow us time to procure office space and similar
services and technology from third parties. We cannot assure you, however, that
we will be able to do so, and our inability to procure

                                        25
<PAGE>

office space and critical services and technology in a timely manner and on
commercially reasonable terms could materially and adversely impact our
business.

     In addition, in the past we have relied extensively on CMGI for financial
assistance. As of July 31, 2002, we owed CMGI approximately $60 million in debt.
As part of the transaction with CMGI in September 2002, all of this pre-existing
debt was cancelled, and we will no longer be able to rely on CMGI for financial
support.

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. The terms of our sales to affiliated customers could change because CMGI
is no longer an affiliate of ours. In addition, CMGI has been instrumental in
introducing us to customers and other business partners in the past. Because
CMGI is no longer an affiliate, our business could be adversely affected.

COMPETITION COULD REDUCE OUR MARKET SHARE AND HARM OUR BUSINESS.

     Our competitors may be able to develop products and services that are more
attractive to businesses than our products and services. Many of our competitors
have longer operating histories, significantly greater financial, technical,
marketing and other resources, greater name recognition and larger customer
bases. As a result, they may be able to adapt more quickly to new or emerging
technologies and changes in customer requirements. They also may be able to
devote greater resources to the promotion and sale of their products and
services than us. If these companies introduce products and services that
effectively competed with our products and services, they could be in a position
to charge lower prices or to bundle their products and services with their other
products and services. This could give them a competitive advantage over us. In
order to be successful in the future, we must continue to respond promptly and
effectively to the challenges of technological change and competitors'
innovations. If we cannot compete successfully with existing or new competitors,
we may have to reduce prices on our products, which could lead to reduced
profits. We could also lose market share, which would materially and adversely
affect our business.

OUR SYSTEMS MAY FAIL OR EXPERIENCE SLOWDOWNS AND WE COULD LOSE KEY DATA USED IN
OUR HOSTED SOFTWARE SERVICES.

     All of our communications hardware and other data center operations are
provided internally and through multiple hosting services firms on the East
Coast. Fire, floods, earthquakes, power loss, telecommunications failures,
break-ins and similar events could damage these systems. Our business could be
materially and adversely affected if our systems were affected by any of these
occurrences or if any data 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
software services, as well as the efficient performance of the systems of third
parties, such as our Internet service providers. For example, 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 content management and marketing
software that is 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
                                        26
<PAGE>

for substantial damages, which, even if unsuccessful, would likely be time
consuming and could result in costly litigation, payment of damages and negative
publicity for our company and products. 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.

     Our customers generally purchase continuing support and maintenance
services in conjunction with the purchase of our products. 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. If our support and maintenance services personnel
cannot satisfy our customers' demands for services, they may not purchase
additional product 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 BUSINESS MAY SUFFER AS A RESULT OF OUR REDUCTION IN WORKFORCE.

     Since we began the restructuring of our business in the first quarter of
fiscal 2001, we have reduced our employee headcount from 1,116 to 172 at July
31, 2002. This reduction in workforce may negatively impact our ability to
conduct business and serve our customers and vendor partners in a manner
comparable with past practice, which could cause our business to suffer
significantly. Further, our workforce reduction and loss of key management
personnel could cause concern among our customers, vendors and other critical
corporate relationships.

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.

OUR BUSINESS WILL NOT GROW IF WE DO NOT KEEP PACE WITH RAPIDLY CHANGING
TECHNOLOGIES.

     Because the market for our software products is rapidly changing, our
future success will depend upon our ability to continue to enhance our current
product line. We also must develop and introduce new products that keep pace
with technological developments, satisfy increasingly sophisticated customer
requirements and achieve market acceptance. If we are not successful in
developing and marketing, on a timely and cost-effective basis, fully functional
product enhancements or new products that respond to technological advances by
others, our business will not grow and our financial results will suffer. In
particular, our business could be harmed by any significant errors or "bugs" in
our software shipped to customers; any delay by customers in making purchasing
decisions in anticipation of the general availability of new or enhanced
products; significant delays in the general availability of our new products or
releases; significant problems in the installation or implementation of our new
products or releases; or customer dissatisfaction with our new products or
releases.

                                        27
<PAGE>

IMPLEMENTATION OF OUR PRODUCTS BY CUSTOMERS IS COMPLEX, TIME CONSUMING AND
EXPENSIVE. WE FREQUENTLY EXPERIENCE LONG SALES AND IMPLEMENTATION CYCLES.

     The timing of the sales and implementation of our products and services, as
it relates primarily to our ContentServer product, is lengthy and not
predictable with any degree of accuracy. You should not rely on prior sales and
implementation cycles as any indication of future cycles. The license of our
software products is often an enterprise-wide decision by prospective customers
and generally requires us to provide a significant level of education to
prospective customers regarding the use and benefits of our products. In
addition, the implementation and deployment of our products requires a
significant commitment of resources by our customers and/or our professional
services organizations. For these and other reasons, the period between initial
contact and the implementation of our products is often lengthy and is subject
to a number of factors, such as the size and complexity of the overall project,
that may cause significant delays, over many of which we have little or no
control. A delay in the sale or implementation of even a limited number of
license transactions could have a material adverse effect on our business and
operations and cause our operating results to vary significantly from quarter to
quarter.

TECHNOLOGICAL CHANGE MAY RENDER OUR PRODUCTS AND SERVICES OBSOLETE.

     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.

     We have operations in a number of international markets. We intend to
continue to expand our 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 internationally. We intend to
enter additional 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; and

     - fluctuations in currency exchange rates.

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

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.

                                        28
<PAGE>

WE WILL NEED TO RELY ON A NEW MANAGEMENT TEAM TO EFFECTIVELY IMPLEMENT OUR NEW
OPERATING STRATEGY.

     John Barone was promoted to President and Chief Operating Officer in
September 2002 and Lisa McAlister joined us as Chief Financial Officer in June
2002. Our success depends upon our management's ability to successfully
implement our new operating strategy. Further, our business is largely dependent
on the personal efforts and abilities of other members of senior management, as
well as other key personnel. Any of our officers or employees can terminate
their employment relationship at any time. We do not maintain key person life
insurance on any member of our management team. The loss of any key employee or
our inability to attract or retain other qualified employees could harm our
business and results of operations.

OUR COMMON STOCK HAS BEEN DELISTED FROM NASDAQ AND IS NOW TRADED ON THE OTC
BULLETIN BOARD, WHICH MAY MAKE IT MORE DIFFICULT FOR YOU TO BUY OR SELL SHARES
AND FOR US TO ENTER INTO FUTURE EQUITY FINANCINGS.

     Our common stock was delisted from the Nasdaq Stock Market effective with
the open of business on August 15, 2002. Our common stock currently is now
quoted on the NASD's OTC Bulletin Board and may be adversely affected by an SEC
rule that imposes additional sales practice requirements on broker-dealers who
sell such securities to persons other than established customers and accredited
investors which are generally institutions with assets in excess of $5,000,000
or individuals with net worth in excess of $1,000,000 or annual income exceeding
$200,000 or $300,000 jointly with their spouse. For transactions covered by the
rule, the broker-dealer must make a special suitability determination for the
purchaser and receive the purchaser's written agreement to the transaction prior
to the sale. Consequently, the rule may affect the ability of broker-dealers to
sell our common stock and also may affect the ability of holders of our common
stock to resell their shares of common stock. In addition, the continued
delisting of our common stock may make our stock less attractive to third
parties, which could adversely affect our ability to enter into future equity
financing transactions or to effect an acquisition or merger with other
businesses.

OUR STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE.

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

     - actual or anticipated fluctuations in our results of operations;

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

     - our ability to implement successfully our new operating strategy;

     - our ability to raise additional capital if needed;

     - technological innovations by us or our competitors;

     - increased competition;

     - additions or departures of key personnel;

     - future sales of or conversion of debt into common stock;

     - conditions and trends in our industry; and

     - general market conditions.

WE HAVE ADOPTED A STOCKHOLDER RIGHTS PLAN, OR POISON PILL, WHICH COULD DELAY OR
DISCOURAGE TAKEOVER ATTEMPTS.

     In October 2002, our board of directors adopted a stockholder rights plan
(which is more commonly known as a Poison Pill) and declared a dividend
distribution of one preferred share purchase right for each outstanding share of
our common stock. Each of these rights entitle holders of our common stock to
purchase one one-thousandth of a share of a new series of junior participating
preferred stock. The rights generally become exercisable only if, without the
approval of our board, someone (i) acquires 15% or more of our common stock or
(ii) announces a tender offer, the consummation of which would result in
ownership of 15%
                                        29
<PAGE>

or more of our common stock. Once exercisable, the Poison Pill allows our
stockholders (other than the acquiror) to purchase our common stock or the stock
of the acquiror at a substantial discount, thereby substantially diluting the
holdings of the acquirer. The board adopted the Poison Pill to protect the
interests of our stockholders in the event of an unsolicited takeover attempt
and to encourage potential acquirers to negotiate fully with the board. The
Poison Pill may, however, have the incidental effect of entrenching management
and delaying or discouraging a change of control, merger or similar transaction
even if the transaction would be favored by a majority of independent
stockholders.

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, and
amounts due to CMGI and affiliates approximate fair value because of the short
maturity of these instruments and market rates of interest.

     We have historically had very low exposure to changes in foreign currency
exchange rates, and as such, have not used derivative financial instruments to
manage foreign currency fluctuation risk. If we choose to 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.

                                        30
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                         INDEX TO FINANCIAL STATEMENTS

<Table>
<Caption>
                                                               PAGE
                                                               ----
<S>                                                            <C>
Independent Auditors' Report................................    32
Consolidated Balance Sheets as of July 31, 2001 and 2002....    33
Consolidated Statements of Operations for the three years
  ended July 31, 2002.......................................    34
Consolidated Statements of Changes in Stockholders' Equity
  (Deficit) for the three years ended July 31, 2002.........    35
Consolidated Statements of Cash Flows for the three years
  ended July 31, 2002.......................................    36
Notes to Consolidated Financial Statements..................    37
</Table>

                                        31
<PAGE>

                          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, 2001 and 2002, 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, 2002. 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, 2001 and 2002, and the results of their
operations and their cash flows for each of the years in the three-year period
ended July 31, 2002, in conformity with accounting principles generally accepted
in the United States of America.

     The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the consolidated financial statements, the Company has incurred significant
operating losses since inception, has an accumulated deficit and a working
capital deficiency. These matters raise substantial doubt about their ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 2. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.

KPMG LLP

Boston, Massachusetts
October 1, 2002, except for Note 20(b) and (c),
which is as of October 31, 2002

                                        32
<PAGE>

                                  ENGAGE, INC.

                          CONSOLIDATED BALANCE SHEETS
                          AS OF JULY 31, 2001 AND 2002

<Table>
<Caption>
                                                                          JULY 31,
                                                              ---------------------------------
                                                                   2001              2002
                                                              ---------------   ---------------
                                                              (IN THOUSANDS, EXCEPT PAR VALUE)
<S>                                                           <C>               <C>
                                            ASSETS
Current assets:
Cash and cash equivalents...................................    $    33,261       $    17,719
Accounts receivable, less allowance for doubtful accounts of
  $1,782 and $1,068 at July 31, 2001 and 2002,
  respectively..............................................          7,432             3,006
Unbilled accounts receivable................................            925               690
Prepaid expenses and other current assets...................          1,221             1,615
Current assets of discontinued operations...................         13,016                30
                                                                -----------       -----------
     Total current assets...................................         55,855            23,060
                                                                -----------       -----------
Property and equipment, net.................................          7,094             3,919
Intangible assets, net of accumulated amortization of
  $83,180 at July 31, 2001..................................         61,389                --
Other assets................................................          7,258                60
Non-current assets of discontinued operations...............          1,241               108
                                                                -----------       -----------
     Total assets...........................................    $   132,837       $    27,147
                                                                ===========       ===========

                        LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of obligation under capital lease...........    $     2,806       $       295
Current portion of long-term debt...........................          1,693                --
Accounts payable............................................          5,903             3,357
Debt to CMGI................................................             --            61,691
Due to CMGI affiliates......................................          1,699             2,710
Accrued expenses............................................         38,396            12,364
Deferred revenue............................................          6,365             2,335
                                                                -----------       -----------
     Total current liabilities..............................         56,862            82,752
                                                                -----------       -----------
Debt to CMGI................................................         39,821                --
Deferred revenue............................................             24                29
Obligation under capital lease, net of current portion......            759                --
Long-term debt, net of current portion......................            266                --
Other long-term liabilities.................................            396               388
                                                                -----------       -----------
     Total liabilities......................................         98,128            83,169
                                                                -----------       -----------
Minority interest...........................................          6,755                --

Commitments and contingencies

Stockholders' equity (deficit):
  Preferred stock, $.01 par value, 5,000 shares authorized,
     0 shares issued and outstanding at July 31, 2001 and
     2002...................................................             --                --
  Common stock, $.01 par value, 350,000 shares authorized,
     196,539 and 196,062 shares issued and outstanding at
     July 31, 2001 and 2002, respectively...................          1,965             1,961
  Additional paid-in capital................................      3,774,494         3,684,066
  Deferred compensation.....................................         (4,337)           (1,062)
  Accumulated other comprehensive income (loss).............            558              (646)
  Accumulated deficit.......................................     (3,744,726)       (3,740,341)
                                                                -----------       -----------
     Total stockholders' equity (deficit)...................         27,954           (56,022)
                                                                -----------       -----------
     Total liabilities and stockholders' equity (deficit)...    $   132,837       $    27,147
                                                                ===========       ===========
</Table>

          See accompanying notes to consolidated financial statements.

