<PAGE>
 
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                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
 
                               ----------------
 
                                   FORM 10-K
 
                    ANNUAL REPORT UNDER SECTION 13 OR 15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934
 
                  For the fiscal year ended December 31, 1998
 
                          Commission File No. 0-21935
 
                               ----------------
 
                        Modem Media . Poppe Tyson, Inc.
            (Exact name of registrant as specified in its charter)
 
               Delaware                              06-1464807
       (State of incorporation)            (I.R.S. Employer Identification
                                                       Number)
 
                                230 East Avenue
                               Norwalk, CT 06855
                                (203) 299-7000
             (Address of principal executive offices and zip code)
 
          Securities registered pursuant to Section 12(b) of the Act:
 
 Class A Common Stock, $0.001 par value, traded on the Nasdaq National Market
 
          Securities registered pursuant to Section 12(g) of the Act:
 
                                     None
 
  Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [_] No [X]
 
  Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
 
  The aggregate market value of the Company's Class A Common Stock held by
non-affiliates as of March 19, 1999, computed by reference to the closing
price of such stock, was approximately $96,417,741.
 
  There were 5,422,826 shares of the Registrant's Class A Common Stock, $.001
par value, and 5,648,624 shares of the Registrant's Class B Common Stock,
$.001 par value, outstanding as of March 19, 1999.
 
                     Documents Incorporated by Reference:
 
                                     None
 
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<PAGE>
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
 Item Description                                                          Page
 ---- -----------                                                          ----
 
 <C>  <S>                                                                  <C>
 PART I
  1   Business..........................................................     1
  2   Properties........................................................     7
  3   Legal Proceedings.................................................     7
  4   Submission of Matters to a Vote of Security Holders...............     7
 PART II
  5   Market for Registrant's Common Equity and Related Stockholder
      Matters...........................................................     7
  6   Selected Financial Data...........................................     7
  7   Management's Discussion and Analysis of Financial Condition and
      Results of Operations.............................................     9
  7A  Quantitative and Qualitative Disclosures About Market Risk........    17
  8   Financial Statements and Supplementary Data.......................    18
  9   Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure..............................................    18
 PART III
 10   Directors and Executive Officers of the Registrant................    18
 11   Executive Compensation............................................    20
 12   Security Ownership of Certain Beneficial Owners and Management....    22
 13   Certain Relationships and Related Transactions....................    23
 PART IV
 14   Exhibits, Financial Statement Schedules, and Reports on Form 8-K..    27
      Index to Exhibits.................................................    27
      Signatures........................................................    30
</TABLE>
<PAGE>
 
                                    PART I
 
ITEM 1. BUSINESS
 
  This Annual Report on Form 10-K contains forward-looking statements, which
involve risks and uncertainties. The actual results of Modem Media . Poppe
Tyson, Inc. ("Modem Media") could differ materially from those anticipated in
these forward-looking statements as a result of certain factors, including
those set forth in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere herein.
 
Overview
 
  Modem Media is an internet marketing company that attracts, acquires and
retains customers for global clients. Modem Media creates marketing programs
that are delivered over the Internet and other electronic media, and that
facilitate two-way communication between its clients and their customers.
Modem Media refers to these programs as "digital interactive marketing
solutions". By developing marketing programs that incorporate advanced
communication technologies, Modem Media enables its clients to establish,
retain and manage customer relationships. Marketing programs offered by Modem
Media include the design and implementation of electronic business programs
that utilize the Internet to enable its clients to acquire, communicate with
and service customers, thereby increasing the value of their globally-
recognized brands. Modem Media combines its substantial expertise in strategic
marketing, creative design and digital technology to deliver on a worldwide
basis a complete range of digital interactive marketing services, including
strategic consulting and research, website design, electronic commerce and
electronic customer communication services, interactive advertising, and data
collection and analysis.
 
  Modem Media's marketing programs are designed to enable its clients to
target narrowly-defined market segments, provide their customers with detailed
product and service information, sell products and services, and provide post-
sale customer support electronically, and promote consumer interest in their
entire product lines. Marketing programs developed by Modem Media are
delivered primarily through the Internet, but also through other digital
channels such as corporate intranets, proprietary online services, CD-ROMs and
interactive kiosks. Modem Media has received numerous industry awards for its
interactive marketing campaigns, websites, banner advertisements and CD-ROMs,
including the Zima.com campaign and website, the AT&T Olympic Games Connection
Website, the AT&T "Intermercial" Campaign, the AT&T Worldnet CD-ROM, the
iVillage.com "About Work" campaign, the Sony PlayStation campaign and the Diet
Pepsi "Convert a Million" campaign. In 1998, Modem Media won the "Interactive
Agency Of The Year" award from the Internet Advertising Bureau, a trade
association, and Modem Media is the only company to win two consecutive
"CASIE" awards for interactive marketing.
 
  Modem Media focuses on promoting long-term client relationships by devising
programs that can be integrally linked to its clients' business functions.
Modem Media believes that interactive technologies, which provide its clients
with the ability to establish highly specific, direct communications with
their customers, are becoming an increasingly important component of
successful marketing strategies. Accordingly, Modem Media works primarily with
a select group of established Fortune 500 clients committed to interactive
marketing, as well as companies with new online business models. During the
year ended December 31, 1998, Modem Media's ten largest clients with whom we
have a continuing relationship measured by revenue were: AT&T; Citibank; Delta
Air Lines; IBM; Intel; JC Penney; John Hancock; Kraft; Sony and Unilever.
 
Company Background
 
  Modem Media's predecessor, Modem Media Advertising Limited Partnership ("the
Modem Partnership"), was founded more than ten years ago by pioneers in
interactive marketing and electronic commerce. Modem Media is the result of
the combination of three separate businesses, the Modem Partnership, the
Northern Lights Interactive division of True North Communications Inc. ("True
North") and the strategic interactive marketing operations of Poppe Tyson,
Inc. In October 1996, True North formed Modem Media as a subsidiary to acquire
 
                                       1
<PAGE>
 
the Modem Partnership and to combine it with True North's interactive
marketing operations. In 1998, True North agreed to transfer to Modem Media
the strategic interactive marketing operations of Poppe Tyson, Inc., another
True North subsidiary, in exchange for all operations originally contributed
in 1996, other than Northern Lights Interactive. This combination was
completed effective October 1, 1998. The historical financial results of the
strategic interactive marketing operations of Poppe Tyson, Inc. have been
prepared on a carved-out basis, and are included in the consolidated financial
statements of the Company from December 31, 1997, the date of the merger of
Bozell, Jacobs, Kenyon & Eckhardt, Inc. ("Bozell"), the former parent of Poppe
Tyson, Inc. ("Poppe Tyson"), with True North.
 
Services
 
  Modem Media is an internet marketing company that attracts, acquires and
retains customers for global clients. Modem Media combines its expertise in
strategic marketing, technology and digital design and production to create
innovative marketing and customer management for its clients on a worldwide
basis. Modem Media offers its clients a wide range of digital interactive
marketing services such as strategic consulting and research, website design,
electronic commerce and electronic customer communication services,
interactive advertising and data collection and analysis. By offering these
services Modem Media has positioned itself to develop and manage all aspects
of a client's internet marketing activities from strategy to execution.
 
  Modem Media focuses on making its digital interactive marketing solutions an
integral part of its clients' marketing strategies in order to promote long-
term client relationships. Modem Media uses dedicated client service teams
with experience in consulting, creative, media, technology and production
disciplines, led by experienced account directors, to provide its integrated
digital marketing communication services. Modem Media's proven processes and
methodologies for executing client work, developed over a decade, enable it to
undertake interactive projects, monitor progress and measure the return on its
clients' investment in interactive marketing campaigns. Modem Media
incorporates client feedback into successive strategic marketing campaigns and
programs to further improve and build upon online customer relationships.
 
  Client initiatives are guided by Modem Media's strategic account management
team through a four-point service framework that includes strategic consulting
and research, strategy development and planning, interactive marketing program
execution, and continuous program measurement and data analysis, as described
below:
 
  Strategic Consulting and Research. Modem Media provides clients with
diagnostic analysis to guide their enterprise-wide interactive marketing
efforts. Services include custom research, online marketing research, and
strategic consulting. These services are aimed at:
 
  .  identifying and prioritizing interactive opportunities to strengthen
     customer relationships;
 
  .  creating strategies to position and brand products in order to create a
     competitive advantage; and
 
  .  reducing marketing communication costs through the creative application
     of interactive technologies.
 
  In addition, a rigorous methodology is used to evaluate current customers
reached by the Internet. Modem Media's strategic business consultants and
research professionals prepare clients to develop interactive communication
programs that effectively and efficiently connect the clients' customers to
their products, services, market position and brand equity.
 
  Strategy Development and Planning. Modem Media works with clients to define
interactive marketing strategies and plans, and seeks to identify concepts
that will maximize these strategies. In formulating detailed program plans,
Modem Media combines creative marketing concepts and interactive technology to
provide customized marketing programs for its clients. The concepts and plans
articulated by Modem Media provide the basis for the development of
interactive marketing programs.
 
                                       2
<PAGE>
 
  Interactive Marketing Program Execution. Based on the interactive strategy
and concepts, Modem Media works with clients to jointly design specific
solutions, determine roles and responsibilities for development work, and
manage the use and flow of data in creating interactive marketing programs
distributed across the following channels:
 
  .  websites, where Modem Media creates or services entire websites for
     clients;
 
  .  banner advertising, where Modem Media creates discrete "banner" size
     advertisements for clients to be posted on the websites of others; and
 
  .  e-mail, where Modem Media designs and enables client advertising by
     means of both in-bound and out-bound electronic mail messages.
 
  Modem Media assembles a development team consisting of account, creative,
production and media professionals to service clients and execute programs.
The team then helps define the components for the solutions and the required
data from client systems, and performs the required systems integration to
architect and build the solutions. Modem Media's programs may incorporate
advertising and promotion services, and are often enabled for e-commerce, e-
care and other value added utilities known in our industry as "e-business."
Modem Media designs, develops, creates, maintains and updates the various
components of each solution as required, consistent with the client's
interactive strategy on a global basis. Modem Media believes that the key to
successful interactive marketing is the incorporation of a participatory
experience through services and utilities that seamlessly integrate the brand
into the three platform channels (website, banner advertising and e-mail) that
occupy the majority of the client's customers time online.
 
  Program Measurement and Data Analysis. Modem Media's data specialists
collect, manage and analyze data that results from interactions between
clients' marketing programs and their customers. Through usage and yield
analysis of traffic and sales transactions, Modem Media is able to gather
valuable insights into the effectiveness of digital marketing communication
programs as well as the segmentation of customer profiles. This acquired
knowledge of customer behavior and transaction patterns enables Modem Media to
further devise, design and implement targeted marketing programs aimed at
increasingly efficient customer acquisition and retention and additional sales
and marketing opportunities.
 
  Continuous Program Improvement. Through strategic marketing initiatives and
ongoing programs for its clients, Modem Media has positioned itself to gain
insights into its clients' businesses. Modem Media uses the information it
collects in performing program measurement and data analysis to help its
clients improve their customer management programs and channels, continuously
improve the effectiveness of their digital interactive marketing programs, and
adapt and deploy these programs globally. Modem Media believes that its
continuous program improvement builds the foundation for recurring client
business.
 
Modem Media Clients
 
  Modem Media's clients consist primarily of organizations whose businesses
are impacted by rapidly changing digital media and interactive communications
technologies, and range from Fortune 500 companies to emerging companies with
online business models. Modem Media's services for these clients include
strategic marketing assignments as well as global digital interactive
marketing and sales programs combining various platforms and services. Our
results of operations and our business depend on our relationship with a
limited number of large clients. Set forth below is the percentage of revenues
on a pro forma basis during the fiscal years ended December 31, 1998 and 1997
for each of the clients that accounted for more than 10% of our revenues and
for our ten largest clients combined:
 
<TABLE>
<CAPTION>
                                                     Year Ended    Year Ended
                                                    December 31,  December 31,
                         Client                         1998          1997
                         ------                     ------------ ---------------
      <S>                                           <C>          <C>
      AT&T.........................................    20.7%          31.4%
      Citibank.....................................    12.8%     (less than 10%)
      Ten largest clients combined.................    76.0%          74.4%
</TABLE>
 
                                       3
<PAGE>
 
  The following is a list of our ten largest clients measured by revenues for
the twelve months ended December 31, 1998 with whom Modem Media has a
continuing relationship, showing the year in which we began providing services
to each client and the primary industries served by these clients:
 
<TABLE>
<S>  <C>
</TABLE>
     Communications                     Financial Services 
       AT&T (1992)                         Citibank (1997)    
                                         John Hancock (1996)
 
 
 
     Computer Hardware                  Travel 
        Intel (1997)                       Delta Air Lines (1995)  
        IBM (1997)
                                        
 
     Consumer Products/Retail 
        Kraft (1996) 
        JC Penney (1989) 
        Sony (1997)
        Unilever (1997)
<TABLE>
<S>  <C>
</TABLE>
 
  Modem Media's clients ordinarily hire Modem Media on an assignment basis
rather than on a retainer basis. Accordingly, Modem Media does not have long-
term contracts with its clients. As a result, Modem Media's clients generally
have the right to terminate their relationships with Modem Media without
penalty and on relatively short or no notice. Once an assignment is completed
there can be no assurance that a client will engage Modem Media for further
services. For example, Modem Media provides services to AT&T and Citibank
pursuant to one-year, renewable contracts that provide the general parameters
of the relationship only. AT&T or Citibank may terminate its agreement with
Modem Media upon 90 days' prior written notice to Modem Media. While Modem
Media is not aware of plans by any of its significant clients to terminate
their use of Modem Media's services, the termination of Modem Media's business
relationship with any of its significant clients, including AT&T or Citibank,
or a material reduction in the use of Modem Media's services by a significant
client, could have a material adverse effect on Modem Media's business,
financial condition or results of operations.
 
  Conflicts of interest between clients and potential clients are inherent in
the marketing communications industry. Moreover, as is customary in the
marketing communications industry, we have entered into formal exclusivity
arrangements with many of our largest clients that restrict our ability to
provide services to competitors of these clients. Even in the absence of such
arrangements, we have in the past been, and may in the future be, unable to
take on new clients because such opportunities would require us to provide
services to direct competitors of our existing clients.
 
Use of Technology
 
  Modem Media's background in developing e-commerce solutions for online
services, the skills of its technology professionals and its legacy of firsts
have helped Modem Media to utilize technology to further the business and
marketing objectives of its client base. Modem Media utilizes technology to
implement its clients' interactive marketing efforts and to help its clients
manage their customer relationships.
 
  Modem Media makes extensive use of third-party technologies and applications
as part of the solutions it engineers for its clients. Modem Media has
utilized third-party technology in order to perform several essential business
and marketing functions for its clients, including credit card processing, ad
serving, e-mail management, data warehousing, order fulfillment and data
processing. Utilizing third-party technology greatly reduces the cost of the
solutions Modem Media provides for its clients, while increasing their
scalability as well as the speed with which Modem Media can bring them to
market. Modem Media intends to continue incorporating advanced third-party
technologies into its service offerings as the interactive marketing needs of
its clients evolve.
 
                                       4
<PAGE>
 
  The technologies used in digital interactive marketing are developing
rapidly and are characterized by evolving industry standards as well as
frequent new product and service introductions and enhancements. There can be
no assurance that the technologies we use and the expertise gained in those
technologies will continue to be applicable in the future. There can be no
assurance that we can correctly identify which technologies will achieve
market acceptance, that such new technologies will be made available to us or
that such technologies can be economically applied by us on a timely basis.
The inability to identify new and existing technologies and apply expertise in
a timely manner to subsequent projects and respond to both evolving demands of
the marketplace and competitive product and service offerings could have a
material adverse effect on our financial performance.
 
Management Information Systems
 
  Modem Media is currently implementing various aspects of its service
delivery infrastructure, which includes financial and project management
systems. Modem Media believes that these systems will enhance its ability to
manage its engagements and monitor the utilization of its professional staff.
In addition, Modem Media is in the process of installing a secure global
network which will provide access to Modem Media's proprietary corporate
memory application, which management believes will significantly improve
consistent handling of clients and business development efforts globally. The
above, coupled with Modem Media's existing proprietary process for service
delivery across Modem Media, will further improve client and business
management globally.
 
Competition
 
  The market for our services is very competitive and highly fragmented and is
characterized by pressures to incorporate new capabilities, accelerate job
completion schedules and reduce prices. We face competition from a number of
sources, including traditional advertising and marketing firms, project-
oriented interactive marketing firms and information technology service
providers. Modem Media's primary competitors include Agency.com, Grey New
Technologies, iXL, Think New Ideas and USWeb/CKS. Many traditional advertising
agencies have also started to develop digital media and interactive
communications capabilities. In this regard, True North may decide to provide
its traditional advertising clients with interactive marketing solutions that
compete with the services provided by Modem Media. Moreover, certain project-
oriented interactive marketing firms and information technology service
providers provide Internet consulting, corporate identity and packaging,
production, advertising and website design services, and are technologically
proficient in the digital media and interactive communications fields. In
addition, in-house marketing and information systems departments and graphic
design companies compete with certain portions of our business.
 
  Some of our competitors and potential competitors have longer operating
histories, longer client relationships, and greater financial, management,
technology, development, sales, marketing and other resources than we do.
Competition depends to a large extent on clients' perceptions of the quality
and creativity as well as the technical proficiency of our digital interactive
marketing services and those of our competitors. We also compete on the basis
of price and the ability to serve clients on a broad geographic basis. To the
extent we lose clients to our competitors because of dissatisfaction with our
services, or if our reputation is adversely impacted for any other reason, our
future operating performance could be materially and adversely affected.
 
  There are relatively low barriers to entry in the digital interactive
marketing industry, primarily because it is a service industry that requires
minimal capital expenditures from new entrants. We expect that we will face
additional competition from new market entrants. There can be no assurance
that existing or future competitors will not develop or offer digital
interactive marketing services and products that provide significant
performance, price, creative, technological or other advantages over our
services, any of which could have a material adverse effect on our future
operating performance.
 
Intellectual Property
 
  Modem Media's ability to anticipate and rapidly adapt its services to
capitalize on emerging technologies is important to establishing and
maintaining a technology leadership position. There can be no assurance that
Modem Media will correctly identify which technologies will achieve market
acceptance, that such new
 
                                       5
<PAGE>
 
technologies will be made available to Modem Media or that such technologies
can be economically applied by Modem Media on a timely basis. Despite Modem
Media's efforts to control access to its technologies, it may be possible for
a third party to copy or otherwise obtain and use Modem Media's technologies
without authorization, or to develop similar or superior services or
technologies independently. In addition, effective copyright, trade secret and
patent protection may be unavailable or limited in certain foreign countries.
Litigation may be necessary in the future to enforce Modem Media's
intellectual property rights, to protect Modem Media's trade secrets, to
determine the validity and scope of the rights to technologies of others, or
to defend against claims of infringement or invalidity. Such litigation could
result in substantial costs and diversion of resources and could have a
material adverse effect on Modem Media's business, financial condition or
results of operations.
 
  Modem Media . Poppe Tyson, Inc., Modem Media, Poppe.com, and Northern Lights
Interactive are trademarks or tradenames of Modem Media.
 
Government Regulation
 
  The marketing communications industry is subject to extensive government
regulation, both domestic and foreign, with respect to the truth in and
fairness of advertising. Modem Media must comply with Federal Trade Commission
regulations with respect to the marketing of products and services and similar
state regulations. In addition, there has been an increasing tendency in the
United States on the part of businesses to resort to the judicial system to
challenge comparative advertising of their competitors on the grounds that the
advertising is false and deceptive.
 
  Although there are currently few laws or regulations directly governing
access to or commerce on the Internet, due to the increasing popularity and
use of the Internet, a number of laws and regulations may be adopted regarding
user privacy, pricing, acceptable content, taxation and quality of products
and services. In addition, the government has been requested to regulate and
impose fees on Internet service providers and online service providers in a
manner similar to long distance telephone carriers. The adoption of any such
laws or regulations could affect the costs of communicating on the Internet
and adversely affect the growth in use of the Internet, or decrease the
acceptance of the Internet as a communications and commercial medium, which
could in turn decrease the demand for Modem Media's services or otherwise have
a material adverse effect on Modem Media's business, results of operations and
financial condition.
 
Employees
 
  In order to maintain high levels of creativity and quality, Modem Media
places great importance on recruiting and retaining talented employees. As of
December 31, 1998, Modem Media had approximately 400 full-time employees.
Modem Media also hires temporary employees and contract service providers as
necessary. None of Modem Media's employees is represented by a labor union,
and Modem Media considers its employee relations to be good.
 
  Modem Media's success will depend to a significant degree on the continuing
contributions of members of its senior management, including Gerald M.
O'Connell, its Chief Executive Officer, and Robert C. Allen, II, its
President, and its key account management, marketing, creative and technology
development personnel, as well as its ability to attract and retain highly
skilled personnel in all job categories. Competition for qualified personnel
in the digital interactive marketing industry is intense. Modem Media has at
times experienced, and continues to experience, difficulty in recruiting
sufficient numbers of qualified personnel. Although Modem Media's executive
officers have entered into employment agreements with Modem Media which
contain non-competition provisions, there can be no assurance that any of
these executives will not voluntarily terminate their employment with Modem
Media. The loss of the services of any senior management or other key employee
or the inability to attract and retain additional personnel as required could
adversely affect Modem Media's business, financial condition or results of
operations. If one or more of Modem Media's key employees resign from Modem
Media to join a competitor or to form a competing company, the loss of such
personnel or the related loss of potential clients, and the fact that there
can be no assurance that Modem Media would be able to prevent the unauthorized
disclosure or use of its technical knowledge, practices, procedures or client
lists, could have a material adverse effect on Modem Media's business,
financial condition or results of operations.
 
                                       6
<PAGE>
 
ITEM 2. PROPERTIES
 
  Modem Media's headquarters are located in Norwalk, Connecticut and use
approximately 54,300 square feet of leased office space. Pursuant to the lease
agreement, such space will be increased to 79,300 square feet in May of 2000.
This lease expires in January of 2009. Modem Media also has an option to lease
additional office space in this facility as it becomes available provided that
the exercise of such option occurs at least one year prior to the expiration
of the lease. Modem Media maintains additional offices in New York City,
Chicago, San Francisco, Toronto, Hong Kong and London.
 
  Modem Media believes that its current facilities, along with facilities
currently subject to negotiation, will be adequate to meet Modem Media's
requirements for the foreseeable future. There can be no assurance that Modem
Media will be successful in obtaining additional space, if required, or if
such space is obtained that it will be on terms acceptable to Modem Media.
 
ITEM 3. LEGAL PROCEEDINGS
 
  Modem Media is not a party to any material legal proceedings.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
  None
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
  Modem Media's Class A common stock is listed on the Nasdaq National Market
("Nasdaq") under the symbol "MMPT". This common stock has traded at a high of
$55 1/8 and a low of $23 15/16 between the inception of its trading on
February 5, 1999 and March 19, 1999. On March 19, 1999, the last sale of Modem
Media's Class A common stock on the Nasdaq was $32 1/16 per share. On March
19, 1999, there were 24 shareholders of record of Modem Media's Class A common
stock.
 
