**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      DC 20549







FORM
      10-Q





**(Mark
      One)**





**[X]
      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
      SECURITIES**


**EXCHANGE
      ACT OF 1934**




**For
      the Quarterly Period Ended March 31, 2006**


**OR**





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


**EXCHANGE
      ACT OF 1934** ****





**For
      the Transition Period From** **** **to** **** **.**







**Commission
      File Number: 000-25781**





**NET
      PERCEPTIONS, INC.**


(Exact
      Name of Registrant as Specified in its Charter)





**Delaware**
            
            **41-1844584**(State
                or other jurisdiction of
              incorporation
                or organization)
            
            (I.R.S.
                Employer
              Identification
                Number)





**One
      Landmark Square**


**Stamford,
      Connecticut 06901**


(Address
      of principal executive offices, Zip Code)








**(203)
      428-2040**


(Registrant’s
      telephone number, including area code)





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act. YESoNOx





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Exchange Act.
      YES o 
NOx





Indicate
      by check mark whether the registrant: (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the Registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. YES xNO o





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Large
      accelerated filer o Accelerated
      filer o Non-accelerated filer x





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act) YES o  NOx





As
      of May
      10, 2006, there were outstanding 29,113,275 shares of the registrant’s Common
      Stock, $0.0001 par value.











**NET
      PERCEPTIONS, INC.**


FORM
      10-Q


For
      the
      Quarter Ended March 31, 2006










**TABLE
      OF CONTENTS**








**Page****PART
                I. FINANCIAL INFORMATION**Item
                1. Financial StatementsConsolidated
                Balance Sheets as of March 31, 2006 and December 31, 2005
            3Consolidated
                Statements of Operations for the Three Months Ended March 31, 2006
                and
                2005
            4Consolidated
                Statements of Cash Flows for the Three Months Ended March 31, 2006
                and
                2005
            5Notes
                to the Consolidated Financial Statements
            6Item
                2. Management’s Discussion and Analysis of Financial Condition and Results
                of Operations
            11Item
                3. Quantitative and Qualitative Disclosures about Market
                Risk
            16Item
                4. Controls and Procedures
            16**PART
                II. OTHER INFORMATION**Item
                6. Exhibits
            17**SIGNATURES**
            17**EXHIBIT
                INDEX**
            18








2


**PART
      I.**  **FINANCIAL
      INFORMATION**





**Item
      1.**  **Financial
      Statements**





**NET
      PERCEPTIONS, INC.**





CONSOLIDATED
      BALANCE SHEETS


(in
      thousands)





March
                31,
              2006
            
            December
                31,
              2005(Unaudited)**Assets**Current
                assets:Cash
                and cash equivalents
            
            $
            199
            
            $
            203Marketable
                securities
            
            
            14,746
            
            
            14,659Prepaid
                expenses and other current assets
            
            
            93
            
            
            123Total
                current assets
            
            
            15,038
            
            
            14,985Other
                assets
            
            
            232
            
            
            210Total
                assets
            
            $
            15,270
            
            $
            15,195**Liabilities
                and Stockholders’ Equity**Current
                liabilities:Accounts
                payable & accrued liabilities
            
            
            381
            
            
            354Total
                current liabilities
            
            
            381
            
            
            354Note
                payable
            
            
            2,533
            
            
            2,533Total
                liabilities
            
            
            2,914
            
            
            2,887Commitments
                and contingenciesStockholders’
                equity:Common
                stock
            
            
            2
            
            
            2Additional
                paid-in capital
            
            
            234,282
            
            
            234,400Unearned
                stock compensation
            
            
            --
            
            
            (108
            )Accumulated
                other comprehensive loss
            
            
            (7
            )
            
            (4
            )Accumulated
                deficit
            
            
            (221,921
            )
            
            (221,982
            )Total
                stockholders’ equity
            
            
            12,356
            
            
            12,308Total
                liabilities and stockholders’ equity
            
            $
            15,270
            
            $
            15,195








See
      accompanying notes to the consolidated financial statements.