                                        33
<PAGE>

                                  ENGAGE, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                FOR THE YEARS ENDED JULY 31, 2000, 2001 AND 2002

<Table>
<Caption>
                                                                     YEAR ENDED JULY 31,
                                                            -------------------------------------
                                                               2000          2001         2002
                                                            ----------   ------------   ---------
                                                            (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                         <C>          <C>            <C>
Revenue:
  Product revenue.........................................  $  18,598    $    14,757    $  5,732
  Product revenue, related parties........................     18,908          3,163          26
  Services and support revenue............................      7,890         24,902      15,182
  Services and support revenue, related parties...........      1,412            526         467
                                                            ---------    -----------    --------
     Total revenue........................................     46,808         43,348      21,407
                                                            ---------    -----------    --------
Cost of revenue:
  Cost of product revenue.................................      1,345           (584)        393
  Cost of services and support revenue....................      9,018         23,948      15,084
  Amortization and impairment of developed technology.....         --          5,159      12,341
                                                            ---------    -----------    --------
     Total cost of revenue................................     10,363         28,523      27,818
                                                            ---------    -----------    --------
       Gross profit.......................................     36,445         14,825      (6,411)
                                                            ---------    -----------    --------
Operating expenses:
  In-process research and development.....................         --            700          --
  Research and development................................     11,281         11,849       8,339
  Selling and marketing...................................     38,330         41,470      12,838
  General and administrative..............................     10,964         19,104      10,615
  Amortization and impairment of goodwill and other
     intangibles..........................................      4,701        176,331      48,665
  Restructuring costs, net................................         --          2,408       2,297
  Stock compensation......................................        347          1,940       1,186
                                                            ---------    -----------    --------
     Total operating expenses.............................     65,623        253,802      83,940
                                                            ---------    -----------    --------
       Operating loss.....................................    (29,178)      (238,977)    (90,351)

Other income (expense):
  Interest income.........................................      5,173          4,935         584
  Interest expense........................................        (15)           (50)     (3,599)
  Equity in loss of joint venture.........................     (1,118)            --          --
  Minority interest.......................................        227          1,132         109
  Other income (expense), net.............................       (111)        (2,068)        907
                                                            ---------    -----------    --------
       Loss from continuing operations....................    (25,022)      (235,028)    (92,350)
                                                            ---------    -----------    --------
Discontinued operations:
  Loss from discontinued operations.......................   (352,848)    (1,025,268)       (602)
  Gain (loss) from disposal of discontinued operations....         --        (16,707)      1,056
                                                            ---------    -----------    --------
Net loss..................................................  $(377,870)   $(1,277,003)   $(91,896)
                                                            =========    ===========    ========
Basic and diluted net loss per share data:
Continuing operations.....................................               $     (1.21)   $  (0.47)
Discontinued operations...................................                     (5.26)         --
Disposal of discontinued operations.......................                     (0.09)         --
                                                                         -----------    --------
  Basic and diluted net loss per share....................               $     (6.56)   $  (0.47)
                                                                         ===========    ========

Pro forma basic and diluted net loss per share data:
Continuing operations.....................................  $   (0.17)
Discontinued operations...................................      (2.44)
                                                            ---------
  Pro forma basic and diluted net loss per share..........  $   (2.61)
                                                            =========

Weighted average number of basic and diluted shares
  outstanding.............................................                   194,756     196,419
                                                                         ===========    ========

Pro forma weighted average number of basic and diluted
  shares outstanding......................................    145,044
                                                            =========
</Table>

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

                                  ENGAGE, INC.

      CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
                FOR THE YEARS ENDED JULY 31, 2000, 2001 AND 2002
<Table>
<Caption>
                                         SERIES                                                        ACCUMULATED
                                       A PREFERRED                                                        OTHER
                                          STOCK          COMMON STOCK     ADDITIONAL                  COMPREHENSIVE
                                     ---------------   ----------------    PAID-IN       DEFERRED        INCOME       ACCUMULATED
                                     SHARES   AMOUNT   SHARES    AMOUNT    CAPITAL     COMPENSATION      (LOSS)         DEFICIT
                                     ------   ------   -------   ------   ----------   ------------   -------------   -----------
<S>                                  <C>      <C>      <C>       <C>      <C>          <C>            <C>             <C>
Balance at July 31, 1999...........    69      $ 1      97,353   $ 973    $  215,901     $ (4,024)       $  (353)     $   (84,715)
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.......................    --       --          --      --            --           --           (565)              --
Amortization of deferred
  compensation.....................    --       --          --      --            --          636             --               --
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)       2,154             --               --
Unrealized gain on
  available-for-sale securities....    --       --          --      --            --           --            658               --
Repurchase of unvested stock
  options..........................    --       --         (19)     --            (8)          --             --               --
Acceleration of unvested stock
  options..........................    --       --          --      --        36,764           --             --               --
Dividend to CMGI...................    --       --      (1,615)    (16)    2,168,684           --             --       (2,169,441)
Net loss...........................    --       --          --      --            --           --             --         (377,870)
                                      ---      ---     -------   ------   ----------     --------        -------      -----------
Balance at July 31, 2000...........    --       --     178,860   1,789     3,650,059       (1,234)          (260)      (2,632,026)
Acquisitions.......................    --       --      16,468     165       286,364      (25,898)            --               --
Foreign currency translation
  adjustment.......................    --       --          --      --            --           --            698               --
Amortization of deferred
  compensation.....................    --       --          --      --            --       18,358             --               --
Exercise of stock options..........    --       --       4,103      41         4,109           --             --               --
Sale of common stock under Employee
  Stock Purchase Plan..............    --       --         467       4         1,060           --             --               --
Reversal of deferred compensation
  on forfeited stock options.......    --       --          --      --        (4,437)       4,437             --               --
Unrealized gain on
  available-for-sale securities....    --       --          --      --            --           --            120               --
Repurchase of unvested stock
  options..........................    --       --         (98)     (1)          (31)          --             --               --
Acceleration of unvested stock
  options..........................    --       --          --      --           745           --             --               --
Adjustment to dividend to CMGI.....    --       --      (3,261)    (33)     (163,375)          --             --          164,303
Net loss...........................    --       --          --      --            --           --             --       (1,277,003)
                                      ---      ---     -------   ------   ----------     --------        -------      -----------
Balance at July 31, 2001...........    --       --     196,539   1,965     3,774,494       (4,337)           558       (3,744,726)
Foreign currency translation
  adjustment.......................    --       --          --      --            --           --         (1,443)              --
Amortization of deferred
  compensation.....................    --       --          --      --            --        2,529             --               --
Exercise of stock options..........    --       --          50       1             4           --             --               --
Sale of common stock under Employee
  Stock Purchase Plan..............    --       --         423       4            69           --             --               --
Reversal of deferred compensation
  on forfeited stock options.......    --       --          --      --          (746)         746             --               --
Unrealized loss on
  available-for-sale securities....    --       --          --      --            --           --            (80)              --
Acquisition of minority interest in
  Engage Japan.....................    --       --       1,000      10         6,488           --            319               --
Return of shares issued in
  MediaBridge acquisition..........    --       --         (31)     --            (6)          --             --               --
Adjustment to dividend to CMGI.....    --       --      (1,919)    (19)      (96,237)          --             --           96,281
Net loss...........................    --       --          --      --            --           --             --          (91,896)
                                      ---      ---     -------   ------   ----------     --------        -------      -----------
Balance at July 31, 2002...........    --      $--     196,062   $1,961   $3,684,066     $ (1,062)       $  (646)     $(3,740,341)
                                      ===      ===     =======   ======   ==========     ========        =======      ===========

<Caption>

                                        TOTAL
                                     -----------
<S>                                  <C>
Balance at July 31, 1999...........  $   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)
Amortization of deferred
  compensation.....................          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.......           --
Unrealized gain on
  available-for-sale securities....          658
Repurchase of unvested stock
  options..........................           (8)
Acceleration of unvested stock
  options..........................       36,764
Dividend to CMGI...................         (773)
Net loss...........................     (377,870)
                                     -----------
Balance at July 31, 2000...........    1,018,328
Acquisitions.......................      260,631
Foreign currency translation
  adjustment.......................          698
Amortization of deferred
  compensation.....................       18,358
Exercise of stock options..........        4,150
Sale of common stock under Employee
  Stock Purchase Plan..............        1,064
Reversal of deferred compensation
  on forfeited stock options.......           --
Unrealized gain on
  available-for-sale securities....          120
Repurchase of unvested stock
  options..........................          (32)
Acceleration of unvested stock
  options..........................          745
Adjustment to dividend to CMGI.....          895
Net loss...........................   (1,277,003)
                                     -----------
Balance at July 31, 2001...........       27,954
Foreign currency translation
  adjustment.......................       (1,443)
Amortization of deferred
  compensation.....................        2,529
Exercise of stock options..........            5
Sale of common stock under Employee
  Stock Purchase Plan..............           73
Reversal of deferred compensation
  on forfeited stock options.......           --
Unrealized loss on
  available-for-sale securities....          (80)
Acquisition of minority interest in
  Engage Japan.....................        6,817
Return of shares issued in
  MediaBridge acquisition..........           (6)
Adjustment to dividend to CMGI.....           25
Net loss...........................      (91,896)
                                     -----------
Balance at July 31, 2002...........  $   (56,022)
                                     ===========
</Table>

          See accompanying notes to consolidated financial statements.

                                        35
<PAGE>

                                  ENGAGE, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                FOR THE YEARS ENDED JULY 31, 2000, 2001 AND 2002

<Table>
<Caption>
                                                                   YEAR ENDED JULY 31,
                                                            ----------------------------------
                                                              2000         2001         2002
                                                            ---------   -----------   --------
                                                                      (IN THOUSANDS)
<S>                                                         <C>         <C>           <C>
Cash flows from operating activities:
  Net loss................................................  $(377,870)  $(1,277,003)  $(91,896)
  Income (loss) from discontinued operations..............   (352,848)   (1,041,975)       454
                                                            ---------   -----------   --------
  Loss from continuing operations.........................    (25,022)     (235,028)   (92,350)
  Adjustments to reconcile net loss to net cash used for
     operating activities:
     Depreciation and amortization........................      5,425        74,721     32,261
     Impairment of goodwill and other intangibles.........         --       109,000     32,091
     Equity in loss of joint venture......................      1,136            --         --
     Provision for (recovery of) bad debts, net...........      1,196         1,823        (19)
     Stock compensation...................................        347         1,940      1,186
     Amortization of discount on available-for-sale
       securities.........................................     (1,183)           (6)        --
     Gain on sale of available-for-sale securities........        (40)           --         --
     (Gain) loss on disposal of property and equipment....         (8)           --        537
     Minority interest....................................       (227)       (1,132)      (109)
     In-process research and development..................         --           700         --
     Changes in operating assets and liabilities, net of
       impact of acquisitions:
       Accounts receivable and unbilled accounts
          receivable......................................    (26,206)       11,647      4,680
       Prepaid expenses and other current assets and other
          assets..........................................     (3,847)        1,352      6,543
       Due to CMGI and affiliates.........................     29,362        15,191     12,095
       Accounts payable...................................      5,117       (31,213)    (3,995)
       Accrued expenses...................................    (28,326)        6,046    (21,426)
       Deferred revenue...................................      1,094        (6,002)    (4,024)
                                                            ---------   -----------   --------
          Net cash used for continuing operations.........    (41,182)      (50,961)   (32,530)
          Net cash provided by (used for) discontinued
            operations....................................    (89,720)      (47,282)    14,571
                                                            ---------   -----------   --------
          Net cash used for operating activities..........   (130,902)      (98,243)   (17,959)
                                                            ---------   -----------   --------
Cash flows from investing activities:
  Purchase of available-for-sale securities...............    (54,263)           --         --
  Proceeds from redemption of available-for-sale
     securities...........................................     87,163        16,400         --
  Net cash acquired on acquisition of subsidiaries........     21,963         2,706         --
  Purchases of property and equipment.....................    (16,842)       (8,217)      (698)
  Other, net..............................................     (1,992)          858         --
                                                            ---------   -----------   --------
          Net cash provided by (used for) investing
            activities....................................     36,029        11,747       (698)
                                                            ---------   -----------   --------
Cash flows from financing activities:
  Net change in debt to CMGI..............................     30,198            --      8,000
  Proceeds from issuance of common stock, net of issuance
     costs and repurchases................................     83,994         6,077        103
  Repayment of capital lease obligations..................     (3,173)       (4,733)    (2,631)
  Repayment of long-term debt.............................     (4,465)       (1,894)    (1,050)
                                                            ---------   -----------   --------
          Net cash provided by (used for) financing
            activities....................................    106,554          (550)     4,422
                                                            ---------   -----------   --------
Effect of exchange rate changes on cash and cash
  equivalents.............................................     (3,906)          498     (1,307)
                                                            ---------   -----------   --------
Net increase (decrease) in cash and cash equivalents......      7,775       (86,548)   (15,542)
Cash and cash equivalents, beginning of period............    112,034       119,809     33,261
                                                            ---------   -----------   --------
Cash and cash equivalents, end of period..................  $ 119,809   $    33,261   $ 17,719
                                                            =========   ===========   ========
Supplemental disclosures of cash flow information:
  Cash paid for interest..................................  $   1,353   $       995   $    188
                                                            =========   ===========   ========
</Table>

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

                                  ENGAGE, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) DESCRIPTION OF BUSINESS

     We sell software that enables publishers, advertisers and merchants to
streamline the creation, approval, production and re-purposing of advertising
and other marketing material. Additionally, our interactive products enable Web
publishers, advertisers and merchants to target and deliver advertisement,
content and e-commerce offerings to their audiences.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  BASIS OF PRESENTATION

     As of July 31, 2002, we were 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. In September 2002, we announced a
transaction with CMGI that resulted in the cancellation of debt and the
retirement of all shares held by CMGI, leaving CMGI with no ownership as of that
time (see note 20).

