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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 March 31, 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
May 10, 2002, the registrant had outstanding an aggregate of 470,213,701 shares of class A common stock.

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divine, inc.        Form 10-Q        INDEX

|                                 |  |                                                                                                        |  | Page
Number
|-------------------------------- |  | ------------------------------------------------------------------------------------------------------ |  | -----------
|Part I.    FINANCIAL INFORMATION |  |                                                                                                       
|Item 1.                          |  | Consolidated Financial Statements                                                                      |  | 3          
|                                 |  | Consolidated Balance Sheets
March 31, 2002 (unaudited) and December 31, 2001                           |  | 3          
|                                 |  | Consolidated Statements of Operations (unaudited)
Three months ended March 31, 2002 and 2001           |  | 4          
|                                 |  | Consolidated Statements of Stockholders' Equity
Three months ended March 31, 2002 (unaudited)          |  | 5          
|                                 |  | Consolidated Statements of Cash Flows (unaudited)
Three months ended March 31, 2002 and March 31, 2001 |  | 6          
|                                 |  | Notes to 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                                             |  | 26         
|Part II.    OTHER INFORMATION    |  |                                                                                                       
|Item 2.                          |  | Changes in Securities and Use of Proceeds                                                              |  | 27         
|Item 6.                          |  | Exhibits and Reports on Form 8-K                                                                       |  | 27         
|SIGNATURE                        |  | 28                                                                                                    

2

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PART I    FINANCIAL INFORMATION

Item 1.    Consolidated Financial Statements

divine, inc.

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

|                                                                                           |                                                                                                                                                                       | March 31,
2002                             |         | December 31,
2001 |        
|------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | ----------------- | -------
|
|Assets                                                                                     |                                                                                                                                                                       |                                            |         |                   |        
|Current assets:                                                                            |                                                                                                                                                                       |                                            |         |                   |        
|                                                                                           | Cash and cash equivalents                                                                                                                                             |                                            | $       | 39,960            |        
|                                                                                           | Restricted cash                                                                                                                                                       |                                            |         | 38,130            |        
|                                                                                           | Accounts receivable, net of allowance for doubtful accounts
of $10,366 and $6,983                                                                                     |                                            |         | 122,071           |        
|                                                                                           | Available-for-sale securities                                                                                                                                         |                                            |         | 2,577             |        
|                                                                                           | Notes receivable                                                                                                                                                      |                                            |         | 308               |        
|                                                                                           | Prepaid expenses                                                                                                                                                      |                                            |         | 13,336            |        
|                                                                                           | Deferred publisher costs                                                                                                                                              |                                            |         | 227,544           |        
|                                                                                           | Other current assets                                                                                                                                                  |                                            |         | 5,941             |        
|                                                                                           |                                                                                                                                                                       |                                            |         |                   |        
|                                                                                           |                                                                                                                                                                       | Total current assets                       |         |                   | 449,867
|Property and equipment, net                                                                |                                                                                                                                                                       |                                            | 50,295  |                   |        
|Goodwill and other intangible assets, net of accumulated amortization
of $7,523 and $4,097 |                                                                                                                                                                       |                                            | 283,059 |                   |        
|Restricted cash                                                                            |                                                                                                                                                                       |                                            |        |                   |        
|Other noncurrent assets                                                                    |                                                                                                                                                                       |                                            | 13,504  |                   |        
|                                                                                           |                                                                                                                                                                       |                                            |         |                   |        
|                                                                                           |                                                                                                                                                                       | Total assets                               |         | $                 | 796,725
|                                                                                           |                                                                                                                                                                       |                                            |         |                   |        
|Liabilities and Stockholders' Equity                                                       |                                                                                                                                                                       |                                            |         |                   |        
|Current liabilities:                                                                       |                                                                                                                                                                       |                                            |         |                   |        
|                                                                                           | Accounts payable                                                                                                                                                      |                                            | $       | 20,216            |        
|                                                                                           | Publisher payables                                                                                                                                                    |                                            |         | 40,797            |        
|                                                                                           | Accrued payroll expenses                                                                                                                                              |                                            |         | 14,457            |        
|                                                                                           | Accrued professional fees                                                                                                                                             |                                            |         | 3,053             |        
|                                                                                           | Current portion of facilities impairment                                                                                                                              |                                            |         | 7,801             |        
|                                                                                           | Current portion of capital leases                                                                                                                                     |                                            |         | 15,407            |        
|                                                                                           | Notes payable and current portion of long-term debt                                                                                                                   |                                            |         | 15,798            |        
|                                                                                           | Deferred revenue                                                                                                                                                      |                                            |         | 288,357           |        
|                                                                                           | Other accrued expenses and current liabilities                                                                                                                        |                                            |         | 49,032            |        
|                                                                                           |                                                                                                                                                                       |                                            |         |                   |        
|                                                                                           |                                                                                                                                                                       | Total current liabilities                  |         |                   | 454,918
|Long-term debt                                                                             |                                                                                                                                                                       |                                            | 62,378  |                   |        
|Long-term facilities impairment                                                            |                                                                                                                                                                       |                                            | 22,546  |                   |        
|Capital leases                                                                             |                                                                                                                                                                       |                                            | 6,625   |                   |        
|Other noncurrent liabilities                                                               |                                                                                                                                                                       |                                            | 15,381  |                   |        
|Stockholders' equity:                                                                      |                                                                                                                                                                       |                                            |         |                   |        
|                                                                                           | Class A common stock, $.001 par value; 2,500,000,000 shares authorized; 470,864,231 and 371,408,945 shares issued; and 462,675,299 and 365,997,791 shares outstanding |                                            |         | 470               |        
|                                                                                           | Additional paid-in capital                                                                                                                                            |                                            |         | 1,228,569         |        
|                                                                                           | Unearned stock-based compensation                                                                                                                                     |                                            |         | (15,230           | )      
|                                                                                           | Accumulated other comprehensive loss                                                                                                                                  |                                            |         | (4,785            | )      
|                                                                                           | Treasury stock, at cost; 6,855,599 and 4,077,821 shares                                                                                                               |                                            |         | (12,945           | )      
|                                                                                           | Accumulated deficit                                                                                                                                                   |                                            |         | (961,202          | )      
|                                                                                           |                                                                                                                                                                       |                                            |         |                   |        
|                                                                                           |                                                                                                                                                                       | Total stockholders' equity                 |         |                   | 234,877
|                                                                                           |                                                                                                                                                                       |                                            |         |                   |        
|                                                                                           |                                                                                                                                                                       | Total liabilities and stockholders' equity |         | $                 | 796,725
|                                                                                           |                                                                                                                                                                       |                                            |         |                   |        

