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SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 10-Q

|ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the Quarterly Period Ended June 30, 2002

OR

|o | 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 0-30043

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divine, inc.(Exact name of Registrant as specified in its charter)

Delaware

36-4301991(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification Number)1301 N. Elston Avenue, Chicago, Illinois(Address of Principal Executive Offices)

60622(Zip Code)


Registrant's telephone number, including area code: (773) 394-6600

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

At
August 9, 2002, the registrant had outstanding an aggregate of 20,182,788 shares of class A common stock.

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divine, inc.        Form 10-Q        INDEX

|                                 |  |                                                                                                                     |  | Page
Number
|-------------------------------- |  | ------------------------------------------------------------------------------------------------------------------- |  | -----------
|Part I.    FINANCIAL INFORMATION |  | 3                                                                                                                  
|Item 1.                          |  | Consolidated Financial Statements                                                                                   |  | 3          
|                                 |  | Consolidated Balance Sheets
June 30, 2002 (unaudited) and December 31, 2001                                         |  | 3          
|                                 |  | Consolidated Statements of Operations (unaudited)
Three months and six months ended June 30, 2002 and June 30, 2001 |  | 4          
|                                 |  | Consolidated Statement of Stockholders' Equity
Six months ended June 30, 2002 (unaudited)                           |  | 5          
|                                 |  | Consolidated Statements of Cash Flows (unaudited)
Six months ended June 30, 2002 and June 30, 2001                  |  | 6          
|                                 |  | Notes to Unaudited Interim Consolidated Financial Statements                                                        |  | 7          
|Item 2.                          |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                               |  | 13         
|Item 3.                          |  | Quantitative and Qualitative Disclosures about Market Risk                                                          |  | 28         
|Part II.                         |  | OTHER INFORMATION                                                                                                   |  | 29         
|Item 2.                          |  | Changes in Securities and Use of Proceeds                                                                           |  | 29         
|Item 4.                          |  | Submission of Matters to a Vote of Security Holders                                                                 |  | 29         
|Item 6.                          |  | Exhibits and Reports on Form 8-K                                                                                    |  | 30         
|SIGNATURE                        |  | 31                                                                                                                 

2

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PART I    FINANCIAL INFORMATION

Item 1.    Financial Statements

divine, inc.        CONSOLIDATED BALANCE SHEETS  (in thousands, except share and per share data)

|                                                                                            |                                                                                                                                                               | June 30,
2002                              |         | December 31,
2001 |        
|------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | ----------------- | -------
|
|Assets                                                                                      |                                                                                                                                                               |                                            |         |                   |        
|Current assets:                                                                             |                                                                                                                                                               |                                            |         |                   |        
|                                                                                            | Cash and cash equivalents                                                                                                                                     |                                            | $       | 29,866            |        
|                                                                                            | Restricted cash                                                                                                                                               |                                            |         | 23,689            |        
|                                                                                            | Accounts receivable, net of allowance for doubtful accounts of $6,977 and $6,983                                                                              |                                            |         | 111,370           |        
|                                                                                            | Available-for-sale securities                                                                                                                                 |                                            |         | 1,551             |        
|                                                                                            | Notes receivable                                                                                                                                              |                                            |         |                  |        
|                                                                                            | Prepaid expenses                                                                                                                                              |                                            |         | 14,087            |        
|                                                                                            | Deferred publisher costs                                                                                                                                      |                                            |         | 184,788           |        
|                                                                                            | Other current assets                                                                                                                                          |                                            |         | 7,719             |        
|                                                                                            |                                                                                                                                                               |                                            |         |                   |        
|                                                                                            |                                                                                                                                                               | Total current assets                       |         |                   | 373,070
|Property and equipment, net                                                                 |                                                                                                                                                               |                                            | 54,322  |                   |        
|Goodwill and other intangible assets, net of accumulated amortization of $11,787 and $4,097 |                                                                                                                                                               |                                            | 281,672 |                   |        
|Restricted cash                                                                             |                                                                                                                                                               |                                            |        |                   |        
|Other noncurrent assets                                                                     |                                                                                                                                                               |                                            | 13,118  |                   |        
|                                                                                            |                                                                                                                                                               |                                            |         |                   |        
|                                                                                            |                                                                                                                                                               | Total assets                               |         | $                 | 722,182
|                                                                                            |                                                                                                                                                               |                                            |         |                   |        
|Liabilities and Stockholders' Equity                                                        |                                                                                                                                                               |                                            |         |                   |        
|Current liabilities:                                                                        |                                                                                                                                                               |                                            |         |                   |        
|                                                                                            | Accounts payable                                                                                                                                              |                                            | $       | 36,962            |        
|                                                                                            | Publisher payables                                                                                                                                            |                                            |         | 35,856            |        
|                                                                                            | Accrued payroll expenses                                                                                                                                      |                                            |         | 8,408             |        
|                                                                                            | Accrued professional fees                                                                                                                                     |                                            |         | 3,417             |        
|                                                                                            | Current portion of facilities impairment                                                                                                                      |                                            |         | 7,719             |        
|                                                                                            | Current portion of capital leases                                                                                                                             |                                            |         | 15,673            |        
|                                                                                            | Notes payable and current portion of long-term debt                                                                                                           |                                            |         | 11,945            |        
|                                                                                            | Deferred revenue                                                                                                                                              |                                            |         | 257,887           |        
|                                                                                            | Other accrued expenses and current liabilities                                                                                                                |                                            |         | 45,437            |        
|                                                                                            |                                                                                                                                                               |                                            |         |                   |        
|                                                                                            |                                                                                                                                                               | Total current liabilities                  |         |                   | 423,304
|Long-term debt                                                                              |                                                                                                                                                               |                                            | 57,669  |                   |        
|Long-term facilities impairment                                                             |                                                                                                                                                               |                                            | 20,045  |                   |        
|Capital leases                                                                              |                                                                                                                                                               |                                            | 7,932   |                   |        
|Other noncurrent liabilities                                                                |                                                                                                                                                               |                                            | 13,959  |                   |        
|Stockholders' Equity:                                                                       |                                                                                                                                                               |                                            |         |                   |        
|                                                                                            | Series B convertible preferred stock, $0.001 par value; 100,000 shares authorized; 22,941 and 0 shares issued and outstanding                                 |                                            |         | 22,941            |        
|                                                                                            | Class A common stock, $.001 par value; 2,500,000,000 shares authorized; 19,248,135 and 14,856,358 shares issued; 18,461,677 and 14,639,912 shares outstanding |                                            |         | 19                |        
|                                                                                            | Additional paid-in capital                                                                                                                                    |                                            |         | 1,226,064         |        
|                                                                                            | Unearned stock-based compensation                                                                                                                             |                                            |         | (8,793            | )      
|                                                                                            | Accumulated other comprehensive loss                                                                                                                          |                                            |         | (8,854            | )      
|                                                                                            | Treasury stock, at cost; 786,458 and 163,113 shares                                                                                                           |                                            |         | (19,687           | )      
|                                                                                            | Accumulated deficit                                                                                                                                           |                                            |         | (1,012,417        | )      
|                                                                                            |                                                                                                                                                               |                                            |         |                   |        
|                                                                                            |                                                                                                                                                               | Total stockholders' equity                 |         |                   | 199,273
|                                                                                            |                                                                                                                                                               |                                            |         |                   |        
|                                                                                            |                                                                                                                                                               | Total liabilities and stockholders' equity |         | $                 | 722,182
|                                                                                            |                                                                                                                                                               |                                            |         |                   |        

See accompanying notes to unaudited interim consolidated financial statements.

3

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divine, inc.    CONSOLIDATED STATEMENTS OF OPERATIONS  (unaudited)  (in thousands, except share and per share data)

|                                                                                   |                                                                                                                                                                          | Three Months Ended                                                                                   |                                                                                | Six Months Ended |        
|---------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | ---------------- | -------
|
|Revenues:                                                                          |                                                                                                                                                                          |                                                                                                      |                                                                                |                  |        
|                                                                                   | Products                                                                                                                                                                 |                                                                                                      | $                                                                              | 125,587          |        
|                                                                                   | Services                                                                                                                                                                 |                                                                                                      |                                                                                | 37,970           |        
|                                                                                   |                                                                                                                                                                          |                                                                                                      |                                                                                |                  |        
|                                                                                   |                                                                                                                                                                          | Total revenues                                                                                       |                                                                                |                  | 163,557
|                                                                                   |                                                                                                                                                                          |                                                                                                      |                                                                                |                  |        
|Operating expenses:                                                                |                                                                                                                                                                          |                                                                                                      |                                                                                |                  |        
|                                                                                   | Cost of revenues:                                                                                                                                                        |                                                                                                      |                                                                                |                  |        
|                                                                                   |                                                                                                                                                                          | Products (exclusive of $(6), $10, $7 and $31 of amortization (recovery) of stock-based compensation) |                                                                                |                  | 95,995 
|                                                                                   |                                                                                                                                                                          | Services (exclusive of $156, $187, $341 and $307 of amortization of stock-based compensation)        |                                                                                |                  | 34,124 
|                                                                                   |                                                                                                                                                                          |                                                                                                      |                                                                                |                  |        
|                                                                                   |                                                                                                                                                                          |                                                                                                      | Total cost of revenues                                                         |                  |        
|                                                                                   | Selling, general and administrative (exclusive of $1,300, $1,960, $2,921 and $5,016 of amortization of stock-based compensation)                                         |                                                                                                      |                                                                                | 56,974           |        
|                                                                                   | Research and development (exclusive of $11, $77, $68 and $199 of amortization of stock-based compensation)                                                               |                                                                                                      |                                                                                | 23,684           |        
|                                                                                   | Bad debt expense (recovery)                                                                                                                                              |                                                                                                      |                                                                                | (3,825           | )      
|                                                                                   | Amortization of intangible assets                                                                                                                                        |                                                                                                      |                                                                                | 4,306            |        
|                                                                                   | Acquired technology: in-process research and development                                                                                                                 |                                                                                                      |                                                                                | 17               |        
|                                                                                   | Impairment (recovery) of intangible and other assets                                                                                                                     |                                                                                                      |                                                                                | 1,152            |        
|                                                                                   | Amortization of stock-based compensation                                                                                                                                 |                                                                                                      |                                                                                | 1,461            |        
|                                                                                   |                                                                                                                                                                          |                                                                                                      |                                                                                |                  |        
|                                                                                   |                                                                                                                                                                          |                                                                                                      | Total operating expenses                                                       |                  |        
|                                                                                   |                                                                                                                                                                          |                                                                                                      |                                                                                |                  |        
|                                                                                   |                                                                                                                                                                          |                                                                                                      | Operating loss                                                                 |                  |        
|                                                                                   |                                                                                                                                                                          |                                                                                                      |                                                                                |                  |        
|Other income (expense):                                                            |                                                                                                                                                                          |                                                                                                      |                                                                                |                  |        
|                                                                                   | Interest income                                                                                                                                                          |                                                                                                      |                                                                                | 241              |        
|                                                                                   | Interest expense                                                                                                                                                         |                                                                                                      |                                                                                | (1,740           | )      
|                                                                                   | Other income, net                                                                                                                                                        |                                                                                                      |                                                                                | 31               |        
|                                                                                   |                                                                                                                                                                          |                                                                                                      |                                                                                |                  |        
|                                                                                   |                                                                                                                                                                          | Total other income (expense)                                                                         |                                                                                |                  | (1,468 
|                                                                                   | Loss before minority interest, equity in losses of associated companies, (impairment) recovery of investment in equity and cost method companies, and extraordinary gain |                                                                                                      |                                                                                | (51,799          | )      
|Minority interest                                                                  |                                                                                                                                                                          |                                                                                                      |                                                                               |                  |        
|Equity in losses of associated companies                                           |                                                                                                                                                                          |                                                                                                      |                                                                               |                  |        
|(Impairment) recovery of investment in equity and cost method associated companies |                                                                                                                                                                          |                                                                                                      | 524                                                                            |                  |        
|                                                                                   |                                                                                                                                                                          |                                                                                                      |                                                                                |                  |        
|                                                                                   |                                                                                                                                                                          |                                                                                                      | Net loss before extraordinary gain                                             |                  |        
|Extraordinary gain                                                                 |                                                                                                                                                                          |                                                                                                      | 60                                                                             |                  |        
|                                                                                   |                                                                                                                                                                          |                                                                                                      |                                                                                |                  |        
|                                                                                   |                                                                                                                                                                          |                                                                                                      | Net loss applicable to common stockholders                                     |                  | $      
|                                                                                   |                                                                                                                                                                          |                                                                                                      |                                                                                |                  |        
|                                                                                   |                                                                                                                                                                          |                                                                                                      | Basic and diluted net loss per share before extraordinary gain                 |                  | $      
|                                                                                   |                                                                                                                                                                          |                                                                                                      | Extraordinary gain                                                             |                  |        
|                                                                                   |                                                                                                                                                                          |                                                                                                      |                                                                                |                  |        
|                                                                                   |                                                                                                                                                                          |                                                                                                      | Basic and diluted net loss per share applicable to common stockholders         |                  | $      
|                                                                                   |                                                                                                                                                                          |                                                                                                      |                                                                                |                  |        
|                                                                                   |                                                                                                                                                                          |                                                                                                      | Weighted average shares used in computing basic and diluted net loss per share |                  |        