ITEM 6. SELECTED FINANCIAL DATA
 
  The following selected financial data of Modem Media should be read in
conjunction with the financial statements and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein. The statements of operations data for the fiscal
years ended December 31, 1995 and 1994 and the balance sheet data as of
December 31, 1996, 1995 and 1994 are derived from financial statements of
Modem Media that have been audited by Arthur Andersen LLP, independent public
accountants, which are not included herein. The statements of operations data
for the fiscal years ended December 31, 1998, 1997 and 1996 and the balance
sheet data as of December 31, 1998 and 1997 are derived from financial
statements of Modem Media that have been audited by Arthur Andersen LLP,
independent public accountants, and are included elsewhere herein. As a result
of the combination of Modem Media and the strategic interactive marketing
operations of Poppe Tyson, and other factors, Modem Media believes that the
historical results of operations may not be indicative of the results of
operations to be expected in the future. Accordingly, Modem Media has included
pro forma results of operations data under "Management's Discussion and
Analysis of Financial Condition and Results of Operations," which management
believes may be useful to investors in evaluating the performance of Modem
Media on an ongoing basis.
 
  Our pro forma results of operations in the table below assume that the sale
of Modem Media's non-strategic interactive marketing operations to True North
in connection with the combination of Modem Media and the strategic
interactive marketing operations of Poppe Tyson occurred on January 1, 1998.
 
                                       7
<PAGE>
 
  The pro forma balance sheet data reflects adjustments for transactions
related to Modem Media's initial public offering, including:
 
  .  the sale of the 2,600,000 shares of Class A common stock at the initial
     public offering price of $16.00 per share in February 1999 and the
     exercise by the underwriters of their over-allotment option of 390,000
     shares at $16.00 per share in March 1999;
 
  .  application of the net proceeds from the offering after deducting
     underwriting discounts and commissions, estimated offering expenses and
     $6.0 million which was used to pay indebtedness due and payable to True
     North upon consummation of the offering; and
 
  .  increased goodwill due to the payment of additional purchase price of
     $18,518,000 by True North to the former partners of the Modem
     Partnership upon consummation of the offering. Such increase will result
     in additional amortization of goodwill of approximately $1,000,000 per
     year over the next 18 years.
 
<TABLE>
<CAPTION>
                                                      Actual
                           Pro Forma   -----------------------------------------
                           Year Ended         Year Ended December 31,
                          December 31, -----------------------------------------
                              1998      1998     1997     1996     1995    1994
                          ------------ -------  -------  -------  -------  -----
                          (unaudited)
                                (in thousands, except per-share data)
<S>                       <C>          <C>      <C>      <C>      <C>      <C>    <C>
Statements of Operations
 Data:
Revenues................    $ 42,544   $42,544  $25,497  $ 2,093  $   438  $ --
Salaries and benefits...      29,368    29,368   15,894    1,322      308    --
Office and general......      14,729    14,729    9,038      712      215    --
Amortization of
 goodwill...............       1,768     1,768    1,666      --       --     --
Operating losses
 (income) of True North
 Units Held for
 Transfer...............         --         13    2,180    1,309    1,766   (326)
                            --------   -------  -------  -------  -------  -----
Operating (loss)
 income.................      (3,321)   (3,334)  (3,281)  (1,250)  (1,851)   326
Interest income
 (expense), net.........          29        29      (76)     --       --     --
                            --------   -------  -------  -------  -------  -----
(Loss) income before
 income taxes...........      (3,292)   (3,305)  (3,357)  (1,250)  (1,851)   326
(Benefit) provision for
 income taxes...........        (218)     (102)    (248)    (548)    (873)    70
                            --------   -------  -------  -------  -------  -----
Net (loss) income.......    $ (3,074)  $(3,203) $(3,109) $  (702) $  (978) $ 256
                            ========   =======  =======  =======  =======  =====
Basic and diluted net
 loss per share.........    $  (0.38)  $ (0.43) $ (0.43) $(35.10) $   --   $ --
                            ========   =======  =======  =======  =======  =====
<CAPTION>
                                                      Actual
                                       -----------------------------------------
                           Pro Forma               December 31,
                          December 31, -----------------------------------------
                              1998      1998     1997     1996     1995    1994
                          ------------ -------  -------  -------  -------  -----
                          (unaudited)
<S>                       <C>          <C>      <C>      <C>      <C>      <C>    <C>
Balance Sheet Data:
Cash....................    $ 45,283   $ 7,824  $ 7,056  $ 2,726  $   --   $ --
Working capital
 (deficit)..............      37,542    (5,917)   3,269    3,428      548    --
Total assets............     125,924    71,286   59,024   54,022      753    256
Capital lease
 obligations, less
 current portion........         323       323      472      193      --     --
Related party
 obligations, less
 current portion........         --        --     9,346    6,000      620    --
Other long-term
 obligations............          19        19       41       55      --     --
Total stockholders'
 equity (deficit).......      96,198    35,560   35,618   40,493     (846)   256
</TABLE>
 
                                       8
<PAGE>
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS
 
  Certain statements herein constitute "forward-looking statements" within the
meaning of Section 21E(i)(1) of the Securities and Exchange Act of 1934. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results of Modem Media to be
materially different from any future results expressed or implied by these
statements. Such factors include, among other things, the following: a history
of operating losses, dependence on a limited number of clients, variability of
operating results, the ability to integrate acquired companies, the ability to
estimate costs in fixed-fee assignments, the extent to which the interests of
Modem Media's controlling stockholder, True North, conflict with Modem Media's
interests, the ability to manage future growth, dependence on key management
personnel, exclusivity arrangements with clients that may limit the ability to
provide services to others, dependence on technology, dependence on the
continued growth of the Internet, and changes in government regulation. In
light of these and other uncertainties, the forward-looking statements
included in this document should not be regarded as a representation by Modem
Media that its plans and objectives will be achieved.
 
Overview
 
  Modem Media derives substantially all of its revenues from fees for internet
marketing services rendered to a select number of Fortune 500 companies and
emerging companies with online business models. Modem Media's digital
interactive marketing services include:
 
  .  strategic consulting and research;
 
  .  strategy development and planning;
 
  .  development of electronic customer service capabilities which Modem
     Media refers to as "customer management platform development," and
 
  .  continuous monitoring of the quantitative and qualitative effectiveness
     of services previously provided to clients by Modem Media, which is
     commonly referred to in Modem Media's industry as "program measurement
     and analysis."
 
  A majority of Modem Media's revenues are derived from fixed-fee assignments.
Modem Media recognizes revenues as services are rendered. Modem Media
reassesses its estimated costs on each project periodically and losses are
accrued, on a project-by-project basis, to the extent costs incurred and
anticipated costs to complete projects exceed anticipated billings. Provisions
for losses on uncompleted contracts are recognized in the period in which such
losses are determined.
 
  Clients generally hire Modem Media on an engagement basis rather than a
retainer basis. Once a project is completed, there can be no assurance that a
client will engage Modem Media for future services. As a result, a client that
generates substantial revenue for Modem Media in one period may not be a
substantial source of revenue in a subsequent period. In addition, Modem
Media's clients generally have the right to terminate their relationships with
Modem Media without penalty and with relatively short or no notice. The
termination of Modem Media's business relationships with any of its
significant clients, or a material reduction in the use of Modem Media's
services by any such clients, could adversely affect Modem Media's business,
financial condition and results of operations. Modem Media's five largest
clients accounted for 53.4% and 56.8% of revenues on a pro forma basis for the
years ended December 31, 1998 and 1997, respectively. AT&T accounted for 20.7%
and 31.4% of Modem Media's revenues on a pro forma basis for the years ended
December 31, 1998 and 1997, respectively. In addition, Citibank accounted for
12.8% of Modem Media's revenues on a pro forma basis for the year ended
December 31, 1998.
 
  Salaries and benefits represent the majority of Modem Media's operating
expenses. These expenses include salaries, employee benefits, incentive
compensation and other payroll-related costs. Office and general is comprised
of office rent and utilities, depreciation, amortization of software,
professional and consulting fees, travel, telephone and other related
expenses.
 
                                       9
<PAGE>
 
  Modem Media has experienced operating losses as well as net losses on both a
historical and pro forma basis, as defined below, in eight of the twelve
quarters in the period January 1, 1996 through December 31, 1998. Although
Modem Media has experienced revenue growth in recent periods, these growth
rates may not be sustainable or indicative of future operating results. In
addition, Modem Media has incurred substantial costs to expand and integrate
its operations and intends to continue to invest heavily in ongoing expansion
and integration efforts as well as infrastructure development. As a result,
including the effect of amortization of goodwill, Modem Media expects to
continue to incur operating losses through 1999 and beyond. There can be no
assurance that Modem Media will achieve or sustain profitability.
 
  Modem Media was formed by True North in October 1996 to acquire the Modem
Partnership and to combine it with certain of True North's digital interactive
marketing operations, including its Northern Lights Interactive division. The
Modem Partnership was formed in 1987 by Gerald M. O'Connell, Modem Media's
Chief Executive Officer, and Douglas C. Ahlers, Modem Media's Executive Vice
President. Effective October 1, 1998, Modem Media acquired the strategic
interactive marketing operations of Poppe Tyson from True North in exchange
for (i) non-strategic digital interactive marketing businesses originally
contributed by True North to Modem Media in 1996, (ii) 809,514 shares of Class
B common stock and (iii) the forgiveness of approximately $5.8 million of
intercompany payables. This transaction occurred among companies under common
control, and, accordingly, has been recorded as of December 31, 1997 (the date
of True North's acquisition of the strategic interactive marketing operations
of Poppe Tyson) at historical cost. Poppe Tyson was formed in December 1985 as
a subsidiary of Bozell, which was acquired by True North in December 1997 in a
business combination accounted for under the pooling-of-interests method. See
Notes 1, 3 and 16 of Notes to Consolidated Financial Statements of Modem Media
 . Poppe Tyson, Inc. and Subsidiaries.
 
  The results of operations for Modem Media include the results of:
 
  .  the Modem Partnership;
 
  .  the digital interactive marketing operations contributed by True North
     to Modem Media in 1996, including both Northern Lights Interactive and
     the non-strategic digital interactive marketing businesses that Modem
     Media sold back to True North effective October 1, 1998; and
 
  .  the strategic interactive marketing operations of Poppe Tyson,
 
from their respective dates of acquisition by True North. The results of
operations of the businesses that Modem Media sold back to True North
effective October 1, 1998 are included in the results of Modem Media through
September 30, 1998 and are presented as "Operating Losses of True North Units
Held for Transfer" in Modem Media's consolidated financial statements included
elsewhere in this Annual Report on Form 10-K.
 
  The financial statements of:
 
  .  the Modem Partnership as of and for the year ended December 31, 1996;
     and
 
  .  the strategic interactive marketing operations of Poppe Tyson as of and
     for the years ended December 31, 1997 and 1996
 
are included herein as the financial statements of the predecessors to Modem
Media.
 
Pro Forma Results of Operations
 
  The following table sets forth certain pro forma statements of operations
data of Modem Media for the years ended December 31, 1998, 1997 and 1996. The
pro forma results of operations data of Modem Media presented below assume
that the following transactions each occurred on January 1, 1996:
 
  .  the combination of Modem Media and the Modem Partnership;
 
  .  the acquisition of the strategic interactive marketing operations of
     Poppe Tyson; and
 
  .  the disposition of the non-strategic digital interactive marketing
     operations that Modem Media sold back to True North effective October 1,
     1998.
 
                                      10
<PAGE>
 
  Management believes that the pro forma statements of operations data may be
useful to investors in evaluating the financial performance of Modem Media on
an ongoing basis. Such pro forma data may not, however, be indicative of the
results of operations of Modem Media that actually would have occurred had the
transactions reflected in the pro forma results occurred at the beginning of
the periods presented, or of the results of operations that may be obtained by
Modem Media in the future.
 
<TABLE>
<CAPTION>
                              Year Ended December 31,
                              ---------------------------
                               1998      1997      1996
                              -------   -------   -------
                                  (unaudited, in
                                    thousands)
     <S>                      <C>       <C>       <C>
     Revenues................ $42,544   $29,422   $20,321
     Salaries and benefits...  29,368    19,244    14,050
     Office and general......  14,729    12,217     6,569
     Amortization of
      goodwill...............   1,768     1,666     1,666
                              -------   -------   -------
     Operating loss..........  (3,321)   (3,705)   (1,964)
     Interest income
      (expense), net.........      29      (121)       16
     (Benefit) provision for
      income taxes...........    (218)       66        68
                              -------   -------   -------
     Net loss................ $(3,074)  $(3,892)  $(2,016)
                              =======   =======   =======
 
  The following table sets forth certain statements of operations data of
Modem Media as a percentage of total revenues on a pro forma basis, as
defined, for the periods indicated:
 
<CAPTION>
                              Year Ended December 31,
                              ---------------------------
                               1998      1997      1996
                              -------   -------   -------
                                    (unaudited)
     <S>                      <C>       <C>       <C>
     Revenues................   100.0%    100.0%    100.0%
     Salaries and benefits...    69.0      65.4      69.2
     Office and general......    34.6      41.5      32.3
     Amortization of
      goodwill...............     4.2       5.7       8.2
                              -------   -------   -------
     Operating loss..........    (7.8)    (12.6)     (9.7)
     Interest income
      (expense), net.........     0.1      (0.4)      0.1
     (Benefit) provision for
      income taxes...........    (0.5)      0.2       0.3
                              -------   -------   -------
     Net loss................    (7.2)%   (13.2)%    (9.9)%
                              =======   =======   =======
</TABLE>
 
 Pro Forma Year Ended December 31, 1998 Compared to Pro Forma Year Ended
December 31, 1997
 
  Revenues. Pro forma revenues increased $13.1 million, or 44.6%, to $42.5
million for the year ended December 31, 1998 from $29.4 million for the year
ended December 31, 1997. Pro forma revenues increased primarily as a result of
increased services provided to existing clients, as well as the addition of
new clients.
 
  Salaries and Benefits. Pro forma salaries and benefits increased $10.2
million, or 53.1%, to $29.4 million for the year ended December 31, 1998 from
$19.2 million for the year ended December 31, 1997. Pro forma salaries and
benefits represented 69.0% and 65.4% of pro forma revenues for the years ended
December 31, 1998 and 1997, respectively. Both the dollar and percentage
increases in pro forma salaries and benefits were attributable to a company-
wide increase in headcount to better manage the growth of its business,
service clients and actively pursue new client business.
 
  Office and General. Pro forma office and general increased $2.5 million, or
20.5%, to $14.7 million for the year ended December 31, 1998 from $12.2
million for the year ended December 31, 1997. Pro forma office and general
represented 34.6% and 41.5% of pro forma revenues for the years ended December
31, 1998 and 1997, respectively. The dollar increase in pro forma office and
general was due primarily to increased occupancy and office support expenses
incurred in connection with increases in headcount. The decrease in office and
general as a percentage of pro forma revenue was due primarily to higher
percentage growth rates in revenue.
 
                                      11
<PAGE>
 
  Amortization of Goodwill. Pro forma amortization of goodwill increased by
$0.1 million, or 5.9%, to $1.8 million for the year ended December 31, 1998
from $1.7 million for the year ended December 31, 1997, as a result of the
payment of $3.3 million in additional purchase price for the Modem Partnership
in May 1998. Goodwill resulted from the combination of Modem Media with the
Modem Partnership in December 1996 (the "Modem Partnership Combination") and
is being amortized by Modem Media over a 20-year period. In connection with
the Modem Partnership Combination, True North was obligated to pay the former
owners of the Modem Partnership an aggregate of up to $18.5 million as
additional consideration upon consummation of an initial public offering of
Modem Media's equity securities. In connection with the completion of such
offering in February 1999, True North paid the additional consideration to the
former owners of the Modem Partnership thereby resulting in a corresponding
increase in goodwill recorded on the books of Modem Media. Such increase will
result in additional amortization of goodwill by Modem Media of approximately
$1.0 million per year over the next 18 years.
 
  Income Taxes. Modem Media had a benefit for income taxes of $0.2 million on
a pro forma pre-tax loss of $3.3 million for the year ended December 31, 1998,
as compared to a provision for income taxes of $0.1 million on a pro forma
pre-tax loss of $3.8 million for the year ended December 31, 1997. The
effective income tax benefit rate was 6.6% on a pro forma basis for the year
ended December 31, 1998 compared to an effective income tax rate of 1.7% on a
pro forma basis for the year ended December 31, 1997. The effective tax rates
differ from the federal statutory rate primarily due to the effect of non-
deductible goodwill amortization and losses of foreign subsidiaries on which
Modem Media did not recognize a tax benefit.
 
 Pro Forma Year Ended December 31, 1997 Compared to Pro Forma Year Ended
December 31, 1996
 
  Revenues. Pro forma revenues increased by $9.1 million, or 44.8%, to $29.4
million for the year ended December 31, 1997 from $20.3 million for the year
ended December 31, 1996. The increase in pro forma revenues between 1997 and
1996 resulted principally from increased services provided to existing
clients, and, to a lesser extent, the addition of new clients. The opening of
new offices in the United Kingdom and Hong Kong during the fourth quarter of
1996 and first quarter of 1997, respectively, also contributed to the
increase.
 
  Salaries and Benefits. Pro forma salaries and benefits increased $5.1
million, or 36.2%, to $19.2 million for the year ended December 31, 1997 from
$14.1 million for the year ended December 31, 1996. As a percentage of
revenues, pro forma salaries and benefits decreased to 65.4% for the year
ended December 31, 1997 from 69.2% for the year ended December 31, 1996. The
dollar increase in pro forma salaries and benefits was due primarily to
company-wide increases in headcount to support new business and the
establishment of two international offices. The decrease of pro forma salaries
and benefits as a percentage of pro forma revenue is attributable primarily to
higher percentage growth rates in revenue.
 
  Office and General. Pro forma office and general increased $5.6 million, or
84.8%, to $12.2 million for the year ended December 31, 1997 from $6.6 million
for the year ended December 31, 1996. As a percentage of revenues, pro forma
office and general was 41.5% and 32.3% in 1997 and 1996, respectively. Both
the dollar and percentage increases were related to continued infrastructure
commitments to expand operations, the opening of new offices in the United
Kingdom and Hong Kong during the fourth quarter of 1996 and the first quarter
of 1997, respectively, and the recognition of a $0.6 million, non-cash charge
in 1997 for the relocation of Modem Media's main office.
 
  Amortization of Goodwill. Pro forma amortization of goodwill remained
constant at $1.7 million in 1997 and 1996. Goodwill resulted from the Modem
Partnership Combination and is being amortized over a 20-year period.
 
  Income Taxes. Modem Media's pro forma provision for income taxes remained
constant at $0.1 million on pro forma pre-tax losses of $3.8 and $2.0 million
for the years ended December 31, 1997 and 1996, respectively. The effective
pro forma income tax rates were 1.7% in 1997 and 3.5% in 1996. These rates
differ from the federal statutory rate primarily due to the effect of non-
deductible goodwill amortization and losses of foreign subsidiaries on which
Modem Media did not recognize a tax benefit.
 
                                      12
<PAGE>
 
Factors Affecting Operating Results
 
  Modem Media's revenues have historically been higher during the second half
of each year as its clients prepare marketing campaigns for products and
services launched in anticipation of fall trade shows and the holiday season.
During the first quarter of the year, Modem Media has historically experienced
revenue declines from the fourth quarter of the preceding year as clients
reestablish their annual marketing and advertising budgets. Modem Media
expects this variation in revenue to continue in the future.
 
  Modem Media's operating results have fluctuated in the past, and may
continue to fluctuate in the future, as a result of a variety of factors,
including the timing of new projects, material reductions, cancellations or
completions of major projects, the loss of significant clients, the opening or
closing of an office, Modem Media's relative mix of business, changes in Modem
Media's pricing strategies or those of its competitors, employee utilization
rates, changes in personnel and other factors that are outside of Modem
Media's control. In addition, Modem Media has experienced some variation in
operating results throughout the year resulting in part from marketing
communications spending patterns and business cycles of its clients. As a
result, period-to-period comparisons of Modem Media's operating results cannot
be relied upon as indicators of future performance.
 
Historical Results of Operations
 
Overview
 
  The following table sets forth certain items from Modem Media's statements
of operations data included elsewhere in this Annual Report on Form 10-K.
 
<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                                    -------------------------
                                                     1998     1997     1996
                                                    -------  -------  -------
                                                        (in thousands)
     <S>                                            <C>      <C>      <C>
     Revenues...................................... $42,544  $25,497  $ 2,093
     Salaries and benefits.........................  29,368   15,894    1,322
     Office and general............................  14,729    9,038      712
     Amortization of goodwill......................   1,768    1,666      --
     Operating losses of True North Units Held for
      Transfer.....................................      13    2,180    1,309
                                                    -------  -------  -------
     Operating loss................................  (3,334)  (3,281)  (1,250)
     Interest income (expense), net................      29      (76)     --
     Benefit for income taxes......................    (102)    (248)    (548)
                                                    -------  -------  -------
     Net loss...................................... $(3,203) $(3,109) $  (702)
                                                    =======  =======  =======
</TABLE>
 
  The following table sets forth certain items from Modem Media's statements
of operations data as a percentage of total revenues for the periods
indicated:
 
<TABLE>
<CAPTION>
                                                 Year Ended December 31,
                                                 ---------------------------
                                                  1998      1997      1996
                                                 -------   -------   -------
     <S>                                         <C>       <C>       <C>
     Revenues...................................   100.0%    100.0%    100.0%
     Salaries and benefits......................    69.0      62.3      63.2
     Office and general.........................    34.6      35.5      34.0
     Amortization of goodwill...................     4.2       6.5       --
     Operating losses of True North Units Held
      for Transfer..............................     --        8.6      62.5
                                                 -------   -------   -------
     Operating loss.............................    (7.8)    (12.9)    (59.7)
     Interest income (expense), net.............     0.1      (0.3)      --
     Benefit for income taxes...................    (0.2)     (1.0)    (26.2)
                                                 -------   -------   -------
     Net loss...................................    (7.5)%   (12.2)%   (33.5)%
                                                 =======   =======   =======
</TABLE>
 
 
                                      13
<PAGE>
 
 Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
 
  Revenues. Revenues increased $17.0 million, or 66.7%, to $42.5 million for
the year ended December 31, 1998 from $25.5 million for the year ended
December 31, 1997. Revenues increased $6.8 million, or 26.7%, due to the
addition of the revenues of the strategic interactive marketing operations of
Poppe Tyson as a result of the combination of those operations with Modem
Media, and also as a result of increased services provided to existing clients
and the addition of new clients. See Note 1 of Notes to Consolidated Financial
Statements of Modem Media . Poppe Tyson, Inc. and Subsidiaries.
 
  Salaries and Benefits. Salaries and benefits increased $13.5 million, or
84.9%, to $29.4 million for the year ended December 31, 1998 from $15.9
million for the year ended December 31, 1997. Salaries and benefits
represented 69.0% and 62.3% of revenues for the years ended December 31, 1998
and 1997, respectively. The dollar and percentage increases in salaries and
benefits are attributable to a company-wide increase in headcount, partially
as a result of the combination of Modem Media and the strategic interactive
marketing operations of Poppe Tyson.
 