See accompanying notes to 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                                                                |                                                               
|------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------- | --------------------------------------------------------------
|
|Revenues:                                                                      |                                                                                                                                                                                                                      |                                                                                   |                                                               
|                                                                               | Products                                                                                                                                                                                                             |                                                                                   | $                                                             
|                                                                               | Services                                                                                                                                                                                                             |                                                                                   |                                                               
|                                                                               |                                                                                                                                                                                                                      |                                                                                   |                                                               
|                                                                               |                                                                                                                                                                                                                      | Total revenues                                                                    |                                                               
|Operating expenses:                                                            |                                                                                                                                                                                                                      |                                                                                   |                                                               
|                                                                               | Cost of revenues:                                                                                                                                                                                                    |                                                                                   |                                                               
|                                                                               |                                                                                                                                                                                                                      | Products (exclusive of $13 and $21 of amortization
of stock-based compensation)   |                                                               
|                                                                               |                                                                                                                                                                                                                      | Services (exclusive of $185 and $120 of amortization
of stock-based compensation) |                                                               
|                                                                               |                                                                                                                                                                                                                      |                                                                                   |                                                               
|                                                                               |                                                                                                                                                                                                                      |                                                                                   | Total cost of revenues                                        
|                                                                               | Selling, general and administrative (exclusive of $1,621 and $3,056 of amortization of stock-based compensation)                                                                                                     |                                                                                   |                                                               
|                                                                               | Research and development (exclusive of $57 and $122
of amortization of stock-based compensation)                                                                                                                     |                                                                                   |                                                               
|                                                                               | Bad debt expense (recovery)                                                                                                                                                                                          |                                                                                   |                                                               
|                                                                               | Amortization of intangible assets                                                                                                                                                                                    |                                                                                   |                                                               
|                                                                               | Impairment of intangible and other assets                                                                                                                                                                            |                                                                                   |                                                               
|                                                                               | Amortization of stock-based compensation                                                                                                                                                                             |                                                                                   |                                                               
|                                                                               |                                                                                                                                                                                                                      |                                                                                   |                                                               
|                                                                               |                                                                                                                                                                                                                      |                                                                                   | Total operating expenses                                      
|                                                                               |                                                                                                                                                                                                                      |                                                                                   |                                                               
|                                                                               |                                                                                                                                                                                                                      |                                                                                   | Operating loss                                                
|Other income (expense):                                                        |                                                                                                                                                                                                                      |                                                                                   |                                                               
|                                                                               | Interest income                                                                                                                                                                                                      |                                                                                   |                                                               
|                                                                               | Interest expense                                                                                                                                                                                                     |                                                                                   |                                                               
|                                                                               | Other income (expense), net                                                                                                                                                                                          |                                                                                   |                                                               
|                                                                               |                                                                                                                                                                                                                      |                                                                                   |                                                               
|                                                                               |                                                                                                                                                                                                                      |                                                                                   | Total other income (expense)                                  
|                                                                               | Loss before minority interest, net gain on stock transactions of associated companies, equity in losses of associated companies, impairment of investment in equity and cost method companies and extraordinary
gain |                                                                                   |                                                               
|Minority interest                                                              |                                                                                                                                                                                                                      |                                                                                   |                                                              
|Net gain on stock transactions of associated companies                         |                                                                                                                                                                                                                      |                                                                                   |                                                              
|Equity in losses of associated companies                                       |                                                                                                                                                                                                                      |                                                                                   |                                                              
|Impairment of investment in equity method and cost method
associated companies |                                                                                                                                                                                                                      |                                                                                   | (1,461                                                        
|                                                                               |                                                                                                                                                                                                                      |                                                                                   |                                                               
|                                                                               |                                                                                                                                                                                                                      |                                                                                   | Net loss before extraordinary gain                            
|Extraordinary gain                                                             |                                                                                                                                                                                                                      |                                                                                   | 2,419                                                         
|                                                                               |                                                                                                                                                                                                                      |                                                                                   |                                                               
|                                                                               |                                                                                                                                                                                                                      |                                                                                   | Net loss                                                      
|                                                                               |                                                                                                                                                                                                                      |                                                                                   |                                                               
|                                                                               |                                                                                                                                                                                                                      |                                                                                   | Basic and diluted net loss per share before extraordinary gain
|                                                                               |                                                                                                                                                                                                                      |                                                                                   | Extraordinary gain                                            
|                                                                               |                                                                                                                                                                                                                      |                                                                                   |                                                               
|                                                                               |                                                                                                                                                                                                                      |                                                                                   | Basic and diluted net loss per share                          
|                                                                               |                                                                                                                                                                                                                      |                                                                                   |                                                               
|                                                                               |                                                                                                                                                                                                                      |                                                                                   | Shares used in computing basic and diluted net loss per share 

See accompanying notes to consolidated financial statements.