See
accompanying notes to unaudited interim consolidated financial statements.

4

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divine, inc.        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY  (in thousands, except share data)

|                                                                                                                 |                           | Common stock                              |   | Preferred stock |    |  |        |  |   |        |  |   |           |   |   |         |  
|---------------------------------------------------------------------------------------------------------------- | ------------------------- | ----------------------------------------- | - | --------------- | -- |  | ------ |  | - | ------ |  | - | --------- | - | - | ------- | -
|
|
|Balance at December 31, 2001                                                                                     |                           | 14,639,912                                |   | $               | 15 |  |       |  | $ |       |  | $ | 1,172,204 |   | $ | (16,654 | )
|For the six months ended June 30, 2002 (unaudited)                                                               |                           |                                           |   |                 |    |  |        |  |   |        |  |   |           |   |   |         |  
|                                                                                                                 | Comprehensive loss:       |                                           |   |                 |    |  |        |  |   |        |  |   |           |   |   |         |  
|                                                                                                                 |                           | Net loss                                  |   |                |    |  |       |  |  |        |  |  |           |   |  |         |  
|                                                                                                                 | Other comprehensive loss: |                                           |   |                 |    |  |        |  |   |        |  |   |           |   |   |         |  
|                                                                                                                 |                           | Unrealized holding loss during the period |   |                |    |  |       |  |  |        |  |  |           |   |  |         |  
|                                                                                                                 |                           | Foreign currency translation              |   |                |    |  |       |  |  |        |  |  |           |   |  |         |  
|                                                                                                                 |                           |                                           |   |                 |    |  |        |  |   |        |  |   |           |   |   |         |  
|                                                                                                                 | Total comprehensive loss  |                                           |   |                 |    |  |        |  |   |        |  |   |           |   |   |         |  
|                                                                                                                 |                           |                                           |   |                 |    |  |        |  |   |        |  |   |           |   |   |         |  
|Issuance of Series B convertible preferred stock                                                                 |                           |                                          |   |                 |   |  | 22,941 |  |   | 22,941 |  |   |          |   |   |        |  
|Issuance of Class A common stock                                                                                 |                           | 3,977,831                                 |   |                 | 4  |  |       |  |   |       |  |   | 50,572    |   |   |        |  
|Issuance of warrants in conjunction with acquisitions                                                            |                           |                                          |   |                 |   |  |       |  |   |       |  |   | 151       |   |   |        |  
|Issuance of warrants to acquire the Company's common stock                                                       |                           |                                          |   |                 |   |  |       |  |   |       |  |   | 822       |   |   |        |  
|Issuance of stock options in conjunction with acquisitions                                                       |                           |                                          |   |                 |   |  |       |  |   |       |  |   | 6,076     |   |   |        |  
|Issuance of Class A common stock through the Employee Stock Purchase Plans                                       |                           | 117,441                                   |   |                 |   |  |       |  |   |       |  |   | 884       |   |   |        |  
|Issuance of Class A common stock through the exercise of stock options                                           |                           | 349,777                                   |   |                 |   |  |       |  |   |       |  |   | 331       |   |   |        |  
|Unearned stock-based compensation                                                                                |                           |                                          |   |                 |   |  |       |  |   |       |  |   |          |   |   | (452    | )
|Stock-based compensation                                                                                         |                           |                                          |   |                 |   |  |       |  |   |       |  |   |          |   |   | 3,337   |  
|Recovery of unearned stock-based compensation                                                                    |                           |                                          |   |                 |   |  |       |  |   |       |  |   | (4,976    | ) |   | 4,976   |  
|Purchase of treasury stock, at cost                                                                              |                           | (591,082                                  | ) |                 |   |  |       |  |   |       |  |   |          |   |   |        |  
|Change in indirect ownership of shares of the Company's common stock owned by equity method associated companies |                           | (32,263                                   | ) |                 |   |  |       |  |   |       |  |   |          |   |   |        |  
|                                                                                                                 |                           |                                           |   |                 |    |  |        |  |   |        |  |   |           |   |   |         |  
|Balance at June 30, 2002 (unaudited)                                                                             |                           | 18,461,677                                |   | $               | 19 |  | 22,941 |  | $ | 22,941 |  | $ | 1,226,064 |   | $ | (8,793  | )
|                                                                                                                 |                           |                                           |   |                 |    |  |        |  |   |        |  |   |           |   |   |         |  

See
accompanying notes to unaudited interim consolidated financial statements.

5

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divine, inc.    CONSOLIDATED STATEMENTS OF CASH FLOWS  (Unaudited)

|                                                 |                                                                                                               | Six months
ended
June 30,
2002                                                           |                                                     | Six months
ended
June 30,
2001 |        
|------------------------------------------------ | ------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | --------------------------------------------------- | ------------------------------ | -------
|
|Cash flows from operating activities:            |                                                                                                               |                                                                                          |                                                     |                                |        
|                                                 | Net loss                                                                                                      |                                                                                          | $                                                   | (122,111                       | )      
|                                                 | Adjustments to reconcile net loss to net cash used in operating activities:                                   |                                                                                          |                                                     |                                |        
|                                                 |                                                                                                               | Depreciation and amortization                                                            |                                                     |                                | 17,851 
|                                                 |                                                                                                               | Acquired technology: in-process research and development                                 |                                                     |                                | 17     
|                                                 |                                                                                                               | Extraordinary gain                                                                       |                                                     |                                | (2,479 
|                                                 |                                                                                                               | Stock-based compensation                                                                 |                                                     |                                | 3,337  
|                                                 |                                                                                                               | Noncash compensation expense                                                             |                                                     |                                |       
|                                                 |                                                                                                               | Bad debt expense (recovery)                                                              |                                                     |                                | (4,500 
|                                                 |                                                                                                               | Equity in losses of associated companies                                                 |                                                     |                                |       
|                                                 |                                                                                                               | Gain on stock transactions of associated companies                                       |                                                     |                                |       
|                                                 |                                                                                                               | Impairment charges                                                                       |                                                     |                                | 2,339  
|                                                 |                                                                                                               | Minority interest                                                                        |                                                     |                                |       
|                                                 |                                                                                                               | Loss (gain) on the sale of assets                                                        |                                                     |                                | (929   
|                                                 |                                                                                                               | Realized gain on sale of investment                                                      |                                                     |                                |       
|                                                 |                                                                                                               | Realized gain on sale of associated company                                              |                                                     |                                |       
|                                                 | Changes in assets and liabilities, excluding effects from acquisitions:                                       |                                                                                          |                                                     |                                |        
|                                                 |                                                                                                               | Restricted cash                                                                          |                                                     |                                | 2,661  
|                                                 |                                                                                                               | Accounts receivable                                                                      |                                                     |                                | 94,647 
|                                                 |                                                                                                               | Prepaid expenses                                                                         |                                                     |                                | 1,015  
|                                                 |                                                                                                               | Deferred publisher costs                                                                 |                                                     |                                | 64,715 
|                                                 |                                                                                                               | Other assets                                                                             |                                                     |                                | (9,339 
|                                                 |                                                                                                               | Accounts payable                                                                         |                                                     |                                | 12,054 
|                                                 |                                                                                                               | Publisher payables                                                                       |                                                     |                                | (40,896
|                                                 |                                                                                                               | Accrued expenses and other liabilities                                                   |                                                     |                                | (20,757
|                                                 |                                                                                                               | Deferred revenue                                                                         |                                                     |                                | (62,320
|                                                 |                                                                                                               |                                                                                          |                                                     |                                |        
|                                                 |                                                                                                               |                                                                                          | Net cash used in operating activities               |                                |        
|                                                 |                                                                                                               |                                                                                          |                                                     |                                |        
|Cash flows from investing activities:            |                                                                                                               |                                                                                          |                                                     |                                |        
|                                                 | Additions to property and equipment                                                                           |                                                                                          |                                                     | (3,058                         | )      
|                                                 | Acquisition, sale and deconsolidation of ownership interests in associated companies, including cash acquired |                                                                                          |                                                     | 3,533                          |        
|                                                 | Capitalized acquisition costs                                                                                 |                                                                                          |                                                     | (2,949                         | )      
|                                                 | Proceeds from the sale of property and equipment                                                              |                                                                                          |                                                     | 1,648                          |        
|                                                 | Change in notes receivable                                                                                    |                                                                                          |                                                     | 349                            |        
|                                                 |                                                                                                               |                                                                                          |                                                     |                                |        
|                                                 |                                                                                                               |                                                                                          | Net cash provided by (used in) investing activities |                                |        
|                                                 |                                                                                                               |                                                                                          |                                                     |                                |        
|Cash flows from financing activities:            |                                                                                                               |                                                                                          |                                                     |                                |        
|                                                 | Proceeds from the issuance of preferred stock                                                                 |                                                                                          |                                                     | 22,941                         |        
|                                                 | Issuance of shares under Employee Stock Purchase Plans                                                        |                                                                                          |                                                     | 884                            |        
|                                                 | Repayments of notes payable                                                                                   |                                                                                          |                                                     | (25,914                        | )      
|                                                 | Issuance of notes payable                                                                                     |                                                                                          |                                                     |                               |        
|                                                 | Proceeds from the issuance of long-term debt                                                                  |                                                                                          |                                                     | 34                             |        
|                                                 | Repayments of long-term debt                                                                                  |                                                                                          |                                                     | (23                            | )      
|                                                 | Proceeds from the exercise of stock options                                                                   |                                                                                          |                                                     | 331                            |        
|                                                 | Repurchase and cancellation of exercised stock options                                                        |                                                                                          |                                                     |                               |        
|                                                 | Purchase of treasury stock                                                                                    |                                                                                          |                                                     | (5,855                         | )      
|                                                 | Proceeds from repayments of stock subscription receivable                                                     |                                                                                          |                                                     |                               |        
|                                                 |                                                                                                               |                                                                                          |                                                     |                                |        
|                                                 |                                                                                                               |                                                                                          | Net cash provided by (used in) financing activities |                                |        
|                                                 |                                                                                                               |                                                                                          |                                                     |                                |        
|Effect of exchange rates on cash                 |                                                                                                               |                                                                                          | (1,840                                              | )                              |        
|Net decrease in cash and cash equivalents        |                                                                                                               |                                                                                          | (74,614                                             | )                              |        
|Cash and cash equivalents at beginning of period |                                                                                                               |                                                                                          | 104,480                                             |                                |        
|                                                 |                                                                                                               |                                                                                          |                                                     |                                |        
|Cash and cash equivalents at end of period       |                                                                                                               | $                                                                                        | 29,866                                              |                                | $      
|                                                 |                                                                                                               |                                                                                          |                                                     |                                |        
|Supplemental disclosures:                        |                                                                                                               |                                                                                          |                                                     |                                |        
|                                                 | Interest paid                                                                                                 |                                                                                          | $                                                   | 2,593                          |        
|                                                 | Noncash financing and investing activities:                                                                   |                                                                                          |                                                     |                                |        
|                                                 |                                                                                                               | Issuance of notes payable, stock, options, and warrants in conjunction with acquisitions |                                                     |                                | 55,105 
|                                                 |                                                                                                               | Retirement of notes receivable from exercise of stock options                            |                                                     |                                |       