  Office and General. Office and general increased $5.7 million, or 63.3%, to
$14.7 million for the year ended December 31, 1998 from $9.0 million for the
year ended December 31, 1997. Office and general represented 34.6% and 35.5%
of revenues for the years ended December 31, 1998 and 1997, respectively. The
dollar increase in office and general was due primarily to the addition of
office and general expenses of the strategic interactive marketing operations
of Poppe Tyson as a result of the combination of these operations with Modem
Media ($3.1 million, or 34.4%), as well as increased occupancy and office
support incurred in connection with increases in headcount. The decrease in
office and general as a percentage of revenue is due primarily to a higher
rate of revenue growth than the rate of growth in office and general.
 
  Amortization of Goodwill. Pro forma amortization of goodwill increased by
$0.1 million, or 5.9%, to $1.8 million for the year ended December 31, 1998
from $1.7 million for the year ended December 31, 1997, as a result of the
payment of $3.3 million in additional purchase price for the Modem Partnership
in May 1998. Goodwill resulted from the Modem Partnership Combination and is
being amortized by Modem Media over a 20-year period. In connection with the
Modem Partnership Combination, True North was obligated to pay the former
owners of the Modem Partnership an aggregate of up to $18.5 million as
additional consideration upon consummation of an initial public offering of
Modem Media's equity securities. In connection with the completion of such
offering in February 1999, True North paid the additional consideration to the
former owners of the Modem Partnership thereby resulting in a corresponding
increase in goodwill recorded on the books of Modem Media. Such increase will
result in additional amortization of goodwill by Modem Media of approximately
$1.0 million per year over the next 18 years.
 
  Operating Losses of True North Units Held for Transfer. The operating losses
of the non-strategic digital interactive businesses that Modem Media sold back
to True North effective October 1, 1998, shown on the face of the financial
statements as "Operating Losses of True North Units Held for Transfer,"
decreased to breakeven during the nine months ended September 30, 1998 (the
period prior to their sale to True North) from operating losses of $2.2
million during the year ended December 31, 1997, principally due to the
closure of one office and overhead reductions at other locations.
 
  Income Taxes. Modem Media had a benefit for income taxes of $0.1 million on
pre-tax losses of $3.3 million for the year ended December 31, 1998, as
compared to a benefit for income taxes of $0.2 million on a pre-tax loss of
$3.4 million for the year ended December 31, 1997. The effective income tax
benefit rates were 3.1% and 7.4% for the years ended December 31, 1998 and
1997, respectively. The effective tax rates differ from the federal statutory
rate primarily due to the effect of non-deductible goodwill amortization, the
tax effects of the non-strategic digital interactive marketing operations that
Modem Media sold back to True North effective October 1, 1998, and, in 1998,
losses of foreign subsidiaries on which Modem Media did not recognize a tax
benefit.
 
 
                                      14
<PAGE>
 
 Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
 
  Revenues. Revenues increased by $23.4 million to $25.5 million for the year
ended December 31, 1997 from $2.1 million for the year ended December 31,
1996. The increase in revenues between 1997 and 1996 resulted principally from
the Modem Partnership Combination, which was accounted for under the purchase
method.
 
  Salaries and Benefits. Salaries and benefits increased $14.6 million to
$15.9 million for the year ended December 31, 1997 from $1.3 million for the
year ended December 31, 1996. As a percentage of revenues, salaries and
benefits decreased to 62.3% in 1997 from 63.2% in 1996. The overall increase
in salaries and benefits was primarily due to the addition of the Modem
Partnership salaries and benefits as a result of the Modem Partnership
Combination. The decrease in salaries and benefits as a percentage of revenue
was due primarily to higher percentage revenue growth rates compared to
salaries and benefits growth rates.
 
  Office and General. Office and general increased $8.3 million to $9.0
million for the year ended December 31, 1997 from $0.7 million for the year
ended December 31, 1996. As a percentage of revenues, office and general was
35.5% and 34.0% in 1997 and 1996, respectively. The overall increase in office
and general was due to the addition of the Modem Partnership office and
general as a result of the Modem Partnership Combination.
 
  Amortization of Goodwill. Amortization of goodwill increased to $1.7 million
for the year ended December 31, 1997 from zero for the year ended December 31,
1996. Goodwill resulted from the Modem Partnership Combination and is being
amortized over a 20-year period.
 
  Operating Losses of True North Units Held for Transfer. The operating losses
of the non-strategic digital interactive marketing operations that Modem Media
sold back to True North effective October 1, 1998, shown on the face of the
financial statements as "Operating Losses of True North Units Held for
Transfer," increased $0.9 million, or 69.2%, to $2.2 million for the year
ended December 31, 1997 from $1.3 million for the year ended December 31,
1996.
 
  Income Taxes. Modem Media's benefit for income taxes decreased by $0.3
million to a benefit of $0.2 million on pre-tax losses of $3.4 million for the
year ended December 31, 1997 from a benefit of $0.5 million on pre-tax losses
of $1.3 million for the year ended December 31, 1996. The effective income tax
benefit rate was 7.4% and 43.8% in 1997 and 1996, respectively. These rates
differ from the federal statutory rate primarily due to the effect of non-
deductible goodwill amortization.
 
Liquidity and Capital Resources
 
  Modem Media historically has financed its operations primarily from funds
generated from operations and borrowings from True North. At December 31,
1998, Modem Media had a non-interest bearing intercompany note payable to True
North of $6.0 million, which was repaid in February 1999 from the net proceeds
of Modem Media's initial public offering. Pursuant to agreements between True
North and its lenders, Modem Media is subject to limitations on indebtedness
that could adversely affect Modem Media's ability to secure debt financing in
the future.
 
  Net cash provided by (used in) operating activities was $6.3 million, $6.4
million and $(3.7) million for the years ended December 31, 1998, 1997 and
1996, respectively. The investment in working capital was partially offset by
depreciation expense and goodwill amortization, which totaled $3.6 million and
$2.9 million for the years ended December 31, 1998 and 1997, respectively.
 
  Net cash (used in) investing activities was $(4.1) million and $(1.2)
million for the years ended December 31, 1998 and 1997, respectively. Net cash
of $2.6 million was provided by investing activities for the year ended
December 31, 1996 due to the acquisition of the Modem Partnership's cash via
the Modem Partnership Combination. Investing activities reflect capital
expenditures to purchase and install enterprise software in 1998, and to
purchase other computer software, computer hardware, furniture and office
equipment in all periods.
 
                                      15
<PAGE>
 
  Net cash (used in) provided by financing activities was $(1.4) million,
$(0.9) million and $3.8 million for the years ended December 31, 1998, 1997
and 1996, respectively. The primary source of cash flows from financing
activities was borrowings from True North of $0.7 million and $5.4 million for
the years ended December 31, 1997 and 1996, respectively.
 
  Modem Media's short-term capital commitments include 1999 lease payments
aggregating approximately $3.2 million, payments to settle intercompany
payables of $1.2 million made in the first quarter of 1999 and payments of
approximately $0.5 million to complete a new financial accounting system. The
long-term capital needs of Modem Media will depend on numerous factors,
including the rates at which Modem Media is able to obtain new business from
clients and expand its personnel and infrastructure to accommodate growth, as
well as the rate at which it chooses to invest in new technologies. Modem
Media has ongoing needs for capital, including working capital for operations,
project development costs and capital expenditures to maintain and expand its
operations.
 
  In August 1998, True North extended a credit facility to Modem Media
allowing for revolving borrowings in the amount of up to $3.0 million to be
outstanding at any given time. The credit facility with True North expires two
years from the date of completion of Modem Media's February 1999 initial
public offering, or upon 60 days advance notice if True North's voting control
in Modem Media falls below 50% of total voting power.
 
  Modem Media believes that the net proceeds of $42.1 million from its initial
public offering, together with funds available from operations, if any, will
be sufficient to meet its capital needs for at least the next twelve months. A
portion of the net proceeds from this offering may also be used to acquire or
invest in complementary marketing communications companies, services, products
or technologies, or to invest in geographic expansion. Modem Media has no
agreements or commitments with respect to any such transactions.
 
Year 2000 Compliance
 
  Modem Media has completed an assessment of its non-information technology
systems, and believes based on that assessment that these systems do not
contain any elements that are susceptible to Year 2000 problems. Based on
recent assessments of its information technology systems, however, Modem Media
has determined that it will be required to modify or replace some portions of
its information processing systems in order to ensure that those systems are
Year 2000 compliant. Modem Media intends to replace these systems in 1999, and
does not believe that the cost of replacement will be material. As a result,
Modem Media believes that its internal computer systems will properly utilize
dates beyond December 31, 1999. If, in the worst case scenario, such
replacement is not made, or is not completed on a timely basis, the Year 2000
issue could have a material impact on the operations of Modem Media.
 
  Modem Media regularly conducts transactions and performs services that
interface directly with systems of its clients. Modem Media has not undertaken
to confirm that its clients' systems are Year 2000 compliant. In the worst
case scenario, the inability of a substantial number of Modem Media's clients
to complete their Year 2000 compliance could cause them to substantially
reduce their spending on interactive marketing programs.
 
  Furthermore, there can be no assurance that Modem Media's suppliers will not
experience material business disruptions as a result of the Year 2000 issue
that could affect Modem Media. In this regard, Modem Media has asked each of
its third-party suppliers to confirm that they are Year 2000 compliant.
Substantially all of Modem Media's third-party suppliers have indicated that
they expect to be Year 2000 compliant by the Year 2000 based on their progress
to date, and a majority have indicated that their Year 2000 compliance
programs have already been completed. However, in the worst case scenario, a
substantial number of third parties could be unable to complete their Year
2000 resolution process, causing significant disruptions in Modem Media's
ability to provide services to its clients.
 
  In addition, True North has agreed to provide legal, tax preparation,
insurance, treasury, financing and debt and lease guaranty services to Modem
Media. Modem Media does not believe that any Year 2000 problems
 
                                      16
<PAGE>
 
experienced by True North would have a material effect on True North's ability
to provide these services to Modem Media, for the following reasons:
 
  .  True North's ability to provide these services is based for the most
     part on the availability of its personnel, rather than the integrity of
     its systems;
 
  .The use of these systems by True North personnel is generally incidental
  to the service provided; and
 
  .The systems used generally consist of off-the-shelf software that is
  readily replaceable.
 
  Modem Media has not established contingency plans in case of failure of its
information technology systems since it expects to have its material systems
in place by the second quarter of 1999. In connection with Modem Media's
assessment of third party readiness in early 1999, Modem Media will evaluate
the necessity of contingency plans based on the level of uncertainty regarding
such compliance. In the event Modem Media's clients, intermediaries or vendors
do not expect to be Year 2000 compliant, Modem Media's contingency plan may
include replacing such intermediaries or vendors or conducting the particular
operation itself.
 
  In order to keep pace with the growth and expansion of its business, Modem
Media decided in 1997 to replace its existing financial accounting system and
is currently in the process of doing so. Under the purchase agreement, the
system provider has given Modem Media a two-year limited warranty that the
replacement financial accounting system will be Year 2000 compliant.
 
Recently Issued Accounting Pronouncements
 
  Segment Disclosures. In June 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 131,
Disclosure About Segments of an Enterprise and Related Information, which is
effective for fiscal years beginning after December 15, 1997. SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports. The statement also establishes
standards for related disclosure about products and services, geographic areas
and major customers. In accordance with SFAS No. 131, the Company has adopted
the new requirements retroactively in these notes to its consolidated
financial statements.
 
  Derivative Instruments. In June 1998, the FASB issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument, including certain derivative instruments embedded in other
contracts, be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. Management believes that the implementation of
SFAS No. 133 will not have a material impact on Modem Media's earnings.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
  The Company's consolidated financial statements are denominated in U.S.
dollars. In 1998, the Company derived approximately 12.2% of its revenues from
operations outside of the United States. Currency fluctuations may give rise
to translation gains and losses when financial statements of foreign operating
units are translated into U.S. dollars. Significant strengthening of the U.S.
dollar against major foreign currencies could have an adverse impact on the
Company's results of operations. In general, the Company incurs most of its
costs to support the related revenues in the same currency in which these
revenues are billed, thereby reducing exposure to currency fluctuations.
Currently, the Company does not hedge foreign currency transactions into U.S.
dollars because management believes that, over time, the cost of a hedging
program will outweigh any benefit of greater predictability in the Company's
U.S.-dollar denominated results. However, as the Company continues to extend
the depth and breadth of its foreign operations, management will, from time-
to-time, reconsider the issue of whether a foreign currency hedging program
would be beneficial to its operations.
 
                                      17
<PAGE>
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
   See Financial Statements commencing on page F-1 hereof.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE
 
   None
 
                                   PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
Executive Officers and Directors
 
  The following table sets forth certain information with respect to the
executive officers and directors of Modem Media as of December 31, 1998:
 
<TABLE>
<CAPTION>
   Name                                Age Position(s)
   ----                                --- ----------
   <S>                                 <C> <C>
   Gerald M. O'Connell................  37 Chief Executive Officer and Director
   Douglas C. Ahlers..................  38 Executive Vice President
   Robert C. Allen, II................  31 President and Director
   Steven C. Roberts..................  37 Chief Financial Officer
   Donald M. Elliman, Jr..............  53 Director
   Donald L. Seeley...................  55 Director
   Theodore J. Theophilos.............  45 Director
</TABLE>
 
  Gerald M. O'Connell has served as Chief Executive Officer and a director of
Modem Media since November 1998. From October 1996 to November 1998, Mr.
O'Connell was President and Chief Operating Officer and a director of Modem
Media. From 1987 to October 1996, Mr. O'Connell was a Managing Partner of the
Modem Partnership, which he co-founded in 1987. From 1986 to 1987, Mr.
O'Connell was Product Manager of CUC International, a consumer services
company, where he was responsible for Comp-u-Mall, an electronic shopping
mall. Mr. O'Connell received a B.A. in English and History from Middlebury
College. Mr. O'Connell is a director of the Direct Marketing Association.
 
  Douglas C. Ahlers has served as Executive Vice President of Modem Media
since November 1998. From October 1996 to November 1998, Mr. Ahlers was
President of the Relationship Technology Group, a division of Modem Media, and
a director of Modem Media. From 1987 to October 1996, Mr. Ahlers was a
Managing Partner of the Modem Partnership, which he co-founded in 1987. From
1983 to 1987, Mr. Ahlers served as Manager of Product Development of CUC
International, a consumer services company. Mr. Ahlers received a B.A. in
Sociology and Theater from the University of Rhode Island and an M.J. in
Journalism and Communications from Louisiana State University.
 
  Robert C. Allen, II has served as President and a director of Modem Media
since November 1998. From October 1996 to November 1998, Mr. Allen was
President of a division of Modem Media and a director of Modem Media. From
1992 to October 1996, Mr. Allen served as a Managing Partner of the Modem
Partnership. From 1989 to 1992, Mr. Allen was the Director of Business
Development at the Modem Partnership. Mr. Allen received a B.A. in English
from Gettysburg College.
 
  Steven C. Roberts has served as Chief Financial Officer of Modem Media since
August 1998. From January 1997 to August 1998, Mr. Roberts served in various
capacities with Modem Media, most recently as Vice President, Finance and
International Operations. From 1990 to January 1997, Mr. Roberts held various
management positions at a number of subsidiaries of United Technologies. From
1984 to 1989, Mr. Roberts served as Second Vice President of Corporate Finance
at Continental Bank. Mr. Roberts holds a B.A. in Economics from Middlebury
College and an M.B.A. in Finance and Production from the University of
Chicago.
 
                                      18
<PAGE>
 
  Donald L. Seeley has been a director of Modem Media since November 1998 and
has been Executive Vice President, Chief Financial Officer, of True North
since 1997. From 1993 to 1997, Mr. Seeley was Chief Executive Officer of the
Alexander Consulting Group. From 1988 to 1993, Mr. Seeley was Senior Vice
President of Alexander & Alexander Services Inc., the parent company of the
Alexander Consulting Group. From 1986 to 1988, Mr. Seeley was Vice President
and Treasurer of United Airlines. Mr. Seeley holds a B.S. in Accounting and an
M.B.A. from the University of Colorado at Boulder, and is a Chartered
Financial Analyst.
 
  Theodore J. Theophilos has been a director of Modem Media since November
1998 and has been Executive Vice President of Corporate Development and
Business Affairs of True North since May 1998. Mr. Theophilos also served True
North as Executive Vice President, General Counsel from October 1996 to May
1998. From 1995 to 1996, Mr. Theophilos was Senior Vice President and General
Counsel of A.C. Nielsen Company, and from 1986 to 1995 was a partner of Sidley
& Austin (a law firm). Mr. Theophilos holds a B.A. and an M.A. from
Northwestern University and a J.D. from the University of Chicago.
 
  Donald M. Elliman, Jr. has served as a director of Modem Media since
November 1998, as a director of True North since May 1998 and as a director of
Bozell since 1991. Mr. Elliman is currently an Executive Vice President and
director of Time Inc. Mr. Elliman was the President of Sports Illustrated from
September 1992 through January 1998 and has held various senior
sales/marketing and publishing positions with Time Inc. since 1967.
 
  Messrs. O'Connell and Allen were elected to the Board of Directors of Modem
Media pursuant to an agreement with True North entered into in connection with
the formation of Modem Media in December 1996. Modem Media and True North
agreed in 1996 to cause each of Messrs. O'Connell and Allen to be elected to
Modem Media's Board of Directors as long as each serves as an executive
officer of Modem Media and until their collective ownership of Modem Media's
Class A common stock falls below certain levels.
 
  Each officer serves at the discretion of Modem Media's Board of Directors.
There are no family relationships among any of the directors or officers of
Modem Media.
 
  Modem Media's Board of Directors currently has two vacancies, which Modem
Media's Bylaws authorize the Board of Directors to fill. The Board of
Directors intends to appoint two persons who are not officers or employees of
Modem Media or True North to the Board of Directors during the second quarter
of 1999 and is required to do so to maintain Modem Media's listing on the
Nasdaq National Market. If Modem Media does not add such independent
directors, Modem Media could be delisted from the Nasdaq National Market,
which could have an adverse effect on the liquidity and price of the Class A
common stock.
 
Director Compensation
 
  Modem Media directors who are not also employees of Modem Media or True
North will be paid an annual retainer of $10,000. Directors who are also
employees of Modem Media or True North will not receive any additional
compensation for serving on the Board of Directors.
 
                                      19
<PAGE>
 
ITEM 11. EXECUTIVE COMPENSATION
 
Executive Compensation and Employment Agreements
 
  The following table sets forth information concerning the compensation
received for services rendered to Modem Media by its current Chief Executive
Officer and each of the other most highly-compensated executive officers of
Modem Media during the year ended December 31, 1998 whose total compensation
in fiscal 1998 equaled or exceeded $100,000:
 
                          SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                                 Annual           Long-Term
                                              Compensation   Compensation Awards
                                            ---------------- -------------------
                                                                 Securities
        Name and Principal Position          Salary   Bonus  Underlying Options
        ---------------------------         -------- ------- -------------------
<S>                                         <C>      <C>     <C>
Gerald M. O'Connell(1)
 Chief Executive Officer................... $300,000 $90,000       142,500
Robert C. Allen, II(2)
 President.................................  300,000  90,000       142,500
Douglas C. Ahlers(3)
 Executive Vice President..................  212,500     --            --
Steven C. Roberts(4)
 Chief Financial Officer...................  174,000  85,000        60,454
</TABLE>
--------
(1) Mr. O'Connell served as President and Chief Operating Officer of Modem
    Media from January through November 1998. In November 1998, Mr. O'Connell
    was appointed Chairman and Chief Executive Officer of Modem Media.
(2) Mr. Allen served as a division president from January through November
    1998. In November 1998, Mr. Allen was appointed President of Modem Media.
(3) Mr. Ahlers served as President, Relationship Technology Group, from
    January through November 1998. In November 1998, Mr. Ahlers was appointed
    Executive Vice President of Modem Media.
(4) Mr. Roberts served as Vice President, Operations, of Modem Media from
    January through August 1998. In August 1998, Mr. Roberts was appointed
    Chief Financial Officer of Modem Media.
 
  The following table sets forth information as to options granted to the
executive officers during the year ended December 31, 1998.
 
                         OPTION GRANTS IN FISCAL 1998
 
<TABLE>
<CAPTION>
                                                                               Potential Realizable Value at
                          Number of    Percent of                              Assumed Annual Rate of Stock
                         Securities       Total                                      Appreciation for
                         Underlying  Options Granted                                  Option Term (3)
                           Options   to Employees in Exercise Price Expiration -----------------------------
          Name           Granted (1)   Fiscal Year    Per Share (2)    Date         5%             10%
          ----           ----------- --------------- -------------- ---------- -----------------------------
<S>                      <C>         <C>             <C>            <C>        <C>           <C>
Gerald M. O'Connell.....   142,500        13.8%          $11.05      12/21/08  $     990,509 $     2,510,144
Robert C. Allen, II.....   142,500        13.8            11.05      12/21/08        990,509       2,510,144
Douglas C. Ahlers.......       --          --               --            --             --              --
Steven C. Roberts.......    12,954         1.3            11.58      01/02/08         94,332         239,055
                            47,500         4.6            11.05      12/21/08        330,170         836,715
</TABLE>
--------
(1)  These options to purchase shares of Class A common stock were granted
     under the TN Technologies, Inc. 1997 Stock Option Plan and provide that
     the options vest as to 20% of the underlying common stock on the date of
     grant and as to an additional 20% per year thereafter.
(2) Options were granted at an exercise price equal to 100% of the fair market
    value of Modem Media's Class A common stock on the date of grant, as
    determined by the Board of Directors.
 
                                      20
<PAGE>
 
(3) This column shows the hypothetical gains or option spreads of the options
    granted based on assumed annual compound stock appreciation rates of 5%
    and 10% over the full ten-year term of the options. The assumed rates of
    appreciation are mandated by the rules of the Securities and Exchange
    Commission and do not represent Modem Media's estimate or projection of
    future common stock prices.
 
  The following table sets forth information with respect to unexercised
options held by the executive officers as of December 31, 1998. No options
were exercised by the executive officers during fiscal 1998.
 
                AGGREGATE STOCK OPTION EXERCISES IN FISCAL 1998
                          AND FISCAL YEAR-END VALUES
 
<TABLE>
<CAPTION>
                               Number of Securities      Value of Unexercised
                              Underlying Unexercised    In-the-Money Options at
                           Options at December 31, 1998   December 31, 1998(1)
                             ------------------------- -------------------------
   Name                      Exercisable Unexercisable Exercisable Unexercisable
   ----                      ----------- ------------- ----------- -------------
   <S>                       <C>         <C>           <C>         <C>
   Gerald M. O'Connell......   43,700       136,800       $--          $--
   Robert C. Allen, II......   43,700       136,800       $--          $--
   Douglas C. Ahlers........   15,200        22,800       $--          $--
   Steven C. Roberts........   21,936        63,131       $--          $--
</TABLE>
--------
(1)  Calculated by determining the difference between the exercise price and
     the deemed fair market value of the securities underlying the options at
     December 31, 1998.
 
  In December 1996, Modem Media entered into five-year employment agreements
with each of Messrs. O'Connell, Ahlers and Allen providing for an initial
annual base salary of $300,000 each, subject to increases at the discretion of
Modem Media's Board of Directors. Messrs. O'Connell and Allen currently
receive base salaries of $300,000 each. In June 1998, Mr. Ahlers' salary was
set at $150,000 per year in connection with his appointment as Executive Vice
President. Pursuant to the employment agreements, if Modem Media terminates
any executive's employment without cause, the executive is entitled to receive
severance benefits equal to salary plus profit-sharing for a period equal to
the lesser of three years after such termination or the time remaining in the
initial term of employment. In addition, each of Messrs. O'Connell, Ahlers and
Allen has agreed to certain confidentiality, non-competition and non-
solicitation provisions.
 