3





**NET
      PERCEPTIONS, INC.**





CONSOLIDATED
      STATEMENTS OF OPERATIONS


(Unaudited,
      in thousands, except per share amounts)








Three
                Months EndedMarch
                31,2006
            
            2005Revenues:Service,
                maintenance and royalties
            
            $
            19
            
            $
            10Total
                revenues
            
            
            19
            
            
            10Cost
                of revenues:Service
                and maintenance
            
            
            --
            
            
            --Total
                cost of revenues
            
            
            --
            
            
            --Gross
                margin
            
            
            19
            
            
            10Operating
                expenses:General
                and administrative
            
            
            88
            
            
            60Gain
                on litigation settlement
            
            
            --
            
            
            (229
            )Total
                operating expenses
            
            
            88
            
            
            (169
            )Operating
                income
            
            
            (69
            )
            
            179Other
                income (expense):Interest
                income
            
            
            159
            
            
            83Interest
                expense
            
            
            (13
            )
            
            (27
            )Other
                (expense) income
            
            
            (16
            )
            
            24Total
                other income, net
            
            
            130
            
            
            80Net
                income
            
            $
            61
            
            $
            259Net
                income per share:Basic
            
            $
            0.00
            
            $
            0.01Diluted
            
            $
            0.00
            
            $
            0.01Shares
                used in computing basic and diluted net income per share:Basic
            
            
            28,992
            
            
            28,918Diluted
            
            
            34,810
            
            
            29,172





See
      accompanying notes to the consolidated financial statements.





4




**NET
      PERCEPTIONS, INC.**





CONSOLIDATED
      STATEMENTS OF CASH FLOWS


(Unaudited,
      in thousands)





Three
                Months Ended
              March
                31,2006
            
            2005**Cash
                flows from operating activities:**Net
                income
            
            $
            61
            
            $
            259Reconciliation
                of net income to net cash provided by (used in) operating
                activities:Amortization
                of discount on investments, net
            
            
            (120
            )
            
            --Amortization
                of debt issuance costs
            
            
            8
            
            
            7Amortization
                of discount on notes payable
            
            
            --
            
            
            14Stock
                based compensation
            
            
            26
            
            
            15Changes
                in assets and liabilities:Accounts
                receivable
            
            
            --
            
            
            (5
            )Prepaid
                expenses and other current assets
            
            
            30
            
            
            (52
            )Accounts
                payable & accrued liabilities
            
            
            (9
            )
            
            17Other
                assets
            
            
            (30
            )
            
            --Net
                cash (used in) provided by operating activities
            
            
            (34
            )
            
            255**Cash
                flows from investing activities:**Purchase
                of marketable securities
            
            
            (11,620
            )
            
            --Proceeds
                from the sales of marketable securities
            
            
            11,650
            
            
            --Net
                cash provided by investing activities
            
            
            30
            
            
            --**Cash
                flows from financing activities:**Net
                cash provided by financing activities
            
            
            --
            
            
            --Net
                (decrease) increase in cash and cash equivalents
            
            
            (4
            )
            
            255Cash
                and cash equivalents at beginning of period
            
            
            203
            
            
            14,444Cash
                and cash equivalents at end of period
            
            $
            199
            
            $
            14,699SUPPLEMENTAL
              DISCLOSURE:Deferred
              compensation
            
            $
            5
            
            $
            15Restricted
              stock
            
            $
            (36
            )
            $
            ---Cash
              paid for taxes
            
            $
            5
            
            $
            3







See
      accompanying notes to the consolidated financial statements.




5


NET
      PERCEPTIONS, INC.





NOTES
      TO
      THE CONSOLIDATED FINANCIAL STATEMENTS


(dollars
      in thousands, except per share amounts)





**Note
      1. Basis of Presentation**





In
      the
      opinion of management, the accompanying unaudited financial statements contain
      all adjustments necessary to make a fair statement of the Company’s financial
      position, results of operations and cash flows for the periods presented. These
      adjustments consist of normal, recurring items unless otherwise noted. The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts therein. Due to
      the
      inherent uncertainty involved in making estimates, actual results in future
      periods may differ from those estimates *.*





Certain
      information and footnote disclosures normally included in financial statements
      prepared in accordance with generally accepted accounting principles have been
      condensed or omitted. These financial statements should be read in conjunction
      with the Company’s financial statements and notes thereto for the year ended
      December 31, 2005, which are contained in the Company’s Annual Report on Form
      10-K filed with the Securities and Exchange Commission on March 31, 2006. The
      results of operations for the interim periods presented are not necessarily
      indicative of results that may be expected for any other interim period or
      for
      the full fiscal year *.*





The
      consolidated financial statements include accounts of the Company and its wholly
      owned subsidiaries. All inter-company accounts and transactions have been
      eliminated.