     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.

  DISCONTINUED OPERATIONS

     In April 2001, we announced the sale of certain assets of our wholly-owned
subsidiary Internet Profiles Corporation ("I/PRO"). In September 2001, we
announced the sale of certain assets of our AdKnowledge media service and the
shutdown of our media network, both of which, combined with I/PRO, comprised our
Media segment. Our media operations ceased in October 2001. During the year
ended July 31, 2001, we recorded a loss on the sale and abandonment of our media
operations of $16,707,000, or $(.09) in net loss per common share, fully
diluted. The loss from disposal of discontinued operations consisted of
$8,941,000 related to the write down of media fixed assets to their estimated
net realizable value, $3,290,000 related to the accrual of estimated losses for
the period August 1, 2001 through the date that media operations cease and
$4,476,000 related to costs directly associated with the decision to divest,
including post divestiture reorganization costs. Loss on discontinued operations
in the year ended July 31, 2002 of $602,000 represents the net losses for our
media operations in excess of prior estimates recorded during the year ended
July 31, 2001 as a result of a decision made in September 2001 to exit the media
segment. During the year ended July 31, 2002, we adjusted the loss on disposal
of discontinued operations to reflect the actual costs to close the segment,
resulting in a net reduction of losses totaling $1,056,000. The Media segment
has been accounted for as a discontinued operation. Accordingly, the Media
segment's current and long term assets have been segregated from continuing
operations in the accompanying consolidated balance sheet, and its operating
results have been segregated and reported as discontinued operations in the
accompanying consolidated statements of operations and cash flows, and related
notes. No liabilities associated with discontinued operations were assumed by a
third party. The results of discontinued operations were as follows:

<Table>
<Caption>
                                                            YEAR ENDED JULY 31,
                                                      --------------------------------
                                                        2000         2001        2002
                                                      ---------   -----------   ------
                                                               (IN THOUSANDS)
<S>                                                   <C>         <C>           <C>
Revenue.............................................  $ 129,977   $    67,354   $4,511
Loss from discontinued operations...................   (352,848)   (1,025,268)    (602)
Loss from disposal of discontinued operations.......         --       (16,707)   1,056
</Table>

                                        37
<PAGE>
                                  ENGAGE, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<Table>
<Caption>
                                                                 JULY 31,
                                                              --------------
                                                               2001     2002
                                                              -------   ----
                                                              (IN THOUSANDS)
<S>                                                           <C>       <C>
Accounts receivable, net of allowance for doubtful
  accounts..................................................  $12,008   $--
Prepaid expenses............................................    1,008    30
                                                              -------   ---
     Total current assets of discontinued operations........  $13,016   $30
                                                              =======   ===
</Table>

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

<Table>
<Caption>
                                                                 JULY 31,
                                                              ---------------
                                                               2001     2002
                                                              -------   -----
                                                              (IN THOUSANDS)
<S>                                                           <C>       <C>
Property and equipment, net of accumulated depreciation and
  amortization..............................................  $  701    $ 60
Other assets................................................     540      48
                                                              ------    ----
     Total non-current assets of discontinued operations....  $1,241    $108
                                                              ======    ====
</Table>

     As of July 31, 2002, we have a reserve of approximately $13,000 related to
future losses from discontinued operations that we expect to utilize during the
first quarter of our fiscal year 2003. Additionally, we have approximately
$3,418,000 of outstanding accounts receivable from media operations that have
been fully reserved. Any future collections of these receivables will result in
a reduction in loss from discontinued operations to be recorded in the period in
which cash is collected.

  LIQUIDITY

     At July 31, 2002, we had a working capital deficit of $59,692,000, an
accumulated deficit of $3.7 billion, and have reported losses from operations
since inception. We have used cash from operations of $41,182,000, $50,961,000
and $32,530,000 in the years ended July 31, 2000, 2001 and 2002, respectively.
We anticipate incurring additional losses throughout our next fiscal year.
Management has taken several actions to ensure that we continue as a going
concern through July 31, 2002, including actual and planned reductions in
operating expenses through headcount reductions, the closure of several
facilities, and the restructuring of amounts due to our parent, CMGI, discussed
in note 20. Based upon our cash flow estimates, we currently anticipate that our
available cash resources will be sufficient to meet our anticipated needs for
working capital and capital expenditures for at least the next year. Our cash
flow estimates are based upon attaining certain levels of sales, maintaining
budgeted levels of operating expenses, and collections of accounts receivable
for both our continuing and discontinued operations, among other assumptions,
including an improvement in the overall economic environment. Our sales
estimates include revenue from new sales channels for which we have no
historical basis to make estimates and we may be required to further reduce
expenses if budgeted sales are not attained. We may be unsuccessful in reducing
costs in proportion to any shortfall in projected sales. Our continued
collection of accounts receivable from discontinued operations may be hindered
by the old age of the outstanding balances, the financial status of the debtors,
the fact that uncollected amounts are comprised of a large number of small
balances, and the ability to continue to devote internal resources to the
collection effort.

     Since inception, the Company's operations have been funded primarily by
CMGI through the issuance of common stock, preferred stock, debt and convertible
debt, and our initial public offering in fiscal 2000. Since

                                        38
<PAGE>
                                  ENGAGE, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

we completed our transaction with CMGI in September 2002, we no longer have
access to financing through CMGI. If additional funds are needed and 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.

     Our common stock was delisted from the Nasdaq Stock Market effective with
the open of business on August 15, 2002. Our common stock currently is now
quoted on the NASD's OTC Bulletin Board. The continued delisting of our common
stock may make our stock less attractive to third parties, which could adversely
affect our ability to enter into future equity financing transactions or to
effect an acquisition or merger with other businesses. The accompanying
consolidated financial statements have been prepared assuming that the Company
will continue as a going concern, and as such, do not reflect any adjustments
that may result from the outcome of these uncertainties.

  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 accounting
principles generally accepted in the United States of America 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.

  REVENUE RECOGNITION

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

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

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

     Our service and support revenue includes revenue from software maintenance
and other professional services, primarily from consulting, implementation and
training. We defer revenue from software maintenance and recognize it ratably
over the term of each maintenance agreement, which is typically twelve
                                        39
<PAGE>
                                  ENGAGE, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

months. We recognize revenue from professional services as the services are
performed and collectibility is probable.

     Revenue recognized on transactions whereby we exchange products and/or
services in return for equity instruments is valued when a contract is signed,
signaling a mutual understanding of the terms of the equity based compensation
and a commitment of performance on our behalf to earn the equity instruments.
Revenue under such arrangements is recognized in accordance with the revenue
recognition policies stated above.

     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, 2001 and 2002
consisted of a money market mutual fund.

  NON-CASH TRANSACTIONS

     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 a 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, Inc. ("AdKnowledge"), Flycast,
the Virtual Billboard Network ("VBN") and additional ownership in Engage
Technologies Japan through the issuance of an aggregate of approximately
64,217,000 shares of common stock (see note 4).

     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 4). 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.

     During fiscal 2001, as a result of the termination of employment of certain
employees prior to the vesting of their stock options, unvested stock options
for which deferred compensation costs had been recorded in a prior period were
cancelled. As a result of these cancellations, we have recorded a reduction of
$4,437,000 in both deferred compensation and additional paid-in capital.

     During fiscal 2001, we acquired MediaBridge and Space Media Holdings
Limited ("Space") through the issuance of an aggregate of approximately
16,441,000 shares of common stock (see note 4).

     During fiscal 2001, as a result of the termination of employment of former
Flycast employees, non-cash financing activities included the return of Engage
common shares previously issued to CMGI as part of the Flycast acquisition. As a
result, we have recorded a reduction of additional paid-in capital and dividend
to CMGI (included within accumulated deficit) of approximately $163,408,000 and
$164,303,000, respectively (see note 4).

                                        40
<PAGE>
                                  ENGAGE, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     During fiscal 2002, approximately $53.7 million in amounts due to CMGI were
formally converted to secured debt to CMGI (see note 7).

     During fiscal 2002, we increased our ownership percentage in Engage Japan,
Inc. from 66.6% to 94.0% through the issuance of one million shares of our
common stock to Sumitomo Corporation, a minority stockholder in Engage Japan,
Inc. Additionally, we closed Engage Japan, Inc. Accordingly, we have written-
off the minority interest of Engage Japan to additional paid-in capital due to
the subsidiary's net deficit position and the resulting determination that there
are no additional liabilities to minority shareholders.

     During fiscal 2002, we settled a liability that had been accrued as part of
the purchase accounting associated with the acquisition of MediaBridge. The
settlement was $383,000 less than originally accrued as part of our purchase
accounting transaction, and as such the gain has been recorded as an offset to
goodwill recorded in the MediaBridge acquisition.

     During fiscal 2002, as a result of the termination of employment of certain
employees prior to the vesting of their stock options, unvested stock options
for which deferred compensation costs had been recorded in a prior period were
cancelled. As a result of these cancellations, we have recorded a reduction of
$746,000 in both deferred compensation and additional paid-in capital.

     During fiscal 2002, as a result of the termination of employment of former
Flycast employees, non-cash financing activities included the return of Engage
common shares previously issued to CMGI as part of the Flycast acquisition. As a
result, we have recorded a reduction of additional paid-in capital and dividend
to CMGI (included within accumulated deficit) of approximately $96,237,000 and
$96,281,000, respectively (see note 4).

  FAIR VALUE OF FINANCIAL INSTRUMENTS, CONCENTRATION OF RISK AND SIGNIFICANT
CUSTOMERS

     The carrying value of cash and cash equivalents, accounts receivable,
unbilled accounts receivable, prepaid expenses and other current assets,
accounts payable, due to CMGI and due to CMGI affiliates approximates fair value
because of the short-term nature of these instruments. The carrying value of
debt to CMGI, 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.

     Sales to two customers accounted for 28% and 11% of our revenue for the
year ended July 31, 2000. Sales to two customers accounted for 13% and 12% of
our revenue for the year ended July 31, 2001. No customer accounted for greater
than 10% of our revenue for the year ended July 31, 2002. Our customer base
consists of geographically diverse customers concentrated primarily in the
newspaper and retail industries.

  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.

  INTANGIBLE ASSETS

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

                                        41
<PAGE>
                                  ENGAGE, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS

     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 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.

                                        42
<PAGE>
                                  ENGAGE, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     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.

     Subsequent to our acquisition of MediaBridge, CMGI owned approximately 78%
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 the MediaBridge
acquisition. 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 group; however, under the policy, CMGI is not obligated to reimburse us
for any losses utilized in the consolidated CMGI group. See note 20.

  ADVERTISING COSTS

     We expense advertising costs as incurred. Advertising expense was
approximately $5,417,000, $4,868,000 and $(84,000) for the fiscal years ended
July 31, 2000, 2001 and 2002, 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 13).

     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 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 12, 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 4 and 7).
The pro forma basic and diluted net loss per share information included in the
accompanying statements of operations for the year ended July 31, 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.

                                        43
<PAGE>
                                  ENGAGE, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Historical basic and diluted net loss per share have not been presented on
the face of the income statement for the year ended July 31, 2000 because they
are irrelevant due to the significant change in our 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 per share loss from continuing operations is as follows:

                        BASIC AND DILUTED LOSS PER SHARE

<Table>
<Caption>
                                                               YEAR ENDED JULY 31,
                                                              ----------------------
                                                                 2001        2002
                                                              ----------   ---------
                                                              (IN THOUSANDS, EXCEPT
                                                                 PER SHARE DATA)
<S>                                                           <C>          <C>
Numerator:
Loss from continuing operations.............................  $(235,028)   $(92,350)
                                                              ---------    --------
Denominator:
Weighted average shares outstanding.........................    194,756     196,419
                                                              ---------    --------
Basic and diluted per share loss from continuing
  operations................................................  $   (1.21)   $  (0.47)
                                                              =========    ========
</Table>

     The reconciliation of the numerators and denominators of the pro forma
basic and pro forma diluted per share loss from continuing operations for the
year ended July 31, 2000 is as follows:

                   PRO FORMA BASIC AND DILUTED LOSS PER SHARE

<Table>
<Caption>
                                                              (IN THOUSANDS, EXCEPT
                                                                 PER SHARE DATA)
<S>                                                           <C>
Numerator:
Loss from continuing operations.............................        $(25,022)
                                                                    --------
Denominator:
Weighted average shares outstanding.........................         137,615
Assumed conversion of preferred stock.......................             514
Assumed conversion of debt to CMGI..........................           6,915
                                                                    --------
Weighted average number of diluted shares outstanding.......         145,044
                                                                    --------
Pro forma basic and diluted per share loss from continuing
  operations................................................        $  (0.17)
                                                                    ========
</Table>

     Had we presented the historical basic and diluted per share loss from
continuing operations for the year ended July 31, 2000, the historical basic and
diluted per share loss from continuing operations would have been $(0.18).