4

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

|                                                                          |                           | Common stock                              |   |   |     |  |   |           |  |   |         |   |   |         |  
|------------------------------------------------------------------------- | ------------------------- | ----------------------------------------- | - | - | --- |  | - | --------- |  | - | ------- | - | - | ------- | -
|
|
|
|Balance at December 31, 2001                                              |                           | 365,997,791                               |   | $ | 366 |  | $ | 1,171,853 |  | $ | (16,654 | ) | $ | (9,639  | )
|                                                                          | Comprehensive loss:       |                                           |   |   |     |  |   |           |  |   |         |   |   |         |  
|                                                                          |                           | Net loss                                  |   |  |     |  |  |           |  |  |         |   |  |         |  
|                                                                          | Other comprehensive loss: |                                           |   |   |     |  |   |           |  |   |         |   |   |         |  
|                                                                          |                           | Unrealized holding loss during the period |   |  |     |  |  |           |  |  |         |   |  |         |  
|                                                                          |                           | Foreign currency translation              |   |  |     |  |  |           |  |  |         |   |  |         |  
|                                                                          |                           |                                           |   |   |     |  |   |           |  |   |         |   |   |         |  
|                                                                          | Total comprehensive loss  |                                           |   |   |     |  |   |           |  |   |         |   |   |         |  
|                                                                          |                           |                                           |   |   |     |  |   |           |  |   |         |   |   |         |  
|Issuance of Class A common stock                                          |                           | 96,494,042                                |   |   | 101 |  |   | 49,190    |  |   |        |   |   |        |  
|Issuance of warrants in conjunction with acquisitions                     |                           |                                          |   |   |    |  |   | 151       |  |   |        |   |   |        |  
|Issuance of warrants to acquire the Company's common stock                |                           |                                          |   |   |    |  |   | 822       |  |   |        |   |   | (822    | )
|Issuance of stock options in conjunction with acquisitions                |                           |                                          |   |   |    |  |   | 5,820     |  |   |        |   |   |        |  
|Issuance of Class A common stock through the Employee Stock Purchase Plan |                           | 1,077,803                                 |   |   | 1   |  |   | 558       |  |   |        |   |   |        |  
|Issuance of Class A common stock through the exercise
of stock options    |                           | 1,883,441                                 |   |   | 2   |  |   | 175       |  |   |        |   |   |        |  
|Unearned stock-based compensation                                         |                           |                                          |   |   |    |  |   |          |  |   | (452    | ) |   |        |  
|Stock-based compensation                                                  |                           |                                          |   |   |    |  |   |          |  |   | 1,876   |   |   |        |  
|Purchase of treasury stock, at cost                                       |                           | (2,777,778                                | ) |   |    |  |   |          |  |   |        |   |   | (2,484  | )
|                                                                          |                           |                                           |   |   |     |  |   |           |  |   |         |   |   |         |  
|Balance at March 31, 2002                                                 |                           | 462,675,299                               |   | $ | 470 |  | $ | 1,228,569 |  | $ | (15,230 | ) | $ | (12,945 | )
|                                                                          |                           |                                           |   |   |     |  |   |           |  |   |         |   |   |         |  

See accompanying notes to consolidated financial statements.

5

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

|                                                 |                                                                             | Three months ended
March 31,                                                                                  |                                                    
|------------------------------------------------ | --------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------
|
|
|Cash flows from operating activities:            |                                                                             |                                                                                                               |                                                    
|                                                 | Net loss                                                                    |                                                                                                               | $                                                  
|                                                 | Adjustments to reconcile net loss to net cash used in operating activities: |                                                                                                               |                                                    
|                                                 |                                                                             | Depreciation and amortization                                                                                 |                                                    
|                                                 |                                                                             | Extraordinary gain                                                                                            |                                                    
|                                                 |                                                                             | Stock-based compensation                                                                                      |                                                    
|                                                 |                                                                             | Other noncash compensation expense                                                                            |                                                    
|                                                 |                                                                             | Bad debt expense (recovery)                                                                                   |                                                    
|                                                 |                                                                             | Equity in losses of associated companies                                                                      |                                                    
|                                                 |                                                                             | Gain (loss) on stock transactions of associated companies                                                     |                                                    
|                                                 |                                                                             | Impairment charges                                                                                            |                                                    
|                                                 |                                                                             | Minority interest                                                                                             |                                                    
|                                                 |                                                                             | Gain on the sale of assets                                                                                    |                                                    
|                                                 | Changes in assets and liabilities, excluding effects from acquisitions:     |                                                                                                               |                                                    
|                                                 |                                                                             | Restricted cash                                                                                               |                                                    
|                                                 |                                                                             | Accounts receivable                                                                                           |                                                    
|                                                 |                                                                             | Prepaid expenses                                                                                              |                                                    
|                                                 |                                                                             | Deferred publisher costs                                                                                      |                                                    
|                                                 |                                                                             | Other assets                                                                                                  |                                                    
|                                                 |                                                                             | Accounts payable                                                                                              |                                                    
|                                                 |                                                                             | Publisher payables                                                                                            |                                                    
|                                                 |                                                                             | Accrued expenses and other liabilities                                                                        |                                                    
|                                                 |                                                                             | Deferred revenue                                                                                              |                                                    
|                                                 |                                                                             |                                                                                                               |                                                    
|                                                 |                                                                             |                                                                                                               | Net cash used in operating activities              
|                                                 |                                                                             |                                                                                                               |                                                    
|Cash flows from investing activities:            |                                                                             |                                                                                                               |                                                    
|                                                 |                                                                             | Additions to property and equipment                                                                           |                                                    
|                                                 |                                                                             | Acquisition, sale and deconsolidation of ownership interests in associated companies, including cash acquired |                                                    
|                                                 |                                                                             | Capitalized acquisition costs                                                                                 |                                                    
|                                                 |                                                                             | Proceeds from the sale of property and equipment                                                              |                                                    
|                                                 |                                                                             | Change in current notes receivable                                                                            |                                                    
|                                                 |                                                                             |                                                                                                               |                                                    
|                                                 |                                                                             |                                                                                                               | Net cash provided by (used in) investing activities
|                                                 |                                                                             |                                                                                                               |                                                    
|Cash flows from financing activities:            |                                                                             |                                                                                                               |                                                    
|                                                 |                                                                             | Issuance of shares under Employee Stock Purchase Plan                                                         |                                                    
|                                                 |                                                                             | Change in current notes payable                                                                               |                                                    
|                                                 |                                                                             | Proceeds from the issuance of long-term debt                                                                  |                                                    
|                                                 |                                                                             | Repayments of long-term debt                                                                                  |                                                    
|                                                 |                                                                             | Proceeds from the exercise of stock options                                                                   |                                                    
|                                                 |                                                                             | Repurchase and cancellation of exercised stock options                                                        |                                                    
|                                                 |                                                                             | Purchase of treasury stock                                                                                    |                                                    
|                                                 |                                                                             |                                                                                                               |                                                    
|                                                 |                                                                             |                                                                                                               | Net cash provided by (used in) financing activities
|                                                 |                                                                             |                                                                                                               |                                                    
|Effect of exchange rates on cash                 |                                                                             |                                                                                                               | 185                                                
|Net decrease in cash and cash equivalents        |                                                                             |                                                                                                               | (64,520                                            
|Cash and cash equivalents at beginning of period |                                                                             |                                                                                                               | 104,480                                            
|                                                 |                                                                             |                                                                                                               |                                                    
|Cash and cash equivalents at end of period       |                                                                             | $                                                                                                             | 39,960                                             
|                                                 |                                                                             |                                                                                                               |                                                    
|Supplemental disclosures:                        |                                                                             |                                                                                                               |                                                    
|                                                 | Interest paid                                                               |                                                                                                               | $                                                  
|                                                 | Noncash financing and investing activities:                                 |                                                                                                               |                                                    
|                                                 |                                                                             | Issuance of notes payable, stock, options, or warrants in conjunction with acquisitions                       |                                                    
|                                                 |                                                                             | Issuance of warrants in conjunction with the acquisition of treasury stock                                    |                                                    
|                                                 |                                                                             | Retirement of notes receivable from exercise of stock options                                                 |                                                    