**Note
      2. Stock-based compensation**





On
      January 1, 2006, the Company adopted Statement of Financial Accounting Standards
      No. 123 (revised 2004), “Share-Based Payments” (“FAS 123R”), requiring
      recognition of expense related to the fair value of stock option awards. The
      Company recognizes the cost of the share-based awards on a straight-line basis
      over the requisite service period of the award. Prior to January 1, 2006, the
      Company accounted for stock option plans under the recognition and measurement
      provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock
      Issued to Employees” (“APB 25”) and related interpretations, as permitted by
      Statement of Financial Accountant Standard No. 123, “Accounting for Stock-Based
      Compensation” (“SFAS 123”). Effective January 1, 2006, the Company adopted the
      fair value provisions of FAS 123R, using the modified prospective transition
      method. Under this transition method, compensation cost recognized during the
      first quarter of 2006 includes compensation cost for all share-based payments
      granted prior to, but not yet vested as of January 1, 2006, based on the grant
      date fair value estimated in accordance with the original provisions of SFAS
      123. Results for prior periods have not been restated.





We
      will
      continue to estimate the fair value of our option awards granted after January
      1, 2006, using a Black-Scholes option pricing model. No options were granted
      during the three-month period ended March 31, 2006. As of March 31, 2006, there
      were 218 unvested shares and compensation expense of $5 recognized from these
      unvested stock options. The remaining compensation expense for these unvested
      options is $84 as of the quarter ended March 31, 2006. The expected life of
      the
      options granted is management’s estimate and represents the period of time that
      options granted are expected to be outstanding. We currently do not pay
      dividends. Volatility is based on the historical volatility of our stock price.
      The risk-free interest rate for periods within the contractual life of the
      option is based on the U.S. Treasury yield curve in effect at the time of grant.




The
      fair
      value of each option grant during the three months ended March 31, 2005 is
      estimated on the date of grant with the following weighted-average
      assumptions:




Expected life of option
            5 yearsDividend yield
            0.0%Volatility
            57.0%Risk free interest rate
            4.0%







6


The
      weighted average fair value of options granted during the three months ended
      March 31, 2005 is as follows:





Fair
              value of each option grant
            
            $
            0.39Total
              number of options granted
            
            
            65Total
              fair value of all options
              granted
            
            $
            25




Outstanding
      options, consisting of incentive and non-qualified stock options, generally
      vest
      and become exercisable over a one- to three-year period from the date of grant.
      The outstanding options generally expire ten years from date of grant or upon
      retirement from the Company and are contingent upon continued employment during
      the applicable ten-year period. The following assumptions were utilized under
      FAS 123R for the outstanding options as of March 31, 2006:








March 31, 2006Expected life of options
            5.65 yearsDividend yield
            0.0%Volatility
            52.8%Risk free interest rate
            3.4%Fair value of each option
              grant
            $0.28





The
      following table shows what the effect on net income and income per share if
      the
      fair value recognition provisions of SFAS 123, to options granted under our
      stock option plans during the three-month period ended March 31, 2005. For
      purposes of this pro forma disclosure, the value of the options is amortized
      to
      expense on a straight-line basis over the vesting period and forfeitures are
      recognized as they occur.





Net
                income, as reported
            
            $
            259Add:
                Stock-based employee compensation expense included in reported net
                income
            
            
            15Deduct:
                Total stock-based employee compensation expense determined under
                fair
                value based method for all awards
            
            
            (20
            )Pro
                forma net income
            
            $
            254Net
                income per share:BasicAs reported
            
            $
            0.01Pro forma
            
            $
            0.01DilutedAs reported
            
            $
            0.01Pro forma
            
            $
            0.01








A
      summary
      of the status of stock option grants as of March 31, 2006, and changes during
      the three months ended March 31, 2006, is presented below:





WeightedAverageOptions
              
              Exercise
                  PriceOutstanding
                  at December 31, 2005
              
              
              321
              
              $
              0.68Granted
              
              
              --
              
              
              --Exercised
              
              
              --
              
              
              --Forfeited
              
              
              --
              
              
              --Outstanding
                  at March 31, 2006
              
              
              321
              
              $
              0.68Options
                  exercisable at March 31, 2006
              
              
              102
              
              $
              0.67
  7





The
        following table summarizes information about stock options outstanding as
        of
        March 31, 2006:
 