See
accompanying notes to unaudited interim consolidated financial statements.

6

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divine, inc.        NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(1)  Summary of Significant Accounting Policies



The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all
adjustments (consisting of only normal recurring accruals) necessary for a fair presentation have been included. The results of operations for the three and six months ended June 30, 2002 are
not necessarily indicative of results that may be expected for the year ending December 31, 2002 or for any future periods. These unaudited interim consolidated financial statements and related
notes should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2001, which are contained in the Company's Annual Report
on Form 10-K filed with the Securities and Exchange Commission (SEC) on April 1, 2002 as amended on Form 10-K/A on May 9, 2002.



In May 2002, the Company effected a 1 for 25 reverse stock split of its class A common stock. All share and per share data of the Company in the
accompanying unaudited interim consolidated financial statements, and in these notes to the unaudited consolidated financial statements, give effect to the reverse stock split.



Net loss per share is calculated in accordance with Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." Basic earnings per
share is computed based on the weighted average number of common shares outstanding during the period. The dilutive effect of common stock equivalents and convertible preferred stock is included in
the calculation of diluted earnings per share only when the effect of their inclusion would be dilutive. Because the Company reported a net loss for the three and six month periods ended
June 30, 2002 and 2001, potentially dilutive securities have not been included in the shares used to compute net loss per share.

Had
the Company reported net income for the three and six month periods ended June 30, 2002, the weighted average number of shares outstanding for those periods would have
potentially been diluted by approximately 3,233,591 and 3,387,223 common equivalent shares, respectively, assuming the exercise of all outstanding stock options; by 383,053 and 377,003 common
equivalent shares, respectively, assuming the exercise of all outstanding warrants; and by 1,297,016 and 652,091 common equivalent shares, assuming the conversion of all outstanding convertible
preferred stock.

Had
the Company reported net income for the three and six month periods ended June 30, 2001, the weighted average number of shares outstanding for those periods would have
potentially been diluted by approximately 424,160 and 350,552 common equivalent shares, respectively, assuming the exercise of all outstanding stock options.



Certain reclassifications of prior period amounts have been made to conform to current period presentations.

7

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(2)  Business Combinations



In January 2002, the Company acquired 100% of the stock of Data Return Corporation, a provider of high-availability managed hosting services.
The purchase price, for the purpose of purchase accounting for this transaction, consisted of $8,898,000 of cash payments related to acquisition costs and interim financing, and 2,982,028 shares of
the Company's class A common stock, with a fair value of $34,137,000. In addition, the Company assumed or issued options and warrants to purchase 602,819 shares of the Company's class A
common stock which are included as part of the purchase price paid for Data Return. The Black-Scholes fair value of these options and warrants was $5,948,000.

In
January 2002, through one of its wholly-owned subsidiaries, the Company acquired certain assets of Northern Light Technology LLC, a leading provider of search and content
integration solutions, in exchange for 560,106 shares of the Company's class A common stock and the assumption of certain liabilities of Northern Light. In addition, the Company issued to a
vendor of Northern Light a warrant to purchase up to 4,803 shares of the Company's class A common stock, at an exercise price of $14.50 per share. The exact number of shares for which the
warrant will be exercisable has not yet been determined, and is subject to the amount of cash paid to the Company under a Development Agreement between the Company and that vendor.

In
February 2002, the Company acquired the 66.7% of Perceptual Robotics, Inc. that it did not already own in exchange for 177,108 shares of the Company's class A
common stock and $55,000 in cash.

In
February 2002, the Company acquired the minority interest of Net Unlimited, Inc. in exchange for 14,601 shares of the Company's class A common stock.

In
February 2002, the Company acquired 100% of RWT Corporation (d/b/a RealWorld Technologies, Inc.), a leading provider of production management and tracking software, in
exchange for 30,769 shares of the Company's class A common stock.

In
April 2002, the Company acquired Denalii Inc., a provider of content management solutions for the Asian market, in exchange for 60,190 shares of the Company's
class A common stock. The Company also provided $1,016,000 of interim financing to Denalii. In addition, the Company granted options to
purchase a total of 19,600 shares of the Company's class A common stock to certain continuing employees of Denalii and the Company agreed to issue a maximum of $5,600,000 of the Company's
class A common stock if the acquired Denalii business meets certain revenue thresholds in 2002.

During
the six months ended June 30, 2002, in conjunction with the Company's transactions related to Northern Light, Perceptual Robotics, Net Unlimited, RWT, and Denalii as
described herein, the purchase price, for the purpose of recording the purchase accounting for these transactions, consisted of $1,444,000 of cash payments (including acquisition costs and interim
financing), 842,774 shares of the Company's class A common stock, with a fair value of $14,672,000, and options to purchase 19,600 shares of the Company's class A common stock, with a
Black-Scholes fair value of $256,000. Additionally, in conjunction with the Northern Light acquisition, the Company has granted a warrant to purchase up to 4,803 shares of the Company's class A
common stock which is included as part of the purchase price paid for the assets of Northern Light. The Black-Scholes fair value of this warrant, assuming it will be exercisable for the maximum number
of shares, was $23,000.

The
value of stock issued as consideration in these acquisitions was determined based on the average closing market price of divine's common shares on the measurement date and the three
trading

8

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days before and after the measurement date. The measurement date is generally the date on which the terms of the acquisition are agreed to and announced, unless the number of shares or the amount of
other consideration is subsequently changed as a result of further negotiations or a revised acquisition agreement, or if the number of shares or the amount of other consideration to be issued could
change pursuant to a formula in the initial acquisition agreement. In these cases, the measurement date is the first date on which the number of acquirer shares and the amount of other consideration
become fixed.

The
following table presents information (in thousands) concerning the purchase price allocations for acquisitions completed during the six months ended June 30, 2002.

|Company     |  | Purchase
Price |        | Fair Value
of Tangible
Net Assets
Acquired
(Net Liabilities Assumed) |   | Developed
Technology |   | Unearned
Stock-Based
Compensation |       | Extraordinary
Gain |   | Goodwill
|----------- |  | -------------- | ------ | -------------------------------------------------------------------- | - | -------------------- | - | --------------------------------- | ----- | ------------------ | - | --------
|
|Data Return |  | $              | 48,983 |                                                                      | $ | (16,110              | ) | $                                 |      |                    | $ | 452     
|Others      |  |                | 16,395 |                                                                      |   | 4,927                |   |                                   | 9,711 |                    |   |        
|            |  |                |        |                                                                      |   |                      |   |                                   |       |                    |   |         
|            |  | $              | 65,378 |                                                                      | $ | (11,183              | ) | $                                 | 9,711 |                    | $ | 452     
|            |  |                |        |                                                                      |   |                      |   |                                   |       |                    |   |         

Developed technology is amortized over the useful life of the technology, which ranges from two to four years. The extraordinary gain represents the excess of
the fair value of the net current assets acquired over the fair value of the Company's purchase price related to the Company's acquisition of Perceptual Robotics.

The
acquired companies are included in the Company's consolidated financial statements from the dates of acquisition. The following table summarizes the estimated fair value (in
thousands) of the tangible net assets acquired at the date of acquisition for the acquisitions completed during the six months ended June 30, 2002.

|                         |                                                        | Data Return |        | Others 
|------------------------ | ------------------------------------------------------ | ----------- | ------ | -------
|
|Current assets           |                                                        | $           | 9,584  |        
|Fixed assets             |                                                        |             | 9,706  |        
|Other non-current assets |                                                        |             |       |        
|                         |                                                        |             |        |        
|                         | Total tangible assets acquired                         |             |        | 19,290 
|Current liabilities      |                                                        |             | 25,389 |        
|Non-current liabilities  |                                                        |             | 10,011 |        
|                         |                                                        |             |        |        
|                         | Total liabilities assumed                              |             |        | 35,400 
|                         |                                                        |             |        |        
|                         | Tangible net assets acquired (net liabilities assumed) |             | $      | (16,110
|                         |                                                        |             |        |        

As
of January 1, 2002, the Company implemented SFAS No. 142,Goodwill and Other Intangible Assets, which requires that
goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. SFAS No. 142 also requires that intangible assets
with estimable useful lives be amortized over their respective estimated useful lives and reviewed for impairment. For the six months ended June 30, 2001, the Company recorded amortization
expense of $9,878,000 related to goodwill and certain intangible assets, as well as net excess investment over the equity in net assets of equity-method associated companies, that would not have been
amortized if SFAS No. 142 had been adopted as of January 1, 2001. Had the Company not recorded these amortization expenses, net loss and basic and diluted loss per share for the six
months

9

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ended June 30, 2001 would have been $94,254,000 and $16.88, respectively. Detail about the Company's intangible assets is as follows:

|                               |                         | As of June 30, 2002 |   | As of December 31, 2001 | 
|------------------------------ | ----------------------- | ------------------- | - | ----------------------- | 
|
|
|Amortized intangible assets:   |                         |                     |   |                         | 
|                               | Developed technology    |                     | $ | 66,559                  | 
|                               | Other intangible assets |                     |   | 400                     | 
|Unamortized intangible assets: |                         |                     |   |                         | 
|                               | Goodwill                |                     |   | 226,500                 | 



In February 2002, the Company sold 51% of its interest in mindwrap, Inc. to mindwrap LLC for nominal consideration. Additionally, the Company
entered into a General Release and Operating Agreement wherein mindwrap LLC paid the Company $766,000, which constitutes payment in full for all amounts due and owing to the Company from or arising
out of the Company's ownership and control of mindwrap, Inc. prior to the closing date. In exchange, the Company released mindwrap LLC from any current or future liability arising from any
condition existing prior to the closing date. The Company also entered into a Joint Ownership Conveyance Agreement with mindwrap LLC wherein the Company will receive a perpetual,
royalty-free, transferable joint ownership interest in certain mindwrap software and other intellectual property.