     At July 31, 2002, we had outstanding stock options to purchase 7,707,856
shares of common stock at a weighted average exercise price of $3.49 that could
potentially dilute earnings. None of these outstanding stock options were
in-the-money as of July 31, 2002. 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.

                                        44
<PAGE>
                                  ENGAGE, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  COMPREHENSIVE LOSS

     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
and the change in foreign currency translation, which prior to adoption were
reported separately in stockholders' equity, to be included in other
comprehensive income.

  RECLASSIFICATIONS

     Certain prior year amounts in the consolidated financial statements have
been reclassified to conform to the current year presentation.

  NEW ACCOUNTING PRONOUNCEMENTS

     In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 provides new
guidance on the accounting for a business combination at the date a business
combination is completed. Specifically, it requires use of the purchase method
of accounting for all business combinations initiated after June 30, 2001,
thereby eliminating use of the pooling-of-interests method. SFAS No. 142
establishes new guidance on how to account for goodwill and intangible assets
after a business combination is completed. Among other things, it requires that
goodwill and certain other intangible assets will no longer be amortized and
will be tested for impairment at least annually and written down only when
impaired. This statement will apply to existing goodwill and intangible assets,
beginning with fiscal years starting after December 15, 2001. Early adoption of
the statement will be permitted for companies with a fiscal year beginning after
March 15, 2001, for which first quarter financial statements have not been
issued. We do not believe that either of these statements will have a material
impact on our financial position, results of operation and cash flows.

     In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations, which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and for the
associated retirement costs. SFAS No. 143 applies to all entities that have a
legal obligation associated with the retirement of a tangible long-lived asset.
This statement is effective for fiscal years beginning after June 15, 2002. We
do not believe that the adoption of SFAS No. 143 will have a material impact on
our financial position, results of operations and cash flow.

     In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which addresses financial accounting and
reporting for the impairment of long-lived assets. This statement was effective
for fiscal years beginning after December 15, 2001, and interim periods within
those years. We do not believe that the adoption of SFAS No. 143 will have a
material impact on our financial position, results of operations and cash flow.

     In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. This statement rescinds SFAS No. 4, Repotting Gains and Losses from
Extinguishment of Debt, SFAS No. 64, Extinguishment of Debt Made to Satisfy
Sinking-Fund Requirements and SFAS No. 44, Accounting for Intangible Assets of
Motor Carriers. This statements also amends SFAS No. 13, Accounting for Leases,
to eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. This
statement also amends other existing authoritative pronouncements to make
various technical corrects, clarify meanings or describe their applicability
under changed conditions. This statements is effective for financial statements
issued on or after May 15, 2002. The adoption of SFAS No. 145 did not have a
material impact on our financial position, results of operations and cash flows.

                                        45
<PAGE>
                                  ENGAGE, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
With the Exit or Disposal Activities. This statement requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
This statement is effective for fiscal years beginning after December 31, 2002.
While the adoption of SFAS No. 146 may impact the period in which exit or
disposal costs are recognized, we do not believe its adoption will have a
material impact on our financial position, results of operation or cash flows.

(3) PROPERTY AND EQUIPMENT

<Table>
<Caption>
                                                                             JULY 31,
                                                     ESTIMATED           -----------------
                                                    USEFUL LIFE           2001      2002
                                              ------------------------   -------   -------
                                                                          (IN THOUSANDS)
<S>                                           <C>                        <C>       <C>
Office furniture and computer equipment.....         3-5 years           $ 8,438   $ 7,668
Software licenses...........................         3-4 years             3,172     3,374
Leasehold improvements......................  4 years or life-of-lease       542       580
                                                                         -------   -------
     Total..................................                              12,152    11,622
Less: Accumulated depreciation and
  amortization..............................                              (5,058)   (7,703)
                                                                         -------   -------
Property and equipment, net.................                             $ 7,094   $ 3,919
                                                                         =======   =======
</Table>

     Property and equipment recorded under capital leases amounted to
approximately $269,000 at July 31, 2001. Total accumulated amortization related
to these assets under capital leases amounted to approximately $85,000 at July
31, 2001. All equipment recorded under capital leases at July 31, 2001 was
included in non-current assets of discontinued operations. Assets recorded under
capital lease as of July 31, 2002 were fully impaired, and as such, no cost or
accumulated depreciation was recorded at that time.

(4) ACQUISITIONS AND DIVESTITURES

     The following summarizes acquisitions within our continuing operations:

     In September 2000, we completed our acquisition of MediaBridge, a leading
software provider of cross-media, closed loop targeted marketing systems, for
approximately $219.1 million including acquisition costs of approximately
$482,000 and net of cash acquired of $2.6 million. The purchase price consisted
of approximately 11,741,000 common shares with a weighted average per share
value of $16.20 and stock options to acquire our common stock valued at
approximately $31.1 million. We also recorded approximately $7.0 million in
deferred compensation related to the intrinsic value of stock options issued to
MediaBridge employees. Approximately twelve percent of the shares issued are
subject to an escrow period of one year to secure certain indemnification
obligations of the former stockholders of MediaBridge. The value of our shares
included in the purchase price was recorded net of a weighted average 6.25%
market discount to reflect restrictions on transferability on some of these
shares. In the third quarter of fiscal 2001, we recorded a $2.9 million
adjustment to the goodwill that was originally recorded for the MediaBridge
acquisition. The adjustment related principally to accruing liabilities related
to MediaBridge's pre-acquisition contingencies. The additional goodwill recorded
will be amortized over the remaining life of the goodwill originally recorded
for the MediaBridge acquisition.

     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 dates of acquisition.
The amounts of the purchase price allocated to goodwill and other identifiable
intangible assets are being amortized on a straight-line basis over two to three
years. Amortization of goodwill and other identifiable intangible assets,
excluding developed technology amortization, is reflected as a separate
component within operating expenses. Amortization of developed technology is
reflected as a separate

                                        46
<PAGE>
                                  ENGAGE, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

component within cost of revenue. The acquired companies are included in our
consolidated financial statements from the dates of acquisition.

     The purchase prices for the acquisition was allocated as follows:

<Table>
<S>                                                           <C>
Working capital deficit, net of cash acquired of $2,636.....  $(10,177)
Property and equipment......................................     2,034
Other assets................................................       286
In-process research and development.........................       700
Long-term obligations.......................................      (690)
Goodwill....................................................   202,612
Other identifiable intangible assets........................    24,300
                                                              --------
Purchase price, net of cash acquired........................  $219,065
                                                              ========
</Table>

     The following table represents our unaudited pro forma results of
operations for the years ended July 31, 2000 and 2001, as if the MediaBridge
acquisition had occurred on August 1, 1999 and as if we owned 66.6% of Engage
Technologies Japan on August 1, 1999. These pro forma results include
adjustments for the amortization of goodwill and other intangibles and deferred
compensation, 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,
                                                              -----------------------
                                                                 2000         2001
                                                              ----------   ----------
                                                                  (IN THOUSANDS,
                                                              EXCEPT PER SHARE DATA)
<S>                                                           <C>          <C>
Net revenue.................................................  $  68,138    $  45,136
Loss from continuing operations.............................   (118,671)    (250,971)
Pro forma net loss from continuing operations per share.....  $   (0.63)   $   (1.28)
</Table>

     The following summarizes acquisitions within our discontinued Media
segment:

     In December 1999, we acquired 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
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.

     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"). 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%

                                        47
<PAGE>
                                  ENGAGE, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 reconciliation of the net
dividend to CMGI recorded as a component of accumulated deficit for the years
ended July 31, 2000, 2001 and 2002, 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 received from/due from CMGI
  for option cancellations for the period April 30, 2000
  through July 31, 2000.....................................       (80,927)
Cash consideration for exercise price of CMGI stock
  options...................................................        (7,497)
                                                                ----------
  Net dividend to CMGI recorded as of July 31, 2000.........     2,169,441
Value of Engage common shares received from/due from CMGI
  for option cancellations for the period August 1, 2000
  through July 31, 2001.....................................      (163,408)
Cash consideration for exercise price of CMGI stock
  options...................................................          (895)
                                                                ----------
  Net dividend to CMGI as of July 31, 2001..................     2,005,138
Value of Engage common shares received from/due from CMGI
  for option cancellations for the period August 1, 2001
  through July 31, 2002.....................................       (96,256)
Cash consideration for exercise price of CMGI stock
  options...................................................           (25)
                                                                ----------
  Net dividend to CMGI as of July 31, 2002..................    $1,908,857
                                                                ==========
</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.

     In June 2000, we acquired substantially all of the assets of 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.

                                        48
<PAGE>
                                  ENGAGE, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In August 2000, we completed our acquisition of Space, a leading
independent Internet marketing network in Asia, in an all-stock transaction for
approximately $35.8 million including acquisition costs of $425,000 and net of
cash acquired of $70,000. The purchase price consisted of approximately
3,174,000 common shares with a per share value of $11.17. We also recorded
approximately $18.9 million in deferred compensation related to approximately
1,525,000 common shares issuable to the employee shareholders of Space
contingent upon the employees' remaining with us for one year after the date of
acquisition. Contingent consideration, consisting of approximately 1,404,000
common shares, was placed in escrow to secure certain performance obligations by
Space. The performance goals were not met by Space, and the contingent
consideration shares in escrow were returned to us during fiscal 2002.

     Business operations associated with 2Can, Adsmart, I/PRO, AdKnowledge,
Flycast, VBN, ISI and Space were included in our Media segment, which
discontinued operations in October 2001 (see note 2).

     In April 2001, we sold certain assets and liabilities of I/PRO to an
unrelated third-party and ceased providing the related media services. We
recorded a loss of approximately $2.3 million in the year ended July 31, 2001 in
conjunction with the sale of certain assets and liabilities of I/PRO.

(5) CONSOLIDATION OF ENGAGE JAPAN

     In August 1998, we acquired for $1.4 million in cash, 49% of the shares of
Engage Japan (formerly Engage Technologies Japan, Inc.), 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 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 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.

     In November 2001, we increased our ownership percentage in Engage Japan,
Inc. from 66.6% to 94.0% through the issuance of 1 million shares of common
stock valued at $250,000 to Sumitomo Corporation, a minority stockholder in
Engage Japan, Inc. In conjunction with this transaction, we recorded a
reclassification of $6.8 million from minority interest to additional paid-in
capital to reflect the incremental change in ownership interest.

     As of April 2002, we had ceased the operations of Engage Japan, Inc. We
intend to service the Japanese market through both our US and foreign
subsidiaries. As part of the transaction, we have entered into an arrangement
with Sumitomo Corporation through April 2003 whereby we will pay them a 50%
royalty on qualifying software sales made by Engage in Japan until an aggregate
of $350,000 has been paid to Sumitomo, at which point a 25% royalty will be
paid. Such payments will be recorded as a component of cost of product revenue.

(6) IMPAIRMENT

     During the year ended July 31, 2001, we recorded impairment charges
totaling approximately $109.0 million related to our software and services
business which are reflected within amortization and impairment of goodwill and
other intangibles. Impairment charges were recorded as a result of management's
business review and impairment analysis performed during the year ended July 31,
2001 under its existing policy regarding impairment of long-lived assets.
Additionally, where impairment indicators were identified, management determined
the amount of the impairment charge by comparing the carrying value of goodwill
and certain other intangible assets to their fair value. Management determines
fair value utilizing a combination of the discounted cash flow methodology,
which is based upon converting expected future cash flows to present value, and
the market approach, which includes an analysis of market price multiples of
companies engaged in lines of business similar to our business. The market price
multiples are selected and applied to us based on

                                        49
<PAGE>
                                  ENGAGE, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the relative performance, future prospects and risk profile of Engage in
comparison to the guideline companies.

     During the year ended July 31, 2001, we experienced negative revenue growth
due to worsening general macroeconomic conditions, a decrease in both the size
and quantity of orders for our ad serving and content management software
solutions, declines in the market value of our stock, liquidity issues, and
management's expectations of future performance. As a result, during
management's quarterly and year end reviews of the value and periods of
amortization of both goodwill and other intangible assets, it was determined
that the carrying value of goodwill and certain other intangible assets within
our software and services business were not fully recoverable. As a result, in
the fourth quarter ended July 31, 2001, we recorded impairment charges totaling
$109.0. Management also assessed the useful lives associated with remaining
intangibles, primarily three years, and determined that the useful lives were
appropriate.