 WeightedExercise
                  Price
              
              
              
              
              
              Remaining
                  Life
              
              AverageRange
              
              Outstanding
              
              Exercisable
              
              In
                  Years
              
              Exercise
                  Price$0.23
              
              
              6
              
              
              6
              
              
              5.00
              
              $
              0.23$0.48
              
              
              50
              
              
              25
              
              
              8.06
              
              $
              0.48$0.69
              
              
              100
              
              
              --
              
              
              9.61
              
              $
              0.69$0.74
                  - $0.75
              
              
              165
              
              
              93
              
              
              8.45
              
              $
              0.74Total
              
              
              321
              
              
              102
              
              
              8.03
              
              $
              0.67
 
 Remaining
        non-exercisable options as of March 31, 2006, become exercisable as
        follows:
 
 Remainder
                  of 2006
              1082007
              552008
              56
 
 The
        fair
        value of unvested shares is determined based on the market price of our shares
        on the grant date.


**Note
      3. Per Share Data**








Basic
      earnings per share is computed using net income and the weighted average number
      of common shares outstanding. Diluted earnings per share reflects the weighted
      average number of common shares outstanding plus any potentially dilutive shares
      outstanding during the period. Potentially dilutive shares consist of shares
      issuable upon the exercise of stock options and restricted stock awards and
      a
      convertible note. Shares used in the diluted net income per share for the three
      months ended March 31, 2006 and 2005, exclude the impact of 265 and zero
      potential common shares from exercise of stock options, respectively, which
      were
      anti-dilutive.








**Three
                Months Ended****March
                31,****2006**
            
            **2005****Basic
                earnings per share calculation:**Net
                income
            
            $
            61
            
            $
            259Weighted
                average common shares - basic
            
            
            28,992
            
            
            28,918Basic
                net income per share
            
            $
            0.00
            
            $
            0.01**Diluted
                earnings per share calculation:**Net
                income
            
            $
            61
            
            $
            259Weighted
                average common shares - basic
            
            
            28,992
            
            
            28,918Effect
                of dilutive stock options
            
            
            14
            
            
            46Effect
                of convertible note
            
            
            5,628
            
            
            --Effect
                of restricted stock awards
            
            
            176
            
            
            208Weighted
                average common shares - diluted
            
            
            34,810
            
            
            29,172Diluted
                net income per share
            
            $
            0.00
            
            $
            0.01








**Note
      4. Commitments and Contingencies**





Contingencies





Except
      as
      set forth below, we are not a party to nor are any of our properties subject
      to
      any pending legal, administrative or judicial proceedings other than routine
      litigation incidental to our business.




8




Public
      Offering Securities Litigation





On
      November 2, 2001, Timothy J. Fox filed a purported class action lawsuit against
      the Company; FleetBoston Robertson Stephens, Inc., the lead underwriter of
      the
      Company’s April 1999 initial public offering; several other underwriters who
      participated in the initial public offering; Steven J. Snyder, the Company’s
      then president and chief executive officer; and Thomas M. Donnelly, the
      Company’s then chief financial officer. The lawsuit was filed in the United
      States District Court for the Southern District of New York and was assigned
      to
      the pretrial coordinating judge for substantially similar lawsuits involving
      more than 300 other issuers. An amended class action complaint, captioned *In
      re
      Net Perceptions, Inc. Initial Public Offering Securities*  *Litigation,* 01
      Civ.
      9675 (SAS), was filed on April 22, 2002, expanding the basis for the action
      to
      include allegations relating to the Company’s March 2000 follow-on public
      offering in addition to those relating to its initial public offering.  The
      action against the Company was thereafter coordinated with the other
      substantially similar class actions as *In
      re
      Initial Public Offering Securities Litigation* ,
      21 MC
      (SAS) (the “Coordinated Class Actions”).