See accompanying notes to consolidated financial statements.

6

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divine, inc.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)    Summary of Significant Accounting Policies



The accompanying unaudited 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
necessary for a fair presentation have been included. The results of operations for the three months ended March 31, 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 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.



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 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 month periods
ended March 31, 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 month period ended March 31, 2002, the weighted average number of shares outstanding would have potentially been diluted by
85,684,286 common equivalent shares, assuming the exercise of all outstanding stock options, and by 9,272,052 common equivalent shares, assuming the exercise of all outstanding warrants. Had the
Company reported net income for the three month period ended March 31, 2001, the weighted average number of shares outstanding would have potentially been diluted by approximately 6,918,376
common equivalent shares, assuming the exercise of stock options.



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

(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 74,437,043 shares of
the Company's class A common stock, with a fair value of $34,037,000. In addition, the Company assumed or issued options and warrants to purchase 15,070,454 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.

7

---

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 14,002,643 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 120,065 shares of the Company's class A common stock. 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 4,427,683 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 365,020 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 769,231 shares of the Company's class A common stock.

In
March 2002, the Company signed a definitive agreement to acquire Delano Technology Corporation, a Toronto-based marketing solutions company offering
state-of-the-art interaction-based e-business and CRM solutions. The Company expects to issue approximately 51,550,000 shares of the Company's
class A common stock in connection with the acquisition. The transaction, which will be structured as a plan of arrangement under Canadian law, is subject to customary regulatory and court
approvals, as well as the approval of Delano's shareholders.

During
the three months ended March 31, 2002, in conjunction with the Company's transactions related to Northern Light, Perceptual Robotics, Net Unlimited, and RWT, as described
herein, the purchase price, for the purpose of recording the purchase accounting for these transactions, consisted of $198,000 of cash payments (including acquisition costs) and 19,564,577 shares of
the Company's class A common stock, with a fair value of $13,841,000. Additionally, in conjunction with the Northern Light acquisition, the Company has granted a warrant to purchase up to
120,065 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 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.

8

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The
following table presents information (in thousands) concerning the purchase price allocations for acquisitions completed during the three months ended March 31, 2002.

|            |  |   |        |  |   | Fair Value on Acquisition Date
|----------- |  | - | ------ |  | - | ------------------------------
|
|
|
|2002        |  |   |        |  |   |                               
|Data Return |  | $ | 48,883 |  | $ | (17,046                       
|Others      |  |   | 14,062 |  |   | 5,422                         
|            |  |   |        |  |   |                               
|            |  | $ | 62,945 |  | $ | (11,624                       
|            |  |   |        |  |   |                               

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 three months ended March 31, 2002.

|                         |                                | Data Return |        | Others 
|------------------------ | ------------------------------ | ----------- | ------ | -------
|
|Current assets           |                                | $           | 9,751  |        
|Fixed assets             |                                |             | 9,706  |        
|Other non-current assets |                                |             | 30     |        
|                         |                                |             |        |        
|                         | Total tangible assets acquired |             |        | 19,487 
|                         |                                |             |        |        
|Current liabilities      |                                |             | 26,885 |        
|Non-current liabilities  |                                |             | 9,648  |        
|                         |                                |             |        |        
|                         | Total liabilities assumed      |             |        | 36,533 
|                         |                                |             |        |        
|                         | Tangible net assets acquired   |             | $      | (17,046
|                         |                                |             |        |        

As
of January 1, 2002, we 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 three months ended March 31, 2001, the Company recorded
amortization expense of $4,612,000 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 are no
longer being amortized in accordance with SFAS No. 142. Had the Company not recorded these amortization expenses, net loss

9

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and basic and diluted loss per share for the quarter ended March 31, 2001 would have been $60,975,000 and $0.45, respectively. Detail about the Company's intangible assets is as follows.

|                               |                         | As of March 31, 2002 |   | As of December 31, 2001
|------------------------------ | ----------------------- | -------------------- | - | -----------------------
|
|
|Amortized intangible assets:   |                         |                      |   |                        
|                               | Developed technology    |                      | $ | 67,105                 
|                               | Other intangible assets |                      |   | 613                    
|Unamortized intangible assets: |                         |                      |   |                        
|                               | Goodwill                |                      |   | 222,864                



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 situation
prior to the closing date. The Company also entered into a Joint Ownership Conveyance Agreement with mindwrap LLC wherein the Company will receive 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 three months ended March 31, 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 three months ended March 31, 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

10

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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:

|                                                                       |  | Three Months
Ended
March 31, 2001 |        
|---------------------------------------------------------------------- |  | --------------------------------- | -------
|
|Revenues                                                               |  | $                                 | 131,507
|Net loss applicable to common stockholders                             |  |                                   | (95,270
|Basic and diluted net loss per share applicable to common stockholders |  | $                                 | (0.31  

(3)    Impairment Charges

For the three months ended March 31, 2002, the Company recorded impairment charges on intangible and other assets of $250,000. These charges related mainly
to cash paid by the Company during the three months ended March 31, 2002, to settle pre-acquisition invoices owed by acquired companies that were written off as of
December 31, 2001. Additionally, for the three months ended March 31, 2002, the Company recorded $1,461,000 of impairment of investment in equity method and cost method associated
companies. These charges represent mainly the fair value of 2,159,074 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. 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.