  In December 1996, Modem Media entered into an employment agreement with Mr.
Roberts providing for an initial annual base salary of $150,000. Mr. Roberts
currently receives a base salary of $174,000. Pursuant to the employment
agreement, if Modem Media terminates Mr. Roberts' employment without cause, he
is entitled to receive severance benefits equal to one year's salary. In
addition, Mr. Roberts has agreed to certain confidentiality, non-competition
and non-solicitation provisions.
 
Stock Plans
 
 1997 Stock Option Plan
 
  Modem Media has established a stock option plan pursuant to which a total of
3,040,000 shares of Class A common stock have been reserved for issuance to
provide additional incentive to its employees, officers, directors and
consultants. Pursuant to the stock option plan, Modem Media may grant stock
options and stock purchase rights to Modem Media's employees, officers,
directors and consultants. The Board of Directors, or a committee to whom the
Board has delegated authority (the "Plan Administrator"), selects the
individuals to whom options and stock purchase rights are granted, interprets
and adopts rules for the operation of the stock option plan and specifies the
vesting, exercise price and other terms of options and stock purchase rights.
As of December 31, 1998, options to purchase an aggregate of 2,040,174 shares
of Class A common stock are outstanding, at a weighted-average exercise price
of $11.07 per share. In connection with the removal of the non-strategic
operations originally contributed to Modem Media, True North has agreed to
satisfy up to an aggregate of
 
                                      21
<PAGE>
 
139,555 options held by employees associated with those operations.
Accordingly, upon exercise of such options, the exercise price will be paid to
True North and True North will surrender an equivalent number shares of common
stock to Modem Media. Similarly, True North has agreed to satisfy options to
purchase up to an aggregate of 149,011 shares of common stock held by former
employees of Poppe Tyson.
 
 1999 Employee Stock Purchase Plan
 
  Concurrently with the offering, Modem Media established an Employee Stock
Purchase Plan under which a total of 950,000 shares of Class A common stock
were made available for sale. The purchase plan, which is intended to qualify
as an employee stock purchase plan within the meaning of Section 423 of the
Internal Revenue Code of 1986, as amended, is administered by the Board of
Directors or a committee to whom the Board has delegated authority. Employees
are eligible to participate if they are employed by Modem Media or a
subsidiary of Modem Media designated by the Board for at least 20 hours per
week and for more than five months in any calendar year. The purchase plan
permits eligible employees to purchase Class A common stock through payroll
deductions, which may not exceed 15% of an employee's compensation, subject to
certain limitations.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
  The following table sets forth certain information with respect to the
beneficial ownership of Modem Media's common stock as of December 31, 1998, as
adjusted to reflect the sale of 2,990,000 shares of Class A common stock by
Modem Media through its initial public offering during the first quarter of
1999, by:
 
  .  each person or entity who is known by Modem Media to beneficially own
     five percent or more of the outstanding shares of either class of common
     stock of Modem Media;
 
  .  each director;
 
  .  each executive officer; and
 
  .  all directors and executive officers of Modem Media as a group.
 
<TABLE>
<CAPTION>
                                          Common
                                    Stock Beneficially
                                         Owned(1)       Percent of  Percent of
                                    -------------------   Total       Total
               Name                  Class A   Class B  Ownership  Voting Power
----------------------------------- --------- --------- ---------- ------------
<S>                                 <C>       <C>       <C>        <C>
True North Communications,
 Inc.(2)...........................        -- 5,648,624    51.1%       83.9%
 101 East Erie Street
 Chicago, Illinois 60611
Gerald M. O'Connell(3)(4).......... 1,099,673        --     9.9%        3.3%
Douglas C. Ahlers(3)(5)............ 1,071,174        --     9.7%        3.2%
Robert C. Allen, II(3)(4)..........   319,789        --     2.9%          *
Steven C. Roberts(3)(6)............    26,600        --       *           *
Donald M. Elliman, Jr.(7)..........        -- 5,648,624    51.1%       83.9%
Donald L. Seeley(8)................        -- 5,648,624    51.1%       83.9%
Theodore J. Theophilos(9)..........        -- 5,648,624    51.1%       83.9%
All directors and executive
 officers
 as a group (seven persons)(10).... 2,517,236 5,648,624    73.0%       91.0%
</TABLE>
--------
  * Less than one percent.
 (1) Beneficial ownership is determined in accordance with the rules of the
     Securities and Exchange Commission. In computing the number of shares
     beneficially owned by a person and the percentage ownership of that
     person, shares of Class A common stock subject to options held by that
     person that are
 
                                      22
<PAGE>
 
   currently exercisable or exercisable within 60 days of December 31, 1998
   are deemed outstanding. Such shares, however, are not deemed outstanding
   for the purpose of computing the percentage ownership of any other person.
   Except as indicated in the footnotes to this table and pursuant to
   applicable community property laws, each stockholder named in the table has
   sole voting and investment power with respect to the shares set forth
   opposite such stockholder's name.
 (2) Includes shares of Class B common stock held by various wholly-owned
   subsidiaries of True North.
 (3) The address of each of Messrs. O'Connell, Ahlers, Allen and Roberts is
   c/o Modem Media . Poppe Tyson, Inc., 230 East Avenue, Norwalk, CT 06855.
 (4) Includes 43,700 shares of Class A common stock subject to options that
   are exercisable within 60 days of December 31, 1998.
 (5) Includes 15,200 shares of Class A common stock subject to options that
   are exercisable within 60 days of December 31, 1998.
 (6) Includes 26,600 shares of Class A common stock subject to options that
   are exercisable within 60 days of December 31, 1998.
 (7) Includes 5,648,624 shares of Class B common stock beneficially owned by
   True North and its wholly-owned subsidiaries. Mr. Elliman disclaims
   beneficial ownership of such shares.
 (8) Includes 5,648,624 shares of Class B common stock beneficially owned by
   True North and its wholly-owned subsidiaries. Mr. Seeley disclaims
   beneficial ownership of such shares.
 (9) Includes 5,648,624 shares of Class B common stock beneficially owned by
     True North and its wholly-owned subsidiaries. Mr. Theophilos disclaims
     beneficial ownership of such shares.
(10) Includes an aggregate of 129,200 shares of Class A common stock subject
     to options held by directors and executive officers of Modem Media, which
     are exercisable within 60 days of December 31, 1998.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
Relationship with True North
 
  After taking into consideration Modem Media's February 1999 initial public
offering and the March 1999 exercise of the underwriters' over-allotment
option granted in connection therewith, True North owns approximately 51.1% of
the common stock outstanding, representing 83.9% of the total voting power of
Modem Media. As long as True North controls a majority of the voting power of
Modem Media, it will be able, acting alone, to:
 
  .  elect at least a majority of the Board of Directors of Modem Media;
 
  .  amend Modem Media's Certificate of Incorporation or effect a merger,
     sale of assets or other major corporate transaction;
 
  .  defeat any non-negotiated takeover attempt;
 
  .  determine the amount and timing of dividends paid to itself and to
     holders of Class A common stock; and
 
  .  otherwise control the management and operations of Modem Media and the
     outcome of most matters submitted for a stockholder vote.
 
  Currently, two of the five directors of Modem Media (Messrs. Seeley and
Theophilos) are also members of management of True North, and are compensated
by True North in connection with their employment by True North. In addition,
one of the other current directors of Modem Media (Mr. Elliman) is a director
of True North and was selected by True North. These directors may have
conflicts of interest in addressing certain business opportunities and
strategies in circumstances where Modem Media's and True North's interests
differ. Modem Media has not adopted any formal plan or arrangement to address
such potential conflicts of interest.
 
The Modem Partnership Combination
 
  Prior to 1996, True North provided limited digital interactive marketing
services through its Northern Lights Interactive division to a number of its
traditional advertising clients. In 1996, True North decided that it might
 
                                      23
<PAGE>
 
be possible to maximize stockholder value of True North by establishing a
separate subsidiary to operate its digital interactive marketing businesses.
At the same time, True North began to consider the acquisition of other
complementary digital interactive marketing companies and began to consider
the potential public offering of stock of the subsidiary. True North formed
Modem Media in October 1996 to acquire the Modem Partnership from Gerald M.
O'Connell, Modem Media's current Chairman and Chief Executive Officer, Douglas
C. Ahlers, Modem Media's current Executive Vice President, Robert C. Allen,
II, Modem Media's current President, and one other unaffiliated owner (the
"Limited Partners") and to consolidate True North's digital interactive
marketing operations. Accordingly, in December 1996, True North sold to Modem
Media its digital interactive marketing operations and its technology
development operations. In connection with the acquisition by True North of
the Modem Partnership and the sale to Modem Media of True North's digital
interactive marketing operations, True North and the Limited Partners received
the following consideration:
 
 True North
 
  .  5,648,624 shares of Class B common stock of Modem Media.
 
 Limited Partners
 
  .  an aggregate of 2,415,646 shares of Class A common stock of Modem Media;
 
  .  $24.4 million of common stock of True North; and
 
  .  an additional $4.0 million of common stock of True North and up to $19.0
     million cash from True North upon consummation of an initial public
     offering of Modem Media, which subsequently occurred in February 1999.
 
  In accordance with EITF 90-13, "Accounting for Simultaneous Common Control
Mergers," the valuation of the 64% interest in the Modem Partnership acquired
by True North is stated at fair value in the consolidated financial statements
of Modem Media included elsewhere in this Annual Report on Form 10-K. The
assets and liabilities of the True North digital interactive marketing
operations and the 36% interest in the Modem Partnership not acquired by True
North are reflected at historical costs.
 
The Combination and Related Transactions
 
  As part of True North's decision to reorganize its interactive marketing
operations by centralizing them in Modem Media, True North decided to combine
the strategic interactive marketing operations then being conducted by Poppe
Tyson with the operations of its Northern Lights Interactive division and the
Modem Partnership. At the same time, True North decided to reacquire from
Modem Media businesses originally contributed to Modem Media that were not
complementary to the combined businesses. Accordingly, Modem Media completed
the following transactions effective as of October 1, 1998:
 
  .  Poppe Tyson formed a wholly-owned subsidiary ("Poppe Tyson Operations
     Holding Company") and contributed fixed assets of $1.6 million and the
     strategic interactive marketing operations of Poppe Tyson, including
     client relationships and related accounts receivable in the United
     States and interactive agencies in the United Kingdom and Hong Kong, to
     Poppe Tyson Operations Holding Company.
 
  .  Bozell forgave approximately $5,763,000 of intercompany indebtedness
     owed to Bozell by the strategic interactive marketing operations of
     Poppe Tyson.
 
  .  Poppe Tyson declared a dividend of all the outstanding capital stock of
     Poppe Tyson Operations Holding Company to Bozell, which in turn declared
     a dividend of all the outstanding capital stock of Poppe Tyson
     Operations Holding Company to True North, so that Poppe Tyson Operations
     Holding Company became a direct, wholly-owned subsidiary of True North.
 
  .  Poppe Tyson Operations Holding Company was merged with and into Modem
     Media, with Modem Media succeeding to all the business and operations of
     Poppe Tyson Operations Holding Company. In
 
                                      24
<PAGE>
 
     exchange, Modem Media granted True North the right to receive 1,666,288
     shares of Class B common stock of Modem Media.
 
  .  Assets and liabilities related to non-strategic digital interactive
     marketing operations that were originally contributed by True North to
     Modem Media in connection with the Modem Partnership Combination were
     returned by Modem Media to True North and its affiliates. In exchange,
     True North agreed to surrender to Modem Media 856,774 shares of Class B
     common stock of Modem Media previously held by True North and its
     affiliates.
 
  These transactions have been accounted for at historical costs, as they
occurred between commonly controlled entities.
 
Intercompany Agreements
 
  In the normal course of business, Modem Media and True North have from time-
to-time entered into various business transactions and agreements, and they
may enter into additional transactions in the future. The following is a
summary of each of the material agreements that Modem Media and True North
have entered into in connection with the combination of Modem Media and the
strategic interactive marketing operations of Poppe Tyson. Such summaries are
qualified in their entirety by those agreements, which are incorporated by
reference in this Annual Report on Form 10-K.
 
  Administrative Services Agreement. Under an Administrative Services
Agreement, True North will perform various administrative functions and
provide other services to Modem Media, including tax preparation, insurance,
treasury consulting and legal. During the period in which True North performs
administrative functions for Modem Media, expenses associated with such
functions will be charged to Modem Media based on rates and estimates set
forth on schedules attached to the Administrative Service Agreement. Modem
Media may terminate this agreement at any time upon 90 days' prior written
notice, and True North may terminate the agreement 12 months following the
combination of Modem Media and the strategic interactive marketing operations
of Poppe Tyson, but must give 180 days' written notice of such intent to
terminate.
 
  Intercompany Credit Arrangements. Modem Media and True North are parties to
certain intercompany credit agreements. In August 1998, True North extended a
credit facility to Modem Media allowing for revolving borrowings in the amount
of up to $3.0 million to be outstanding at any given time at an interest rate
equal to True North's cost of borrowings, plus two percent. In addition, True
North has agreed at its discretion to provide guarantees for Modem Media
borrowings from time-to-time in exchange for a fee of 0.5% per annum on the
amount guaranteed. The credit facility with True North expires two years from
the date of completion of the initial public offering, or upon 60 days advance
notice if True North's voting control in Modem Media falls below 50% of total
voting power. Modem Media provides advances to True North under an
Intercompany Demand Note from time-to-time upon True North's request and at
Modem Media's discretion. Such advances are due on demand and bear interest at
5.75% per annum. At December 31, 1998, an aggregate of $4.5 million was
outstanding under such advances. In February 1999, True North paid all amounts
outstanding under this note.
 
  Sublease with Bozell. Modem Media has entered into a sublease with Bozell
pursuant to which Modem Media will lease office space in New York City. The
rent per square foot under the sublease agreement is based on the average
monthly rent per square foot and other related costs under Bozell's underlying
lease.
 
  Brazil Affiliation Agreement. Modem Media has entered into an agreement with
Bozell pursuant to which Bozell has agreed, for a period of two years, to
provide services to Modem Media's clients through its office in Sao Paolo,
Brazil as requested by Modem Media. In return, Modem Media has granted a
license to Bozell to operate its office in Brazil under the name "Modem Media
 . Poppe Tyson, Inc." during the same period.
 
  Tax Matters Agreement. In connection with the transactions consummated
effective October 1, 1998, Modem Media and True North intend to enter into an
agreement providing for unitary state tax-sharing arrangements.
 
                                      25
<PAGE>
 
  Parent Company Guarantees. Commencing on July 1, 1998, True North has
guaranteed payment on behalf of Modem Media under operating and other leases
at a fee of 0.5% of the amount guaranteed.
 
  Management believes that all of the transactions set forth above were made
on terms equivalent to those that Modem Media could have obtained from
unaffiliated third parties. All future transactions, including loans, between
Modem Media and its officers, directors and principal stockholders and their
affiliates will be approved by a majority of the Board of Directors, including
a majority of the independent and disinterested directors of the Board, and
will be on terms equivalent to those that Modem Media could obtain from
unaffiliated third parties.
 
                                      26
<PAGE>
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
 
  (a)The following documents are filed as part of this Annual Report on Form
10-K:
 
    1.Financial Statements
 
      Modem Media . Poppe Tyson, Inc. and Subsidiaries
 
      Report of Independent Public Accountants
      Consolidated Balance Sheets as of December 31, 1998 and 1997
      Consolidated Statements of Operations for the years ended December
      31, 1998, 1997 and 1996
      Consolidated Statements of Changes in Stockholders' Equity for the
      years ended
       December 31, 1998, 1997 and 1996
      Consolidated Statements of Cash Flows for the years ended December
      31, 1998, 1997 and 1996
      Notes to Consolidated Financial Statements
 
      Modem Media Advertising Limited Partnership
 
      Report of Independent Public Accountants
      Balance Sheet as of December 31, 1996
      Statement of Income for the year ended December 31, 1996
      Statement of Partners' Capital for the year ended December 31, 1996
      Statement of Cash Flows for the year ended December 31, 1996
      Notes to Financial Statements
 
      Poppe Tyson Strategic Interactive Marketing Operations
 
      Report of Independent Public Accountants
      Balance Sheets as of December 31, 1997 and 1996
      Statements of Operations for the years ended December 31, 1997 and
      1996
      Statements of Changes in Equity (Deficit) for the years ended
      December 31, 1997 and 1996
      Statements of Cash Flows for the years ended December 31, 1997 and
      1996
      Notes to Financial Statements
 
    2.Financial Statement Schedules
 
      All schedules have been omitted since the required information is
      not present in amounts sufficient to require submission of the
      schedule, or because the information required is included in the
      consolidated financial statements or notes thereto.
 
    3.Exhibits
 
      See list of Exhibits set forth in paragraph (c) below.
 
      The following management contracts or compensatory plans and
      arrangements are required to be filed as exhibits to this Annual
      Report on Form 10-K pursuant to Item 14(c).
 
<TABLE>
       <C>      <S>
       10.5(a)* Amended and Restated Employment Agreement between Registrant
                and Gerald M. O'Connell, dated as of January 1, 1997, as
                amended and restated as of November 25, 1998.
       10.5(b)* Amended and Restated Employment Agreement between Registrant
                and Douglas C. Ahlers, dated as of January 1, 1997, as amended
                and restated as of June 1, 1998.
       10.5(c)* Amended and Restated Employment Agreement between Registrant
                and Robert C. Allen, II, dated as of January 1, 1997, as
                amended and restated as of November 25, 1998.
</TABLE>
 
                                      27
<PAGE>
 
<TABLE>
       <C>      <S>
       10.6(a)* Covenant Not to Compete or Solicit Business between Registrant
                and Gerald M. O'Connell, dated as of December 31, 1996.
       10.6(b)* Covenant Not to Compete or Solicit Business between Registrant
                and Douglas C. Ahlers, dated as of December 31, 1996.
       10.6(c)* Covenant Not to Compete or Solicit Business between Registrant
                and Robert C. Allen, II, dated as of December 31, 1996.
       10.7(a)* Letter Agreement between Registrant and Steven C. Roberts dated
                December 2, 1996.
       10.7(b)* Noncompetition, Confidentiality and Proprietary Rights
                Agreement between Steven C. Roberts and the Registrant.
       10.8*    Form of Indemnification Agreement.
       10.9*    1997 Stock Option Plan, as amended.
       10.10*   1999 Employee Stock Purchase Plan.
</TABLE>
--------
* Previously filed together with the Registrant's Registration Statement on
  Form S-1 (File No. 333-68057) dated February 4, 1999, and incorporated
  herein by reference.
 
  (b)The Company filed no reports on Form 8-K during the fiscal year ended
   December 31, 1998.
 
  (c) Exhibits
 
<TABLE>
<CAPTION>
 Exhibit
   No.                                 Description
 -------- ---------------------------------------------------------------------
 <C>      <S>
 3.1*     Form of Certificate of Incorporation of Registrant.
 3.2*     Form of Bylaws of Registrant.
 4.1*     Form of Registrant's Class A common stock certificate.
 10.1(a)* Form of Administrative Services Agreement between Registrant and True
          North Communications Inc.
 10.1(b)* Form of Intercompany Credit Agreement between the Registrant and True
          North Communications Inc.
 10.1(c)* Form of Asset Purchase Agreement by and between the Registrant and
          True North Communications Inc. dated February 2, 1999.
 10.1(d)* Form of Asset Purchase Agreement by and between the Registrant and
          R/GA Media Group, Inc. dated February 2, 1999.
 10.1(e)* Form of Agreement and Plan of Merger Among True North Communications
          Inc., PT Controlled, Inc., the Registrant and each of Douglas C.
          Ahlers, Robert C. Allen, II, Gerald M. O'Connell and Kraft
          Enterprises, Ltd. dated February 2, 1999.
 10.2*    Intercompany Demand Note dated November 24, 1998 issued by True North
          Communications Inc. to the Registrant.
 10.3*    Form of Affiliate Agreement between the Registrant and Modem Media .
          Poppe Tyson do Brasil Ltda.
 10.4*    Sublease Agreement between the Registrant and Bozell, Jacobs, Kenyon
          & Eckhardt, Inc., dated August 1, 1998.
 10.5(a)* Amended and Restated Employment Agreement between Registrant and
          Gerald M. O'Connell, dated as of January 1, 1997, as amended and
          restated as of November 25, 1998.
 10.5(b)* Amended and Restated Employment Agreement between Registrant and
          Douglas C. Ahlers, dated as of January 1, 1997, as amended and
          restated as of June 1, 1998.
</TABLE>
 
                                      28
<PAGE>
 
<TABLE>
<CAPTION>
 Exhibit
   No.                                Description
 -------- ------------------------------------------------------------------
 <C>      <S>
 10.5(c)* Amended and Restated Employment Agreement between Registrant and
          Robert C. Allen, II, dated as of January 1, 1997, as amended and
          restated as of November 25, 1998.
 10.6(a)* Covenant Not to Compete or Solicit Business between Registrant and
          Gerald M. O'Connell, dated as of December 31, 1996.
 10.6(b)* Covenant Not to Compete or Solicit Business between Registrant and
          Douglas C. Ahlers, dated as of December 31, 1996.
 10.6(c)* Covenant Not to Compete or Solicit Business between Registrant and
          Robert C. Allen, II, dated as of December 31, 1996.
 10.7(a)* Letter Agreement between Registrant and Steven C. Roberts dated
          December 2, 1996.
 10.7(b)* Noncompetition, Confidentiality and Proprietary Rights Agreement
          between Steven C. Roberts and the Registrant.
 10.8*    Form of Indemnification Agreement.
 10.9*    1997 Stock Option Plan, as amended.
 10.10*   1999 Employee Stock Purchase Plan.
 10.11*+  Interactive Advertising/Marketing Agreement by and between the
          Registrant and AT&T Corp., dated as of December 1, 1995.
 21.1*    List of subsidiaries.
 23.2     Consent of Arthur Andersen LLP, Independent Public Accountants.
 24.1     Power of Attorney (included on signature page).
 27.1     Financial Data Schedule.
</TABLE>
--------
* Previously filed together with the Registrant's Registration Statement on
  Form S-1 (File No. 333-68057) dated February 4, 1999, and incorporated
  herein by reference.
+ Modem Media was granted confidential treatment by the Commission for
  portions of this document.
 
                                      29
<PAGE>
 
                                  SIGNATURES
 
  Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Norwalk, State of Connecticut, on this 30th day of March, 1999.
 
                                          Modem Media . Poppe Tyson, Inc.
 