During the year ended December 31, 2001, the Company acquired 100% of eshare communications, Inc., Eprise Corporation, RoweCom Inc., and Open
Market, Inc. ("the pro forma acquisitions"). The following unaudited pro forma financial information for the six months ended June 30, 2001 presents the consolidated operations of the
Company as if the acquisitions had been made on January 1, 2001, after giving effect to certain adjustments, including amortization of certain intangible assets actually recorded by the Company
as part of the purchase accounting for the pro forma acquisitions as of the respective acquisition dates. Under the provisions of SFAS No. 142, goodwill acquired in transactions completed after
June 30, 2001 is not amortized. As the pro forma acquisitions occurred subsequent to that date, these pro forma results do not reflect any goodwill amortization expense related to these
acquisitions. Other acquisitions made during 2001 and during the six months ended June 30, 2002 have been excluded from the unaudited pro forma financial information because their effects would
be immaterial. The unaudited pro forma financial information is provided for informational purposes only and should not be construed to be indicative of the Company's consolidated results of
operations had the 2001 acquisitions been consummated on these earlier dates, and do not project the Company's results of operations for any future period:

|                                                                       |  | Six Months
Ended
June 30, 2001 |         
|---------------------------------------------------------------------- |  | ------------------------------ | --------
|
|Revenues                                                               |  | $                              | 246,021 
|Net loss applicable to common stockholders                             |  |                                | (162,230
|Basic and diluted net loss per share applicable to common stockholders |  | $                              | (29.05  

10

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(3)  Equity Financing

In May 2002, the Company entered into a securities purchase agreement with a group of investors led by Oak Investment Partners (Oak), whereby the investors
have purchased, or have agreed to purchase, shares of the Company's Series B and Series B-1 convertible preferred stock. The agreement was amended in July 2002.
Pursuant to the original agreement, the Company received an aggregate of $22,941,000 in May and June 2002 in exchange for 22,941 shares of the Company's series B convertible preferred stock,
each of which is convertible into a number of shares of the Company's common stock determined by dividing the $1,000 per share purchase price of the Company's Series B convertible preferred stock by
the conversion price of $6.00 per share of the Company's common stock. Pursuant to the amended agreement, the Company expects to receive an additional $38,000,000, net of issuance costs, in the second
and final round of funding in September 2002 in exchange for 38,659 shares of the Company's series B-1 convertible preferred stock, each of which is convertible into a number of shares of the
Company's common stock determined by dividing the $1,000 per share purchase price of the Company's Series B-1 convertible preferred stock by the conversion price of the Company's common stock, which
will be no less than $1.50 per share, and no greater than $5.00 per share. Receipt of the second round of funding is subject to a number of customary closing conditions, including approval of the
Company's stockholders, all of which may be waived by the investors. The Series B convertible preferred stock was originally not included in stockholders' equity because the investors had the
ability to redeem their investment in the event that the Company had not terminated a potential $50,000,000 obligation under its Alliance Agreement with Microsoft Corporation. However, in
July 2002, the Company terminated that Alliance Agreement and signed a new Alliance Agreement with Microsoft, which eliminated the $50,000,000 obligation mentioned above. Consequently, the
Company is classifying the Series B convertible preferred stock as equity in its unaudited consolidated balance sheet as of June 30, 2002.

(4)  Impairment Charges

For the six months ended June 30, 2002, the Company recorded impairment charges on intangible and other assets of $1,402,000 resulting mainly from
additional charges related to certain acquired companies that were previously written off. Of this amount, $467,000 represents the fair value of 53,000 shares of divine common stock that were issued
in connection with an earnout agreement related to the Company's 2001 acquisition of SageMaker, Inc. Additionally, for the six months ended June 30, 2002, the Company recorded $937,000 of
impairment of investment in equity method and cost method associated companies. These charges represent mainly the fair value of 86,363 shares of the Company's class A common stock that were
issued in February 2002 as partial settlement of an obligation of the Company pursuant to the Company's collar agreement with Launchworks, net of the fair value of the portion of these shares
recorded as treasury stock because the Company maintains an equity ownership in Launchworks. This collar agreement was entered into in conjunction with the Company's investment in Launchworks in
August 2000. The Company had completely written off its investment in Launchworks as of December 31, 2001.

(5)  Segment and Geographic Information

The Company has two operating segments: the software, services and hosting segment and the divine interVentures segment. The software, services and hosting
segment encompasses the operations surrounding the Company's core strategy of delivering integrated web solutions. The divine interVentures segment encompasses the operations of the Company's
remaining portfolio of associated companies, focusing primarily on e-commerce and vertical markets. The Company evaluates segment

11

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performance based on income from operations. The Company does not allocate total assets to its segments.

Segment
information is presented in accordance with SFAS No. 131,Disclosures about Segments of an Enterprise and Related
Information. This standard is based on a management approach, which requires segmentation based upon the Company's internal organization and disclosure of revenue and operating
loss based upon internal accounting methods. Segment results for the six months ended June 30, 2002 and June 30, 2001 are as follows:

|                                           |  | Six Months Ended
June 30, 2002 |          | Six Months Ended
June 30, 2001 |  
|------------------------------------------ |  | ------------------------------ | -------- | ------------------------------ | -
|
|
|External revenue                           |  | $                              | 309,886  |                                | $
|Intersegment revenue                       |  |                                |         |                                |  
|                                           |  |                                |          |                                |  
|                                           |  | $                              | 309,886  |                                | $
|Eliminations                               |  |                                |          |                                |  
|                                           |  |                                |          |                                |  
|Total revenues                             |  |                                |          |                                |  
|                                           |  |                                |          |                                |  
|Net loss applicable to common stockholders |  | $                              | (121,174 | )                              | $
|                                           |  |                                |          |                                |  

The
Company's business is conducted on a global basis, with the principal markets for the Company's products and services located in the United States. For the six months ended
June 30, 2002, the Company recorded revenues of $309,886,000. Of these revenues, $205,239,000 were generated in the United States, $51,840,000 were generated in France, and $52,807,000 were
generated in other foreign countries. Revenues are attributed to countries based on the location of the sales group, as well as the country of domicile of the sales contract.

(6)  Subsequent Events

In July 2002, the Company acquired Delano Technology Corporation, a Toronto-based marketing solutions company offering
state-of-the-art interaction-based e-business and CRM solutions. In connection with the acquisition, the Company issued, or will issue, a total of
2,080,879 shares of its class A common stock. In addition, the Company plans to issue options to purchase approximately 71,313 shares of the Company's class A common stock to certain
continuing employees of Delano.

In
July 2002, the Company amended its definitive agreement to acquire Viant Corporation, a professional services organization providing business solutions and industry insight to
help clients leverage assets for better business performance. The Company expects to issue approximately 2,898,000 shares of the Company's class A common stock in connection with the
acquisition. Consummation of the merger is subject to a number of closing conditions, including approval of the merger by Viant's stockholders.

In
August 2002, Kevin Nater resigned from the Company's board of directors. Mr. Nater was nominated to the board of directors by Dell USA L.P, pursuant to the terms of
their investment in the Company. Dell has the right to name a replacement board member for Mr. Nater. As of the date of this filing, no replacement has been named.

12

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

General

We provide extended enterprise solutions for our base of over 20,000 customers. We offer Web-based software and technology that allows the critical
business units and functional areas of our clients to operate in a more cohesive manner. We also offer the services necessary to deploy these software solutions and to integrate them with existing
software and technical systems. Our product and service offerings allow us to provide a comprehensive solution for our clients and we offer our customers a single point of accountability, as our
solutions extend across the enterprise. Our extended enterprise solution is comprised of the following key components:



We
focus on Global 5000 and high-growth middle market firms, government agencies, and educational institutions. We expect that our revenues in future periods will be
generated principally through our extended enterprise solutions.

We
began operations as divine interVentures, inc. on June 30, 1999, engaging in business-to-business e-commerce through a community of
associated companies in which we invested. In 1999 and 2000, we acquired interests in 40 associated companies, established a total of 13 associated companies, and also further developed our
operational procedures and capabilities.

In
February 2001, we announced our strategy to primarily focus on enterprise Web solutions and changed our name to divine, inc. Since that time, we have not reflected
separately our interests in associated companies that provide solutions for the extended enterprise. Instead, the operations of these businesses are considered a part of our core business strategy.
Our remaining associated companies, offering software and services focused on e-commerce and vertical markets, were included in our divine interVentures segment. As of December 31,
2001, we have completely written off our investments in the associated companies in our divine interVentures portfolio, other than amounts included in available-for-sale
securities. We do not expect to invest additional funds into these companies in future periods.

Through
integrating the products and services of acquired companies into our infrastructure, we extend a broader array of offerings and deliver greater value to all our constituencies.
We introduce combined product suites to gain financial and market leverage from incremental revenue and the operational efficiencies of integration.

13

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Since
April 1, 2002, we have completed, or entered into agreements to complete, several acquisitions, including:





We
anticipate that the integration of these companies into our products and services offering will enhance our combination of professional services, software services, and managed
services to our customers.

In
addition to these acquisitions, we entered into a securities purchase agreement with a group of investors led by Oak Investment Partners (Oak) in May 2002, which was amended in
July 2002. Pursuant to this agreement, we received an aggregate of $22,941,000 in May and June 2002. We expect to receive an additional $38,000,000, net of issuance costs, in the second
and final round of this financing in September 2002 in exchange for 38,569 shares of our Series B-1 convertible preferred stock. Receipt of this second round of funding is subject to a
number of customary closing conditions, including approval of our stockholders, all of which may be waived by the investors.