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

11

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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 are as follows:

|                                           |  | Three Months Ended
March 31, 2002 |         | Three Months Ended
March 31, 2001 |  
|------------------------------------------ |  | --------------------------------- | ------- | --------------------------------- | -
|
|
|External revenue                           |  | $                                 | 146,329 |                                   | $
|Intersegment revenue                       |  |                                   |        |                                   |  
|                                           |  |                                   |         |                                   |  
|                                           |  | $                                 | 146,329 |                                   | $
|Eliminations                               |  |                                   |         |                                   |  
|                                           |  |                                   |         |                                   |  
|Total revenues                             |  |                                   |         |                                   |  
|                                           |  |                                   |         |                                   |  
|Net loss applicable to common stockholders |  | $                                 | (69,493 | )                                 | $
|                                           |  |                                   |         |                                   |  

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 three months ended
March 31, 2002, the Company recorded revenues of $146,329,000. Of these revenues, $100,898,000 were generated in the United States, $23,175,000 were generated in France, and $22,256,000 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.

(5)    Subsequent Event

In April 2002, the Company acquired Denalii Inc., a provider of content management solutions for the Asian market, in exchange for 1,504,742 shares
of the Company's class A common stock. In addition, the Company granted options to purchase a total of 490,000 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.

In
April 2002 the Company signed a definitive agreement to acquire Viant Corporation, a professional services organization providing business solutions, and industry insight and
understanding to help clients leverage assets for better business performance. The Company expects to issue approximately 200,000,000 shares of the Company's class A common stock in connection
with the acquisition. In addition, the Company expects to issue options to purchase approximately 26,500,000 shares of the Company's class A common stock. Consummation of the merger is subject
to a number of closing conditions, including approval of the merger by divine's and Viant's stockholders.

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. Additionally, 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 when we identified opportunities
consistent with our former business strategy, 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 operational efficiencies of integration.

13

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Since
January 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.

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 months ended March 31,
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.

14

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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 March 31, 2002, we did not reflect any minority interest liability 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. 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 statement of operations for the three
months ended March 31, 2002 does 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."

15

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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 extended enterprise 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 actively 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 three months ended March 31, 2002 were considerably different than our operations for the three months ended March 31, 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, and our acquisition of certain assets, subject to certain liabilities, of marchFIRST, Inc., were made subsequent to March 31, 2001. These acquisitions have provided
us with a larger customer base and an increased revenue stream. During the three months ended March 31, 2001, our operations resulted primarily from our consolidated associated companies in the
business-to-business e-commerce sector, many of which were in the early stages of development and generated significant losses with comparably low revenue. All of
these consolidated associated companies have discontinued operations, have been sold, or are now included as part of our core business strategy. Additionally, we held investment interests in 15
associated companies accounted for under the equity method of accounting as of March 31, 2001, with a book value of $33,227,000 as of that date. Conversely, we carried no book value on our
consolidated balance sheet related to our investment interests in associated companies accounted for under the equity method as of March 31, 2002. This decrease in equity-method associated
companies has led to decreases in our equity in losses of associated companies.



We generated revenues totaling $146,329,000 for the three months ended March 31, 2002, which is an increase of $136,572,000 over revenues of $9,757,000 for
the three months ended March 31, 2001. The total revenues for the three months ended March 31, 2002 included $110,172,000 from the sale of products. Product revenues included $74,608,000
from sales of content, $18,366,000 from software sales contracts, and $15,249,000 from managed services. Revenue from software sales contracts included $8,807,000 related to our CIM Telephony
software, $4,052,000 related to our Enterprise Content Management software, $1,511,000 related to our Enterprise Content Center software, $1,509,000 related to our CIM Internet software, $1,164,000
related to our Collaboration software, and $1,018,000 related to our Enterprise Portal software.

Total
revenues for the three months ended March 31, 2002 also included $36,157,000 from the sale of services, generated exclusively from our Professional Services Organization.
Service revenues consisted of $30,110,000 from consulting services, $3,585,000 from divine Product Solutions Group, and $2,462,000 from Technology Information Services.

At
March 31, 2002, we had deferred revenue of $288,357,000, of which $241,281,000 related to sales of content. We expect that this deferred revenue will result in a significant
increase in our revenues recognized during 2002.

Revenues
for the three months ended March 31, 2001 included approximately $1,535,000 from the sale of products, all of which was generated by our software, services, and hosting
segment. Product revenues included $829,000 from software sales contracts and $706,000 from sales of computer hardware. The total revenues also included approximately $8,222,000 from the sale of
services,

16

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including $6,098,000 from our software, services, and hosting segment and $2,124,000 from our divine interVentures segment. Services revenues from our software, services, and hosting segment included
$2,484,000 from web design services, $1,315,000 from facilities management, and $765,000 from hosting services. Services revenues from our divine interVentures segment included $1,891,000 from
inventory management services.



For the three months ended March 31, 2002, our cost of revenues was $124,702,000, exclusive of $198,000 of amortization of stock-based compensation. This
is an increase of $117,082,000 over the
$7,620,000 (exclusive of $141,000 of amortization of stock-based compensation) cost of revenues we incurred for the three months ended March 31, 2001. Cost of revenues for the three months
ended March 31, 2002 included $44,987,000 of direct costs of providing services, which consisted principally of $36,055,000 of salaries and benefits, $3,784,000 of rent and facilities services,
$1,688,000 of travel costs, and $1,137,000 of depreciation expense. Cost of revenues for the three months ended March 31, 2002 also included $79,715,000 of direct costs of providing products,
which consisted primarily of $65,444,000 of content costs, $4,782,000 of salaries and benefits, $3,541,000 of rent and facilities services, and $4,861,000 of office and computer supplies. Cost of
revenues for the three months ended March 31, 2001 included approximately $6,769,000 of direct costs of providing services, which consisted principally of $4,129,000 of employee salaries and
related benefits, $1,210,000 of rent and facilities services, and $481,000 of depreciation and amortization. Cost of revenues for 2001 also included approximately $851,000 of direct costs of providing
products.