                                                    Gerald M. O'Connell
                                          By___________________________________
                                                 Gerald M. O'Connell Chief
                                               Executive Officer (Principal
                                                    Executive Officer)
 
                               POWER OF ATTORNEY
 
  Each person whose signature appears below constitutes and appoints Gerald M.
O'Connell and Steven C. Roberts, and each of them, as attorneys-in-fact, each
with the power of substitution, for him or her in any and all capacities, to
sign any amendments to this report, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting to said attorneys-in-fact, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact or either of them, or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
 
  Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated:
 
             Signatures                        Title                 Date
 
       /s/ Gerald M. O'Connell         Chief Executive          March 30, 1999
-------------------------------------   Officer and
         Gerald M. O'Connell            Director (Principal
                                        Executive Officer)
 
        /s/ Steven C. Roberts          Chief Financial          March 30, 1999
-------------------------------------   Officer (Principal
          Steven C. Roberts             Financial and
                                        Accounting Officer)
 
       /s/ Robert C. Allen, II         Director                 March 30, 1999
-------------------------------------
         Robert C. Allen, II
 
     /s/ Donald M. Elliman, Jr.        Director                 March 30, 1999
-------------------------------------
       Donald M. Elliman, Jr.
 
        /s/ Donald L. Seeley           Director                 March 30, 1999
-------------------------------------
          Donald L. Seeley
 
     /s/ Theodore J. Theophilos        Director                 March 30, 1999
-------------------------------------
       Theodore J. Theophilos
 
                                      30
<PAGE>
 
                         INDEX TO FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
<S>                                                                        <C>
Modem Media . Poppe Tyson, Inc. and Subsidiaries
Report of Independent Public Accountants.................................   F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997.............   F-3
Consolidated Statements of Operations for the years ended December 31,
 1998, 1997 and 1996.....................................................   F-4
Consolidated Statements of Changes in Stockholders' Equity for the years
 ended December 31, 1998, 1997 and 1996..................................   F-5
Consolidated Statements of Cash Flows for the years ended December 31,
 1998, 1997 and 1996.....................................................   F-6
Notes to Consolidated Financial Statements...............................   F-7
Modem Media Advertising Limited Partnership
Report of Independent Public Accountants.................................  F-25
Balance Sheet as of December 31, 1996....................................  F-26
Statement of Income for the year ended December 31, 1996.................  F-27
Statement of Partners' Capital for the year ended December 31, 1996......  F-28
Statement of Cash Flows for the year ended December 31, 1996.............  F-29
Notes to Financial Statements............................................  F-30
Poppe Tyson Strategic Interactive Marketing Operations
Report of Independent Public Accountants.................................  F-33
Balance Sheets as of December 31, 1997 and 1996..........................  F-34
Statements of Operations for the years ended December 31, 1997 and 1996..  F-35
Statements of Changes in Equity (Deficit) for the years ended December
 31, 1997 and 1996.......................................................  F-36
Statements of Cash Flows for the years ended December 31, 1997 and 1996..  F-37
Notes to Financial Statements............................................  F-38
</TABLE>
 
                                      F-1
<PAGE>
 
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To Modem Media . Poppe Tyson, Inc.:
 
  We have audited the accompanying consolidated balance sheets of Modem Media
 . Poppe Tyson, Inc. (a Delaware corporation) and subsidiaries as of December
31, 1998 and 1997, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Modem Media . Poppe Tyson,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1998 in conformity with generally accepted
accounting principles.
 
                                          Arthur Andersen LLP
 
Stamford, Connecticut
February 11, 1999
 
                                      F-2
<PAGE>
 
                MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                           December 31,
                                                     -------------------------
                                                         1998         1997
                                                     ------------  -----------
<S>                                                  <C>           <C>
                       ASSETS
Current assets:
 Cash............................................... $  7,824,000  $ 7,056,000
 Accounts receivable, net of bad debt reserve of
  $968,000 and $452,000, respectively...............   13,619,000    7,414,000
 Unbilled revenues..................................    1,261,000    1,044,000
 Unbilled charges...................................      640,000      658,000
 Deferred taxes.....................................      484,000      303,000
 Prepaid expenses and other current assets..........    1,139,000      341,000
 True North note receivable.........................    4,500,000          --
                                                     ------------  -----------
   Total current assets.............................   29,467,000   16,816,000
Property and equipment:
 Leasehold improvements.............................    1,074,000      239,000
 Computers and software.............................    6,731,000    2,240,000
 Furniture and other................................    2,156,000    1,480,000
                                                     ------------  -----------
   Total property and equipment.....................    9,961,000    3,959,000
Less: accumulated depreciation and amortization.....   (3,135,000)  (1,134,000)
                                                     ------------  -----------
   Total property and equipment, net................    6,826,000    2,825,000
Other assets:
 Goodwill, net of accumulated amortization of
  $3,433,000 and $1,666,000, respectively...........   33,139,000   31,645,000
 Net assets of True North Units Held for Transfer...          --     7,573,000
 Deferred taxes.....................................      229,000       84,000
 Other assets, including deferred offering costs....    1,625,000       81,000
                                                     ------------  -----------
   Total other assets...............................   34,993,000   39,383,000
                                                     ------------  -----------
   Total assets..................................... $ 71,286,000  $59,024,000
                                                     ============  ===========
        LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 Accounts payable................................... $  4,522,000  $ 1,101,000
 Pre-billed media...................................    6,295,000    3,886,000
 Advance billings...................................    1,694,000    2,163,000
 Deferred revenues..................................    5,484,000    1,616,000
 Income taxes payable...............................      273,000      549,000
 Current portion of long-term lease obligations.....      375,000      342,000
 Due to True North..................................    1,797,000      729,000
 Note payable to True North.........................    6,000,000          --
 Accrued expenses and other current liabilities.....    8,944,000    3,161,000
                                                     ------------  -----------
   Total current liabilities........................   35,384,000   13,547,000
Noncurrent liabilities:
 Due to Bozell, non-interest bearing................          --     3,346,000
 Note payable to True North, less current portion...          --     6,000,000
 Capital lease obligations, less current portion....      323,000      472,000
 Other liabilities..................................       19,000       41,000
Commitments and contingencies.......................
Stockholders' equity:
 Common stock, Class A, $.001 par value--39,351,376
  shares authorized, 2,424,135 issued and
  outstanding.......................................        3,000        3,000
 Common stock, Class B, $.001 par value--5,648,624
  shares authorized, 5,648,624 issued and
  outstanding.......................................        5,000        5,000
 Preferred stock, $.001 par value--5,000,000 shares
  authorized, none issued and outstanding...........          --           --
 Paid-in capital....................................   47,211,000   44,828,000
 Accumulated deficit................................  (11,613,000)  (9,192,000)
 Accumulated other comprehensive income.............      (46,000)     (26,000)
                                                     ------------  -----------
   Total stockholders' equity.......................   35,560,000   35,618,000
                                                     ------------  -----------
   Total liabilities and stockholders' equity....... $ 71,286,000  $59,024,000
                                                     ============  ===========
</TABLE>
 
  The accompanying notes to consolidated financial statements are an integral
                         part of these balance sheets.
 
                                      F-3
<PAGE>
 
                MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                     Year Ended
                                                    December 31,
                                         ------------------------------------
                                            1998         1997         1996
                                         -----------  -----------  ----------
<S>                                      <C>          <C>          <C>
Revenues................................ $42,544,000  $25,497,000  $2,093,000
Costs and expenses:
  Salaries and benefits.................  29,368,000   15,894,000   1,322,000
  Office and general....................  14,729,000    9,038,000     712,000
  Amortization of goodwill..............   1,768,000    1,666,000         --
  Operating losses of True North Units
   Held for Transfer....................      13,000    2,180,000   1,309,000
                                         -----------  -----------  ----------
    Total costs and expenses............  45,878,000   28,778,000   3,343,000
Operating loss..........................  (3,334,000)  (3,281,000) (1,250,000)
Interest income (expense), net..........      29,000      (76,000)        --
                                         -----------  -----------  ----------
Loss before income taxes................  (3,305,000)  (3,357,000) (1,250,000)
Benefit for income taxes................    (102,000)    (248,000)   (548,000)
                                         -----------  -----------  ----------
Net loss................................ $(3,203,000) $(3,109,000) $ (702,000)
                                         ===========  ===========  ==========
Basic and diluted net loss per share.... $     (0.43) $     (0.43) $   (35.10)
                                         ===========  ===========  ==========
Basic and diluted weighted-average
 number of common shares outstanding....   7,465,000    7,260,000      20,000
                                         ===========  ===========  ==========
</TABLE>
 
 
 
  The accompanying notes to consolidated financial statements are an integral
                           part of these statements.
 
                                      F-4
<PAGE>
 
                MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
 
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                                                                     Accumulated
                          Common Stock                                  Other         Total
                         ---------------   Paid-in    Accumulated   Comprehensive Stockholders'
                         Class A Class B   Capital      Deficit        Income        Equity
                         ------- ------- -----------  ------------  ------------- -------------
<S>                      <C>     <C>     <C>          <C>           <C>           <C>
Balance as of December
 31, 1995............... $  --   $  --   $       --   $   (846,000)   $    --      $  (846,000)
Comprehensive income:
 Net loss...............    --      --           --       (702,000)        --         (702,000)
                                                                                   -----------
   Total comprehensive
    income..............                                                              (702,000)
                                                                                   -----------
Acquisition of Modem
 Partnership............  3,000   5,000   35,134,000           --          --       35,142,000
Forgiveness of
 intercompany
 borrowings.............    --      --     8,454,000           --          --        8,454,000
Dividends...............    --      --           --     (1,555,000)        --       (1,555,000)
                         ------  ------  -----------  ------------    --------     -----------
Balance as of December
 31, 1996...............  3,000   5,000   43,588,000    (3,103,000)        --       40,493,000
Comprehensive income:
 Net loss...............    --      --           --     (3,109,000)        --       (3,109,000)
 Foreign currency
  translation
  adjustment............    --      --           --            --        8,000           8,000
                                                                                   -----------
   Total comprehensive
    income..............                                                            (3,101,000)
                                                                                   -----------
Acquisition of Poppe
 Tyson Strategic
 Interactive Marketing
 Operations.............    --      --           --     (2,980,000)    (34,000)     (3,014,000)
Payment to former Modem
 Partnership partners...    --      --     1,150,000           --          --        1,150,000
Other, net..............    --      --        90,000           --          --           90,000
                         ------  ------  -----------  ------------    --------     -----------
Balance as of December
 31, 1997...............  3,000   5,000   44,828,000    (9,192,000)    (26,000)     35,618,000
Comprehensive income:
 Net loss...............    --      --           --     (3,203,000)        --       (3,203,000)
 Foreign currency
  translation
  adjustment............    --      --           --            --      (20,000)        (20,000)
                                                                                   -----------
   Total comprehensive
    income..............                                                            (3,223,000)
                                                                                   -----------
Forgiveness of
 intercompany
 borrowings.............    --      --     5,763,000           --          --        5,763,000
Dividend to True North
 of True North Units
 Held for Transfer......    --      --    (7,444,000)          --          --       (7,444,000)
Acquisition of fixed
 assets from True North
 in connection with the
 Combination............    --      --     1,624,000           --          --        1,624,000
Payment to former Modem
 Partnership partners...    --      --     3,263,000           --          --        3,263,000
Other, net..............    --      --      (823,000)      782,000         --          (41,000)
                         ------  ------  -----------  ------------    --------     -----------
Balance as of December
 31, 1998............... $3,000  $5,000  $47,211,000  $(11,613,000)   $(46,000)    $35,560,000
                         ======  ======  ===========  ============    ========     ===========
</TABLE>
 
  The accompanying notes to consolidated financial statements are an integral
                           part of these statements.
 
                                      F-5
<PAGE>
 
                MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                Year Ended December 31,
                                           ------------------------------------
                                              1998         1997         1996
                                           -----------  -----------  ----------
<S>                                        <C>          <C>          <C>
Cash flows from operating activities:
  Net loss................................ $(3,203,000) $(3,109,000) $ (702,000)
  Adjustments to reconcile net loss to net
   cash provided by (used in) operating
   activities:
    Depreciation..........................   1,846,000    1,189,000      15,000
    Amortization of goodwill..............   1,768,000    1,666,000         --
    Provision for doubtful accounts.......     660,000      517,000         --
    Loss on disposal of equipment.........     155,000       98,000         --
    Changes in assets and liabilities:
      Accounts receivable.................  (6,865,000)    (568,000) (1,692,000)
      Unbilled revenues...................    (217,000)    (454,000)    (76,000)
      Unbilled charges....................      18,000       38,000     (52,000)
      Prepaid expenses and other current
       assets.............................    (798,000)    (125,000)        --
      Accounts payable, accrued expenses
       and other current liabilities......   9,204,000      731,000      31,000
      Pre-billed media....................   2,409,000    2,543,000         --
      Advance billings....................    (469,000)     770,000     428,000
      Deferred revenues...................   3,868,000    1,442,000     (76,000)
      Income taxes payable................    (276,000)     375,000     210,000
      Deferred taxes......................    (326,000)    (413,000)   (135,000)
      Other, net..........................  (1,586,000)     (22,000)      1,000
      Net assets of True North Units Held
       for Transfer.......................     129,000    1,718,000  (1,635,000)
                                           -----------  -----------  ----------
        Net cash provided by (used in)
         operating activities.............   6,317,000    6,396,000  (3,683,000)
Cash flows from investing activities:
  Purchase of property and equipment......  (4,133,000)  (1,324,000)   (139,000)
  Cash of acquired companies..............         --       147,000   2,723,000
                                           -----------  -----------  ----------
        Net cash (used in) provided by
         investing activities.............  (4,133,000)  (1,177,000)  2,584,000
Cash flows from financing activities:
  Funding (to) from parent company........  (1,015,000)     729,000   5,380,000
  Dividends paid to True North............         --            --  (1,555,000)
  Distributions to former Modem
   Partnership partners...................         --    (1,564,000)        --
  Principal payments made under capital
   lease obligations......................    (361,000)    (143,000)        --
  Other, net..............................     (40,000)      89,000         --
                                           -----------  -----------  ----------
        Net cash (used in) provided by
         financing activities.............  (1,416,000)    (889,000)  3,825,000
                                           -----------  -----------  ----------
Net increase in cash......................     768,000    4,330,000   2,726,000
Cash, at beginning of the year............   7,056,000    2,726,000         --
                                           -----------  -----------  ----------
Cash, at end of the year.................. $ 7,824,000  $ 7,056,000  $2,726,000
                                           ===========  ===========  ==========
</TABLE>
 
  The accompanying notes to consolidated financial statements are an integral
                           part of these statements.
 
                                      F-6
<PAGE>
 
               MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. Basis of Presentation
 
  Modem Media . Poppe Tyson, Inc. ("Modem Media" or the "Company") was formed
by True North Communications Inc. ("True North") in 1996 to combine certain of
True North's strategic interactive marketing and website design and
maintenance units with Modem Media Advertising Limited Partnership (the "Modem
Partnership") in a business combination accounted for under the purchase
method (see Note 3). Accordingly, the Modem Partnership has been reflected in
the Modem Media financial statements since December 31, 1996. The Modem
Partnership is a predecessor entity of Modem Media, and its financial
statements as of and for the year ended December 31, 1996 are included
elsewhere in this Annual Report on Form 10-K. The Company's name was changed
from TN Technologies Inc. to Modem Media . Poppe Tyson, Inc. in November 1998.
 
  Effective October 1, 1998, the Company acquired the strategic interactive
marketing operations of Poppe Tyson, Inc. (the "Poppe Tyson Strategic
Interactive Marketing Operations") from True North in exchange for certain of
the Company's subsidiaries and operations and an aggregate of 809,514 shares
of Class B common stock (the "Combination") (see Notes 3 and 16). The Poppe
Tyson Strategic Interactive Marketing Operations consist of the strategic
interactive marketing operations of Poppe Tyson, Inc. ("Poppe Tyson") in the
United Kingdom, Hong Kong and the U.S., and certain fixed assets. The
historical financial results of the Poppe Tyson Strategic Interactive
Marketing Operations have been prepared on a carved-out basis, and are
included in the consolidated financial statements of the Company from December
31, 1997, the date of the merger of Bozell with True North. All adjustments
necessary for the fair presentation of the consolidated financial statements
related to the Poppe Tyson Strategic Interactive Marketing Operations are
reflected herein. The accumulated deficit arising from the carved-out
operating results of the Poppe Tyson Strategic Interactive Marketing
Operations for the period from December 31, 1997 to the date of its
acquisition by the Company is reflected as a reduction in paid-in capital in
the accompanying consolidated balance sheet at December 31, 1998. The Poppe
Tyson Strategic Interactive Marketing Operations is a predecessor entity of
the Company, and its financial statements as of and for the years ended
December 31, 1997 and 1996 are included elsewhere in this Annual Report on
Form 10-K.
 
  Poppe Tyson was formed in December 1985 as a subsidiary of Bozell, Jacobs,
Kenyon & Eckhardt, Inc. ("Bozell"), which was acquired by True North in
December 1997 in a business combination accounted for under the pooling-of-
interests method. Poppe Tyson includes the strategic interactive marketing
operations and website production and maintenance businesses of Bozell.
 
  Prior to undertaking the Combination, the Company and True North management
agreed that the value of the non-strategic digital interactive marketing
operations contributed to Modem Media by True North in 1996 would be optimized
under True North management, as the strategic focus of those businesses would
not be complementary to the Company. True North and the Company have analyzed
the future cash flows of those businesses and believe the investment is fully
realizable at this time. Because the Combination occurred among True North and
majority-owned, controlled subsidiaries, the transaction has been recorded at
historical cost as of December 31, 1997, the date upon which the Company and
the Poppe Tyson Strategic Interactive Marketing Operations came under common
control.
 
  In contemplation of the Combination effected as of October 1, 1998, the net
assets of the businesses to be sold back to True North have been presented as
one line, "Net assets of True North Units Held for Transfer," on the face of
the accompanying consolidated balance sheet as of December 31, 1997 in a
manner similar to that of assets held for sale. Similarly, the pre-tax losses
of those businesses through the date of such sale, September 30, 1998, have
been presented as one line, "Operating losses of True North Units Held for
Transfer," in the accompanying consolidated statements of operations for each
of the years ended December 31, 1998, 1997 and 1996.
 
                                      F-7
<PAGE>
 
               MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
  Summarized financial data of the businesses sold back to True North are as
follows:
 
<TABLE>
<CAPTION>
                                          Nine Months
                                             Ended           Year Ended
                                           September        December 31,
                                              30,      ------------------------
     <S>                                  <C>          <C>          <C>
                                             1998         1997         1996
                                          -----------  -----------  -----------
                                          (unaudited)
     Revenues............................ $10,140,000  $16,766,000  $18,401,000
     Costs and expenses..................  10,019,000   18,652,000   19,663,000
     Loss before income taxes............     (13,000)  (2,180,000)  (1,309,000)
     Net loss............................    (129,000)  (1,718,000)    (751,000)
</TABLE>
 
<TABLE>
<CAPTION>
                                                                      December
                                                                      31, 1997
                                                                     -----------
     <S>                                                             <C>
     Current assets................................................. $10,378,000
     Goodwill, net..................................................   5,893,000
     Total assets...................................................  19,845,000
     Current liabilities............................................   4,119,000
     Total liabilities..............................................  12,272,000
     Net assets.....................................................   7,573,000
</TABLE>
 
2. Summary of Significant Accounting Policies
 
  Nature of Operations--The Company has been a leading provider of digital
interactive marketing solutions since 1987. By developing internet marketing
programs that incorporate advanced communications technologies, the Company
enables its clients to attract, acquire and retain customers. The Company's
marketing programs include the design and implementation of electronic
business programs that enable its clients to support and leverage their world-
class brands. The Company combines its substantial expertise in strategic
marketing, creative design and digital technology to deliver, on a worldwide
basis, a complete range of digital interactive marketing services, including
strategic consulting and research, electronic commerce and electronic consumer
care services, interactive advertising, and data collection and analysis. The
Company's marketing programs are designed to enable its clients to target
narrowly-defined market segments, provide their customers with detailed
product and service information, sell products and services and provide post-
sale customer support electronically, and offer ongoing marketing programs.
Marketing programs developed by the Company are delivered primarily through
the Internet. The Company has operations in the United States, Canada, Hong
Kong and the United Kingdom, with an affiliate office in Brazil.
 
  Principles of Consolidation--The accompanying consolidated financial
statements include all of the accounts of the Company and its subsidiaries.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
 
  Reclassifications--Certain reclassifications have been made in the prior
year consolidated financial statements to conform to the current year
presentation.
 
  Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the dates of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
 
  Revenue Recognition and Billing--A majority of the Company's revenues are
derived from fixed-fee assignments. Revenues are recognized as services are
rendered. Unbilled revenues represent labor costs incurred and estimated
earnings in excess of billings. Unbilled charges represent production and
other client reimbursable
 
                                      F-8
<PAGE>
 
               MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
out-of-pocket costs in excess of billings. Revenue is reported net of such
reimbursable costs. Pre-billed media represents amounts billed to customers
for media placement in advance of the advertisements being placed. Advance
billings represent billings of production and other client reimbursable out-
of-pocket costs in excess of those incurred. Amounts billed to clients in
excess of revenues recognized to date are classified as deferred revenues. The
Company reassesses its estimated costs on each project periodically and losses
are accrued, on a project-by-project basis, to the extent the costs incurred
and anticipated costs to complete projects exceed anticipated billings.
Provisions for estimated losses on uncompleted projects are made in the period
in which such losses are determinable.
 
  Business Concentrations and Credit Risk--The Company's services have been
provided to a limited number of clients located worldwide in a variety of
industries. The Company had revenues from five clients during the years ended
December 31, 1998 and 1997 that accounted for 53.4% and 65.5% of total
revenues, respectively. No one client accounted for more than 10% of revenues
during the year ended December 31, 1996. The Company generally does not
require its clients to provide collateral.
 
  The Company is subject to a concentration of credit risk with respect to its
accounts receivable. Four customers accounted for 53.0% and one customer
accounted for 16.4% of gross accounts receivable as of December 31, 1998 and
1997, respectively.
 
  Property and Equipment--Property and equipment are stated at cost and are
depreciated, principally using the straight-line method, over their estimated
useful lives of three to five years for computers and software, and five to
twelve years for furniture and other. Purchased software and third-party costs
incurred to develop software for internal use are capitalized and amortized
principally over three years. Leasehold improvements are amortized over the
lesser of their estimated useful lives or the remaining lease term. In
accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of, the Company reviews its recorded property and equipment for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable and provides currently for
any identified impairments. In conjunction with the transactions that occurred
effective October 1, 1998 (see Note 1), the Company performed physical
inventories of property and equipment at certain international locations. As a
result of such inventories, the Company recorded a non-cash impairment loss of
$155,000 during the third quarter of 1998, which is included in office and
general expenses in the accompanying consolidated statement of operations.
 
  Income Taxes--Modem Media and True North have certain tax-sharing
arrangements that are described in Note 10. The Company accounts for income
taxes under the liability method in accordance with SFAS No. 109, Accounting
for Income Taxes. In accordance with such standard, the provision for income
taxes includes deferred income taxes resulting from items reported in
different periods for income tax and financial statement purposes. Deferred
tax assets and liabilities represent the expected future tax consequences of
the differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. The effects of changes
in tax rates on deferred tax assets and liabilities are recognized in the
period that includes the enactment date.
 
  Goodwill--Goodwill represents acquisition costs in excess of the fair value
of tangible net assets of purchased subsidiaries and is amortized using the
straight-line method over 20 years. Carrying values are periodically reviewed
for impairment and adjusted, if necessary, based upon current facts and
circumstances and management's estimates of undiscounted future cash flows
from the related businesses.
 
  Fair Value of Financial Instruments--The carrying values of the Company's
assets and liabilities approximate fair value because of the short maturities
of these financial instruments.
 