Effect of Various Accounting Methods on the Consolidated Financial Statements

We have held ownership interests in many associated companies since our inception. Since February 2001, our acquisitions have been almost exclusively
acquisitions of 100% of the stock of certain companies that fit our operating strategy. The following discussion regarding various methods of accounting is meant to explain how we accounted for
investments in associated companies focused on e-business and vertical markets, which accounted for the majority of our consolidated operations for the three and six months ended
June 30, 2001. These companies were considered part of our divine interVentures portfolio throughout 2001. The significance of the operations of these associated companies on our consolidated
operations decreased throughout 2001, and as of December 31, 2001, we had completely written off our investments in the associated companies in our divine interVentures portfolio, other than
amounts included in available-for-sale securities.



Associated companies in which we own, directly or indirectly, more than 50% of the outstanding voting power are accounted for under the consolidation method of
accounting. Under this method, an associated company's results of operations are reflected within our consolidated statement of operations. Earnings or losses attributable to other stockholders of a
consolidated associated company are identified as "minority interest" in our consolidated statement of operations. Minority interest adjusts our consolidated net results of operations to reflect only
our share of the earnings or losses of a consolidated associated company. As of June 30, 2002 we did not reflect any minority interest liability

14

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on our consolidated balance sheet. The results of operations of our consolidated associated companies are reflected in our consolidated financial statements from the acquisition date of the related
company.



Associated companies in which we own 50% or less of the outstanding voting power, but over which we exercise significant influence, are accounted for under the
equity method of accounting. Whether or not we exercise significant influence with respect to an associated company depends on an evaluation of several factors including, among other things,
representation on the associated company's board of directors, ownership percentage, and voting rights associated with our holdings in the associated company. With respect to our current associated
companies, if we own at least 20%, but not more than 50%, of the outstanding voting power of an associated company, we account for our interest under the equity method. Under the equity method of
accounting, an associated company's results of operations are not reflected within our consolidated operating results. However, our share of the earnings or losses of that associated company is
identified as "equity in losses of associated companies" in our consolidated statement of operations.

The
net effect of an associated company's results of operations on our results of operations is generally the same under either the consolidation method of accounting or the equity
method of accounting, because, under each of these methods, only our share of the earnings or losses of an associated company is reflected in the net loss in our consolidated statement of operations.
However, the presentation of the consolidation method differs dramatically from the equity method of accounting. The consolidation method presents associated company results in the applicable line
items within our consolidated financial statements. In contrast, the equity method of accounting presents associated company results in a single category, "equity in losses of associated companies"
within our consolidated statement of operations. Because we wrote off our remaining investments in equity-method associated companies in 2001, our consolidated statements of operations for the three
and six months ended June 30, 2002 do not reflect any "equity in losses of associated companies".



Associated companies not accounted for under either the consolidation or the equity method of accounting are accounted for under the cost method of accounting.
Under this method, our share of the earnings and losses of these companies is not included in our consolidated statements of operations unless earnings or losses are distributed.

We
record our ownership interest in equity securities of our associated companies accounted for under the cost method at the lesser of cost or fair value. Those cost method associated
companies that have readily determinable fair values based on quoted market prices are classified in accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities.''

Results of Operations



Beginning in the first quarter of 2001, we segregated our operations into two operating segments. Our software, services and hosting segment encompasses the
operations surrounding our core strategy of delivering integrated web solutions. Our divine interVentures segment encompasses the operations of our remaining portfolio of associated companies,
focusing primarily on e-commerce and vertical markets. Beginning in 2001, we changed our business strategy from being an Internet holding company engaged in
business-to-business e-commerce through our community of associated companies to

15

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becoming a leader in Web-based solutions for the extended enterprise. Our operations for the three months ended June 30, 2002 were considerably different than our operations for
the three months ended June 30, 2001. This is because nearly all of our acquisitions made in conjunction with our new strategy, including our acquisitions of RoweCom Inc., eshare
communications, Inc., Open Market, Inc., Eprise Corporation, and Data Return Corporation were made subsequent to June 30, 2001. These
acquisitions have provided us with a larger customer base and an increased revenue stream. Because of our change in strategy and the numerous acquisitions we have completed in the last twelve months,
our core business operations have changed substantially enough to make a comparison of our operations for the three months ended June 30, 2002 to our operations for the three months ended
June 30, 2001 almost meaningless.



We generated revenues totaling $163,557,000 for the three months ended June 30, 2002, all of which were generated by our software, services, and hosting
segment. This represents an increase of $102,276,000 over revenues of $61,281,000 for the three months ended June 30, 2001. The total revenues for the three months ended June 30, 2002
included $125,587,000 from the sale of products. Product revenues included $85,667,000 from sales of content, $22,605,000 from software sales contracts, and $17,290,000 from managed services. Revenue
from software sales contracts included $8,601,000 related to our CIM Telephony software, $7,213,000 related to our Enterprise Content Manager software, $3,105,000 related to our Enterprise Content
Center software, $2,505,000 related to our Collaboration software, and $1,180,000 related to our CIM Internet software.

Total
revenues for the three months ended June 30, 2002 also included $37,970,000 from the sale of services, generated exclusively from our Professional Services Organization.
Services revenues included $30,058,000 from consulting services, $4,261,000 from divine Product Solutions Group, and $1,912,000 from Technology Information Services.

Revenues
for the three months ended June 30, 2001 included $3,381,000 from the sale of products, all of which were generated by our software, services and hosting segment. Product
revenues included $2,796,000 from software sales contracts and $585,000 from sales of computer hardware. The total revenues also included $57,900,000 from the sale of services, generated almost
exclusively from the operations of our Professional Services Organization, which accounted for $56,088,000 of service revenues.



For the three months ended June 30, 2002, our cost of revenues totaled $130,119,000, exclusive of $150,000 of amortization of stock-based compensation.
This is an increase of $74,028,000 over the $56,091,000 (exclusive of $197,000 of amortization of stock-based compensation) cost of revenues we incurred for the three months ended June 30,
2001. Cost of revenues for the three months ended June 30, 2002 included $95,995,000 of direct costs of providing products, which consisted primarily of $79,497,000 of content costs, $7,429,000
of office and computer supplies, $3,576,000 of salaries and related benefits, and $3,273,000 of rent and facilities services. Cost of revenues for 2002 also included
$34,124,000 of direct costs of providing services, which consisted principally of $25,223,000 of salaries and benefits, $3,400,000 of rent and facilities services and $1,119,000 of depreciation
expense.

Costs
of revenues for the three months ended June 30, 2001 included $53,947,000 of direct costs of providing services, which consisted principally of $52,464,000 of salaries and
related benefits, $613,000 of rent and facilities services, and $155,000 of depreciation and amortization. Cost of revenues for 2001 also included $2,144,000 of direct costs of providing products.

16

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For the three months ended June 30, 2002, we incurred selling, general, and administrative expenses of $56,974,000, exclusive of $1,300,000 of amortization
of stock-based compensation. This represents an increase of $20,497,000 over the $36,477,000 (exclusive of $1,960,000 of amortization of stock-based compensation) of selling, general, and
administrative expenses for the three months ended June 30, 2001. These expenses for the three months ended June 30, 2002 consisted primarily of $33,333,000 of employee salaries and
related benefits, $6,871,000 of fees for professional services, including legal, consulting, and accounting, $6,487,000 of depreciation and amortization, $3,019,000 of office and computer supplies,
and $1,718,000 of rent and facilities services.

Selling,
general, and administrative expenses for the three months ended June 30, 2001 consisted primarily of $16,233,000 of employee benefits and related compensation, $4,661,000
of facility costs, consisting primarily of rent expense, $4,019,000 of travel costs, $2,440,000 of depreciation expense, and $2,345,000 of fees for professional services, including legal, consulting,
and accounting.



For the three months ended June 30, 2002, we incurred research and development expenses of $23,684,000, exclusive of $11,000 of amortization of stock-based
compensation. This represents an increase of $20,827,000 over the $2,857,000 (exclusive of $77,000 of amortization of stock-based compensation) of research and development expenses for the three
months ended June 30, 2001. Research and development expenses for the three months ended June 30, 2002 consisted primarily of $16,940,000 of employee salaries and related benefits and
$2,993,000 of facility costs, consisting primarily of rent. Research and development expenses for the three months ended June 30, 2001 consisted primarily of $2,642,000 of employee benefits and
related compensation.



For the three months ended June 30, 2002, we recorded a net bad debt recovery of $3,825,000 as compared to $1,492,000 of bad debt expense recorded for the
three months ended June 30, 2001. The net bad debt recovery for the three months ended June 30, 2002 related mainly to the collection of accounts receivable written off in the fourth
quarter of 2001.



For the three months ended June 30, 2002, we incurred amortization expense of $4,306,000 on our intangible assets. This represents a decrease of $3,240,000
from the $7,546,000 of amortization expense recorded by us for the three months ended June 30, 2001. The decrease is attributable mainly to a reduction in amortization related to the impairment
of intangible assets in the fourth quarter of 2001 and our implementation in January 2002 of SFAS No. 142, under which goodwill and various other intangible assets are no longer
amortized, offset partially by intangible assets recorded in conjunction with acquisitions we made in the fourth quarter of 2001.



For the three months ended June 30, 2002, we recorded impairment charges of $1,152,000 related mainly to additional charges related to acquired companies
that were previously written off. Of this amount, $467,000 represents the fair value of 53,000 shares of divine common stock that were issued in connection with an earnout agreement related to the
Company's 2001 acquisition of SageMaker. We recorded an impairment recovery of $232,000 for the three months ended June 30, 2001.

17

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For the three months ended June 30, 2002, we incurred a non-cash expense of $1,331,000 related to the issuance, prior to our Initial Public
Offering (IPO), of shares of restricted stock and grants of options to employees, directors, and consultants with exercise prices lower than the fair value of our class A common stock on the
dates of grant. Additionally, we incurred a non-cash expense of $224,000 related
to the issuance of stock options, as part of our acquisitions of Eprise and Data Return, with exercise prices lower than the fair value of our class A common stock on the dates of the grant.
Also for the three months ended June 30, 2002, we recovered $94,000 of previously recognized compensation expense related to non-vested options of terminated employees.

For
the three months ended June 30, 2001, we incurred a non-cash expense of $2,207,000 related to the issuance, prior to our IPO, of shares of restricted stock and
grants of options to employees, directors, and consultants with exercise prices lower than the fair value of our class A common stock on the dates of grant. Additionally, we incurred a
one-time charge of $132,000 related to the issuance of options to members of our advisory committee. Also for the three months ended June 30, 2001, we recovered $105,000 of
previously recognized compensation expense related to options of terminated employees that had not vested, and we repurchased a total of 1,967 shares of restricted class A common stock that
were previously exercised by terminated employees.