For the three months ended March 31, 2002, we incurred selling, general, and administrative expenses of $56,223,000, exclusive of $1,621,000 of
amortization of stock-based compensation. This represents an increase of $24,512,000 over the $31,711,000 (exclusive of $3,056,000 of amortization of stock-based compensation) of selling, general, and
administrative expenses for the three months ended March 31, 2001. These expenses for the three months ended March 31, 2002 consisted primarily of $33,512,000 of employee salaries and
related benefits, $4,705,000 of travel costs, $4,217,000 of fees for professional services, including legal, consulting, and accounting, $4,079,000 of office and computer supplies, and $5,993,000 of
depreciation and amortization expense.

Selling,
general, and administrative expenses for the three months ended March 31, 2001 consisted primarily of approximately $16,012,000 of employee salaries and related benefits,
approximately $3,474,000 of facility costs, consisting primarily of rent expense, approximately $3,076,000 of fees for professional services, including legal, consulting, and accounting, approximately
$2,779,000 of travel costs, and approximately $2,438,000 of depreciation expense.



For the three months ended March 31, 2002, we incurred research and development expenses of $30,541,000, exclusive of $57,000 of amortization of
stock-based compensation. This represents an increase of $27,408,000 over the $3,133,000 (exclusive of $122,000 of amortization of stock-based compensation) of research and development expenses for
the three months ended March 31, 2001. These expenses for the three months ended March 31, 2002 consisted primarily of $20,120,000 of employee salaries and related benefits, $2,080,000
of professional fees, and $3,969,000 of facility costs. Research and development expenses for the three months ended March 31, 2001 consisted primarily of approximately $2,544,000 of employee
salaries and related benefits.

17

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For the three months ended March 31, 2002, we recorded a net bad debt recovery of $675,000 as compared to $1,103,000 of bad debt expense recorded for the
three months ended March 31, 2001. The net bad debt recovery for the three months ended March 31, 2002 related mainly to the collection of previously written off accounts receivable of
companies acquired in the fourth quarter of 2001.



For the three months ended March 31, 2002, we incurred amortization expense of $3,792,000 on our intangible assets. This represents an increase of
$2,608,000 from the $1,184,000 of amortization expense recorded by us for the three months ended March 31, 2001. The increase is attributable mainly to intangible assets recorded in conjunction
with acquisitions made in the fourth quarter of 2001, offset partially by a reduction in amortization related to the impairment of intangible assets in 2001 and our implementation in
January 2002 of SFAS No. 142, under which goodwill and various other intangible assets are no longer amortized.



For the three months ended March 31, 2002, we recorded impairment charges of $250,000 related to intangible and other assets. This represents a decrease of
$3,006,000 from the $3,256,000 of similar impairment charges recorded for the three months ended March 31, 2001.



For the three months ended March 31, 2002, we incurred a non-cash expense of $2,058,000 related mainly to the issuance, prior to our initial
public offering (IPO), of shares of restricted stock and grants of options to employees, directors, and consultants under our stock incentive plans with exercise prices lower than the fair value of
the class A common stock on the dates of grant. Also for the three months
ended March 31, 2002, we recovered $182,000 of previously recognized compensation expense related to non-vested options of terminated employees.

For
the three months ended March 31, 2001, we incurred non-cash expense of approximately $3,817,000 related to the issuance, prior to our IPO, of shares of restricted stock and
grants of options to employees, directors, and consultants under our stock incentive plans with exercise prices lower than the fair value of the class A common stock on the dates of grant. Also for
the three months ended March 31, 2001, we recovered $498,000 of previously recognized compensation expense related to non-vested options of terminated employees, and we repurchased a total of
36,638 shares of our restricted class A common stock which were previously exercised by terminated employees.



Interest income for the three months ended March 31, 2002 was $253,000 and was earned from the investment of our available cash balances. This is a
decrease of $3,254,000 from the $3,507,000 of interest income earned during the three months ended March 31, 2001. Interest expense for the three months ended March 31, 2002 was
$2,194,000 and was incurred primarily from our long-term debt. This is an increase of $1,918,000 over the $276,000 of interest expense incurred during the three months ended
March 31, 2001, which was also incurred primarily from our long-term debt.



Other income, net for the three months ended March 31, 2002 was $467,000. This is an increase of $517,000 over the $50,000 of other expense for the three
months ended March 31, 2001. Other income, net for the three months ended March 31, 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.,

18

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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 $274,000.



We recorded no income tax provision or benefit for the three months ended March 31, 2002 or the three months ended March 31, 2001. Because we have
no history of taxable income through March 31,
2002, the tax benefit associated with our net losses has been fully reserved. As of March 31, 2002 we had total net operating loss carryforwards of $101,116,000, of which $52,608,000 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. Of the total net operating loss carryforwards, $48,461,000 relate to pre-acquisition net operating losses
attributable to acquired companies. Our ability to utilize such pre-acquisition losses is substantially limited by current tax laws. In addition, our utilization of the net operating loss
carryforwards may be limited under Internal Revenue Code Section 382 as a result of prior ownership changes. The net operating loss carryforwards will expire from 2019 through 2022.

In
assessing whether or not the deferred tax assets will be realized, 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 March 31, 2002.



Minority interest of $0 and $2,820,000 represents the non-controlling stockholders' share of our consolidated associated companies' net losses for the
three months ended March 31, 2002 and the three months ended March 31, 2001, respectively.



We reported no gain on stock transactions of associated companies for the three months ended March 31, 2002. The net gain on stock transactions of
associated companies of approximately $695,000 for the three months ended March 31, 2001 related to the net increase in the value of our investments in associated companies resulting from the
issuance of stock by these companies to outside investors at prices higher than the value at which we have carried these investments, and other stock transactions of these associated companies. The
gain was attributed mainly to issuances of stock by Outtask, which accounted for approximately $312,000.