 
                                      F-9
<PAGE>
 
               MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
  Net Loss Per Share--In accordance with SFAS No. 128, Earnings Per Share,
basic net loss per share is computed using the weighted-average number of
common shares outstanding during each period. Diluted net loss per share gives
effect to all potential dilutive securities that were outstanding during each
period. The Company had a net loss for all periods presented herein;
therefore, none of the options outstanding during each of the periods
presented were included in the computations of diluted loss per share because
they were antidilutive. See Note 6 for the details of options outstanding.
 
  On January 11, 1999, the Company's Board of Directors approved a 0.95-for-1
reverse split of the Company's outstanding common stock effective upon
completion of the Combination. Accordingly, all historical weighted-average
share and per-share amounts have been restated to reflect the reverse stock
split.
 
  Initial Public Offering--In connection with the Company's initial public
offering of securities in February 1999 (see Note 16), the Company incurred
approximately $1,408,000 in offering-related costs through December 31, 1998,
that were deferred until the consummation of such offering, at which time they
were charged against paid-in capital.
 
  Foreign Currency Translation--The Company's financial statements were
prepared in accordance with the requirements of SFAS No. 52, Foreign Currency
Translation. Under this method, net foreign currency transaction gains and
losses are included in the accompanying consolidated statements of operations.
Such gains and losses were immaterial for each of the years ended December 31,
1998, 1997 and 1996.
 
  Comprehensive Income--The Company reflects its comprehensive income, such as
unrealized gains and losses on the Company's foreign currency translation
adjustments, as a separate component of stockholders' equity as required by
SFAS No. 130, Reporting Comprehensive Income. There were no other items of
comprehensive income during these periods.
 
  Segment Reporting--In June 1997, the Financial Accounting Standards Board
("FASB") issued SFAS No. 131, Disclosure About Segments of an Enterprise and
Related Information, which is effective for fiscal years beginning after
December 15, 1997. SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. The
statement also establishes standards for related disclosure about products and
services, geographic areas and major customers. In accordance with SFAS No.
131, the Company has adopted the new requirements retroactively in these notes
to its consolidated financial statements (see Note 11).
 
 
  Derivative Instruments--In June 1998, the FASB issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument, including certain derivative instruments embedded in other
contracts, be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. Management believes that the implementation of
SFAS No. 133 will not have a material impact on the Company's earnings.
 
3. Acquisitions
 
  On December 31, 1996, True North, through the Company, acquired a 64%
interest in the Modem Partnership for $32,590,000. The consideration was
comprised of $24,387,000 in common stock of True North and a 36% interest in
certain operations of the Company valued at $8,203,000 by independent
appraisal experts. In addition, True North is obligated to make cash payments
of up to $19,000,000 (reduced by the payments
 
                                     F-10
<PAGE>
 
               MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
discussed below) and issue $4,000,000 in shares of True North common stock to
the former owners of the Modem Partnership upon completion of an initial
public offering of the Company's common stock and/or certain other events (see
below). True North contributed its interests in the Modem Partnership to the
Company in exchange for shares of Class B common stock. The remaining
interests in the Modem Partnership were contributed by its former owners to
the Company in exchange for shares of Class A common stock. The above
transactions resulted in True North holding 4,839,110 shares of Class B common
stock of the Company and the former owners of the Modem Partnership holding
2,415,646 shares of Class A common stock of the Company at December 31, 1996.
Assets acquired, liabilities assumed and intercompany indebtedness forgiven by
True North in this transaction were $42,300,000, $7,158,000 and $8,454,000,
respectively, and are reflected in the accompanying consolidated balance
sheets. In accordance with EITF 90-13, "Accounting for Simultaneous Common
Control Mergers", the valuation of the 64% interest in the Modem Partnership
acquired by True North is stated at fair value in the accompanying
consolidated financial statements. The assets and liabilities of the
operations of the Company and the 36% of the Modem Partnership not acquired by
True North are reflected at historical costs. The difference between the
initial purchase price and the fair value of assets acquired of approximately
$32,161,000, excluding costs of the transaction, has been allocated to
goodwill by the Company.
 
  Additional payments made will be allocated to the cost in excess of the fair
value of tangible net assets acquired and amortized by the Company over the
remaining life of the assets. The acquisition agreement also requires
additional payments contingent on future earnings to be made in the event that
an initial public offering has not occurred, which payments thereby reduce the
aforementioned $19,000,000 obligation. Pursuant to the agreement, payments
aggregating $1,150,000 and $3,263,000 were made to the former owners in
February 1997 and May 1998, respectively, resulting in corresponding increases
in goodwill. On February 10, 1999, the Company completed an initial public
offering of its common stock. As a result, True North paid $14,587,000 in cash
and issued $3,931,000 in True North common stock to the former owners of the
Modem Partnership, thereby resulting in corresponding increases in goodwill.
Such amounts will be amortized over the remainder of the original 20-year
amortization period beginning in February 1999.
 
  Effective October 1, 1998, the Company purchased the Poppe Tyson Strategic
Interactive Marketing Operations in exchange for (i) the net assets of the
non-strategic digital interactive marketing operations originally contributed
by True North to Modem Media in 1996 of $7,444,000 and (ii) 809,514 shares of
Class B common stock of the Company (see Note 1). Assets acquired and
liabilities assumed by the Company in this transaction were $1,565,000 and
$4,579,000, respectively, and are reflected in the accompanying consolidated
balance sheets beginning on December 31, 1997, the date upon which the Company
and the Poppe Tyson Strategic Interactive Marketing Operations came under
common control.
 
  In conjunction with the acquisition of the Poppe Tyson Strategic Interactive
Marketing Operations, Bozell forgave $5,763,000 of intercompany borrowings and
transferred $1,624,000 of fixed assets to the Company.
 
                                     F-11
<PAGE>
 
               MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
  The following information reflects pro forma statements of operations data
for the years ended December 31, 1997 and 1996 assuming the acquisitions of
the Modem Partnership and the Poppe Tyson Strategic Interactive Marketing
Operations were consummated on January 1, 1996 (see Note 1).
 
<TABLE>
<CAPTION>
                                                  Poppe Tyson
                                                   Strategic
                                                  Interactive
                                       The Modem   Marketing    Pro Forma
                         The Company  Partnership Operations   Adjustments    Combined
                         -----------  ----------- -----------  ------------  -----------
<S>                      <C>          <C>         <C>          <C>           <C>
Year Ended December 31,
 1997
Revenues................ $25,497,000  $       --  $ 3,925,000  $        --   $29,422,000
Loss before income
 taxes..................  (3,357,000)         --   (2,648,000)          --    (6,005,000)
Net loss................  (3,109,000)         --   (2,500,000)          --    (5,609,000)
Basic net loss per
 common share...........                                                            (.70)
Year Ended December 31,
 1996
Revenues................ $ 2,093,000  $18,102,000 $   126,000  $        --   $20,321,000
(Loss) income before
 income taxes...........  (1,250,000)     137,000    (480,000)   (1,666,000)  (3,259,000)
Net (loss) income.......    (702,000)     137,000    (480,000)   (1,723,000)  (2,768,000)
Basic net loss per
 common share...........                                                           (3.34)
</TABLE>
 
  The pro forma adjustments above reflect the annual amortization expense on
approximately $32,000,000 in goodwill, over a useful life of 20 years, that
would have resulted from the acquisition of the Modem Partnership were it to
have occurred on January 1, 1996 and the tax provision that would have been
recorded on the earnings of the Modem Partnership had it ceased existing as a
limited partnership as of such date.
 
4. Debt
 
  Restrictions on Indebtedness--Pursuant to certain agreements between True
North and its lenders, the Company is subject to certain limitations on
indebtedness. Such limitations could adversely affect the Company's ability to
secure debt financing in the future. Based on its internal projections and
business plans, management believes that cash flows from operations, together
with cash from the Company's initial public offering, will provide adequate
funds to support ongoing operations.
 
  Lines of Credit--In June 1997, the Company increased its bank line of credit
from $1,000,000 to $2,000,000 and the facility subsequently expired in June
1998. No borrowings were outstanding under this line of credit as of December
31, 1997.
 
  Interest Expense--The Company incurred interest expense on all borrowings,
including those from related parties, of $185,000, $119,000 and $0 for the
years ended December 31, 1998, 1997 and 1996, respectively. Related party
interest expense in the respective totals above are $42,000, $46,000 and $0.
 
5. Equity
 
  Pursuant to the Company's Amended and Restated Certificate of Incorporation
(see Note 16), the Company has the authority to issue an aggregate of
50,000,000 shares of capital stock, consisting of 39,351,376 shares of Class A
common stock, par value $.001 per share, 5,648,624 shares of Class B common
stock, par value $.001 per share, and 5,000,000 shares of undesignated
preferred stock, par value $.001 per share.
 
                                     F-12
<PAGE>
 
               MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
  Common Stock--The shares of Class A common stock and Class B common stock
are identical in all respects, except for voting rights and certain conversion
rights. Each share of Class A common stock outstanding is entitled to one vote
on all matters submitted to a vote of the Company's stockholders, including
the election of directors, and each share of Class B common stock entitles the
holder to five votes on each such matter. True North owns, directly or
indirectly, all of the outstanding shares of Class B common stock. Except as
required by applicable law, holders of Class A common stock and Class B common
stock vote together as a single class on all matters submitted to a vote of
the stockholders of the Company. There is no cumulative voting in the election
of directors.
 
  The shares of Class A common stock are not convertible. The shares of Class
B common stock are convertible into shares of Class A common stock, in whole
or in part, at any time at the option of the holder, into an equal number of
shares of Class A common stock. Each share of Class B common stock will also
automatically convert into one share of Class A common stock upon the sale or
transfer of such share of Class B common stock to any person other than a
parent corporation or wholly-owned subsidiary of such holder or other
qualified recipient. The holders of Class B common stock shall have, upon
conversion of their shares of Class B common stock into shares of Class A
common stock, one vote per share of Class A common stock held on all matters
submitted to a vote of the Company's stockholders.
 
  In the event of any dissolution, liquidation, or winding up of the affairs
of the Company, whether voluntary or involuntary, after payment of the debts
and other liabilities of the Company and making provision for the holders of
preferred stock, if any, the remaining assets of the Company will be
distributed ratably among the holders of the Class A common stock and the
Class B common stock, treated as a single class.
 
  Upon a merger, combination, or other similar transaction in which shares of
common stock are exchanged for or changed into other stock or securities, cash
and/or any other property, holders of the Class A common stock and Class B
common stock will be entitled to receive an equal per share amount of stock,
securities, cash, and/or any other property, as the case may be, into which or
for which each share of any other class of common stock is exchanged or
changed; provided that in any transaction in which shares of capital stock are
distributed, such shares so exchanged for or changed into may differ as to
voting rights and certain conversion rights to the extent, and only to the
extent, that the voting rights and certain conversion rights of Class A common
stock and Class B common stock differ at that time.
 
  The holders of the Class A common stock and Class B common stock are not
entitled to preemptive rights. There are no redemption provisions or sinking
fund provisions applicable to the Class A common stock or the Class B common
stock.
 
  All shares of Class A common stock and Class B common stock outstanding are
fully paid and nonassessable, and all the shares of Class A common stock and
Class B common stock to be outstanding upon completion of the Company's
initial public offering will be fully paid and nonassessable (see Note 16).
 
  Preferred Stock--Preferred stock may be issued, from time-to-time, pursuant
to a resolution by the Company's Board of Directors that will set forth the
voting powers and other pertinent rights of each series.
 
6. Stock-Based Compensation Plan
 
  The Company has established various stock option plans for its officers,
directors, key employees and consultants. Options to purchase 345,244 shares
of Class A common stock that vested immediately and expire on September 30,
2006 were issued under the Modem Media Advertising Limited Partnership 1996
Option Plan at an exercise price of $0.64 per share. The TN Technologies, Inc.
1997 Stock Option Plan provides for up to 3,040,000 shares of Class A common
stock to be issued at an exercise price of at least 100% of the fair market
 
                                     F-13
<PAGE>
 
               MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
value of the stock on the date of grant as determined by the Board of
Directors. These options expire ten years after the date of grant with 20%
vesting on the date of grant and the remainder vesting at an additional 20% on
each anniversary thereof.
 
  In connection with the transfer to True North of the non-strategic digital
interactive marketing operations originally contributed to the Company in 1996
(see Notes 1 and 3), True North has agreed to satisfy up to an aggregate of
139,555 options held by employees associated with those operations.
Accordingly, upon exercise of such options, the exercise price will be paid by
the Company to True North and True North will surrender an equivalent number
of shares of common stock to Modem Media. Similarly, True North has agreed to
satisfy options to purchase up to an aggregate of 149,011 shares of common
stock held by former employees of the Poppe Tyson Strategic Interactive
Marketing Operations.
 
  The Company follows the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, and applies APB No. 25 and related
interpretations in accounting for its stock option plan. Under APB No. 25,
because the exercise prices of the Company's employee stock options are equal
to the market prices of the underlying Company stock on the date of grant, no
compensation expense is recognized. If compensation expense for stock options
awarded under the Company's plans had been determined consistent with SFAS No.
123, the Company's net loss and net loss per share would have been increased
to the following pro forma amounts:
 
<TABLE>
<CAPTION>
                                                     December 31,
                                           -----------------------------------
<S>                                        <C>          <C>          <C>
                                              1998         1997        1996
                                           -----------  -----------  ---------
Net loss:
 As reported.............................. $(3,203,000) $(3,109,000) $(702,000)
 Pro forma................................  (5,324,000)  (4,077,000)  (709,000)
Basic and diluted net loss per share:
 As reported.............................. $     (0.43) $     (0.43) $  (35.10)
 Pro forma................................       (0.71)       (0.56)    (35.45)
</TABLE>
 
 
  The effect of applying SFAS No. 123 on the pro forma net loss per share
disclosures is not indicative of future amounts because it does not take
option grants to be made in future years into consideration.
 
                                     F-14
<PAGE>
 
                MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
  The following is a summary of the activity under the Company's stock option
plans for each annual period presented:
 
<TABLE>
<CAPTION>
                                               December 31,
                           ----------------------------------------------------
<S>                        <C>       <C>      <C>     <C>      <C>     <C>
                                  1998              1997             1996
                           ------------------ ---------------- ----------------
                                     Weighted         Weighted         Weighted
                                     Average          Average          Average
                                     Exercise         Exercise         Exercise
                            Shares    Price   Shares   Price   Shares   Price
                           --------- -------- ------- -------- ------- --------
Outstanding at the
 beginning of the year...    968,220 $   7.69 355,608 $   0.96     --  $    --
Granted..................  1,163,928    11.10 694,187    11.58 355,608     0.96
Exercised................        775     4.93   7,714    11.58     --       --
Forfeited................     91,199    11.14  73,861    11.37     --       --
                           --------- -------- -------          ------- --------
Outstanding at the end of
 the year................  2,040,174          968,220          355,608
                           ---------          -------          -------
Exercisable at the end of
 the year................    816,092          472,924          347,317
                           ---------          -------          -------
Weighted average fair
 value of options
 granted.................            $  10.39         $   8.37         $   8.28
                                     ========         ========         ========
</TABLE>
 
  The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following weighted-
average assumptions:
 
<TABLE>
<CAPTION>
                                                        Year Ended December 31,
                                                       -------------------------
<S>                                                    <C>      <C>     <C>
                                                         1998    1997     1996
                                                       -------- ------- --------
Risk-free interest rate...............................    4.67%   6.75%    6.44%
Expected life......................................... 10 years 9 years 10 years
Expected volatility...................................  111.47%  52.77%      --
Expected dividend yield...............................      --      --       --
</TABLE>
 
  The following table summarizes information regarding the Company's stock
options outstanding and exercisable as of December 31, 1998:
 
<TABLE>
<CAPTION>
                                                                    Options
                                    Options Outstanding           Exercisable
                            ----------------------------------- ----------------
<S>                         <C>       <C>              <C>      <C>     <C>
                                          Weighted     Weighted         Weighted
                                          Average      Average          Average
                                         Remaining     Exercise         Exercise
      Exercise Price         Shares   Contractual Life  Price   Shares   Price
--------------------------- --------- ---------------- -------- ------- --------
$0.64......................   339,658          8 years $   0.64 339,658 $   0.64
$11.05..................... 1,049,154         10 years $  11.05 231,363 $  11.05
$11.58.....................   651,362          9 years $  11.58 245,071 $  11.58
</TABLE>
 
                                      F-15
<PAGE>
 
               MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
7. Related Party Transactions
 
  The Company believes that the historical financial statements reflect all
costs of doing business. Many of such costs are derived from transactions with
related parties.
 
  In the normal course of business, the Company and True North have from time-
to-time entered into various business transactions and agreements, and the
Company and True North may enter into additional transactions in the future.
The following is a summary of each of the material agreements between the
Company and True North.
 
  Administrative Services Agreement--Under an Administrative Services
Agreement, True North provides administrative functions and other services to
the Company, including tax preparation, insurance, treasury consulting and
legal. During the period in which True North performs administrative functions
for the Company, expenses associated with such functions will be charged to
the Company based on agreed upon rates. The Company may terminate this
agreement at any time upon 90 days' prior written notice and True North may
terminate the agreement 12 months following the Combination, but must give 180
days' written notice of such intent to terminate.
 
  Intercompany Credit Arrangements--The Company and True North are parties to
intercompany credit agreements. In August 1998, True North extended a credit
facility to the Company allowing for revolving borrowings in the amount of up
to $3.0 million to be outstanding at any given time at an interest rate equal
to True North's cost of borrowing plus two percent. In addition, True North
has agreed at its discretion to provide guarantees for Modem Media's
borrowings in exchange for a fee of 0.5% per annum on the amount guaranteed.
The credit facility with True North expires two years from the date of
completion of the initial public offering (see Note 16), or upon 60 days
advance notice if True North's voting control in the Company falls below 50%
of total voting power. In May 1998, the Company agreed to provide advances to
True North from time-to-time upon True North's request and subject to the
Company's discretion.
 
  Sublease with Bozell--The Company has entered into a sublease with Bozell
pursuant to which the Company will lease office space in New York City. The
rent per square foot under the sublease agreement is based on the average
monthly rent per square foot and other related costs under Bozell's underlying
lease.
 
  Brazil Affiliation Agreement--The Company has entered into an agreement with
Bozell pursuant to which Bozell has agreed, for a period of two years, to
provide services to the Company's clients through its office in Sao Paolo,
Brazil as requested by the Company. In return, the Company has granted a
license to Bozell to operate its office in Brazil under the name "Modem Media
 . Poppe Tyson, Inc." during the same period.
 
  Tax Matters Agreement--In connection with the transactions consummated
effective October 1, 1998, the Company and True North intend to enter into an
agreement providing for certain unitary state tax-sharing arrangements.
 
  Parent Company Allocations--True North charges each of its operating units
for general corporate expenses incurred at the parent company level, including
costs to administer employee benefit plans (see Note 8); legal, accounting and
treasury services; use of office facilities; and other services for certain
operations. The amount of the charge is primarily based on budgeted revenue.
The Company believes that the method used to allocate these expenses is
reasonable. These charges amounted to approximately $308,000, $291,000 and
$262,000 for the years ended December 31, 1998, 1997 and 1996, respectively,
and are included in office and general expenses in the consolidated statements
of operations. True North ceased charging allocations to the Company as of
June 30, 1998, as the Company has taken on responsibility for the majority of
the functions that generate the aforementioned corporate expenses. The Company
expects that it will incur increased expenses associated with being a public
company.
 
                                     F-16
<PAGE>
 
               MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
  Parent Company Guarantees--Commencing on July 1, 1998, True North has
guaranteed payment on behalf of the Company under certain operating and other
leases at a fee of 0.5% of the amount guaranteed.
 
  Payment to Former Modem Partnership Partners--In December 1996, prior to the
acquisition by True North, the partners of the Modem Partnership declared a
distribution of $1,564,000, which was paid in cash on January 2, 1997.
 
  As a result of the above agreements and other related transactions, the
accompanying consolidated financial statements reflect the following balances:
 
  True North Note Receivable--On May 26, 1998, the Company entered into an
agreement to loan up to $3,000,000 to True North under a demand note facility.
Such agreement was amended on November 24, 1998 to increase the availability
under such facility to $10,000,000. The Company receives payments from True
North under such facility from time-to-time, as requested. The loan bears
interest at 5.75% per annum, payable quarterly, unless the parties agree upon
other arrangements. The principal amount outstanding under the facility is due
and payable at termination of the agreement, which may be effected at either
party's sole discretion upon one business day's written notice. The
outstanding balance under this facility was $4,500,000 as of December 31, 1998
and is reflected as "True North note receivable" in the accompanying
consolidated balance sheets. In February 1999, True North paid all amounts
outstanding under this note (see Note 16).
 
  Due to Bozell--Amounts borrowed from Bozell to fund operations are non-
interest bearing. Amounts owed to Bozell as of the date of the Combination
have been contributed to paid-in capital. Accordingly, the balance outstanding
as of December 31, 1997 has been reflected as a noncurrent liability in the
accompanying consolidated balance sheet.
 
  The average balances outstanding for the nine months ended September 30,
1998 (the period prior to the Combination) and the year ended December 31,
1997 were $4.3 million and $1.7 million, respectively. The amount was incurred
ratably over the period as advances to fund the operations of Poppe Tyson.
 
  Due to True North--On December 31, 1996, the Company entered into a one-year
agreement with True North, whereby True North provided the Company with a
credit facility. The agreement has been extended indefinitely beyond the
initial one-year term by mutual consent and under the terms outlined
hereafter. The Company receives advances from True North under the facility
from time-to-time, as requested. Prior to 1998, outstanding borrowings bore
interest at LIBOR plus .75%, which was due monthly. All accrued interest is
due and payable upon termination of the agreement. In 1998, True North ceased
charging interest to the Company under this facility. The outstanding balances
at December 31, 1998 and 1997 were $1,797,000 and $6,659,000, respectively,
including $5,930,000 at December 31, 1997 included in Net assets of True North
Units Held for Transfer. Future payments under this facility will be made at
the option of the Company or on demand. At December 31, 1998 and 1997,
$1,797,000 and $729,000, respectively, are reflected as "Due to True North" in
the accompanying consolidated balance sheets. In February 1999, the Company
repaid approximately $1,163,000 of these borrowings.
 
  The average amount outstanding for the year ended December 31, 1998 for
which no interest expense has been accrued is approximately $1,263,000. The
amounts borrowed represent advances to fund operations.
 
  Note Payable to True North--On December 31, 1996, True North capitalized
intercompany payables from the Company to True North in the amount of
$8,454,000 into equity, including $6,394,000 recorded in Net assets of True
North Units Held for Transfer. The remaining $6,000,000 intercompany payable
became a noncurrent obligation, payable by the Company upon completion of an
initial public offering. This $6,000,000 note payable was repaid to True North
in February 1999, upon completion of the Company's initial public offering
(see Note 16), and accordingly, such amount is reflected as a current
liability in the December 31, 1998 consolidated balance sheet.
 
                                     F-17
<PAGE>
 
               MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
  The Company believes that all of the transactions set forth above were made
on terms equivalent to those that the Company could have obtained from
unaffiliated third parties. All future transactions, including loans, between
the Company and its officers, directors and principal stockholders and their
affiliates will be approved by a majority of the Board of Directors, including
a majority of the independent and disinterested directors of the Board, and
will be on terms equivalent to those that the Company could obtain from
unaffiliated third parties.
 