     The discount rates used in the impairment calculations during fiscal 2001
ranged from 20% to 25%. These discount rates were determined by an analysis of
the risks associated with certain goodwill and other intangible assets at the
time at which the impairment analysis was performed. The resulting net cash
flows to which the discount rates were applied were based on management's
estimates of revenues, operating expenses and income taxes from the assets with
identified impairment indicators at the time at which the impairment analysis
was performed.

     During the year ended July 31, 2002, our business continued to experience
negative revenue growth due to worsening general macroeconomic conditions, a
decrease in both the size and quantity of orders for our ad serving and content
management software solutions, declines in the market value of our stock,
liquidity issues, as well as management's continued expectations for marginal
future performance. Additionally, in the fourth quarter of the year ended July
31, 2002, CMGI rescinded their offer to acquire all of the outstanding shares of
the Company, leaving doubt about our ability to raise additional financing to
fund operations. With all of these factors in mind, during management's
quarterly and year end reviews of the value and periods of amortization of both
goodwill and other intangible assets, it was determined that the carrying value
of goodwill and certain other intangible assets within our Software segment were
not fully recoverable. As a result, in the fourth quarter ended July 31, 2002 we
recorded impairment charges totaling $32.1 million. The impairment charge is
based on utilizing a combination of the discounted cash flow methodology, which
is based upon converting expected future cash flows to present value, and the
market approach, which includes an analysis of market price multiples of
companies engaged in lines of business similar to our business. This analysis
determined that all intangibles remaining at the time of the assessment were
fully impaired and as such should be written-off.

(7) 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
accrued interest at the annual rate of 7%, and advances and accrued interest
were prepayable without penalty. Advances outstanding under this note were
secured by substantially all our assets and intellectual property. Principal and
accrued interest were convertible 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 was 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.

                                        50
<PAGE>
                                  ENGAGE, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

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

     In October 2001, CMGI and Engage agreed to structure any intercompany debt
incurred by us subsequent to October 1, 2001 through July 31, 2002 under a
secured convertible promissory note bearing interest at 7.5%. This note was
amended in February 2002. Under the terms of the promissory note, principal will
become due and payable on demand any time on or after August 1, 2002 or earlier
upon the occurrence of an event of default as defined in the note. Interest is
compounded monthly and payable quarterly in arrears on October 31, January 31,
April 30 and July 31 of each year until the note is paid in full. Interest
payments for the quarters ending October 31, 2001, January 31, 2002, April 30,
2002 and July 31, 2002 are deferred and become payable on August 1, 2002. The
principal and/or interest of the intercompany debt incurred each calendar month
under the note will be convertible, at CMGI's election, into our common stock at
a conversion price equal to the closing price of our common stock on the last
trading day of such calendar month. In addition, the note contains an
anti-dilution provision whereby the conversion price may be adjusted downward if
we were to issue any shares of common stock in the future at a price per share
less than the then current market price. Pursuant to Nasdaq requirements, by
written consent dated February 28, 2002, CMGI, our majority stockholder,
approved the issuance of our common stock that may be issued upon the conversion
of this note. The note is collateralized by substantially all of our assets.
Debt incurred under this agreement was approximately $11.0 million as of July
31, 2002.

     See note 20.

 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
                                        51
<PAGE>
                                  ENGAGE, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

     See note 20.

(8) ACCRUED EXPENSES

<Table>
<Caption>
                                                                  JULY 31,
                                                              -----------------
                                                               2001      2002
                                                              -------   -------
                                                               (IN THOUSANDS)
<S>                                                           <C>       <C>
Restructuring...............................................  $11,511   $ 1,162
Loss from discontinued operations...........................    7,767        13
Accrued accounts payable....................................    5,126     1,798
Rent........................................................      265     2,402
Other.......................................................   13,727     6,989
                                                              -------   -------
Total accrued expenses......................................  $38,396   $12,364
                                                              =======   =======
</Table>

(9) LEASES

     We lease certain computer equipment under capital leases which expired or
were settled during 2002. 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
2005. We also pay CMGI for office facilities used as our headquarters for which
we are charged based upon an allocation of the total costs for the facilities at
estimated market rates.

     We lease certain property and equipment 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. As of July 31, 2002, the leasing
arrangements with the subsidiary of CMGI had been terminated. See note 20.

     Total rent expense amounted to $2,648,000, $5,519,000 and $8,448,000 for
the years ended July 31, 2000, 2001 and 2002, respectively. As a result of a
decrease in facility needs arising from the shutdown of our Media segment, as
well as decreased staffing levels resulting from prior restructuring activities,
we are currently obligated under such sublease to pay for facilities that are no
longer occupied by the Company. As a result, during the year ended July 31, 2002
we accrued approximately $2.6 million related to future estimated net lease and
occupancy costs for such facilities and estimated costs to restore the
facilities to original condition. The accrual is based upon total future lease
costs under the facility lease, which expires in October 2007, less estimated
proceeds from possible subleasing arrangements that the Company may be able to
enter into during future periods. Additionally, we have additional facilities
that are no longer occupied by us under the sublease that are currently being
occupied by CMGI. While we are not incurring an expense for these facilities at
the current time, we are obligated under the sublease to continue lease payments
should CMGI choose to vacate the facility. No accrual of future lease costs has
been made at this time for these facilities.

                                        52
<PAGE>
                                  ENGAGE, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Total sublease payments that were received and offset against rent expense
were approximately $181,000 and $974,000 for the years ended July 31, 2001 and
2002, respectively. Rent paid to CMGI for office facilities amounted to
approximately $548,000, $2,035,000 and $1,863,000 for the years ended July 31,
2000, 2001 and 2002, respectively. Rent expense for equipment billed by CMGI and
a CMGI subsidiary amounted to approximately $1,108,000, $656,000 and $719,000
for the years ended July 31, 2000, 2001 and 2002, respectively. Rent expense for
computer equipment paid to Compaq Computer Corporation ("Compaq"), a previously
affiliated company, amounted to approximately $236,000, $1,417,000 and
$1,420,000 for the years ended July 31, 2000, 2001 and 2002, respectively.

     Minimum annual rental commitments are as follows at July 31, 2002:

<Table>
<Caption>
                                                              OPERATING   CAPITAL
                                                               LEASES     LEASES
                                                              ---------   -------
                                                                (IN THOUSANDS)
<S>                                                           <C>         <C>
2003........................................................   $ 2,554     $295
2004........................................................     2,394       --
2005........................................................     1,780       --
2006........................................................     1,706       --
2007........................................................     1,706       --
Thereafter..................................................       426       --
                                                               -------     ----
                                                               $10,566      295
                                                               =======
Less: amount representing interest..........................                 --
                                                                           ----
Present value of capital lease obligations..................               $295
                                                                           ====
Comprised of:
  Current portion...........................................               $295
  Non-current portion.......................................                 --
                                                                           ----
                                                                           $295
                                                                           ====
</Table>

     See note 20.

(10) LONG-TERM DEBT

     Long-term debt consists of the following at July 31, 2001:

<Table>
<S>                                                           <C>
Subordinated secured promissory note dated February 26,
  1999, 13% interest per annum, 30 monthly payments of
  $49,115, maturing September 2001..........................  $    98
Subordinated loan agreement and secured promissory note,
  dated August 20, 1999, 13.3% interest per annum, 36
  monthly payments of $135,344, maturing September 2002,
  collateralized by substantially all assets of
  AdKnowledge...............................................    1,861
                                                              -------
Total long-term debt........................................    1,959
Less: current portion.......................................   (1,693)
                                                              -------
Net long-term portion.......................................  $   266
                                                              =======
</Table>

(11) INCOME TAXES

     A majority of our 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

                                        53
<PAGE>
                                  ENGAGE, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

     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,
                                                              -------------------
                                                                2001       2002
                                                              --------   --------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
Deferred tax assets:
  Research credits..........................................  $    656   $  1,942
  Deferred stock-based compensation.........................    10,136         --
  Deferred revenue..........................................       815        699
  Accruals and other reserves...............................     9,698      3,412
  Income tax basis in excess of financial basis of
     intangible and fixed assets............................        --        806
  Loss carryforwards........................................   129,340    100,056
                                                              --------   --------
                                                               150,645    106,915
  Less: Valuation allowance.................................   147,180    106,915
                                                              --------   --------
  Net deferred tax assets...................................     3,465         --
                                                              --------   --------
Deferred tax liabilities:
  Financial basis in excess of income tax basis of
     intangible and fixed assets............................    (3,465)        --
                                                              --------   --------
                                                              $     --   $     --
                                                              ========   ========
</Table>

     Subsequently reported tax benefits relating to the valuation allowance for
deferred tax assets as of July 31, 2002 will be allocated as follows:

<Table>
<Caption>
                                                              (IN THOUSANDS)
<S>                                                           <C>
Income tax benefit that would be recognized in the
  consolidated statements of operations.....................     $ 93,491
Charge to additional paid-in capital for recognition of
  stock-based compensation..................................       13,424
                                                                 --------
                                                                 $106,915
                                                                 ========
</Table>

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

<Table>
<Caption>
                                                                     JULY 31,
                                                             ------------------------
                                                              2000     2001     2002
                                                             ------   ------   ------
<S>                                                          <C>      <C>      <C>
Statutory tax rate.........................................   35.00%   35.00%   35.00%
Non-deductible goodwill amortization.......................   (6.00)  (26.26)  (23.12)
Write-off of in-process research and development...........    0.00    (0.11)    0.00
Losses not benefited, including losses utilized by
  parent...................................................  (28.44)   (8.30)  (11.40)
Nondeductible and other permanent items....................   (0.56)   (0.33)   (0.48)
                                                             ------   ------   ------
     Net effective tax rate................................    0.00%    0.00%    0.00%
                                                             ======   ======   ======
</Table>

                                        54
<PAGE>
                                  ENGAGE, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     We have federal net operating loss carryforwards of approximately
$263,792,000 as of July 31, 2002, which will expire from 2009 through 2022, of
which approximately $31,058,000 resulted from employee stock option exercises.
We also have state net operating loss carryforwards of approximately
$289,078,000, which will expire from 2002 through 2012, of which, $41,361,000
resulted from employee stock option exercises. 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 or future ownership changes. An
ownership change occurs when the ownership percentage of 5% or greater
stockholders changes by more than 50% over a three-year period (see note 20).

(12) STOCKHOLDERS' EQUITY

  PRIVATE PLACEMENT

     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.

  AUTHORIZED SHARE INCREASE AND STOCK SPLIT

     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

     During fiscal 2000, we 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.

     During fiscal 2001, we recorded deferred compensation of $6,971,000 related
to the intrinsic value of stock options issued to MediaBridge employees and
$18,927,000 related to approximately 1,525,000 common shares issuable to the
employee shareholders of Space contingent upon the employees' remaining with us
for one year after the date of acquisition. 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 2001, we recorded $745,000 of stock compensation resulting
from the acceleration of stock options granted to several executives whose
employment with Engage was terminated.

     During fiscal 2002, as a result of the Media shutdown, approximately
$1,343,000 of stock compensation costs originally recorded in the Space
acquisition were recognized and recorded as an offset to our reserve for
discontinued operations.

                                        55
<PAGE>
                                  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,
                                                              ----------------------
                                                              2000    2001     2002
                                                              ----   ------   ------
                                                                  (IN THOUSANDS)
<S>                                                           <C>    <C>      <C>
Cost of revenue.............................................  $ 33   $  475   $  396
Research and development....................................   136      476      370
Selling and marketing.......................................   134      611      378
General and administrative..................................    44      378       42
                                                              ----   ------   ------
     Total..................................................  $347   $1,940   $1,186
                                                              ====   ======   ======
</Table>

  PREFERRED STOCK -- ENGAGE

     In July 1998, our shareholders authorized 5,000,000 shares of preferred
stock. No shares have been issued or are outstanding.

  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 was 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 was voting and was 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 had a liquidation preference
of $13.33 per share plus dividends of 7% compounded annually beginning on
February 1, 1998. The Series A Preferred Stock was 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 was 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 was 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 ranked pari passu with the Series A Preferred Stock, and had a liquidation
preference equal to its purchase price plus dividends computed at 7% annually.
The Series B Preferred Stock was 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.

(13) 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

                                        56
<PAGE>
                                  ENGAGE, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

  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.

  ENGAGE 2000 EQUITY INCENTIVE PLAN

     In August 2000, our Board of Directors approved the 2000 Equity Incentive
Plan (the "2000 Plan"). Under the 2000 Plan up to 10,000,000 non-qualified stock
options may be granted to employees or consultants of Engage or any affiliate,
except to individuals who are subject to the reporting obligations of Section 16
of the Securities Exchange Act of 1934. The Board of Directors administers this
plan, selects the individuals to whom options will be granted, and determines
the number of shares, vesting period and exercise price of each option.