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 March 31, 2002. We recorded $3,252,000 in net losses for the three months ended March 31, 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 $3,999,000 for the three months
ended March 31, 2001.



For the three months ended March 31, 2002, we recorded $1,461,000 of impairment of investment in equity method and cost method associated companies. These
charges represent mainly the fair value

19

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of 2,159,074 shares of our class A common stock that we issued in February 2002 as partial settlement of our obligation under a collar agreement with Launchworks inc. We had completely
written off our investment in Launchworks as of December 31, 2001. For the three months ended March 31, 2001, we recorded impairment charges of $23,463,000 for other than temporary
declines in the carrying values of certain equity and cost method associated companies.



For the three months ended March 31, 2002, we reported an extraordinary gain of $2,419,000, 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 March 31, 2001.

Summary of Currently Expected Fixed Charges

The following table summarizes the fixed charges as of March 31, 2002 that we currently expect to incur, throughout the remainder of 2002 and over the next
three years, for amortization of identifiable intangible assets and unearned stock-based compensation:

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

---

Liquidity and Capital Resources

As of March 31, 2002, we had cash and cash equivalents, current restricted cash, and available-for-sale securities of $80,667,000,
which represented a decrease of $60,065,000 from $140,732,000 as of December 31, 2001. The net decrease in cash and cash equivalents was due primarily to net cash used in operating activities
of $42,385,000, net cash used to pay down notes payable of $25,052,000, net cash provided from the acquisition and sale of ownership interests in associated companies of $4,674,000, and cash used to
acquire property and equipment of $1,707,000.

As
of March 31, 2002, we had a $25,000,000 line of credit with LaSalle Bank N.A, which was increased to $40,000,000 in April 2002. 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
March 31, 2002, we had established letters of credit of $23,353,000 against this line of credit. These letters of credit include $13,535,000 for assumed debt of RoweCom, $4,868,000 for a note
payable to marchFIRST GmbH, and $4,950,000 as collateral for various real estate and equipment leases.

As
of March 31, 2002, we had current restricted cash of $38,130,000, which represented an increase of $5,564,000 from $32,566,000 as of December 31, 2001. Current
restricted cash as of March 31, 2002 included $25,798,000 that secured the $23,353,000 in letters of credit from LaSalle Bank N.A. described above, $2,622,000 that collateralized $2,250,000 of
loans payable by RoweCom to

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publishers, $7,314,000 for other future RoweCom obligations to publishers, and $2,396,000 that secures real estate leases we assumed in our various acquisitions.

At
March 31, 2002, we had $2,577,000 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 IPO in July 2000:



In
connection with our acquisition of certain assets, subject to certain liabilities, from marchFIRST, Inc., in April 2001, we issued, and have outstanding, a
$57.5 million 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. We have the option to pay the note with cash or by issuing 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 $55.0 million 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.

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In
connection with our acquisition of certain assets, subject to certain liabilities, of marchFIRST GmbH in September 2001, we issued, and have outstanding, a note payable in the
amount of 5,369,000 euros (approximately $4,672,000 at March 31, 2002), which is included within current notes payable in our consolidated balance sheets as of March 31, 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.

In
connection with our acquisition of Synchrony Communications, Inc. in October 2001, we acquired debt with balances totaling $1,184,000 as of March 31, 2002,
payable in equal monthly installments through March 2003.

Aleksander
Szlam, who served as one of our directors in 2000, was the Chairman and Chief Executive Officer of eshare communications, Inc. while he served on our board of
directors. In connection with our acquisition of eshare in October 2001, we entered into two separate stock repurchase arrangements with Mr. Szlam covering the shares of our common stock
that Mr. Szlam received in the acquisition. These arrangements gave Mr. Szlam the right to sell back a portion of his shares to us at an agreed upon price (put option), while also giving
us the right to buy back the same number of shares from
Mr. Szlam at the same price (call option). In December 2001, the first buyback period, which covers 5,428,800 shares, was extended to be coterminous with the second buyback period. The
second buyback period is effective for the time period beginning six months after the merger (April 23, 2002) and ending 18 months after the merger (April 23, 2003), and covers
5,959,200 shares of our common stock. The agreed-upon purchase price for the related put and call options is $0.53 per share. This means that until April 23, 2003, Mr. Szlam
has the right to sell to us, and we have a separate right to buy from Mr. Szlam, up to 11,388,000 shares of our common stock at a price of $0.53 per share. We are currently negotiating the
timing of Mr. Szlam's put and certain other matters related to Mr. Szlam's relationship with us.

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 three months ended March 31, 2002, we made payments of $6,750,000 on these notes. The balances of these notes at March 31, 2002 totaled $9,481,000. In addition, we acquired
other RoweCom long-term debt with balances of $4,743,000 as of March 31, 2002, which is due in quarterly installments from June 30, 2003 to September 30, 2006.

As
of March 31, 2002, we had a revolving loan agreement for $20,000,000 with Fleet Capital Corporation. The loans under that agreement are collateralized by eligible accounts
receivable balances of the domestic operations of RoweCom, and the loans are repaid from the net operating receipts of the domestic operations of RoweCom. During the three months ended
March 31, 2002, we made payments of $17,083,000 on this loan agreement, and as of March 31, 2002, we had no outstanding balance on this loan. The payments were from the excess of
RoweCom's domestic collections over payments to publishers during the three months ended March 31, 2002. This revolving loan agreement expired in April 2002.

In
connection with our acquisition of RoweCom, we assumed a factoring arrangement 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 accounts receivable, which is paid when the
accounts receivable are transferred to the factoring company.

The
operations of RoweCom Inc. historically have resulted in cyclical cash flows throughout the year, with the fourth calendar quarter historically resulting in the highest
required funding level by

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RoweCom. The seasonal fourth quarter funding requirements are due to the required payments to publishers in excess of collections from customers.