8. Employee Benefit Plans
 
  The Company maintains a profit-sharing plan with a 401(k) feature for the
benefit of its eligible employees. There is no minimum length of service
required to participate in the plan and employees of the Company are eligible
to begin participation on designated quarterly enrollment dates provided that
they have reached 21 years of age. The Company makes annual matching and/or
profit-sharing contributions to the plan at its discretion. In addition,
certain employees of the Company have participated in other similar defined
contribution plans. Such employees subsequently became participants of the
aforementioned profit-sharing plan. Aggregate cost of contributions made by
the Company to all employee benefit plans were $217,000, $40,000 and $0 during
the years ended December 31, 1998, 1997 and 1996, respectively.
 
  In February 1999, the Company adopted the Modem Media . Poppe Tyson, Inc.
1999 Employee Stock Purchase Plan (see Note 16).
 
9. Commitments and Contingencies
 
  Information Systems--In April 1998, the Company entered into a contract for
the replacement of its financial accounting systems. The cost of such systems,
which will be capitalized and amortized over five years, will be approximately
$1,600,000, of which $1,082,000 has been incurred as of December 31, 1998. The
project's completion is expected during the second quarter of 1999.
 
  Lease Obligations--The Company leases its office facilities and certain
equipment under both operating and capital leases, the expirations of which
extend through 2009. Future minimum lease payments under noncancellable leases
with lease terms in excess of one year as of December 31, 1998 are as follows:
 
<TABLE>
<CAPTION>
                                                           December 31, 1998
                                                          ---------------------
                                                          Capital    Operating
                                                          --------  -----------
      <S>                                                 <C>       <C>
      1999............................................... $392,000  $ 2,842,000
      2000...............................................  160,000    2,787,000
      2001...............................................   98,000    2,587,000
      2002...............................................   83,000    2,309,000
      2003...............................................   24,000    2,179,000
      Thereafter.........................................      --     9,550,000
                                                          --------  -----------
                                                           757,000  $22,254,000
                                                                    ===========
      Less: amount representing interest.................  (59,000)
                                                          --------
                                                          $698,000
                                                          ========
</TABLE>
 
  Rent expense, including rent expense resulting from leases with related
parties (see Note 7), was $2,329,000, $1,131,000 and $117,000 for the years
ended December 31, 1998, 1997 and 1996, respectively. The Company incurred a
non-cash charge of $570,000 during the year ended December 31, 1997 in
connection with the termination of a lease for office space that is included
in office and general expenses in the accompanying consolidated statements of
operations.
 
                                     F-18
<PAGE>
 
               MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
  Employment Agreements--In December 1996, the Company entered into employment
agreements with certain senior executives providing for aggregate initial base
salaries of approximately $1,100,000, subject to increases at the discretion
of the Company's Board of Directors. Pursuant to the agreements, if the
Company terminates any executive's employment without cause, the executive is
entitled to receive severance benefits for a predetermined period.
 
  Accrued Bonuses--Accrued expenses and other current liabilities include
accrued bonuses of $2,307,000 as of December 31, 1998, which were paid to
employees in March 1999.
 
  Other--In September 1998, the Company executed a letter of intent relating
to an investment of up to $5.0 million in a company that provides media
placement on the Internet. This letter of intent was terminated in the first
quarter of 1999.
 
10. Income Taxes
 
  The Company and its predecessor entities operated under tax-sharing
arrangements with their former parents. Until October 1, 1998, the effective
date of the Combination, the Poppe Tyson Strategic Interactive Marketing
Operations are included in the consolidated group of which True North is the
common parent for federal income tax purposes. The Poppe Tyson Strategic
Interactive Marketing Operations' federal taxable income and loss through
October 1, 1998 will be included in such group's consolidated tax return filed
by True North. Prospectively from the date of the Combination, the federal
income and loss of the Poppe Tyson Strategic Interactive Marketing Operations
will be included in the consolidated tax return filed by the Company.
 
  Prior to 1997, the Company was included in the consolidated federal and
state tax returns of True North. The settlement of tax provisions or benefits
with True North occurred in the subsequent year after True North filed its
related consolidated tax returns. In 1997, the Company filed a stand-alone
consolidated federal tax return. After the Company's initial public offering
(see Note 16), the Company and True North intend to enter into a tax-sharing
arrangement whereby the Company provides for and pays or receives certain
state taxes.
 
                                     F-19
<PAGE>
 
                MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
  The components of loss before income taxes are as follows:
 
<TABLE>
<CAPTION>
                                               Year Ended December 31,
                                         -------------------------------------
                                            1998         1997         1996
                                         -----------  -----------  -----------
<S>                                      <C>          <C>          <C>
Domestic................................ $(2,489,000) $(1,258,000) $    75,000
International...........................    (803,000)      81,000      (16,000)
True North Units Held for Transfer......     (13,000)  (2,180,000)  (1,309,000)
                                         -----------  -----------  -----------
                                         $(3,305,000) $(3,357,000) $(1,250,000)
                                         ===========  ===========  ===========
</TABLE>
 
  The provision (benefit) for income taxes consists of the following:
 
<TABLE>
<CAPTION>
                                                  Year Ended December 31,
                                               -------------------------------
                                                 1998       1997       1996
                                               ---------  ---------  ---------
<S>                                            <C>        <C>        <C>
Current provision (benefit):
  Federal..................................... $ 175,000  $ 250,000  $(399,000)
  Foreign.....................................   (17,000)    40,000     (7,000)
  State.......................................    71,000     68,000   (466,000)
                                               ---------  ---------  ---------
                                                 229,000    358,000   (872,000)
                                               ---------  ---------  ---------
Deferred (benefit) provision:
  Federal.....................................  (227,000)  (458,000)   196,000
  Foreign.....................................   (25,000)    (2,000)     2,000
  State.......................................   (79,000)  (146,000)   126,000
                                               ---------  ---------  ---------
                                                (331,000)  (606,000)   324,000
                                               ---------  ---------  ---------
Total benefit................................. $(102,000) $(248,000) $(548,000)
                                               =========  =========  =========
</TABLE>
 
  Differences between the Company's effective income tax rate and the U.S.
statutory rate were as follows:
 
<TABLE>
<CAPTION>
                                                                Year Ended
                                                               December 31,
                                                             ------------------
                                                             1998   1997   1996
                                                             -----  -----  ----
<S>                                                          <C>    <C>    <C>
Statutory federal tax rate..................................  35.0%  35.0% 35.0%
State taxes, net of federal benefit.........................   0.1    1.5  17.7
Impact of foreign operations................................  (2.1)  (2.8)  --
Goodwill amortization....................................... (20.9) (20.7) (7.4)
Other.......................................................  (4.4)  (5.6) (1.5)
                                                             -----  -----  ----
                                                               7.7    7.4  43.8
Valuation allowance.........................................  (4.6)   --    --
                                                             -----  -----  ----
Effective rate..............................................   3.1%   7.4% 43.8%
                                                             =====  =====  ====
</TABLE>
 
                                      F-20
<PAGE>
 
               MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
  The deferred tax assets and liabilities included in the consolidated
financial statements as of the balance sheet dates consist of the following:
<TABLE>
<CAPTION>
                                                              December 31,
                                                           --------------------
                                                             1998       1997
                                                           ---------  ---------
     <S>                                                   <C>        <C>
     Current assets:
      Accrued compensation...............................  $ 122,000  $  51,000
      Bad debt reserve...................................    234,000     13,000
      Lease reserve......................................    133,000    239,000
                                                           ---------  ---------
                                                             489,000    303,000
      True North Units Held for Transfer.................        --      16,000
                                                           ---------  ---------
                                                             489,000    319,000
                                                           ---------  ---------
     Noncurrent assets (liabilities):
      Net operating loss carryforwards...................    148,000        --
      Accelerated amortization...........................    109,000    108,000
      Other..............................................    120,000    (24,000)
                                                           ---------  ---------
                                                             377,000     84,000
      True North Units Held for Transfer.................        --    (126,000)
                                                           ---------  ---------
                                                             377,000    (42,000)
                                                           ---------  ---------
                                                             866,000    277,000
     Valuation allowance.................................   (153,000)       --
                                                           ---------  ---------
     Net deferred tax assets.............................  $ 713,000  $ 277,000
                                                           =========  =========
</TABLE>
 
  At December 31, 1998, the Company had net operating loss carryforwards of
$148,000 available to offset future taxable income. These carryforwards
resulted from foreign operating units and may be carried forward indefinitely.
 
                                     F-21
<PAGE>
 
               MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
11. Geographic Information
 
  Information about the Company's operations in different geographic regions
as of and for the years ended December 31, 1998, 1997 and 1996, is as follows:
<TABLE>
<CAPTION>
                                                   December 31,
                                        -------------------------------------
                                           1998         1997         1996
                                        -----------  -----------  -----------
   <S>                                  <C>          <C>          <C>
   Revenues:
    Domestic..........................  $37,348,000  $25,008,000  $ 1,967,000
    International.....................    5,196,000      489,000      126,000
                                        -----------  -----------  -----------
                                        $42,544,000  $25,497,000  $ 2,093,000
                                        ===========  ===========  ===========
   (Loss) income before income taxes:
    Domestic..........................  $(2,489,000) $(1,258,000) $    75,000
    International.....................     (803,000)      81,000      (16,000)
    True North Units Held for
     Transfer.........................      (13,000)  (2,180,000)  (1,309,000)
                                        -----------  -----------  -----------
                                        $(3,305,000) $(3,357,000) $(1,250,000)
                                        ===========  ===========  ===========
   Net (loss) income:
    Domestic..........................  $(2,312,000) $(1,434,000) $    60,000
    International.....................     (762,000)      43,000      (11,000)
    True North Units Held for
     Transfer.........................     (129,000)  (1,718,000)    (751,000)
                                        -----------  -----------  -----------
                                        $(3,203,000) $(3,109,000) $  (702,000)
                                        ===========  ===========  ===========
   Identifiable assets:
    Domestic..........................  $66,620,000  $49,641,000
    International.....................    4,666,000    1,810,000
    True North Units Held for
     Transfer.........................          --     7,573,000
                                        -----------  -----------
                                        $71,286,000  $59,024,000
                                        ===========  ===========
</TABLE>
 
12. Assets Under Capital Leases
 
  Assets under capital leases are included in the accompanying consolidated
balance sheets as follows:
 
<TABLE>
<CAPTION>
                                                            December 31,
                                                        ----------------------
                                                           1998        1997
                                                        ----------  ----------
     <S>                                                <C>         <C>
     Computers and software............................ $  387,000  $  343,000
     Furniture and other...............................    862,000     779,000
                                                        ----------  ----------
                                                         1,249,000   1,122,000
     Less: accumulated depreciation and amortization...   (593,000)   (272,000)
                                                        ----------  ----------
       Total assets under capital leases, net.......... $  656,000  $  850,000
                                                        ==========  ==========
</TABLE>
 
  Depreciation on assets under capital leases is included in depreciation
expense for all periods presented.
 
13. Supplemental Cash Flow Data
 
<TABLE>
<CAPTION>
                                                        Year Ended December 31,
                                                       -------------------------
                                                         1998     1997    1996
                                                       -------- -------- -------
     <S>                                               <C>      <C>      <C>
     Interest paid.................................... $185,000 $119,000 $   --
     Taxes paid....................................... $861,000 $256,000 $15,000
</TABLE>
 
                                     F-22
<PAGE>
 
               MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
14. Bad Debt Reserve
 
  The bad debt reserve and related activity is as follows:
 
<TABLE>
<CAPTION>
                                                      Write-
                          Balance at  Provision for offs, Net
                         Beginning of   Doubtful        of               Balance at
                             Year       Accounts    Recoveries   Other   End of Year
                         ------------ ------------- ----------  -------- -----------
<S>                      <C>          <C>           <C>         <C>      <C>
Year ended December 31,
 1998...................   $452,000     $660,000    $(144,000)  $    --   $968,000
Year ended December 31,
 1997...................   $408,000     $517,000    $(489,000)  $ 16,000  $452,000
Year ended December 31,
 1996...................   $    --      $    --     $     --    $408,000  $408,000
</TABLE>
 
  "Other" represents the bad debt reserve balances acquired in the
acquisitions of the Modem Partnership in 1996 and the Poppe Tyson Strategic
Interactive Marketing Operations in 1997 (see Note 1).
 
15. Quarterly Results of Operations (Unaudited)
 
<TABLE>
<CAPTION>
                                            Quarter Ended
                            -------------------------------------------------
                                                      September
                             March 31     June 30        30       December 31
                            ----------  -----------  -----------  -----------
   <S>                      <C>         <C>          <C>          <C>
   1998
   ----
   Revenues................ $9,016,000  $10,451,000  $10,930,000  $12,147,000
   Operating income
    (loss).................    124,000     (817,000)  (1,333,000)  (1,308,000)
   Income (loss) before
    income taxes...........    123,000     (820,000)  (1,334,000)  (1,274,000)
   Net loss................   (194,000)    (768,000)  (1,126,000)  (1,115,000)
   Net loss per share......      (0.03)       (0.11)       (0.15)       (0.14)
   1997
   ----
   Revenues................ $5,260,000  $ 5,854,000  $ 6,911,000  $ 7,472,000
   Operating loss..........   (912,000)  (1,123,000)    (138,000)  (1,108,000)
   Loss before income
    taxes..................   (934,000)  (1,131,000)    (170,000)  (1,122,000)
   Net loss................   (770,000)    (914,000)    (305,000)  (1,120,000)
   Net loss per share......      (0.11)       (0.13)       (0.04)       (0.15)
</TABLE>
 
  During the second quarter of 1998, the Company significantly increased
headcount in its domestic offices and incurred increased costs to support
office growth. During the fourth quarter of 1997, the Company incurred
approximately $255,000 in severance and as well as a non-cash charge of
$570,000 in connection with the termination of a lease for office space.
 
16. Subsequent Events
 
  Change in Authorized Shares/Reverse Stock Split--On January 11, 1999, the
Company's Board of Directors approved an amendment to the Company's
Certificate of Incorporation to provide for the authorization of an aggregate
of 39,351,376 shares of Class A common stock and 5,648,624 shares of Class B
common stock, and approved a 0.95-for-1 reverse split of both classes of the
Company's outstanding common stock effective upon completion of the
Combination described below. Accordingly, all historical share and per-share
amounts have been restated to reflect the changes in authorized shares and the
reverse stock split.
 
  The Combination--On February 3, 1999, the Company signed a definitive
agreement with True North to purchase the Poppe Tyson Strategic Interactive
Marketing Operations effective October 1, 1998 in exchange for (i) the net
assets of non-strategic digital interactive marketing businesses originally
contributed by True North to Modem Media in 1996 (ii) 809,514 shares of Class
B common stock of the Company and (iii) the forgiveness of $5,763,000 of
intercompany payables.
 
                                     F-23
<PAGE>
 
               MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
  Initial Public Offering--On February 10, 1999, the Company completed an
initial public offering of 2,600,000 shares of its Class A common stock at an
initial public offering price of $16.00 per share. In connection with the
offering, the Company granted its underwriters a 30-day option to purchase up
to an additional 390,000 shares of Class A common stock to cover over-
allotments. On March 2, 1999, the Company's underwriters exercised this
option. Total net proceeds from the offering were approximately $42,051,000.
The Company used a portion of these proceeds to settle a $6,000,000 note
payable to True North that became due and payable upon consummation of the
offering. The Company expects to use the remaining net proceeds for general
corporate purposes. Pending the use of the net proceeds for the above
purposes, the Company has invested such funds in short-term, interest-bearing,
investment grade obligations.
 
  Under the original agreement to purchase the Modem Partnership, True North
is obligated to provide additional consideration to the former owners of the
Modem Partnership upon completion of an initial public offering of the
Company's common stock (see Note 3). Accordingly, in February 1999, True North
paid $14,587,000 in cash and issued $3,931,000 in True North common stock to
the former owners of the Modem Partnership, which resulted in corresponding
increases in goodwill recorded on the books of the Company. The Company will
amortize such amounts over the remainder of the original 20-year amortization
period, beginning in February 1999.
 
  Stock Purchase Plan--Concurrently with its initial public offering, the
Company established an Employee Stock Purchase Plan (the "Purchase Plan")
under which a total of 950,000 shares of Class A common stock have been made
available for sale. Employees are eligible to participate in the Purchase Plan
if the Company employs them for at least 20 hours per week and for more than
five months in any calendar year. The Purchase Plan permits eligible employees
to purchase Class A common stock through payroll deductions, which may not
exceed 15% of an employee's compensation, as defined, subject to certain
limitations. The purchase price of each share of Class A common stock under
this plan will be equal to 85% of the fair market value per share of Class A
common stock on the first or last day of the offering period, whichever is
lower. The Purchase Plan will be implemented in a series of consecutive,
overlapping offering periods, each approximately six months in duration.
However, the first offering period shall be a period of 24 months commencing
on February 15, 1999 and terminating on February 14, 2001. Employees may
modify or end their participation in the offering at any time during the
offering period, subject to certain limitations. Participation ends
automatically on termination of employment with the Company. The Purchase Plan
will terminate in 2009 unless sooner terminated by the Company's Board of
Directors.
 
                                     F-24
<PAGE>
 
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To True North Communications Inc.:
 
  We have audited the accompanying balance sheet of Modem Media Advertising
Limited Partnership (a Connecticut limited partnership) as of December 31,
1996, and the related statements of income, partners' capital and cash flows
for the year then ended. These financial statements are the responsibility of
the management of Modem Media Advertising Limited Partnership. Our
responsibility is to express an opinion on these financial statements based on
our audit.
 
  We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
 
  In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Modem Media Advertising
Limited Partnership as of December 31, 1996 and the results of its operations
and its cash flows for the year then ended in conformity with generally
accepted accounting principles.
 
                                          Arthur Andersen LLP
 
Stamford, Connecticut
March 6, 1997
 
                                     F-25
<PAGE>
 
                  MODEM MEDIA ADVERTISING LIMITED PARTNERSHIP
 
                                 BALANCE SHEET
 
<TABLE>
<CAPTION>
                                                                    December 31,
                                                                        1996
                                                                    ------------
<S>                                                                 <C>
                              ASSETS
Current assets:
  Cash.............................................................  $2,586,000
  Accounts receivable, net of bad debt reserve of $408,000.........   4,287,000
  Unbilled revenues................................................     514,000
  Unbilled charges.................................................     475,000
  Prepaid expenses and other current assets........................     125,000
                                                                     ----------
    Total current assets...........................................   7,987,000
 
Property and equipment:
  Leasehold improvements...........................................     144,000
  Computers and software...........................................   1,957,000
  Furniture and other..............................................     576,000
                                                                     ----------
    Total property and equipment...................................   2,677,000
  Less: accumulated depreciation and amortization..................    (998,000)
                                                                     ----------
    Total property and equipment, net..............................   1,679,000
Other assets.......................................................      33,000
                                                                     ----------
    Total assets...................................................  $9,699,000
                                                                     ==========
                 LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
  Accounts payable.................................................  $1,576,000
  Pre-billed media.................................................   1,343,000
  Advance billings.................................................     965,000
  Deferred revenues................................................     161,000
  Current portion of capital lease obligations.....................      76,000
  Accrued compensation.............................................     313,000
  Due to partners..................................................   1,564,000
  Other current liabilities........................................     506,000
                                                                     ----------
    Total current liabilities......................................   6,504,000
 
Noncurrent liabilities:
  Capital lease obligations, less current portion..................     193,000
  Other liabilities................................................      26,000
 
Partners' capital:
  General partner's interest.......................................   3,031,000
  Limited partners' interest.......................................     (55,000)
                                                                     ----------
    Total partners' capital........................................   2,976,000
                                                                     ----------
      Total liabilities and partners' capital......................  $9,699,000
                                                                     ==========
</TABLE>
 
  The accompanying notes to financial statements are an integral part of this
                                 balance sheet.
 
                                      F-26
<PAGE>
 
                  MODEM MEDIA ADVERTISING LIMITED PARTNERSHIP
 
                              STATEMENT OF INCOME
 
<TABLE>
<CAPTION>
                                                                    Year Ended
                                                                     December
                                                                     31, 1996
                                                                    -----------
<S>                                                                 <C>
Revenues........................................................... $18,102,000
 
Costs and expenses:
  Salaries and benefits............................................   8,252,000
  Guaranteed payments to partners..................................   1,003,000
  Office and general...............................................   5,680,000
  Expense related to issuance of partnership options...............   3,045,000
                                                                    -----------
    Total operating expenses.......................................  17,980,000
 
Operating income...................................................     122,000
  Interest income..................................................      44,000
  Interest expense.................................................     (29,000)
                                                                    -----------
Net income......................................................... $   137,000
                                                                    ===========
</TABLE>
 
 
  The accompanying notes to financial statements are an integral part of this
                                   statement.
 
                                      F-27
<PAGE>
 
                  MODEM MEDIA ADVERTISING LIMITED PARTNERSHIP
 
                         STATEMENT OF PARTNERS' CAPITAL
 
<TABLE>
<CAPTION>
                                           General      Limited       Total
                                          Partner's    Partners'    Partners'
                                          Interest     Interest     Interest
                                         -----------  -----------  -----------
<S>                                      <C>          <C>          <C>
Partners' capital, December 31, 1995.... $ 2,029,000  $ 1,733,000  $ 3,762,000
  Net income............................      70,000       67,000      137,000
  Distributions.........................  (2,113,000)  (1,855,000)  (3,968,000)
  Issuance of partnership options.......   3,045,000          --     3,045,000
                                         -----------  -----------  -----------
Partners' capital, December 31, 1996.... $ 3,031,000  $   (55,000) $ 2,976,000
                                         ===========  ===========  ===========
</TABLE>
 
 
 
  The accompanying notes to financial statements are an integral part of this
                                   statement.
 
                                      F-28
<PAGE>
 
                  MODEM MEDIA ADVERTISING LIMITED PARTNERSHIP
 
                            STATEMENT OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                    Year Ended
                                                                   December 31,
                                                                       1996
                                                                   ------------
<S>                                                                <C>
Cash flows from operating activities:
  Net income...................................................... $   137,000
  Adjustments to reconcile net income to net cash provided by
   operating activities:
    Depreciation and amortization.................................     686,000
    Provision for doubtful accounts...............................     394,000
    Expense related to issuance of partnership options............   3,045,000
    Changes in assets and liabilities:
      Accounts receivable.........................................     252,000
      Unbilled revenues...........................................    (198,000)
      Unbilled charges............................................     284,000
      Prepaid expenses and other current assets...................    (103,000)
      Accounts payable and other current liabilities..............    (521,000)
      Pre-billed media............................................   1,132,000
      Advance billings............................................     933,000
      Deferred revenues...........................................      51,000
      Accrued compensation........................................      (7,000)
      Other, net..................................................      36,000
                                                                   -----------
        Net cash provided by operating activities.................   6,121,000
Cash flows from investing activities:
  Purchase of property and equipment..............................    (952,000)
                                                                   -----------
    Net cash used in investing activities.........................    (952,000)
Cash flows from financing activities:
  Bank overdrafts.................................................    (157,000)
  Principal payments made under capital lease obligations.........    (206,000)
  Partners' distributions, net....................................  (2,404,000)
                                                                   -----------
    Net cash used in financing activities.........................  (2,767,000)
Net increase in cash..............................................   2,402,000
Cash, at beginning of the year....................................     184,000
                                                                   -----------
Cash, at end of the year.......................................... $ 2,586,000
                                                                   ===========
Supplemental disclosure of cash flow information:
  Cash paid during the year for interest.......................... $    29,000
                                                                   ===========
</TABLE>
 
 
  The accompanying notes to financial statements are an integral part of this
                                   statement.
 