Interest income for the three months ended June 30, 2002 was $241,000 and was earned primarily from the investment of our available cash balances. This is
a decrease of $2,164,000 from the $2,405,000 of interest income earned during the three months ended June 30, 2001, which was also earned from the investment of our available cash balances.
Interest expense for the three months ended June 30, 2002 was $1,740,000 and was incurred primarily from our long-term debt. This is an increase of $680,000 from the $1,060,000 of
interest expense incurred during the three months ended June 30, 2001, which was also incurred primarily from our long-term debt.



Other income (net) for the three months ended June 30, 2002 was $31,000. This represents a decrease of $13,556,000 from the $13,587,000 of other income
(net) earned during the three months ended June 30, 2001. Other income for the three months ended June 30, 2001 was earned primarily from the sale of our investments in Farms and Sequoia
Software Corporation, which resulted in realized gains of approximately $7,225,000 and $6,611,000, respectively.



We recorded no income tax provision or benefit for the three months ended June 30, 2002 or the three months ended June 30, 2001. Because we have no
history of taxable income through June 30, 2002, the tax benefit associated with our net losses has been fully reserved. As of June 30, 2002, we had total net
operating loss carryforwards of $173,586,000, of which $125,078,000 may be utilized by us to reduce future consolidated taxable income, if any. Of the total net operating loss carryforwards, $47,000
are attributable to majority-owned subsidiaries not includible in our consolidated tax group. Although each majority-owned subsidiary excluded from our consolidated tax group may utilize its net
operating loss carryforwards to reduce separate future income taxes, if any, such carryforwards may not offset our consolidated taxable income, if any. In addition, our utilization of the net
operating loss carryforwards may be substantially limited under the change in stock ownership rules imposed by Internal Revenue Code Section 382. The net operating loss carryforwards will
expire from 2019 through 2022.

In
assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some or all of the deferred tax assets will not be realized. Based upon our
historical net operating

18

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losses and projections for future tax losses, we believe it is more likely than not that we will not realize the deferred tax assets. Thus, we have provided a full valuation allowance against the net
deferred tax assets as of June 30, 2002.



Minority interest of $0 and $1,055,000 represents the non-controlling stockholders' share of our consolidated associated companies' net loss for the
three months ended June 30, 2002 and the three months ended June 30, 2001, respectively.



Because we had written off, as of December 31, 2001, all of our investments in associated companies accounted for under the equity method of accounting, we
recorded no equity in losses of associated companies for the three months ended June 30, 2002. We recorded $4,500,000 in net losses for the three months ended June 30, 2001. Equity in
losses of associated companies also included amortization of our net excess investment over the equity in the net assets of these associated companies, which totaled $692,000 for the three months
ended June 30, 2001.



For the three months ended June 30, 2002, we recovered impairment charges of $524,000 for other than temporary declines in the carrying value of certain
equity and cost method associated companies. We recorded impairment charges of $4,156,000 during the three months ended June 30, 2001.



For the three months ended June 30, 2002, we reported an extraordinary gain of $60,000, which represented an adjustment to the extraordinary gain related
to our first quarter acquisition of the outstanding equity of Perceptual Robotics that we did not already own. We did not report an extraordinary gain for the three months ended June 30, 2001.



Beginning in the first quarter of 2001, we segregated our operations into two operating segments. Our software, services, and hosting segment encompasses the
operations surrounding our core strategy of delivering integrated web solutions. Our divine interVentures segment encompasses the operations of our remaining portfolio of associated companies,
focusing primarily on e-commerce and vertical markets. Beginning in 2001, we changed our business strategy from being an Internet holding company engaged in
business-to-business e-commerce through our community of associated companies to becoming a leader in Web-based solutions for the extended enterprise.
Our operations for the six months ended June 30, 2002 were considerably different than our operations for the six months ended June 30, 2001. This is because nearly all of our
acquisitions made in conjunction with our new strategy, including our acquisitions of RoweCom Inc., eshare communications, Inc., Open Market, Inc., Eprise Corporation, and Data
Return Corporation were made subsequent to June 30, 2001. These acquisitions have provided us with a larger customer base and an increased revenue stream. Because of our change in strategy and
the numerous acquisitions we have completed in the last twelve months, our core business operations have changed substantially enough to make a comparison of our operations for the six months ended
June 30, 2002 to our operations for the six months ended June 30, 2001 almost meaningless.

19

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We generated revenues totaling $309,886,000 for the six months ended June 30, 2002, which is an increase of $238,848,000 over revenues of $71,038,000 for
the six months ended June 30, 2001. The total revenues for the six months ended June 30, 2002 included $235,759,000 from the sale of products. Product revenues included $160,275,000 from
the sales of content, $40,971,000 from software sales contracts and $34,108,000 from managed services. Revenue from software sales contracts included $17,408,000 related to our CIM Telephony software,
$11,265,000 related to our Enterprise Content Management software, $5,634,000 related to our Enterprise Content Center software, $3,669,000 related to our Collaboration software, and $2,689,000
related to our CIM Internet software.

The
total revenues also included $74,127,000 from the sale of services, generated exclusively from our Professional Services Organization. Services revenues included $60,168,000 from
consulting services, $7,846,000 from divine Product Solutions Group, and $4,374,000 from Technology Information Services.

Revenues
for the six months ended June 30, 2001 included $4,916,000 from the sale of products, all of which was generated by our software, services, and hosting segment. Product
revenues included $3,625,000 from software sales contracts and $1,291,000 from sales of computer hardware. The total revenues also included $66,122,000 from the sale of services, including $64,014,000
from our software, services and hosting segment and $2,108,000 from our divine interVentures segment. Service revenues from our software, services, and hosting segment included $56,088,000 from the
operations of our Professional Services Organization, and $7,926,000 from operations exclusive of our Professional Services Organization including $3,357,000 from Web design services, $2,135,000 from
facilities management and $1,260,000 from hosting services. Services revenues from our divine interVentures segment included $1,891,000 from inventory management services.



For the six months ended June 30, 2002, our cost of revenues were $254,821,000, exclusive of $348,000 of amortization of stock-based compensation. This is
an increase of $191,110,000 over the $63,711,000 (exclusive of $338,000 of amortization of stock-based compensation) cost of revenues we incurred for the six months ended June 30, 2001. Cost of
revenues for the six months ended June 30, 2002 included $175,710,000 of direct costs of providing products, which consisted primarily of $143,825,000 of content costs, $12,290,000 of office
and computer supplies, $8,358,000 of salaries and related benefits, and $6,814,000 of rent and facilities services. Cost of revenues for 2002 also included approximately $79,111,000 of direct costs of
providing services, which consisted principally of $61,278,000 of salaries and benefits, $7,184,000 of rent and facilities services and $2,256,000 of depreciation expense.

Cost
of revenues for the six months ended June 30, 2001 included $60,716,000 of direct costs of providing services, which consisted principally of $56,593,000 of salaries and
related benefits, $1,823,000 of rent and facilities services and $636,000 of depreciation and amortization. Cost of revenues for the six months ended June 30, 2001 also included $2,995,000 of
direct costs of providing products.



For the six months ended June 30, 2002, we incurred selling, general, and administrative expenses of $113,197,000, exclusive of $2,921,000 of amortization
of stock-based compensation. This represents an increase of $45,009,000 over the $68,188,000 (exclusive of $5,016,000 of amortization of stock-based compensation) of selling, general, and
administrative expenses for the six months ended June 30, 2001. These expenses for the six months ended June 30, 2002 consisted primarily of $66,845,000 of employee salaries and related
benefits, $12,480,000 of depreciation and amortization, $11,088,000 of fees for professional services, including legal, consulting, and accounting, $7,098,000 of office and computer supplies,
$4,137,000 of marketing expenses, and $3,164,000 of rent and facilities services.

20

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Selling,
general, and administrative expenses for the six months ended June 30, 2001 consisted primarily of $32,245,000 of employee salaries and related benefits, $8,135,000 of
facility costs, consisting primarily of rent expense, $5,420,000 of fees for professional services, including legal, consulting, and accounting, $6,798,000 of travel costs, and $4,878,000 of
depreciation expense.



For the six months ended June 30, 2002, we incurred research and development expenses of $54,225,000, exclusive of $68,000 of amortization of stock-based
compensation. This represents an increase of $48,235,000 over the $5,990,000 (exclusive of $199,000 of amortization of stock-based compensation) of research and development expenses for the six months
ended June 30, 2001. Research and development expenses for the six months ended June 30, 2002 consisted primarily of $37,060,000 of employee benefits and related compensation and
$6,962,000 of facility costs, consisting primarily of rent. Research and development expenses for the six months ended June 30, 2001 consisted primarily of $2,642,000 of employee benefits and
related compensation.



For the six months ended June 30, 2002, we recorded a net bad debt recovery of $4,500,000 as compared to $2,595,000 of bad debt expense recorded for the
six months ended June 30, 2001. The net bad debt recovery for the six months ended June 30, 2002 related mainly to the collection of accounts receivable written off in the fourth quarter
of 2001.



For the six months ended June 30, 2002, we incurred amortization expense of $8,098,000 on our intangible assets. This represents a decrease of $632,000
from the $8,730,000 of amortization expense we recorded for the six months ended June 30, 2001. The decrease is attributable mainly to a reduction in amortization related to the impairment of
intangible assets in the fourth quarter of 2001 and our implementation in January 2002 of SFAS No. 142, under which goodwill and various other intangible assets are no longer amortized,
offset partially by intangible assets recorded in conjunction with acquisitions we made in the fourth quarter of 2001.



For the six months ended June 30, 2002, we recorded impairment charges of $1,402,000 relating mainly to additional charges related to acquired companies
that were previously written off. Of this amount, $467,000 represents the fair value of 53,000 shares of divine common stock that were issued in connection with an earnout agreement related to the
Company's 2001 acquisition of SageMaker. We recorded impairment charges of $3,024,000 during the six months ended June 30, 2001.



For the six months ended June 30, 2002, we incurred a non-cash expense of $3,388,000 related to the issuance, prior to our IPO, of shares of
restricted stock and grants of options to employees, directors, and consultants with exercise prices lower than the fair value of the class A common stock on the dates of grant. Additionally,
we incurred a non-cash expense of $224,000 related to the issuance of stock options, as part of our acquisitions of Eprise and Data Return, with exercise prices lower than the fair value of the
class A common stock on the dates of the grant. Also for the six months ended June 30, 2002, we recovered $275,000 of previously recognized compensation expense related to
non-vested options of terminated employees.

21

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For the six months ended June 30, 2001, we incurred a non-cash expense of $5,745,000 related to the issuance, prior to our IPO, of shares of restricted stock and
grants of options to employees, directors, and consultants with exercise prices lower than the fair value of the class A common stock on the dates of grant. Additionally, we incurred a
one-time charge of $279,000 related to shares issued in conjunction with our acquisition of SageMaker, and we incurred a one-time charge of $132,000 related to the issuance of
options to members of our advisory committee. Also for the six months ended June 30, 2001, we recovered $603,000 of previously recognized compensation expense related to non-vested
options of terminated employees, and we repurchased a total of 3,434 shares of restricted class A common stock which were previously exercised by terminated employees.