     The following table reflects activity and historical prices of stock
options under our 1995 Plan, the 1999 Directors Plan and the 2000 Plan for the
three years ended July 31, 2002:

<Table>
<Caption>
                                                      YEAR ENDED JULY 31,
                            -----------------------------------------------------------------------
                                    2000                     2001                     2002
                            ---------------------   ----------------------   ----------------------
                                         WEIGHTED                 WEIGHTED                 WEIGHTED
                                         AVERAGE                  AVERAGE                  AVERAGE
                            NUMBER OF    EXERCISE    NUMBER OF    EXERCISE    NUMBER OF    EXERCISE
                              SHARES      PRICE       SHARES       PRICE       SHARES       PRICE
                            ----------   --------   -----------   --------   -----------   --------
<S>                         <C>          <C>        <C>           <C>        <C>           <C>
Options outstanding,
  beginning of period.....  18,534,676    $ 3.37     23,643,071    $16.64     16,433,532    $7.45
Granted...................  10,114,024     35.07     19,513,440      4.16      3,926,000     0.21
Exercised.................  (2,955,344)     1.19     (4,102,661)     1.01        (50,466)    0.10
Cancelled.................  (2,050,285)     9.90    (22,620,318)    15.39    (12,601,210)    7.64
                            ----------              -----------              -----------
Options outstanding, end
  of period...............  23,643,071    $16.64     16,433,532    $ 7.45      7,707,856    $3.49
                            ==========    ======    ===========    ======    ===========    =====
Options exercisable, end
  of period...............   5,356,126    $ 3.56      3,279,593    $10.76      3,331,640    $4.90
                            ==========    ======    ===========    ======    ===========    =====
Options available for
  grant, end of period....   7,956,589               20,378,232               29,056,261
                            ==========              ===========              ===========
</Table>

                                        57
<PAGE>
                                  ENGAGE, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following table summarizes information about stock options under our
1995 Plan, 1999 Directors Plan and the 2000 Plan outstanding at July 31, 2002:

<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 - $0.20....................   2,246,666        4.0            $ 0.17          211,716        $ 0.13
$0.21 - $0.40....................     882,000        4.6              0.28               --            --
$0.41 - $0.60....................      20,000        4.4              0.53               --            --
$0.61 - $0.80....................     762,619        3.1              0.75          345,846          0.75
$0.81 - $1.00....................     953,795        3.5              0.98          830,946          0.99
$1.01 - $2.50....................     998,750        3.0              1.75          822,354          1.71
$2.51 - $5.00....................      76,288        3.2              3.37           59,378          3.18
$5.01 - $7.50....................     427,096        1.1              7.33          371,483          7.32
$7.51 - $10.00...................     321,860        4.4              7.89          170,308          7.87
$10.01 - $92.50..................   1,018,782        2.9             16.80          519,609         18.42
                                    ---------                                     ---------
                                    7,707,856        3.5            $ 3.49        3,331,640        $ 4.90
                                    =========                                     =========
</Table>

  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 three years ended July 31, 2002:

<Table>
<Caption>
                                                         YEAR ENDED JULY 31,
                                 -------------------------------------------------------------------
                                         2000                   2001                    2002
                                 --------------------   ---------------------   --------------------
                                             WEIGHTED                WEIGHTED               WEIGHTED
                                             AVERAGE                 AVERAGE                AVERAGE
                                 NUMBER OF   EXERCISE   NUMBER OF    EXERCISE   NUMBER OF   EXERCISE
                                  SHARES      PRICE       SHARES      PRICE      SHARES      PRICE
                                 ---------   --------   ----------   --------   ---------   --------
<S>                              <C>         <C>        <C>          <C>        <C>         <C>
Options outstanding, beginning
  of period....................  1,019,910    $ 4.66       816,658    $ 8.25     908,584     $21.28
Granted........................     89,650     42.75            --        --          --         --
Transfer of employees from CMGI
  and affiliates...............         --        --     1,890,176     26.96          --         --
Exercised......................   (272,534)     4.38      (368,759)     4.68     (16,055)      0.40
Cancelled......................    (20,368)    28.17    (1,429,491)    25.68    (810,746)     22.88
                                 ---------              ----------              --------
Options outstanding, end of
  period.......................    816,658    $ 8.35       908,584    $21.28      81,783     $ 9.53
                                 =========    ======    ==========    ======    ========     ======
Options exercisable, end of
  period.......................    230,693    $ 4.67       530,219    $17.41      78,828     $ 9.69
                                 =========    ======    ==========    ======    ========     ======
</Table>

                                        58
<PAGE>
                                  ENGAGE, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following table summarizes information about stock options under the
CMGI 1986 Stock Plan outstanding at July 31, 2002:

<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>
$5.00............................    71,699          1.1            $ 5.00         68,744          $ 5.00
$39.44 - $42.75..................    10,084          2.4             41.70         10,084           41.70
                                     ------                                        ------          ------
                                     81,783          1.3              9.53         78,828            9.69
                                     ======                                        ======          ======
</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.

     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
through July 31, 2002:

<Table>
<Caption>
                                                          YEAR ENDED JULY 31,
                                   ------------------------------------------------------------------
                                           2000                   2001                   2002
                                   --------------------   --------------------   --------------------
                                               WEIGHTED               WEIGHTED               WEIGHTED
                                               AVERAGE                AVERAGE                AVERAGE
                                   NUMBER OF   EXERCISE   NUMBER OF   EXERCISE   NUMBER OF   EXERCISE
                                    SHARES      PRICE      SHARES      PRICE      SHARES      PRICE
                                   ---------   --------   ---------   --------   ---------   --------
<S>                                <C>         <C>        <C>         <C>        <C>         <C>
Options outstanding, beginning of
  period.........................   832,572     $4.01      567,245     $5.56       39,728     $1.50
Exercised........................   (24,461)     1.08      (58,679)     0.80           --        --
Cancelled........................  (240,866)     0.65     (468,838)     6.50      (39,728)     1.50
                                   --------               --------                -------
Options outstanding, end of
  period.........................   567,245     $5.56       39,728     $1.50           --     $  --
                                   ========     =====     ========     =====      =======     =====
Options exercisable, end of
  period.........................   567,245     $5.56       39,728     $1.50           --     $  --
                                   ========     =====     ========     =====      =======     =====
</Table>

     The fair value of each stock option grant under the Engage 1995 Plan, the
Engage 1999 Directors' Plan and the Engage 2000 Equity Incentive Plan has been
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions for fiscal 2000, 2001 and 2002,
respectively: volatility of 130.18%, 174.92% and 626.46%; risk-free interest
rate of 6.11%, 3.79% and 2.23%; expected life of options of 2.3, 1.9 and 2.2
years; and 0% dividend yield for all years. The weighted average fair value per
share of options granted during fiscal 2000, 2001 and 2002 was $21.85, $3.11 and
$0.21, 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 2000: volatility of
103.36%; risk-free interest rate of 6.28%; expected life of options of 3.0
years; and 0% dividend yield for both years. The weighted average fair value per
share of options granted during fiscal 2000 was $28.47.

                                        59
<PAGE>
                                  ENGAGE, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     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 2000, 2001 and 2002 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 JULY 31, 2000    YEAR ENDED JULY 31, 2001    YEAR ENDED JULY 31, 2002
                       -------------------------   -------------------------   -------------------------
                       AS REPORTED    PRO FORMA    AS REPORTED    PRO FORMA    AS REPORTED    PRO FORMA
                       ------------   ----------   -----------   -----------   ------------   ----------
                                             (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                    <C>            <C>          <C>           <C>           <C>            <C>
Net loss.............   $(377,870)    $(410,553)   $(1,277,003)  $(1,358,723)    $(91,896)    $(180,544)
Pro forma basic and
  diluted net loss
  per share..........   $   (2.61)    $   (2.83)   $     (6.56)  $     (6.98)    $  (0.47)    $   (0.92)
</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, 2002, 961,135 shares
have been issued under the 1999 ESPP.

(14) COMPREHENSIVE LOSS

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

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

<Table>
<Caption>
                                                           YEAR ENDED JULY 31,
                                                    ----------------------------------
                                                      2000         2001         2002
                                                    ---------   -----------   --------
                                                              (IN THOUSANDS)
<S>                                                 <C>         <C>           <C>
Net loss..........................................  $(377,870)  $(1,277,003)  $(91,896)
Foreign currency adjustments......................       (565)          698     (1,124)
Net unrealized holding gain (loss) arising during
  the period......................................        658           120        (80)
                                                    ---------   -----------   --------
Comprehensive loss................................  $(377,777)  $(1,276,185)  $(93,100)
                                                    =========   ===========   ========
</Table>

     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, 2000..........................    $  (225)        $(35)          $  (260)
Activity, fiscal 2001...........................        698          120               818
                                                    -------         ----           -------
Balance, July 31, 2001..........................        473           85               558
Activity, fiscal 2002...........................     (1,124)         (80)           (1,204)
                                                    -------         ----           -------
Balance, July 31, 2002..........................    $  (651)        $  5           $  (646)
                                                    =======         ====           =======
</Table>

                                        60
<PAGE>
                                  ENGAGE, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(15) RESTRUCTURING

     In the first quarter of fiscal 2001, we reduced our headcount in an effort
to eliminate redundant positions that resulted from recent acquisitions.
Subsequent to our first restructuring, we identified continued weakness in the
overall market; realized that revenues for the remaining three quarters of
fiscal 2001 would be less than previously forecasted and in response identified
additional cost saving opportunities. Accordingly, in the second quarter of
fiscal 2001, we identified specific restructuring activities that were completed
in the second quarter and identified additional restructuring initiatives that
would be finalized in the third and fourth quarters of fiscal 2001. The
additional restructuring opportunities included further consolidating
operations, combining ad serving platforms and eliminating positions during the
second, third and fourth quarters of fiscal 2001 as on-going business needs
allowed. The actual restructuring charges from our restructuring activities are
recorded in the quarter in which we have committed to specific restructuring
activities that identify all significant actions to be taken as part of that
quarter's restructuring.

     In the first fiscal quarter of fiscal 2001, we implemented a restructuring
plan (the "Q1 2001 Restructuring") designed to bring costs in line with revenue
and strengthen our financial performance. The Q1 2001 Restructuring included a
reduction of our workforce by approximately 170 persons or approximately 12% of
our worldwide headcount, and was completed prior to October 31, 2000. Employees
affected by the restructuring were notified both through direct personal contact
and by written notification. In addition to headcount reductions, we have
undertaken plans to close two office locations and consolidate operations. In
connection with the Q1 2001 Restructuring, we incurred severance costs for
terminated employees, accrued future lease costs and wrote off unamortized
leasehold improvements for office locations being closed.

     In the second fiscal quarter of fiscal 2001, we implemented a restructuring
plan (the "Q2 2001 Restructuring") designed to further increase operational
efficiencies and bring costs in line with revenue. The Q2 2001 Restructuring,
which was approved by our Board of Directors on December 7, 2000, included a
reduction in workforce by approximately 275 persons or 26% of our worldwide
headcount, with the employee reduction scheduled for completion by April 30,
2001. Employees affected by the restructuring were notified both through direct
personal contact and by written notification. In addition to headcount
reductions, we have undertaken plans to close various offices. In connection
with the Q2 2001 Restructuring, we incurred severance costs for terminated
employees, accrued future lease costs and wrote off unamortized leasehold
improvements and furniture and fixtures for office locations being closed.

     In the third fiscal quarter of fiscal 2001, our management approved
specific restructuring activities (the "Q3 2001 Restructuring") designed to
further increase operational efficiencies and bring costs in-line with revenue
forecasts. The Q3 2001 Restructuring included a reduction in workforce by
approximately 90 persons or 14% of our worldwide workforce, with the employee
reduction scheduled for completion by July 31, 2002. Employees affected by the
restructuring were notified both through direct personal contact and by written
notification. In addition to headcount reductions, we have undertaken plans to
close additional offices. In connection with the Q3 2001 Restructuring, we
incurred severance costs for terminated employees and accrued future lease
costs, as well as a loss of $2.3 million associated with the sale of certain
assets and liabilities of I/PRO to an unrelated third-party in April 2001.

     In the fourth fiscal quarter of fiscal 2001, we implemented a restructuring
plan (the "Q4 2001 Restructuring") designed primarily to eliminate excess
computer equipment resulting from the consolidation of portions of our media
platform. In connection with the Q4 2001 Restructuring, we incurred severance
costs for terminated employees, and wrote off the net book value of excess
computer hardware. In addition, in April of fiscal 2001, adjustments to the
costs accrued in our Q1 2001 and Q2 2001 restructurings were recorded totaling
$42,000 and $531,000, respectively. These adjustments reflect additional costs
incurred in excess of original estimates related to severance costs paid
primarily to foreign employees as part of the Q1 2001 and Q2 2001
restructurings.

                                        61
<PAGE>
                                  ENGAGE, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In the first fiscal quarter of fiscal 2002, we implemented a restructuring
plan (the "Q1 2002 Restructuring") designed to reduce corporate overhead costs
by reducing the size of the company's finance and marketing staffs, as well as
several senior management positions. In addition, the plan included a reduction
in the Company's research and development, operations and professional services
groups. As a result, our total workforce was reduced by approximately 60 persons
or approximately 22% of our worldwide headcount. The reduction in corporate
overhead costs and research and development staffs reflected a decrease in
staffing needs due to the closing of our Media segment during the first quarter
of fiscal 2002. The reduction in our operations and professional services groups
reflected a downsizing due to expectations about the continued weakness in
demand for our products and services in the immediate future.