                                      F-29
<PAGE>
 
                  MODEM MEDIA ADVERTISING LIMITED PARTNERSHIP
 
                         NOTES TO FINANCIAL STATEMENTS
1. Business and Significant Accounting Policies
 
  Description of Business--Modem Media Advertising Limited Partnership ("Modem
Partnership"), a Connecticut limited partnership, was founded as Interactive
Response Media, a Connecticut general partnership, in 1987. In June 1993,
Interactive Response Media reorganized as a Connecticut limited partnership
and changed its name to Modem Media Advertising Limited Partnership. The Modem
Partnership is a technology-based marketing communications firm that provides
interactive marketing solutions to its customers.
 
  Effective December 31, 1996, True North Communications Inc. ("True North")
acquired a 64% interest in the Modem Partnership directly from the partners.
True North contributed its ownership in the Modem Partnership and certain
other businesses to its subsidiary, TN Technologies Inc., now named Modem
Media . Poppe Tyson, Inc. These transactions are further described in Note 3
to the consolidated financial statements of Modem Media . Poppe Tyson, Inc.
appearing elsewhere in this Annual Report on Form 10-K.
 
  Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
 
  Revenue Recognition--Revenues are recognized as services are rendered.
Unbilled revenues represent labor costs incurred and estimated earnings in
excess of billings. Unbilled charges represent production and other client
reimbursable out-of-pocket costs in excess of billings. Revenue is reported
net of such reimbursable costs. Pre-billed media represents amounts billed to
customers for media placement in advance of the advertisements being placed.
Advance billings represent billings of production and other client
reimbursable out-of-pocket costs in excess of those incurred. Amounts billed
to clients in excess of revenues recognized to date are classified as deferred
revenues. Provisions for estimated losses on uncompleted projects are made in
the period in which such losses are determinable.
 
  Business Concentration--The Modem Partnership's services have been provided
to a limited number of customers located in the United States in a variety of
industries. One customer accounted for approximately 78.4% of the Modem
Partnership's revenues during the year ended December 31, 1996.
 
  Property and Equipment--Property and equipment are stated at cost and are
depreciated, principally using the straight-line method, over their estimated
useful lives of three years for computers and software, and five to seven
years for furniture and other. Leasehold improvements are amortized over the
lesser of their estimated useful lives or the remaining lease term. The Modem
Partnership reviews its recorded fixed assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable and provides currently for any identified impairments.
 
  Income Taxes--The Modem Partnership is a limited partnership pursuant to the
provisions of the Internal Revenue and Connecticut State Tax Codes.
Consequently, any federal and state income taxes applicable to the Modem
Partnership's income are payable directly by its partners. Taxable income to
the partners, computed on a modified cash basis, was $5,105,000 for the year
ended December 31, 1996, as compared to pre-tax book income of $137,000 for
the identical period.
 
  Fair Value of Financial Instruments--The carrying value of the Modem
Partnership's assets and liabilities approximate their fair values due to the
short maturities of these financial instruments.
 
                                     F-30
<PAGE>
 
                  MODEM MEDIA ADVERTISING LIMITED PARTNERSHIP
 
                  NOTES TO FINANCIAL STATEMENTS--(Continued)
 
2. Bad Debt Reserve
 
  The Modem Partnership's bad debt reserve and related activity is as follows:
 
<TABLE>
<CAPTION>
                                    Balance                  Write-    Balance
                                      at     Provision for offs, Net    at End
                                   Beginning   Doubtful        of         of
                                   of Year     Accounts    Recoveries   Year
                                   --------- ------------- ----------  --------
<S>                                <C>       <C>           <C>         <C>
Year ended December 31, 1996...... $262,000    $394,000    $(248,000)  $408,000
</TABLE>
 
3. Lease Commitments
 
  The Modem Partnership leases office space in Westport and Norwalk,
Connecticut and equipment under capital and operating leases expiring in
various years through 2001. Rent expense related to operating leases totaled
$494,000 for the year ended December 31, 1996.
 
  Future minimum lease payments under noncancellable capital and operating
leases with lease terms in excess of one year as of December 31, 1996 are as
follows:
 
<TABLE>
<CAPTION>
                                                           December 31, 1996
                                                        -----------------------
                                                          Capital    Operating
                                                        ------------ ----------
      <S>                                               <C>          <C>
      1997............................................    $ 94,000   $  547,000
      1998............................................      74,000      524,000
      1999............................................      74,000      500,000
      2000............................................      55,000      291,000
      2001............................................       9,000          --
      Thereafter......................................         --           --
                                                          --------   ----------
                                                           306,000   $1,862,000
                                                                     ==========
      Less: amount representing interest..............     (37,000)
                                                          --------
                                                          $269,000
                                                          ========
 
  Assets under capital leases are included in the consolidated balance sheet
as follows:
 
<CAPTION>
                                                        December 31,
                                                            1996
                                                        ------------
      <S>                                               <C>          <C>
      Computers and software..........................    $ 12,000
      Furniture and other.............................     263,000
                                                          --------
                                                           275,000
      Less: accumulated depreciation and
       amortization...................................     (81,000)
                                                          --------
        Total assets under capital leases, net........    $194,000
                                                          ========
</TABLE>
 
  The Modem Partnership's obligations under the lease for office space in
Westport, Connecticut were guaranteed as of December 31, 1996 by a $160,000
standby letter of credit secured by accounts receivable and other assets. In
April 1996, the Company obtained an additional $100,000 standby letter of
credit to guarantee certain vendor payables.
 
  The Modem Partnership entered into two sublease agreements relative to the
Norwalk, Connecticut locations in October 1995 and May 1996. Total revenues to
be received in future years pursuant to these sublease agreements, which will
offset the Modem Partnership's obligation, approximate $58,000 at December 31,
1996.
 
                                     F-31
<PAGE>
 
                  MODEM MEDIA ADVERTISING LIMITED PARTNERSHIP
 
                  NOTES TO FINANCIAL STATEMENTS--(Continued)
 
4. Retirement Benefit Plan
 
  Since January 1, 1994, the Modem Partnership has maintained a profit-sharing
plan with a 401(k) feature for the benefit of eligible employees. No minimum
length of service is required to participate in the plan and employees of the
Company are eligible to begin participation on designated quarterly enrollment
dates provided that they have reached 21 years of age. The Modem Partnership
made discretionary matching contributions of $74,000 during the year ended
December 31, 1996.
 
5. Line of Credit
 
  At December 31, 1996, the Company had a $1,000,000 bank line of credit
secured by accounts receivable and other assets. No borrowings were
outstanding under such line of credit as of the balance sheet date.
 
6. Transactions with Partners
 
  Partner Compensation--The Modem Partnership's partners are also employees of
the Modem Partnership and their compensation is included in the accompanying
statement of income as "Guaranteed payments to partners." Distributions of the
Modem Partnership's net income to the partners are included in the financial
statements as "Distributions."
 
  Due to Partners--In December 1996, the partners of the Modem Partnership
declared a distribution of $1,564,000, which was paid in cash on January 2,
1997.
 
7. 1996 Option Plan
 
  In October 1996, the Modem Partnership established the Modem Media
Advertising Limited Partnership 1996 Option Plan and granted fully vested
options to certain employees to purchase interests in the Modem Partnership.
These options resulted in a pre-tax, one-time, non-cash charge against income
in the fourth quarter of 1996 of $3,045,000. The options have an exercise
price of $0.61 per share and vest upon issuance. The compensation expense was
calculated based upon the fair market value of the Modem Partnership's
ownership interests of approximately $9.00 per share, which is derived from
the acquisition of the Modem Partnership by True North in December 1996.
 
                                     F-32
<PAGE>
 
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To True North Communications Inc.:
 
  We have audited the accompanying balance sheets of the Poppe Tyson Strategic
Interactive Marketing Operations as of December 31, 1997 and 1996, and the
related statements of operations, changes in equity (deficit) and cash flows
for each of the two years in the period ended December 31, 1997. These
financial statements are the responsibility of the management of the Poppe
Tyson Strategic Interactive Marketing Operations. Our responsibility is to
express an opinion on these financial statements based on our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Poppe Tyson Strategic
Interactive Marketing Operations as of December 31, 1997 and 1996 and the
results of its operations and its cash flows for each of the two years in the
period ended December 31, 1997 in conformity with generally accepted
accounting principles.
 
                                          Arthur Andersen LLP
 
Stamford, Connecticut
November 16, 1998
 
                                     F-33
<PAGE>
 
             POPPE TYSON STRATEGIC INTERACTIVE MARKETING OPERATIONS
 
                                 BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                            December 31,
                                                        ----------------------
                                                           1997        1996
                                                        -----------  ---------
<S>                                                     <C>          <C>
                        ASSETS
Current assets:
  Cash................................................. $   147,000  $ 332,000
  Accounts receivable, net of bad debt reserve of
   $16,000 and $0, respectively........................     777,000    137,000
  Unbilled charges.....................................      46,000        --
  Prepaid expenses and other current assets............      60,000     21,000
                                                        -----------  ---------
    Total current assets...............................   1,030,000    490,000
Property and equipment:
  Leasehold improvements...............................       7,000        --
  Furniture, computers and software....................     693,000     24,000
                                                        -----------  ---------
    Total property and equipment.......................     700,000     24,000
  Less: accumulated depreciation and amortization......    (168,000)    (3,000)
                                                        -----------  ---------
    Total property and equipment, net..................     532,000     21,000
Other assets...........................................       3,000      5,000
                                                        -----------  ---------
  Total assets......................................... $ 1,565,000  $ 516,000
                                                        ===========  =========
           LIABILITIES AND EQUITY (DEFICIT)
Current liabilities:
  Accounts payable..................................... $   366,000  $  72,000
  Current portion of capital lease obligations.........     139,000         --
  Accrued liabilities..................................     608,000    233,000
                                                        -----------  ---------
    Total current liabilities..........................   1,113,000    305,000
Noncurrent liabilities:
  Due to Bozell, non-interest bearing..................   3,346,000    724,000
  Capital lease obligations, less current portion......     120,000        --
Equity (deficit):
  Accumulated deficit..................................  (2,980,000)  (480,000)
  Accumulated other comprehensive income...............     (34,000)   (33,000)
                                                        -----------  ---------
    Total equity (deficit).............................  (3,014,000)  (513,000)
                                                        -----------  ---------
  Total liabilities and equity (deficit)............... $ 1,565,000  $ 516,000
                                                        ===========  =========
</TABLE>
 
  The accompanying notes to financial statements are an integral part of these
                                balance sheets.
 
                                      F-34
<PAGE>
 
             POPPE TYSON STRATEGIC INTERACTIVE MARKETING OPERATIONS
 
                            STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                             Year Ended
                                                            December 31,
                                                        ----------------------
                                                           1997        1996
                                                        -----------  ---------
<S>                                                     <C>          <C>
Revenues............................................... $ 3,925,000  $ 126,000
Costs and expenses:
  Salaries and benefits................................   3,350,000    429,000
  Office and general...................................   3,177,000    177,000
                                                        -----------  ---------
    Total operating expenses...........................   6,527,000    606,000
Operating loss.........................................  (2,602,000)  (480,000)
Interest expense, net..................................     (46,000)       --
                                                        -----------  ---------
Loss before income taxes...............................  (2,648,000)  (480,000)
Benefit for income taxes...............................    (148,000)       --
                                                        -----------  ---------
Net loss............................................... $(2,500,000) $(480,000)
                                                        ===========  =========
</TABLE>
 
 
 
  The accompanying notes to financial statements are an integral part of these
                                  statements.
 
                                      F-35
<PAGE>
 
             POPPE TYSON STRATEGIC INTERACTIVE MARKETING OPERATIONS
 
                   STATEMENTS OF CHANGES IN EQUITY (DEFICIT)
 
<TABLE>
<CAPTION>
                                                      Accumulated
                                                         Other        Total
                                        Accumulated  Comprehensive    Equity
                                          Deficit       Income      (Deficit)
                                        -----------  ------------- -----------
<S>                                     <C>          <C>           <C>
Balance as of December 31, 1995........ $       --     $    --     $       --
Comprehensive income:
  Net loss.............................    (480,000)        --        (480,000)
  Foreign currency translation
   adjustment..........................         --      (33,000)       (33,000)
                                                                   -----------
    Total comprehensive income.........                               (513,000)
                                        -----------    --------    -----------
Balance as of December 31, 1996........    (480,000)    (33,000)      (513,000)
Comprehensive income:
  Net loss.............................  (2,500,000)        --      (2,500,000)
  Foreign currency translation
   adjustment..........................         --       (1,000)        (1,000)
                                                                   -----------
    Total comprehensive income.........                             (2,501,000)
                                        -----------    --------    -----------
Balance as of December 31, 1997........ $(2,980,000)   $(34,000)   $(3,014,000)
                                        ===========    ========    ===========
</TABLE>
 
 
 
  The accompanying notes to financial statements are an integral part of these
                                  statements.
 
                                      F-36
<PAGE>
 
             POPPE TYSON STRATEGIC INTERACTIVE MARKETING OPERATIONS
 
                            STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                             Year Ended
                                                            December 31,
                                                        ----------------------
<S>                                                     <C>          <C>
                                                           1997        1996
                                                        -----------  ---------
Cash flows from operating activities:
  Net loss............................................. $(2,500,000) $(480,000)
    Adjustments to reconcile net loss to net cash used
     in
    operating activities:
      Depreciation and amortization....................     165,000      3,000
      Provision for doubtful accounts..................      16,000        --
      Changes in assets and liabilities:
        Accounts receivable............................    (656,000)  (137,000)
        Unbilled charges...............................     (46,000)       --
        Prepaid expenses and other current assets......     (39,000)   (21,000)
        Accounts payable...............................     294,000     72,000
        Accrued liabilities............................     375,000    233,000
        Other, net.....................................       1,000    (38,000)
                                                        -----------  ---------
          Net cash used in operating activities........  (2,390,000)  (368,000)
Cash flows from investing activities:
  Purchase of property and equipment...................    (289,000)   (24,000)
                                                        -----------  ---------
          Net cash used in investing activities........    (289,000)   (24,000)
Cash flows from financing activities:
  Funding from parent company..........................   2,622,000    724,000
  Principal payments made under capital lease
   obligations.........................................    (128,000)        --
 
                                                        -----------  ---------
          Net cash provided by financing activities....   2,494,000    724,000
                                                        -----------  ---------
Net (decrease) increase in cash........................    (185,000)   332,000
Cash, at beginning of the year.........................     332,000        --
                                                        -----------  ---------
Cash, at end of the year............................... $   147,000  $ 332,000
                                                        ===========  =========
Supplemental disclosure of cash flow information:
  Cash paid during the year for interest............... $    46,000  $     --
                                                        ===========  =========
</TABLE>
 
  The accompanying notes to financial statements are an integral part of these
                                  statements.
 
                                      F-37
<PAGE>
 
            POPPY TYSON STRATEGIC INTERACTIVE MARKETING OPERATIONS
 
                         NOTES TO FINANCIAL STATEMENTS
 
1. Business and Significant Accounting Policies
 
  Description of Business--Poppe Tyson, Inc. ("Poppe Tyson") was formed in
December 1985 as a subsidiary of Bozell, Jacobs, Kenyon & Eckhardt, Inc.
("Bozell"), which was acquired by True North Communications Inc. ("True
North") in December 1997 in a business combination accounted for under the
pooling-of-interests method. Poppe Tyson includes the strategic interactive
marketing operations and website production and maintenance businesses of
Bozell.
 
  The strategic interactive marketing operations of Poppe Tyson (the "Poppe
Tyson Strategic Interactive Marketing Operations" or the "Company") consist of
Poppe Tyson's strategic interactive marketing operations in the United
Kingdom, Hong Kong and the U.S., and certain fixed assets. The operations in
the United Kingdom commenced operations in the fourth quarter of 1996 and the
operations in Hong Kong and the United States commenced in 1997.
 
  Effective October 1, 1998, the Poppe Tyson Strategic Interactive Marketing
Operations were purchased by Modem Media . Poppe Tyson, Inc. ("Modem Media"),
formerly TN Technologies, Inc. This transaction is further discussed in Notes
1 and 3 to the consolidated financial statements of Modem Media appearing
elsewhere in this Annual Report on Form 10-K.
 
  Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the dates of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
 
  Revenue Recognition--Revenues are recognized as services are rendered.
Unbilled charges represent production and other client reimbursable out-of-
pocket costs in excess of billings. Revenue is reported net of such
reimbursable costs. Amounts billed to clients in excess of revenues recognized
to date are classified as deferred revenues. Provisions for estimated losses
on uncompleted projects are made in the period in which such losses are
determinable.
 
  Business Concentration and Credit Risk--The Company's services have been
provided to a limited number of clients in a variety of industries. One
customer accounted for 42.4% and three customers accounted for 75.0% of the
Company's revenues during the years ended December 31, 1997 and 1996,
respectively.
 
  Two customers accounted for 34.7% of gross accounts receivable as of
December 31, 1997 and four customers accounted for the entire accounts
receivable balance as of December 31, 1996.
 
  Property and Equipment--Property and equipment are stated at cost and are
depreciated, principally using the straight-line method, over their estimated
useful lives of three years for computers and software, and five to seven
years for furniture and other. Leasehold improvements are amortized over the
lesser of their estimated useful lives or the remaining lease term. The
Company reviews its recorded fixed assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable and provides currently for any identified impairments.
 
  Income Taxes--The Company and Bozell have certain tax-sharing arrangements
as described in Note 4. The Company accounts for income taxes under the
liability method in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 109, Accounting for Income Taxes. In accordance with
such standard, the provision for income taxes includes deferred income taxes
resulting from items reported in different periods for income tax and
financial statement purposes. Deferred tax assets and liabilities represent
the expected future tax consequences of the differences between the financial
statement carrying amounts of existing assets and liabilities
 
                                     F-38
<PAGE>
 
            POPPY TYSON STRATEGIC INTERACTIVE MARKETING OPERATIONS
 
                  NOTES TO FINANCIAL STATEMENTS--(Continued)
and their respective tax bases. The effects of changes in tax rates on
deferred tax assets and liabilities are recognized in the period that includes
the enactment date.
 
  Foreign Currency Translation--The Company's financial statements were
prepared in accordance with the requirements of SFAS No. 52, Foreign Currency
Translation. Under this method, net foreign currency transaction gains and
losses are included in the accompanying statements of operations. Such gains
and losses were immaterial for the years ended December 31, 1997 and 1996.
 
  Fair Value of Financial Instruments--The carrying value of the Company's
assets and liabilities approximate their fair values due to the short
maturities of these financial instruments.
 
2. Lease Commitments
 
  The Company leases office space in the United Kingdom and Hong Kong and
equipment under capital and operating leases expiring in various years through
2002. Rent expense related to operating leases totaled $231,000 and $35,000
for the years ended December 31, 1997 and 1996, respectively.
 
  Future minimum lease payments under noncancellable capital and operating
leases with lease terms in excess of one year as of December 31, 1997 are as
follows:
 
<TABLE>
<CAPTION>
                                                             Capital   Operating
                                                             --------  ---------
      <S>                                                    <C>       <C>
      1998.................................................. $185,000  $287,000
      1999..................................................  143,000   253,000
      2000..................................................   15,000   125,000
      2001..................................................       --   125,000
      2002..................................................       --    32,000
      Thereafter............................................       --        --
                                                             --------  --------
                                                              343,000  $822,000
                                                                       ========
      Less: amount representing interest....................  (84,000)
                                                             --------
                                                             $259,000
                                                             ========
</TABLE>
 
  Assets under capital leases are included in the 1997 balance sheet as
follows:
 
<TABLE>
      <S>                                                              <C>
      Furniture, computers and software..............................  $387,000
      Less: accumulated depreciation and amortization................   (55,000)
                                                                       --------
      Total assets under capital leases, net.........................  $332,000
                                                                       ========
</TABLE>
 
3. Related Party Transactions
 
  Due to Bozell--Amounts remitted to, and borrowed from, Bozell to fund
operations are non-interest bearing. Amounts owed to Bozell as of the
effective date of the sale of the Company to Modem Media (see Note 1) will be
contributed to paid-in capital. Accordingly, the balances outstanding as of
December 31, 1997 and 1996 have been reflected as noncurrent liabilities in
the accompanying balance sheets.
 
 
                                     F-39
<PAGE>
 
            POPPY TYSON STRATEGIC INTERACTIVE MARKETING OPERATIONS
 
                  NOTES TO FINANCIAL STATEMENTS--(Continued)
  The average amount outstanding for the year ended December 31, 1997 was
approximately $60,000. The amount was incurred ratably over the year as
advances to fund operations.
 
  Parent Company Allocations--Bozell charges each of its operating units for
general corporate expenses incurred at the parent company level, including
costs to administer certain employee benefit plans; legal, accounting and
treasury services; use of office facilities; and other services for certain
operations. These charges amounted to approximately $115,000 and $0 for the
years ended December 31, 1997 and 1996, respectively, and are included in
office and general expenses in the accompanying statements of operations. The
Company believes that the method used to allocate these general corporate
expenses (based on revenue) is reasonable and that the expenses that would
have been incurred on a stand-alone basis would not be materially different.
 
4. Income Taxes
 
  The Company operates under a tax-sharing agreement with its parent, Bozell,
and until October 1, 1998, the effective date of the sale of the Company to
Modem Media will continue to be, for federal income tax purposes, included in
Bozell's consolidated returns.
 
  The components of loss before income taxes are as follows:
 
<TABLE>
<CAPTION>
                                                         Year Ended December
                                                                 31,
                                                        -----------------------
                                                            1997        1996
                                                        ------------  ---------
      <S>                                               <C>           <C>
      Domestic........................................  $   (352,000) $      --
      International...................................    (2,296,000)  (480,000)
                                                        ------------  ---------
                                                        $(2,648,000)  $(480,000)
                                                        ============  =========
</TABLE>
 
  The benefit for income taxes consists of the following:
 
<TABLE>
<CAPTION>
                                                       Year Ended December 31,
                                                       --------------------------
                                                           1997          1996
                                                       -------------  -----------
      <S>                                              <C>            <C>
      Current benefit:
        Federal....................................... $    (110,000) $       --
        Foreign.......................................            --          --
        State.........................................       (38,000)         --
                                                       -------------  ----------
                                                           $(148,000) $       --
                                                       =============  ==========
</TABLE>
 
  The Company's effective income tax rates and the U.S. statutory rate of
35.0% differ principally because the Company has not recognized tax benefits
on the losses of its international operations.
 
5. Subsequent Events
 
  Effective October 1, 1998, the Poppe Tyson Strategic Interactive Marketing
Operations were purchased by Modem Media, formerly TN Technologies, Inc. This
transaction is further discussed in Notes 1 and 3 to the consolidated
financial statements of Modem Media appearing elsewhere in this Annual Report
on Form 10-K.
 
                                     F-40