Interest income for the six months ended June 30, 2002 was $494,000 and was earned primarily from the investment of our available cash balances. This is a
decrease of $5,419,000 from the $5,913,000 of interest income earned during the six months ended June 30, 2001, which was also earned from the investment of our available cash balances.
Interest expense for the six months ended June 30, 2002 was $3,934,000 and was incurred primarily from our long-term debt. This is an increase of $2,598,000 from the $1,336,000 of
interest expense incurred during the six months ended June 30, 2001, which was also incurred primarily from our long-term debt.



Other income (net) for the six months ended June 30, 2002 was approximately $498,000. This represents a decrease of $13,732,000 from the $14,230,000 of
other income (net) earned during the six months ended June 30, 2001. Other income for the six months ended June 30, 2002 consisted primarily of gains of $526,000 on disposal of assets
and an investment gain of $215,000 in connection with our investment in i-Fulfillment, Inc., which filed for bankruptcy in 2001. We had previously written off our entire investment
in i-Fulfillment, and in January 2002, we received proceeds from the bankruptcy in the amount of $215,000. Additionally we recorded other expenses, net, of $243,000. Other income
for the six months ended June 30, 2001 was earned primarily from the sale of our investments in Farms and Sequoia Software Corporation, which resulted in realized gains of approximately
$7,225,000 and $6,611,000, respectively.



We recorded no income tax provision or benefit for the six months ended June 30, 2002 or the six months ended June 30, 2001. Because we have no
history of taxable income through June 30, 2002, the tax benefit associated with our net losses has been fully reserved. As of June 30, 2002, we had total net operating loss
carryforwards of approximately $173,586,000 of which approximately $125,078,000 may be utilized by us to reduce future consolidated taxable income, if any. Approximately $47,000 of the total net
operating loss carryforwards are attributable to majority-owned subsidiaries not includible in our consolidated tax group. Although each majority-owned subsidiary excluded from our consolidated tax
group may utilize its net operating loss carryforwards to reduce separate future income taxes, if any, such carryforwards may not offset our consolidated taxable income, if any. In addition, our
utilization of the net operating loss carryforwards may be substantially limited under the change in stock ownership rules imposed by Internal Revenue Code Section 382. The net operating loss
carryforwards will expire from 2019 through 2022.

In
assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some or all of the deferred tax assets will not be realized. Based upon our
historical net operating losses and projections for future tax losses, we believe it is more likely than not that we will not realize the deferred tax assets. Thus, we have provided a full valuation
allowance against the net deferred tax assets as of June 30, 2002.

22

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Minority interest of $0 and $3,875,000 represents the non-controlling stockholders' share of our consolidated associated companies' net loss for the
six months ended June 30, 2002 and the six months ended June 30, 2001, respectively.



Because we had written off, as of December 31, 2001, all of our investments in associated companies accounted for under the equity method of accounting, we
recorded no equity in losses of associated companies for the six months ended June 30, 2002. We recorded $7,752,000 in net losses for the six months ended June 30, 2001. Equity in losses
of associated companies also included amortization of our
net excess investment over the equity in the net assets of these associated companies, which totaled $4,691,000 for the six months ended June 30, 2001.



For the six months ended June 30, 2002, we recorded impairment charges of $937,000 for other than temporary declines in the carrying value of certain
equity and cost method associated companies. We recorded impairment charges of $27,618,000 during the six months ended June 30, 2001.



For the six months ended June 30, 2002, we reported an extraordinary gain of $2,479,000, which related to our acquisition of the outstanding equity of
Perceptual Robotics that we did not already own. This extraordinary gain represented the excess of the fair value of the net assets acquired over the fair value of the consideration we paid in
conjunction with this acquisition. We did not report an extraordinary gain for the three months ended June 30, 2001.

Summary of Currently Expected Fixed Charges

The following table summarizes the fixed charges as of June 30, 2002 that we currently expect to incur throughout the remainder of 2002 and over the next
three years for amortization of our identifiable intangible assets and unearned stock-based compensation:

|                                     |  | Year
|------------------------------------ |  | ----
|
|
|Identifiable Intangible Assets       |  | $   
|Unearned Stock-Based Compensation(1) |  |     
|                                     |  |     
|Total                                |  | $   

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Liquidity and Capital Resources

As of June 30, 2002, we had cash and cash equivalents, current restricted cash, and available-for-sale securities of $55,106,000,
which represented a decrease of $85,626,000 from $140,732,000 as of December 31, 2001, and a decrease of $25,561,000 from $80,667,000 as of March 31, 2002. The net decrease in cash and
cash equivalents for the three months ended June 30, 2002 was due

23

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primarily to net cash used in operating activities of $64,695,000, net cash used to repay notes payable of $25,914,000, net cash provided by the issuance of preferred stock of $22,941,000, net cash
used to acquire treasury stock of $5,855,000, net cash provided by the acquisition, sale, and deconsolidation of ownership interests in associated companies of $3,533,000, and cash used to acquire
property and equipment of $3,058,000.

As
of June 30, 2002, we had a $40,000,000 line of credit with LaSalle Bank N.A. This line of credit is cash collateralized and is available for working capital financing and
general corporate purposes other than permanent financing for acquisitions of interests in associated companies. As of June 30, 2002, we had established letters of credit of $10,504,000 against
this line of credit. These letters of credit include $5,340,000 for a note payable to marchFIRST GmbH and $5,164,000 as collateral for various real estate and equipment leases.

As
of June 30, 2002, we had current restricted cash of $23,689,000, which represented a decrease of $8,877,000 from $32,566,000 as of December 31, 2001 and a decrease of
$14,441,000 from $38,130,000 as of March 31, 2002. Current restricted cash as of June 30, 2002 included $11,351,000 that secured the $10,504,000 in letters of credit from LaSalle Bank
N.A. described above, $8,205,000 securing operating obligations related to our international operations, primarily associated with RoweCom, and $4,133,000 of other current restricted cash, consisting
mainly of $2,353,000 that secures real estate leases we assumed in our various acquisitions.

In
May and June 2002, we received an aggregate of $22,941,000 in the first of two rounds of a $61,600,000 private placement of our series B convertible preferred stock from
a group of investors led by Oak Investment Partners. The investors agreed to purchase an additional $38,000,000, net of issuance costs, of our series B-1 convertible preferred stock
in the second round of this private placement. The receipt of the $38,000,000 is subject to a number of customary closing conditions, including approval of our stockholders, all of which may be waived
by the investors.

In
June 2002, Aleksander Szlam, one of our former directors and the former Chairman and Chief Executive Officer of eshare communications, Inc., exercised a put option on
455,520 shares of our common stock, which was created in connection with our acquisition of eshare in October 2001. We paid a total of $6,241,000 to Mr. Szlam in connection with his exercise of
this put option, which included the agreed-upon purchase price of the shares and related interest charges. We no longer have any liability associated with the put option agreement with
Mr. Szlam.

At
June 30, 2002, we had $1,551,000 in available-for-sale securities. This amount includes shares of Neoforma.com and CMGI.

In
connection with purchases of our shares of class A and class C common stock by private investors concurrent with our initial public offering in July 2000:



24

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In
connection with the acquisition by our subsidiary divine/Whittman-Hart, Inc. of certain assets from marchFIRST, Inc. in April 2001, divine/Whittman-Hart issued, and has
outstanding, a $57,500,000 balloon note, which is due on April 12, 2006 but which is accelerated to the extent of 50% of free cash flow from divine/Whittman-Hart's operations and which is
secured by the assets of divine/Whittman-Hart. divine/Whittman-Hart has the option to pay the note with cash or by delivering shares of our class A common stock. This
note bears interest at the Wall Street Journal prime rate of interest. marchFIRST also is eligible to receive up to an aggregate of $55,000,000 in bonus payments, payable to the extent that 50% of
free cash flow from divine/Whittman-Hart's operations during the five years ending April 12, 2006 exceeds divine/Whittman-Hart's obligation under the promissory notes. We have not guaranteed
the promissory notes from divine/Whittman-Hart to marchFIRST, but the terms of the promissory notes restrict payments from divine/Whittman-Hart to us.

In
connection with our acquisition of certain assets of marchFIRST GmbH in September 2001, we issued, and have outstanding, a note payable in the amount of 5,369,000 euros
(approximately $5,213,000 at June 30, 2002), which is included within current notes payable in our consolidated balance sheets as of June 30, 2002. The note is due on September 1,
2002. We have the option to pay the note with cash or by issuing shares of our class A common stock. We intend to settle this obligation by issuing common stock.

In
connection with our acquisition of Synchrony Communications, Inc. in October 2001, we acquired debt with balances totaling $919,000 as of June 30, 2002, payable
in equal monthly installments through March 2003.

In
conjunction with our acquisition of RoweCom Inc. in November 2001, we acquired current notes payable with balances totaling $15,931,000 as of December 31, 2001.
During the six months ended June 30, 2002, we made payments of $14,802,000 on these notes and also reclassified as current notes payable $5,043,000 of long-term debt related to
RoweCom. The balances of these notes at June 30, 2002 totaled $6,172,000.

In
conjunction with our acquisition of RoweCom, we assumed a factoring agreement previously in place between RoweCom's French subsidiary (RoweCom France) and a European factoring
company. The arrangement allows the factoring company to purchase, without recourse, $55,000,000 of the accounts receivable of RoweCom France during the period October 1, 2001 to
September 30, 2002. The factoring arrangement is structured so that we receive 90% of the face value of the accounts receivable upon sale to the factoring company, with the remaining 10% due to
us upon the ultimate collection of the accounts receivable by the factoring company. Our cost for this arrangement is 0.37% of the face value of the sold receivable, which is paid when the accounts
receivable are transferred to the factoring company.

During
April, May, and June 2002, we used net cash of $4,590,000 million, $15,128,000 million, and $5,154,000 million, respectively. These amounts are
exclusive of an increase of $22,941,000 from the private placement of our Series B convertible preferred stock and a decrease of $23,630,000 principally from payoffs of our RoweCom debt
obligations of $15,350,000 and a payment to Mr. Szlam of $6,241,000 related to his put option. In addition, our working capital, net of deferred publisher costs and deferred revenue, decreased
to $22,865,000 at June 30, 2002 from $55,762,000 at March 31, 2002. Our cash flows from operating activities can vary significantly from month to month, depending on the

25

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timing of operating cash receipts and payments and other working capital changes, especially accounts receivable, accounts payable, accrued expenses, and other current assets and liabilities.

Our
operating plan depends on us achieving increases in revenue and cash receipts and decreases in expenses. We intend to decrease our operating costs, primarily through workforce and
payroll reductions, as we continue to integrate acquired companies into our operations. Based on these forecasts, we believe that our existing unrestricted cash and cash equivalents, accounts
receivable, proceeds from the second round of the Oak private placement, and new cash generated from our customers will be sufficient to fund our operations and capital requirements. There is a
substantial risk, however, that our revenue and cash receipts will not grow at a sufficient rate, and that we will not be able to reduce our expenses to keep them in line with our revenue. If we are
unable to meet our revenue and expense management goals or close the Oak private placement, we will need to significantly reduce our workforce, sell certain of our assets, enter into strategic
relationships or business combinations, discontinue some or all of our operations, or take other similar restructuring actions. While we expect that these actions would result in a reduction of
recurring costs, they also may result in a reduction of recurring revenues and cash receipts. It is also likely that we would incur substantial non-recurring costs to implement one or more
of these restructuring actions.