The
      amended complaint generally alleges that the defendants violated federal
      securities laws by not disclosing certain actions taken by the underwriter
      defendants in connection with the Company’s initial public offering and
      follow-on public offering. The amended complaint alleges specifically that
      the
      underwriter defendants, with the Company’s direct participation and agreement
      and without disclosure thereof, conspired to and did raise and increase their
      underwriters’ compensation and the market prices of the Company’s common stock
      following its initial public offering and in its follow-on public offering
      by
      requiring their customers, in exchange for receiving allocations of shares
      of
      the Company’s common stock sold in its initial public offering, to pay excessive
      commissions on transactions in other securities, to purchase additional shares
      of the Company’s common stock in the initial public offering aftermarket at
      pre-determined prices above the initial public offering price, and to purchase
      shares of the Company’s common stock in its follow-on public offering. The
      amended complaint seeks unspecified monetary damages and certification of a
      plaintiff class consisting of all persons who acquired the Company’s common
      stock between April 22, 1999 and December 6, 2000. The plaintiffs have since
      agreed to dismiss the claims against Mr. Snyder and Mr. Donnelly without
      prejudice, in return for their agreement to toll any statute of limitations
      applicable to those claims; and those claims have been dismissed without
      prejudice.





On
      August
      31, 2005, the Court gave preliminary approval to a settlement reached by the
      plaintiffs and issuer defendants in the Coordinated Class Actions. A fairness
      hearing took place April 24, 2006, but the Court has not yet made a final
      determination whether to approve the settlement as fair, adequate and
      reasonable.  In the opinion of management, the ultimate disposition of this
      matter will not have a material effect on the Company’s financial position,
      results of operation or cash flows.





**Note
      5. Income Taxes**





The
      Company has incurred significant operating losses for all periods from inception
      through March 31, 2006. For income tax purposes, the Company has available
      federal net operating loss carry-forwards of approximately $120,700 and research
      and development credit carry-forwards of $151 at March 31, 2006. The net
      operating loss and research and development credit carry-forwards expire in
      2011
      through 2022 if not previously utilized. The utilization of these carry-forwards
      may be subject to limitations based on past and future changes in ownership
      of
      the Company pursuant to Internal Revenue Code Section 382. If the Company
      were to be acquired at its recent stock value such that Section 382 is
      applicable, this would eliminate the ability to use a substantial majority
      of
      these carry-forwards. Future tax benefits have not been recognized in the
      financial statements, as their utilization is not considered probable based
      on
      the weight of available information.





**Note
      6. Note Payable**





On
      April
      21, 2004, the Company announced that it had closed on an investment into the
      Company by Olden Acquisition LLC (“Olden”), an affiliate of Kanders &
Company, Inc., an entity owned and controlled by the Company's Executive
      Chairman, Warren B. Kanders, for the purpose of initiating a strategy to
      redeploy the Company's assets and use its cash and cash equivalents and
      marketable securities to enhance stockholder value. The Company issued and
      sold
      to Olden a 2% ten-year Convertible Subordinated Note (the “Convertible
      Subordinated Note”), which is convertible after one year (or earlier upon a call
      by the Company and in certain other circumstances) at
      a
      conversion price of $0.45 per share of the Company’s common stock into
      approximately 19.9% of the outstanding common equity of the Company as of the
      closing date. Proceeds to the Company from this transaction totaled
      approximately $2,533 before transaction costs of $288. The transaction costs
      are
      being amortized over ten years, the term of the debt. Interest on the note
      accrues semi-annually but is not payable currently or upon conversion of the
      note. The Convertible Subordinated Note matures on April 21, 2014. The
      Convertible Subordinated Note was deemed to include a beneficial conversion
      feature. At the date of issue, the Company allocated $56 to the beneficial
      conversion feature, which has been fully amortized as of June 30, 2005. Also
      in
      connection with this transaction, the Company entered into a Registration Rights
      Agreement, which requires the Company, upon request of the purchaser of the
      note
      or its assignee, to register under the Securities Act of 1933, as amended,
      the
      resale of the shares of common stock into which the note is convertible. In
      connection with this transaction, the Board of Directors adopted an amendment
      to
      the Company’s Rights Agreement such that the transaction would not trigger the
      rights thereunder.





9


**Note
      7. Gain on litigation settlement**





In
      February 2005, the Company received $229 from the settlement of its lawsuit
      with
      i2 Technologies Inc. resulting from a breach of contract claim. The Company
      recorded the gain on this settlement in the first quarter of 2005.