During
January, February, and March 2002, we used net cash of approximately $18 million, $29 million, and $16 million, respectively. These amounts are
exclusive of an increase of approximately $4 million related to net cash received from acquired companies and exclusive of an increase of approximately $17 million representing RoweCom's
domestic collections in excess of publisher disbursements that were used to pay down the Fleet Capital Corporation revolving loan agreement as described above. Of the net cash used in January,
February, and March 2002, approximately $1 million, $4 million, and $1 million, respectively, related to cash used for non-recurring operating activities,
primarily severance of non-continuing employees and termination of contractual obligations of certain acquired companies. Our cash flows from operating activities can vary significantly
from month to month, depending on the 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 significant increases in revenue and cash receipts and significant decreases in expenses. We expect that our revenue and cash receipts will
increase as we continue to integrate the product and service offerings of our acquired businesses, and we intend to decrease some of our operating costs, primarily through workforce and payroll
reductions. Based on these forecasts, we believe that our existing unrestricted cash and cash equivalents, accounts receivable, and new cash generated from our customers will be sufficient to fund our
operations and capital requirements at least through December 31, 2002. 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, 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.

We
are also exploring a number of alternatives to generate cash, including acquiring other entities that have substantial cash balances, selling certain assets, and new debt or equity
financings. Our pending acquisition of Viant is expected to increase our cash balance by approximately $80,000,000, net of acquisition costs. Other than our pending acquisition of Viant, we do not
currently have in place any agreements to provide us any of these sources of funds, and additional funds may not be available to us on favorable terms, if they are available to us at all. In addition,
any of these transactions also could result in significant equity dilution to the holders of our common stock at the time of the transaction, or later.

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Our
outstanding contractual obligations, leasehold commitments, and outstanding debt balances as of March 31, 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                               |       |                                      
|Other Long-Term Obligations(1)                 |       |                                      
|Other(2)                                       |       |                                      
|                                               |       |                                      
|                                               | Total |                                      

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Recent Accounting Pronouncements

As of January 1, 2002, we 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.

In
December 2001, the FASB staff issued Topic No. D-103,Income Statement Characterization of Reimbursements Received for
"Out-of-Pocket" Expenses Incurred(Topic No. D-103), which is effective for fiscal years beginning after December 15, 2001.
Topic D-103 requires that certain out-of-pocket expenses rebilled to customers be recorded as revenue versus an offset to the related expense. Effective
January 1, 2002, we reflect rebilled expenses as revenue, in accordance with Topic No. D-103.

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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-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.

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Item 3.    Quantitative and Qualitative Disclosures about Market Risk

Equity Price RiskAt March 31, 2002, we had $2,577,000 of
available-for-sale equity securities. These securities represent companies in the Internet and hi-tech sectors, both of which have recently experienced significant
volatility. 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 0.3% of our
total assets at March 31, 2002.

Interest Rate RiskAt March 31, 2002, we had $78,090,000 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
March 31, 2002, we had $64,883,000 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. This risk is mainly derived from our fourth quarter acquisitions of eshare, Open Market, RoweCom, and Eprise. Through March 31, 2002, we have recorded a
$756,000 foreign currency translation adjustment 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.

Impairment RiskAt March 31, 2002, we had goodwill and other intangible assets of $283,059,000 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 three months ended March 31, 2002, we incurred $1,711,000 of
impairment charges, $1,461,000 of which related to our investment in equity-method and cost-method associated companies in our divine interVentures segment. In February 2002, we
issued 2,159,074 shares of our class A common stock with a fair value of $1,403,000 in conjunction with the settlement of our collar agreement with Launchworks, an equity-method associated
company since February 2000. The Company's investment in Launchworks was fully impaired as of December 31, 2001. We have no investments in equity- or cost-basis associated
companies reflected on our balance sheet as of March 31, 2002. At March 31, 2002, we also had $7,801,000 and $22,546,000, 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 January 2002, we issued 14,002,643 shares of our class A common stock to a creditor of Northern Light Technology, LLC in connection with our
acquisition of certain of the assets of Northern Light. Additionally, we issued to a vendor of Northern Light a warrant to purchase up to 120,065 shares of our class A common stock.

In
January 2002, we issued a warrant to purchase 1,100,000 shares of our class A common stock to Level 3 Communications, LLC in connection with the termination of an
agreement concerning the purchase of co-location and bandwidth services from Level 3.

In
February 2002, we issued 4,427,683 shares of our class A common stock to the former stockholders of Perceptual Robotics, Inc. in connection with our acquisition of the
66.7% interest in Perceptual Robotics that we did not already own.

In
February 2002, we issued 365,020 shares of our class A common stock to certain former stockholders of NetUnlimited, Inc. in connection with our acquisition of the
minority interest of NetUnlimited.

In
February 2002, we issued 769,231 shares of our class A common stock to Comerica BankCalifornia in connection with our acquisition of RWT Corporation (d/b/a
RealWorld Technologies, Inc.).

In
February 2002, we issued 333,333 shares of our class A common stock to Dynegy Technology Capital Corp. upon resolution of a holdback established in connection with our
2001 acquisition of SageMaker, Inc.

In
February 2002, we issued 2,159,074 shares of our class A common stock to Launchworks inc. pursuant to a collar agreement that we entered into with Launchworks in
February 2000.

All
of our class A common stock 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 6.    Exhibits and Reports on Form 8-K



|Number |  | Description of Exhibit                                                                                                                                                                                          
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1    |  | Combination Agreement, dated as of March 12, 2002, between divine, inc. and Delano Technology Corporation (incorporated herein by reference to Exhibit 2.1 of divine's Report on Form 8-K filed March 14,
2002).



We
filed a Report on Form 8-K, dated January 24, 2002, announcing the completion of our acquisition of Data Return Corporation.

We
filed a Report on Form 8-K, dated March 14, 2002, announcing that we had entered into an agreement and plan of merger with Delano Technology Corporation,
pursuant to which Delano would become one of our wholly owned subsidiaries.

We
filed a Report on Form 8-K/A, dated March 28, 2002, to amend our Report on Form 8-K, dated July 12, 2001, to include the financial
statements of Emicom Group, Inc. and the pro forma financial
information reflecting the pro forma effect on our consolidated financial statements of our acquisitions of Emicom, Open Market, Inc., eshare communications, Inc., Eprise Corporation,
and Data Return Corporation.

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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 May 15, 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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