     In the second fiscal quarter of 2002, we implemented a restructuring plan
(the "Q2 2002 Restructuring") designed to close our office in Japan. The plan
included the elimination of all staff in Japan, as well as terminating facility
and equipment leases. Employees affected by the restructuring were notified both
through direct personal contact and by written notification. As of January 31,
2002, our estimate of costs to exit Japan resulted in a neutral restructuring
cost and no accrual at that time. However, in the third fiscal quarter of 2002,
we realized better than expected benefits from terminating certain capital
leases, offset by additional severance payments, lease termination costs and
fixed asset write-offs, and have thus recognized a net benefit of $152,000
related to this restructuring in the third fiscal quarter of 2002.

     In the fourth fiscal quarter of fiscal 2002, we implemented a restructuring
plan (the "Q4 2002 Restructuring") designed to reduce staffing throughout the
company and announced that we were looking to sell the assets related to our
interactive products and services. In connection with the sale of our
interactive products and services, we reduced staff supporting the sales and
operations of our interactive product line. As a result, our total workforce
will be reduced by approximately 70 persons or approximately 40% of our
worldwide headcount. While the workforce reduction was throughout all
departments, professional services and research and development incurred the
largest workforce reductions, reflecting the continued decline in anticipated
services arrangements and a decision to delay large development projects for the
immediate future. Additionally, $826,000 of the Q4 2002 Restructuring charge was
an adjustment to all prior period restructuring charges, resulting primarily
from higher than expected severance costs as well as higher than expected costs
to exit certain facilities that were closed as part of these restructuring
activities.

                                        62
<PAGE>
                                  ENGAGE, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following table sets forth a summary of these restructuring costs and
related charges, included within both continuing and discontinued operations,
for our restructurings and the balance of the restructuring reserve established
(in thousands):

<Table>
<Caption>
                                                         FIXED ASSET     FUTURE
                                             SEVERANCE    WRITE-OFF    LEASE COST    TOTAL
                                             ---------   -----------   ----------   --------
<S>                                          <C>         <C>           <C>          <C>
Q1 2001 Restructuring......................   $ 1,852     $    496      $  1,782    $  4,130
Q2 2001 Restructuring......................     2,493        6,820         7,478      16,791
Q3 2001 Restructuring......................       605        2,527         1,879       5,011
Q4 2001 Restructuring......................        21          937            --         958
Adjustment to Q1 2001 Restructuring........        42         (367)          667         342
Adjustment to Q2 2001 Restructuring........       531         (591)        2,134       2,074
Adjustment to Q3 2001 Restructuring........       292          214           256         762
Cash charges...............................    (5,836)       1,158        (3,003)     (7,681)
Non-cash charges...........................        --      (11,194)          318     (10,876)
                                              -------     --------      --------    --------
Reserve balance at July 31, 2001...........        --           --        11,511      11,511

Q1 2002 Restructuring......................       975           --            --         975
Q4 2002 Restructuring......................     1,393           25            55       1,473
Adjustment to Q1 2001 Restructuring........        --           --          (342)       (342)
Adjustment to Q2 2001 Restructuring........        --           --          (124)       (124)
Adjustment to Q3 2001 Restructuring........        --           --           (49)        (49)
Adjustment to Q4 2001 Restructuring........        --           --           (36)        (36)
Adjustment to Q1 2002 Restructuring........      (151)          --            --        (151)
Cash charges...............................    (1,110)          --        (8,300)     (9,410)
Non-cash charges...........................        --          (25)       (2,660)     (2,685)
                                              -------     --------      --------    --------
Reserve balance at July 31, 2002...........   $ 1,107     $     --      $     55    $  1,162
                                              =======     ========      ========    ========
</Table>

     Of the $30,068,000 total restructuring charges recorded during fiscal 2001,
$2,408,000 was included in continuing operations, with the remaining $27,660,000
included in loss from discontinued operations.

(16) 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.

     CMGI paid approximately $21,706,000 of investment banking fees on our
behalf during fiscal 2000 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.

     We sublease our headquarters facility from CMGI. As a result of a decrease
in facility needs arising from the shutdown of our Media segment, as well as
decreased staffing levels resulting from prior restructuring activities, we are
currently obligated under such sublease to pay for facilities that are no longer
occupied by the Company. As a result, we have accrued approximately $2.6 million
related to future estimated net lease and occupancy costs for such facilities
and estimated costs to restore the facilities to original condition. The

                                        63
<PAGE>
                                  ENGAGE, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

accrual is based upon total future lease costs under the facility lease, which
expires in October 2007, less estimated proceeds from possible subleasing
arrangements that the Company may be able to enter into during future periods.
Additionally, we have additional facilities that are no longer occupied by us
under the sublease that are currently being occupied by CMGI. While we are not
incurring an expense for these facilities at the current time, we are obligated
under the sublease to continue lease payments should CMGI choose to vacate the
facility. No accrual of future lease costs has been made at this time for these
facilities.

     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,
                                                              ----------------------
                                                              2000    2001     2002
                                                              ----   ------   ------
                                                                  (IN THOUSANDS)
<S>                                                           <C>    <C>      <C>
Enterprise services.........................................  $606   $  767   $1,444
Rent and facilities.........................................  $752   $2,717   $2,798
Human resources.............................................  $ 42   $   35   $  207
</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, included within both continuing and discontinued operations, related to
outsourcing from related parties for the year ended July 31, 2000, 2001 and 2002
were $15,744,000, $8,876,000, and $307,000, respectively. As of July 31, 2002,
these services have been terminated.

     During fiscal 2002, we settled all outstanding liabilities (including
future lease costs that were included in our restructuring accrual and accrual
for discontinued operations) with a CMGI subsidiary. As a result of the
settlement we recognized a gain of approximately $1,315,000, of which
approximately $118,000 is included as a reduction of cost of revenue in the year
ended July 31, 2002, and the remaining $1,197,000 is included as a reduction in
losses of discontinued operations that were accrued in July 2001.

     During fiscal 2001, we entered into a royalty arrangement with a subsidiary
of CMGI, to whom we sold certain technologies in exchange for royalties on their
future revenues derived from products sold using our technology. During fiscal
2002 we terminated such agreement in exchange for the payment of all past owed
royalties as well as the present value of expected future royalties. These
amounts, totaling $569,000, have been included as a reduction of accrued losses
for discontinued operations during the year ended July 31, 2002.

     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).

     Revenue from related parties included within continuing operations amounted
to $20,320,000, $3,689,000 and $493,000 in fiscal 2000, 2001 and 2002,
respectively.

     See note 20.

                                        64
<PAGE>
                                  ENGAGE, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(17) GEOGRAPHIC INFORMATION

     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,
                                                          ---------------------------
                                                           2000      2001      2002
                                                          -------   -------   -------
                                                                (IN THOUSANDS)
<S>                                                       <C>       <C>       <C>
United States...........................................  $37,802   $22,796   $11,990
Europe..................................................    6,883    11,873     6,938
Rest of world...........................................    2,123     8,679     2,479
                                                          -------   -------   -------
                                                          $46,808   $43,348   $21,407
                                                          =======   =======   =======
</Table>

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

(18) SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

     The following table sets forth selected quarterly financial for the years
ended July 31, 2001 and 2002. The operating results for all quarters have been
retroactively adjusted to reflect the disposal of our Media segment as a
discontinued operation. The operating results for any given quarter are not
necessarily indicative of results for any future period.

<Table>
<Caption>
                                              FISCAL 2001 QUARTER ENDED                     FISCAL 2002 QUARTER ENDED
                                     --------------------------------------------   -----------------------------------------
                                      OCT. 31     JAN. 31    APR. 30     JUL. 31    OCT. 31    JAN. 31    APR. 30    JUL. 31
                                     ---------   ---------   --------   ---------   --------   --------   --------   --------
                                                              (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                  <C>         <C>         <C>        <C>         <C>        <C>        <C>        <C>
Net revenue........................  $  13,410   $   8,380   $ 12,573   $   9,057   $  6,658   $  6,075   $  5,346   $  3,328
Gross profit.......................      7,231       1,025      3,915       2,654        521      1,047        142     (8,121)
Loss from continuing operations....    (25,651)    (40,652)   (31,210)   (137,515)   (14,910)   (13,201)   (15,391)   (48,848)
Loss from discontinued
  operations.......................   (148,166)   (654,911)   (45,427)   (176,764)        --         --         --       (602)
Gain (loss) from disposal of
  discontinued operations..........         --          --         --     (16,707)        --         --         --      1,056
Net loss...........................  $(173,817)  $(695,563)  $(76,637)  $(330,986)  $(14,910)  $(13,201)  $(15,391)  $(48,394)

Basic and diluted net loss per
  share data:
  Loss from continuing
    operations.....................  $   (0.14)  $   (0.21)  $  (0.16)  $   (0.70)  $  (0.08)  $  (0.07)  $  (0.08)  $  (0.25)
  Loss from discontinued
    operations.....................      (0.78)      (3.32)     (0.23)      (0.90)        --         --         --         --
  Loss from disposal of
    discontinued operations........         --          --         --       (0.08)        --         --         --         --
                                     ---------   ---------   --------   ---------   --------   --------   --------   --------
  Basic and diluted net loss per
    share..........................  $   (0.92)  $   (3.53)  $  (0.39)  $   (1.68)  $  (0.08)  $  (0.07)  $  (0.08)  $  (0.25)
                                     =========   =========   ========   =========   ========   ========   ========   ========
</Table>

(19) LEGAL PROCEEDINGS

     On or about September 6, 2001, the first of several putative class action
complaints was filed in the United States District Court for the Southern
District of New York naming us, several of our present and former officers and
directors and the underwriters for our July 20, 1999 initial public offering as
defendants. Purportedly filed on behalf of those persons who purchased our
common stock between July 19, 1999 and December 6, 2000, the complaints allege
violations of the Securities Act of 1933 and the Securities Exchange Act of
1934.

     Specifically, the complaints each allege that the defendants failed to
disclose "excessive commissions" purportedly solicited by and paid to the
underwriter defendants in exchange for allocating shares of our stock to
preferred customers and alleged agreements among the underwriter defendants and
preferred customers

                                        65
<PAGE>
                                  ENGAGE, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

tying the allocation of IPO shares to agreements to make additional aftermarket
purchases at pre-determined prices. Plaintiffs claim that the failure to
disclose these alleged arrangements made our prospectus incorporated in our
registration statement on Form S-1 filed with the SEC in July 1999 materially
false and misleading. Plaintiffs seek unspecified damages.

     By order dated January 15, 2002, the District Court consolidated the
foregoing actions. On April 19, 2002, the plaintiffs filed a Consolidated
Amended Class Action Complaint.

     Motions to dismiss the Consolidated Class Action Complaint have been filed
on behalf of the underwriter defendants and the issuer defendants.

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

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

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

     On May 22, 2002, plaintiffs filed an Amended Complaint reiterating the
claims previously alleged and adding an additional allegation that a merger
proposal announced on May 21, 2002 whereby CMGI would acquire all outstanding
shares of Engage common stock not already owned by CMGI is a coercive
transaction that allegedly does not satisfy the entire fairness standard under
Delaware law.

     On May 21, 2002, two related putative class action lawsuits were filed in
the Court of Chancery for the State of Delaware, challenging the fairness of the
CMGI-Engage merger proposal announced on May 21, 2002. The suits seek injunctive
relief and/or rescission, disgorgement of any profits received by defendants,
attorneys' fees and other unspecified damages.

     The foregoing actions subsequently were consolidated. On or about October
18, 2002, the parties to the litigation filed a Stipulation and Order of
Dismissal, dismissing the consolidated action with prejudice. In connection with
the stipulation of dismissal, the parties are negotiating the reimbursement of a
portion of plaintiff's council's fees. We do not believe that the resolution of
this issue will have a material impact on our financial condition.

                                        66
<PAGE>
                                  ENGAGE, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

(20) SUBSEQUENT EVENTS

  (a) CMGI Transaction

     In September 2002, we completed a transaction with CMGI pursuant to which
all outstanding debt to CMGI (approximately $65 million) was cancelled and all
of CMGI's equity holdings in Engage (approximately 148,417,801 shares of common
stock) were transferred back to Engage and cancelled. In exchange, we paid $2.5
million in cash to CMGI, signed a $2.0 million non-interest bearing secured
promissory note due in September 2006 that is secured by the assets of the
Company, and issued a warrant to CMGI to purchase up to 9.9% of our outstanding
common stock at the time of exercise at an exercise price of $.045 per share.
Additionally, we agreed to pay CMGI up to an additional $6.0 million in future
earn-out payments based upon our quarterly operating income (defined as Engage's
operating income/loss plus the sum of (i) amortization expense and impairment
charges and (ii) amortization of stock-based compensation, as reported in our
financial statements for the fiscal quarter in question included in the
applicable quarterly or annual (as applicable) report filed with the Securities
and Exchange Commission for such quarter) starting with the first quarter of
fiscal 2004 (the quarter ending October 31, 2003). Under the terms of the
earn-out payment and promissory note, if payments under the earn-out agreement
exceed $4.0 million, amounts due under the $2.0 million promissory note will be
cancelled for each dollar of earn-out over the $4.0 million, such that if total
earn-out payments reach $6.0 million, the promissory note will be cancelled in
full.