**Note
      8.** **Related
      Party Transactions**





We
      occupy
      space made available to us by Kanders & Company, Inc., an entity owned and
      controlled by the Company's Executive Chairman, Warren B. Kanders. This
      arrangement can be terminated at any time. In connection with the consummation
      of an asset redeployment transaction, it is expected that management and/or
      Kanders & Company, Inc. will be awarded cash and/or equity compensation
      based upon the completion of the redeployment transaction.





Certain
      telecommunication, professional and general office expenses are incurred on
      behalf of Net Perceptions by Clarus Corporation (“Clarus”). Warren B. Kanders,
      our Executive Chairman, also serves as the Executive Chairman of Clarus
      Corporation. Such expenses aggregated less than $1 during the quarter ended
      March 31, 2006 and $4 during the quarter ended March 31, 2005.





As
      of
      March 31, 2006, the Company had no outstanding payables to Clarus Corporation.
      As of March 31, 2005, the Company had outstanding payables of $4 to Clarus.
      The
      outstanding amount was paid by Net Perceptions in April 2005.





10


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





**Forward-Looking
      Statements**





This
      report contains certain forward-looking statements, including information about
      or related to our future results, certain projections and business trends.
      Assumptions relating to forward-looking statements involve judgments with
      respect to, among other things, future economic, competitive and market
      conditions and future business decisions, all of which are difficult or
      impossible to predict accurately and many of which are beyond our control.
      When
      used in this report, the words "estimate," "project," "intend," "believe,"
      "expect" and similar expressions are intended to identify forward-looking
      statements. Although we believe that our assumptions underlying the
      forward-looking statements are reasonable, any or all of the assumptions could
      prove inaccurate, and we may not realize the results contemplated by the
      forward-looking statements. Management decisions are subjective in many respects
      and susceptible to interpretations and periodic revisions based upon actual
      experience and business developments, the impact of which may cause us to alter
      our business strategy or capital expenditure plans that may, in turn, affect
      our
      results of operations. In light of the significant uncertainties inherent in
      the
      forward-looking information included in this report, you should not regard
      the
      inclusion of such information as our representation that we will achieve any
      strategy, objectives or other plans. The forward-looking statements contained
      in
      this report speak only as of the date of this report, and we have no obligation
      to update publicly or revise any of these forward-looking statements.





These
      and
      other statements, which are not historical facts, are based largely upon our
      current expectations and assumptions and are subject to a number of risks and
      uncertainties that could cause actual results to differ materially from those
      contemplated by such forward-looking statements. These risks and uncertainties
      include, among others, our planned effort to redeploy our assets and use our
      substantial cash, cash equivalent assets and marketable securities to enhance
      stockholder value and the risks and uncertainties as set forth in "Factors
      That
      May Affect Our Future Results" found in Part I of our Annual Report on Form
      10-K, as amended, for the fiscal year ended December 31, 2005 and described
      below. The Company cannot guarantee its future performance.





OVERVIEW





AS
      PART
      OF OUR PREVIOUSLY ANNOUNCED STRATEGY TO LIMIT OPERATING LOSSES AND ENABLE THE
      COMPANY TO REDEPLOY ITS ASSETS AND USE ITS CASH, CASH EQUIVALENT ASSETS AND
      MARKETABLE SECURITIES TO ENHANCE STOCKHOLDER VALUE, ALL OF OUR OPERATIONS OTHER
      THAN ADMINISTRATIVE FUNCTIONS HAVE BEEN TERMINATED. THE INFORMATION APPEARING
      BELOW, WHICH RELATES TO PRIOR PERIODS, IS THEREFORE NOT INDICATIVE OF THE
      RESULTS THAT MAY BE EXPECTED FOR ANY SUBSEQUENT PERIODS. THE THREE-MONTH PERIOD
      ENDED MARCH 31, 2006 PRIMARILY REFLECTS, AND FUTURE PERIODS PRIOR TO A
      REDEPLOYMENT OF OUR ASSETS ARE EXPECTED TO PRIMARILY REFLECT, GENERAL AND
      ADMINISTRATIVE EXPENSES AND TRANSACTION EXPENSES ASSOCIATED WITH THE CONTINUING
      ADMINISTRATION OF THE COMPANY AND ITS EFFORTS TO REDEPLOY ITS ASSETS. FOR A
      DISCUSSION OF RISKS RELATING TO NET PERCEPTIONS, INC. AND OWNERSHIP OF OUR
      COMMON STOCK, PLEASE SEE THE DISCUSSION UNDER PART 1 OF OUR ANNUAL REPORT ON
      FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005.