Our
pending acquisition of Viant is expected to increase our cash balance by approximately $20,000,000, net of current liabilities assumed by us. The pending second round of funding from
the investors led by Oak Investment Partners is expected to increase our cash balance by $38,000,000, net of issuance costs. These transactions also will result in significant equity dilution to the
holders of our common stock at the time of the transaction, or later. Other than our pending acquisition of Viant and the pending equity investment by Oak, we do not currently have in place any
agreements to provide us with additional funds. If the Viant or Oak transactions are not completed, additional funds may not be available to us on favorable terms, if they are available to us at all.

Our
outstanding contractual obligations, leasehold commitments, and outstanding debt balances as of June 30, 2002 are set forth in the following table. These amounts represent
amounts due by us for the periods indicated under non-cancelable contracts, leases, and loan arrangements.

|                                                                            |       | Payments Due by Period (in thousands)
|--------------------------------------------------------------------------- | ----- | -------------------------------------
|
|Notes Payable in Cash or Common Stock                                       |       | $                                    
|Other Notes Payable                                                         |       |                                      
|Long-Term Debt Payable in Cash or Common Stock                              |       |                                      
|Other Long-Term Debt                                                        |       |                                      
|Capital Lease Obligations                                                   |       |                                      
|Operating Leases                                                            |       |                                      
|Obligations Under Our Amended Alliance Agreement with Microsoft Corporation |       |                                      
|                                                                            |       |                                      
|                                                                            | Total |                                      

Recent Accounting Pronouncements

In April 2002, the Financial Accounting Standards Board issued SFAS No. 145, "Recission of FASB Statements No. 4, 44, and 64, Amendment to FASB
Statement No. 13, and Technical Corrections," which requires that gains and losses from extinguishment of debt be classified as extraordinary items only if they meet the criteria in Accounting
Principles Board Opinion No. 30, distinguishing between transactions that are part of an entity's recurring operations and those that are unusual and infrequent and meet the criteria for
classification as an extraordinary item. We expect that

26

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the adoption of SFAS No. 145 will have no material impact on our financial position or its results of operations.

In
June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which requires that a liability for a cost associated with an exit
or disposal activity be recognized when the liability is incurred, not on the date the entity commits to an exit plan. We are currently analyzing the potential impact of SFAS No. 146 on our
results of operations, financial positions, and cash flows upon the adoption of this standard.

Special Note on Forward-Looking Statements

This report includes forward-looking statements that reflect our current expectations and projections about our future results, performance, prospects, and
opportunities. We have tried to identify these forward-looking statements by using words such as "may," "will," "expect," "anticipate," "believe," "intend," "plan," "estimate," and similar
expressions. These forward-looking statements are based on information currently available to us and are subject to a number of risks, uncertainties, and other factors that could cause our actual
results, performance, prospects, or opportunities to differ materially from those expressed in, or implied by, these forward-looking statements. These risks, uncertainties, and other factors include:



Other
matters, including unanticipated events and conditions, also may cause our actual future results to differ materially from these forward-looking statements. We cannot assure you
that our expectations will prove to be correct. In addition, all subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in
their entirety by the cautionary statements mentioned above. You should not place undue reliance on these forward-

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looking statements. All of these forward-looking statements are based on our expectations as of the date of this report. We do not intend to update or revise any forward-looking statements, whether
as a result of new information, future events, or otherwise.

Item 3.    Quantitative and Qualitative Disclosures about Market Risk

Equity Price RiskAt June 30, 2002, we had $1,551,000 of
available-for-sale equity securities. These securities represent companies in the Internet and hi-tech sectors, both of which have experienced significant
volatility, specifically in the past year. These investments are at risk in the event of a downturn in the public markets in general or a downturn in their specific sectors. However, these investments
accounted for only 0.2% of our total assets at June 30, 2002.

Interest Rate RiskAt June 30, 2002, we had $53,555,000 in cash and cash equivalents and restricted cash. A decrease in
market rates of interest would have no material effect on the value of these assets, as they are short-term financial instruments with a fair value approximating our cost basis. Cash
equivalents consist mainly of money market accounts, short-term treasury bills, and commercial paper. The carrying values of other financial instruments, such as accounts receivable, notes
receivable, accounts payable, and notes payable approximate fair value as well because of their short-term nature. The carrying value of long-term debt approximates fair value
due to the variable rates at which the underlying notes bear interest.

At
June 30, 2002, we had $64,591,000 of notes payable and long-term debt carried at variable interest rates. A hypothetical 1% change in market rates of interest would
not have a material effect on our net loss.

Foreign Currency Exchange RiskOur financial market risk includes risks associated with our acquisition of companies with
operations outside the United States, mainly our acquisitions of eshare, Open Market, RoweCom, and Eprise in the fourth quarter of 2001. Through June 30, 2002, we have recorded a net foreign
currency translation loss of $3,798,000 in other comprehensive income as a result of fluctuations in foreign currency exchange rates. We do not currently engage in any activities for the
purpose of hedging foreign currency risk. Occasionally, we enter into forward contracts for the purpose of hedging foreign currency risk related to future obligations associated with sales of content
through RoweCom France. As of June 30, 2002, we had no outstanding forward contracts.

Impairment RiskAt June 30, 2002, we had goodwill and other intangible assets of $281,672,000 related almost
exclusively to our acquisition of companies in the fourth quarter of 2001 and the first quarter of 2002. We will assess the net realizable value of the assets acquired from these companies on a
regular basis to determine if we have incurred any other than temporary decline in the value of our capital investment. For the six months ended June 30, 2002, we incurred $2,339,000 of
impairment charges. At June 30, 2002, we also had $7,719,000 and $20,045,000, respectively, of current and long-term facilities impairment, representing future cash payments we are
obligated to make under operating leases, related mainly to facilities or portions of facilities that we are no longer utilizing. We may incur additional impairment charges in future periods.

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PART II    OTHER INFORMATION

Item 2.    Changes in Securities and Use of Proceeds

In April 2002, we issued 60,190 shares of our class A common stock to the former stockholders of Denalii, Inc. in connection with our
acquisition of Denalii.

In
May and June 2002, we issued an aggregate of 22,941 shares of our series B convertible preferred stock to a group of seven investors led by Oak Investment Partners. The
aggregate purchase price for those shares was $22,941,000. The series B convertible preferred shares are convertible at any time into a number of shares of our class A common stock
determined by dividing the purchase price of the series B convertible preferred stock by the conversion price of $6.00 per share of our class A common stock.

All
of our equity securities issued in the transactions described above were issued in transactions exempt from registration pursuant to Section 4(2) and Rule 506 of the
Securities Act of 1933, as amended.

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

The following summarizes the votes, presented in share numbers that do not reflect divine's 1 for 25 reverse stock split, of divine's Annual Meeting of
Stockholders held on May 21, 2002:

|Matter                                                                                                                                |  | For         |  | Against   |  | Abstain |  | Non-Vote |  | Shares Voted
|------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- |  | --------- |  | ------- |  | -------- |  | ------------
|Election of Directors:                                                                                                                |  |             |  |           |  |         |  |          |  |             
|Michael H. Forster                                                                                                                    |  | 325,749,043 |  | 4,079,416 |  |        |  |         |  | 329,828,459 
|Ratification of the appointment of KPMG LLP as Independent Auditors for divine in 2002                                                |  | 325,233,841 |  | 3,962,210 |  | 632,408 |  |         |  | 329,828,459 
|Approval of an Amendment to divine's third amended and restated Certificate of Incorporation to effect a 1 for 25 reverse stock split |  | 321,696,458 |  | 7,366,228 |  | 765,773 |  |         |  | 329,828,459 

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Item 6.    Exhibits and Reports on Form 8-K



|Number |  | Description of Exhibit                                                                                                                                                                                                                                                
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1    |  | Amendment to Agreement and Plan of Merger and Reorganization dated as of July 23, 2002, by and among divine, inc., DVC Acquisition Company and Viant Corporation (incorporated herein by reference to
Exhibit 2.1 of divine's Report on Form 8-K filed July 25, 2002.)
|3.1    |  | Certificate of Amendment of Third Amended and Restated Certificate of Incorporation of divine, inc.                                                                                                                                                                   
|3.2    |  | Conformed copy of Third Amended and Restated Certificate of Incorporation, as amended, of divine, inc.                                                                                                                                                                
|4.1    |  | Amended Certificate of Designation, Preferences, and Rights of Series A Junior Participating Preferred Stock of divine, inc. (incorporated herein by reference to Exhibit 5 to divine's Form 8-A/A filed on June 4,
2002).                                            
|4.2    |  | Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Stock of divine, inc. (incorporated herein by reference to Exhibit 3.1 to divine's Form 8-K filed on June 3, 2002).                                                             
|10.1   |  | Alliance Agreement, dated as of July 24, 2002, between divine, inc. and Microsoft Corporation.                                                                                                                                                                        
|99.2   |  | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                               



We
filed a Report on Form 8-K, dated April 5, 2002, announcing that we had entered into an Agreement and Plan of Merger and Reorganization with Viant Corporation.

We
filed a Report on Form 8-K, dated May 2, 2002, announcing our earnings for the quarter ended March 31, 2002.

We
filed a Report on Form 8-K, dated May 9, 2002, announcing the resignation of Thomas J. Meredith from our board of directors.

We
filed a Report on Form 8-K, dated May 24, 2002, announcing that we had received a Nasdaq Staff Determination letter on May 16, 2002, indicating that
our Class A common stock failed to comply with the $1.00 minimum bid price requirement for continued listing on the Nasdaq National Market.

We
filed a Report on Form 8-K, dated May 31, 2002, announcing that we had entered into an amendment to the Combination Agreement between us and Delano
Technology Corporation, dated March 12, 2002, to change the date after which a non-breaching party can terminate the Combination Agreement.

We
filed a Report on Form 8-K, dated June 3, 2002, announcing that we had entered into a Securities Purchase Agreement with Oak Investment Partners X, Limited
Partnership, Oak X Affiliates Fund, Limited Partnership, and certain other investors.

We
filed a Report on Form 8-K, dated June 11, 2002, to include the audited financial statements of RoweCom Inc. and pro forma financial information
reflecting the pro forma effect on divine of its acquisition of RoweCom, for use in registration statements that divine has filed or may file under the Securities Act of 1933, as amended.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, on August 14, 2002.

| |  | DIVINE, INC.                                                                                                                                             
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | /s/MICHAEL P. CULLINANEMichael P. Cullinane Executive Vice President,
Chief Financial Officer, and Treasurer
(Principal Financial and Accounting Officer)

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