     Additionally, under the agreement, the parties have has amended the
Company's sublease of office space from CMGI. Under the original sublease, we
were obligated through October 2007 for approximately 103,000 square feet in our
Andover, Massachusetts headquarters. Under the terms of the amended sublease we
rent approximately 36,000 square feet from CMGI through December 2002. We may
extend this arrangement with written notification to CMGI. As of July 31, 2002,
we had accrued approximately $2.4 million related to estimated net future lease
and occupancy costs for certain facilities within the 103,000 square foot
sublease that are no longer occupied by us. The accrual is based upon total
future lease costs under the facility lease, less estimated proceeds from
possible subleasing arrangements that we may be able to enter into during future
periods. As a result of the transaction entered into with CMGI, the future costs
associated with this accrual will not be paid, and as such, we expect to reverse
the unused portion of this accrual remaining at the time of the transaction,
which we anticipate will result in an increase of approximately $2.2 million in
our additional paid-in capital for the first fiscal quarter of fiscal 2003. In
addition, we had approximately $294,000 accrued in other long-term liabilities
as of July 31, 2002 related to an adjustment to recognize rent expense under
this sublease on a straight-line basis over the term of the lease as compared to
recognizing the amount paid in each period as per the lease agreement. This
transaction also eliminates the requirement for this accrual. As such we would
anticipate an increase in additional paid-in capital of approximately $300,000
for the first fiscal quarter of fiscal 2003. As of July 31, 2002, total future
minimum operating lease commitments under our terminated sublease with CMGI
consisted of approximately $1,578,000, $1,592,000, $1,630,000, $1,706,000,
$1,706,000 and $426,000 for the years ended July 31, 2003, 2004, 2005, 2006,
2007 and 2008, respectively.

     The warrants issued in this transaction have been valued using a
Black-Scholes option pricing model, with the fair value of the warrants
calculated at approximately $0.028 per share. Assumptions used in this valuation
are as follows: volatility of 160%; risk-free interest rate of 3.5%; expected
life of 7.0 years; and 0% dividend yield.

                                        67
<PAGE>
                                  ENGAGE, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     As a result of the change in ownership, the utilization of the federal and
state tax net operating loss carryforwards of the Company will be severely
limited pursuant to Internal Revenue Code Section 382.

     In connection with the transaction we also entered into a Transition
Services Agreement with CMGI, in which CMGI will provide certain services and
technology during a defined transition period. All services and technology are
being offered to Engage at current market rates for similar services and
technology.

  (b) Stockholder Rights Plan

     In October 2002, the Board of Directors of the Company adopted a
stockholder rights plan and declared a dividend distribution of one preferred
share purchase right for each outstanding share of the Company's common stock.
Each right will entitle registered holders of the Company's common stock to
purchase one one-thousandth of a share of a new series of junior participating
preferred stock, designated as "Series A Junior Participating Preferred Stock".
The rights generally will be exercisable only if a person (which term includes
an entity or group) (i) acquires 15% or more of the Company's common stock or
(ii) announces a tender offer, the consummation of which would result in
ownership by that person, entity or group of 15% or more of the common stock.
Once exercisable, the stockholder rights plan allows the Company's stockholders
(other than the acquiror) to purchase common stock of the Company or of the
acquiror at a substantial discount.

  (c) Sale of Internet Advertising Business

     In October 2002, we consummated a transaction whereby we sold substantially
all of the assets of our Internet advertising business to Accipiter Solutions,
Inc., a company formed by certain former employees of our Internet advertising
business unit. As part of the transaction, Accipiter Solutions issued us a
warrant to purchase up to 10% of the shares of Accipiter Solutions' common stock
outstanding at the time of exercise, assumed certain liabilities of ours and
agreed to pay us up to $500,000 in the form of future earn-out payments. We do
not anticipate the resulting gain or loss from this transaction will have a
material impact on our financial condition or results of operations.

                                        68
<PAGE>

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 2002 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 2002 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 2002 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 2002 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:

     Independent Auditors' Report

     Consolidated Balance Sheets as of July 31, 2001 and 2002

     Consolidated Statements of Operations for the three years ended July 31,
2002

     Consolidated Statement of Changes in Stockholders' Equity (Deficit) for the
three years ended July 31, 2002

     Consolidated Statements of Cash Flows for the three years ended July 31,
2002

(A)(2) FINANCIAL STATEMENT SCHEDULES

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

     Schedule 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.

                                        69
<PAGE>

(B) REPORTS ON FORM 8-K.

     We filed a Current Report on Form 8-K with the SEC on May 21, 2002 for the
May 21, 2002 events reporting our preliminary results for the third quarter
ended April 30, 2002 and the receipt of a proposal from CMGI to acquire all of
the outstanding publicly held shares of Engage.

                                        70
<PAGE>

                                   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
November 13, 2002.

                                          By:     /s/ LISA P. MCALISTER
                                            ------------------------------------
                                                     Lisa P. McAlister
                                                  Chief Financial Officer
                                                       and Treasurer

                                   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 in the capacities indicated on November 13, 2002.

<Table>
<Caption>
                    SIGNATURE                                             TITLE(S)
                    ---------                                             --------
<S>     <C>                                          <C>

                /s/ JOHN D. BARONE                    Chief Operating Officer, President and Director
 ------------------------------------------------              (Principal Executive Officer)
                  John D. Barone


              /s/ LISA P. MCALISTER                        Chief Financial Officer and Treasurer
 ------------------------------------------------       (Principal Financial and Accounting Officer)
                Lisa P. McAlister


                /s/ PETER J. RICE                                         Director
 ------------------------------------------------
                  Peter J. Rice


              /s/ EDWARD A. BENNETT                                       Director
 ------------------------------------------------
                Edward A. Bennett
</Table>

                                        71
<PAGE>

                                 CERTIFICATIONS

I, John D. Barone, certify that:

     1.  I have reviewed this annual report on Form 10-K of Engage, Inc.;

     2.  Based on my knowledge, this annual report does not contain any untrue
         statements of a material fact or omit to state a material fact
         necessary to make the statements made, in light of the circumstances
         under which such statements were made, not misleading with respect to
         the period covered in this annual report; and

     3.  Based on my knowledge, the financial statements, and other financial
         information included in this annual report, present in all respects the
         financial condition, results of operations and cash flows of the
         registrant as of, and for, the periods presented in this annual report.

                                                  /s/ JOHN D. BARONE
                                          --------------------------------------
                                                     John D. Barone,
                                          Chief Operating Officer and President

Date: November 13, 2002

I, Lisa P. McAlister, certify that:

     1.  I have reviewed this annual report on Form 10-K of Engage, Inc.;

     2.  Based on my knowledge, this annual report does not contain any untrue
         statements of a material fact or omit to state a material fact
         necessary to make the statements made, in light of the circumstances
         under which such statements were made, not misleading with respect to
         the period covered in this annual report; and

     3.  Based on my knowledge, the financial statements, and other financial
         information included in this annual report, present in all respects the
         financial condition, results of operations and cash flows of the
         registrant as of, and for, the periods presented in this annual report.

                                                 /s/ LISA P. MCALISTER
                                          --------------------------------------
                                                    Lisa P. McAlister,
                                                 Chief Financial Officer
                                                      and Treasurer

Date: November 13, 2002

                                        72
<PAGE>

                                 EXHIBIT INDEX

<Table>
<Caption>
EXHIBIT NO.                            EXHIBIT
-----------                            -------
<S>          <C>
2.1(9)       Transaction Agreement dated September 9, 2002 by and between
             the Company, CMGI, Inc. and CMGI (UK) Limited.
3.1          Second Amended and Restated Certificate of Incorporation.
3.2          Amendment to the Second Amended and Restated Certificate of
             Incorporation.
3.3          Certificate of Designation of Series A Junior Participating
             Preferred Stock.
3.4(5)       Amended and Restated By-laws.
4.1(4)       Specimen Certificate for shares of Common Stock.
4.2(7)       Secured Demand Promissory Note, dated September 30, 2001,
             issued to CMGI, Inc. in the principal amount of $42,700,000.
4.3(7)       Secured Convertible Demand Promissory Note, dated October 4,
             2001 issued to CMGI, Inc., in the principal amount of
             $8,000,000.
4.4(8)       Amended and Restated Secured Convertible Demand Promissory
             Note, dated February 15, 2002, issued to CMGI, Inc. for any
             intercompany debt incurred from October 2001 to July 2002.
4.5(10)      Rights Agreement between the Company and American Stock
             Transfer & Trust Company, as Rights Agent, dated as of
             October 4, 2002.
4.6(9)       Common Stock Purchase Warrant dated September 9, 2002 issued
             to CMGI, Inc.
4.7(9)       Senior Secured Promissory Note dated September 9, 2002
             issued to CMGI, Inc. in the principal amount of $2,000,000.
10.1(2)++    Amended and Restated 1995 Equity Incentive Plan.
10.2(5)++    2000 Equity Incentive Plan.
10.3(1)++    1999 Employee Stock Purchase Plan.
10.4(1)++    1999 Stock Option Plan for Non-Employee Directors.
10.5(3)++    1996 Stock Option Plan of AdKnowledge Inc.
10.6(3)++    AdKnowledge Inc. 1998 Stock Option/Stock Issuance Plan.
10.7(9)      First Amendment of Sublease, dated September 9, 2002 by and
             between CMGI, Inc. and the Company.
10.8(9)      Amended and Restated Investor Rights Agreement dated
             September 9, 2002 by and between the Company and CMGI.
10.9(4)      Amended and Restated Investor Rights Agreement by and
             between CPQ Holdings, Inc. and the Company, dated June 19,
             2000.
10.10(6)++   Executive Retention Agreement by and between the Company and
             Anthony Nuzzo.
10.11(9)     Guaranty and Security Agreement dated September 9, 2002 by
             and between the Company, CMGI, Inc. and MediaBridge
             Technologies.
10.12(9)     Intellectual Property Security Agreement dated September 9,
             2002 by and between the Company, CMGI, Inc. and MediaBridge
             Technologies.
10.13(7)     Form of Indemnification Agreement entered into by and
             between the Company and each of Anthony Nuzzo, Christopher
             Evans, Edward Bennett and Frank Campanella, dated August 20,
             2001.
10.14(7)++   Letter from Frank Campanella on behalf of the Compensation
             Committee to Anthony Nuzzo, dated September 10, 2001.
10.15(7)++   Letter from the Company to Anthony Nuzzo, dated September
             24, 2001.
10.16(7)     Waiver and Release by and between the Company and CMGI,
             Inc., dated October 4, 2001.
10.17(9)     Transition Services Agreement, dated September 9, 2002, by
             and between the Company and CMGI, Inc.
10.18(9)     Indemnification Agreement dated, September 9, 2002, by and
             between the Company and George A. McMillan.
10.19(9)     Indemnification Agreement dated, September 9, 2002, by and
             between the Company and David S. Wetherell.
10.20        Letter Agreement, dated May 10, 2002, by and between the
             Company and Robert Bartlett.
</Table>
<PAGE>

<Table>
<Caption>
EXHIBIT NO.                            EXHIBIT
-----------                            -------
<S>          <C>
10.21        Letter Agreement, dated May 10, 2002, by and between the
             Company and Christopher Cuddy.
21.1         Subsidiaries
23.1         Consent of KPMG LLP
23.2         Independent Auditors' Report on Financial Statement 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
     Definitive Proxy Statement filed with the Securities and Exchange
     Commission on April 7, 2000.

 (3) 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.

 (4) 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 30, 2000.

 (5) 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, 2000.

 (6) 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 March 19, 2001.

 (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 14, 2001.

 (8) 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, 2002.

 (9) 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 18, 2002.

(10) 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 October 4, 2002.
---------------

++ Management contract or compensatory plan or arrangement.
<PAGE>

                                                                     SCHEDULE II

                                  ENGAGE, INC.

                       VALUATION AND QUALIFYING ACCOUNTS
                FOR THE YEARS ENDED JULY 31, 2000, 2001 AND 2002
                                 (IN THOUSANDS)

<Table>
<Caption>
                                           BALANCE AT   ADDITIONS    ACQUISITIONS,   DEDUCTIONS   BALANCE
                                           BEGINNING    CHARGED TO     DISPOSALS        FROM      AT END
DESCRIPTION                                 OF YEAR       INCOME       AND OTHER      RESERVES    OF YEAR
-----------                                ----------   ----------   -------------   ----------   -------
<S>                                        <C>          <C>          <C>             <C>          <C>
Year ended July 31, 2000(1):
  Allowance for doubtful accounts........    $  419       $1,196        $   --        $  (275)    $1,340
Year ended July 31, 2001(1):
  Allowance for doubtful accounts........    $1,340       $1,823        $1,321        $(2,702)    $1,782
Year ended July 31, 2002:
  Allowance for doubtful accounts........    $1,782       $  (19)       $   --        $  (695)    $1,068
</Table>

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

(1) Adjusted for discontinued operations.