The
      following discussion and analysis should be read in conjunction with the
      consolidated financial statements and notes thereto appearing elsewhere in
      this
      report.





CRITICAL
      ACCOUNTING POLICIES AND ESTIMATES





The
      Company's discussion of financial condition and results of operations are based
      on the consolidated financial statements, which have been prepared in accordance
      with accounting principles generally accepted in the United States. The
      preparation of these consolidated financial statements require management to
      make estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent liabilities at the date of the
      consolidated financial statements. Estimates also affect the reported amounts
      of
      revenues and expenses during the reporting periods. The Company continually
      evaluates its estimates and assumptions including those related to contingencies
      and litigation. The Company bases its estimates on historical experience and
      other assumptions that are believed to be reasonable under the circumstances.
      Actual results could differ from these estimates.





11





A description
      of the Company’s critical accounting policies was provided in the Management’s
      Discussion and Analysis of Financial Condition and Results of Operations section
      of the Company’s Annual Report on Form 10-K for the year ended December 31,
      2005.  There were no changes to these accounting policies during the
      quarter ended March 31, 2006 except for the adoption of FAS 123R.





STOCK
      BASED COMPENSATION





On
      January 1, 2006, the Company adopted Statement of Financial Accounting Standards
      No. 123 (revised 2004), “Share-Based Payments” (“FAS 123R”), requiring
      recognition of expense related to the fair value of stock option awards. The
      Company recognizes the cost of the share-based awards on a straight-line basis
      over the requisite service period of the award. Prior to January 1, 2006, the
      Company accounted for stock option plans under the recognition and measurement
      provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock
      Issued to Employees” (“APB 25”) and related interpretations, as permitted by
      Statement of Financial Accountant Standard No. 123, “Accounting for Stock-Based
      Compensation” (“SFAS 123”). Effective January 1, 2006, the Company adopted the
      fair value provisions of FAS 123R, using the modified prospective transition
      method. Under this transition method, compensation cost recognized during the
      first quarter of 2006 includes compensation cost for all share-based payments
      granted prior to, but not yet vested as of January 1, 2006, based on the grant
      date fair value estimated in accordance with the original provisions of SFAS
      123. Results for prior periods have not been restated.





We
      will
      continue to estimate the fair value of our option awards granted after January
      1, 2006, using a Black-Scholes option pricing model. No options were granted
      during the three-month period ended March 31, 2006. As of March 31, 2006, there
      were 218 unvested shares and compensation expense of $5 recognized from these
      unvested stock options. The remaining compensation expense for these unvested
      options is $84 as of the quarter ended March 31, 2006. The expected life of
      the
      options granted is management’s estimate and represents the period of time that
      options granted are expected to be outstanding. We currently do not pay
      dividends. Volatility is based on the historical volatility of our stock price.
      The risk-free interest rate for periods within the contractual life of the
      option is based on the U.S. Treasury yield curve in effect at the time of grant.
      The fair value of each option grant during the three months ended 2005 is
      estimated on the date of grant with the following weighted-average
      assumptions:




Expected
                  life of option
              5
                  yearsDividend
                  yield
              0.0%Volatility
              57.0%Risk
                  free interest rate
              4.0%
  The
        weighted average fair value of options granted during the three months ended
        March 31, 2005 is as follows:
 
 Fair
                  value of each option grant
              
              $
              0.39Total
                  number of options granted
              
              
              65Total
                  fair value of all options granted
              
              $
              25
 
 
 Outstanding
        options, consisting of incentive and non-qualified stock options, generally
        vest
        and become exercisable over a one- to three-year period from the date of
        grant.
        The outstanding options generally expire ten years from date of grant or
        upon
        retirement from the Company and are contingent upon continued employment
        during
        the applicable ten-year period. The following assumptions were utilized under
        FAS 123R for the outstanding options as of March 31, 2006:
  March
                  31, 2006Expected
                  life of options
              5.65
                  yearsDividend
                  yield
              0.0%Volatility
              52.8%Risk
                  free interest rate
              3.4%Fair
                  value of each option grant
              $0.28
  The
        following table shows what the effect on net income and income per share
        if the
        fair value recognition provisions of SFAS 123, to options granted under our
        stock option plans during the three-month period ended
 
 12





March
      31,
      2005. For purposes of this pro forma disclosure, the value of the options is
      amortized to expense on a straight-line basis over the vesting period and
      forfeitures are recognized as they occur.





Net
                income, as reported
            
            $
            259Add:
                Stock-based employee compensation expense included in reported net
                income
            
            
            15Deduct:
                Total stock-based employee compensation expense determined under
                fair
                value based method for all awards
            
            
            (20
            )Pro
                forma net income
            
            $
            254Net
                income per share:BasicAs reported
            
            $
            0.01Pro forma
            
            $
            0.01DilutedAs reported
            
            $
            0.01Pro forma
            
            $
            0.01








A
      summary
      of the status of stock option grants as of March 31, 2006, and changes during
      the three months ended March 31, 2006, is presented below:


WeightedAverageOptions
              
              Exercise
                  PriceOutstanding
                  at December 31, 2005
              
              
              321
              
              $
              0.68Granted
              
              
              --
              
              
              --Exercised
              
              
              --
              
              
              --Forfeited
              
              
              --
              
              
              --Outstanding
                  at March 31, 2006
              
              
              321
              
              $
              0.68Options
                  exercisable at March 31, 2006
              
              
              102
              
              $
              0.67
 
 
 The
        following table summarizes information about stock options outstanding as
        of
        March 31, 2006:
  WeightedRemaining
                  Life
              
              AverageExercise
                  Price Range
              
              Outstanding
              
              Exercisable
              
              In
                  Years
              
              Exercise
                  Price$0.23
              
              
              6
              
              
              6
              
              
              5.00
              
              $
              0.23$0.48
              
              
              50
              
              
              25
              
              
              8.06
              
              $
              0.48$0.69
              
              
              100
              
              
              --
              
              
              9.61
              
              $
              0.69$0.74
                  - $0.75
              
              
              165
              
              
              93
              
              
              8.45
              
              $
              0.74Total
              
              
              321
              
              
              102
              
              
              8.03
              
              $
              0.67
 
 
 Remaining
        non-exercisable options as of March 31, 2006, become exercisable as
        follows:
 
 Remainder
                  of 2006
              1082009
              552010
              56




The
      fair
      value of unvested shares is determined based on the market price of our shares
      on the grant date.





13


RESULTS
      OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND MARCH 31,
      2005





The
      following table sets forth certain items in the Company’s consolidated
      statements of operations as a percentage of total revenues for the periods
      indicated *:*





**Three
                Months Ended****March
                31,****2006**
            
            **2005**Revenues:Service,
                maintenance and royalties
            
            
            100
            %
            
            100
            %Total
                revenues
            
            
            100
            
            
            100Cost
                of revenues:Service
                and maintenance
            
            
            --
            
            
            --Total
                cost of revenues
            
            
            --
            
            
            --Gross
                margin
            
            
            100
            
            
            100Operating
                expenses:Gain
                on litigation settlement
            
            
            --
            
            
            (2,290
            )General
                and administrative
            
            
            463
            
            
            600Total
                operating expenses
            
            
            463
            
            
            (1,690
            )Operating
                income
            
            
            (363
            )
            
            1,790Interest
                income
            
            
            837
            
            
            830Interest
                expense
            
            
            (68
            )
            
            (270
            )Other
                (expense) income, net
            
            
            (84
            )
            
            240Net
                income
            
            
            321
            %
            
            2,590
            %





REVENUES





*Total
      revenues* .
      Total
      revenues increased 90% to $19,000 for the three months ended March 31, 2006
      from
      $10,000 for the same period in 2005. Revenues in the United States were $19,000
      in the first quarter of 2006 compared to $10,000 in the same period of 2005,
      representing 100% and 100% of total revenues, respectively. There were no
      revenues from international sales in the first quarter of 2006 or 2005. As
      a
      result of the downsizing of our business and operations, we no longer maintain
      a
      direct sales force and there currently is no sales generating activity.





As
      described above in this Item 2 under “Overview”, we are no longer actively
      marketing our products, and we do not expect that future revenues from these
      products or services related to these products, if any, will be
      significant.





*Service,
      maintenance and royalty revenues.* Service
      and maintenance revenues consisted primarily of professional and maintenance
      services. Our professional service revenues included business consulting,
      implementation support, and educational services and were generally offered
      on a
      time and materials basis. Maintenance revenues were generally derived from
      annual service agreements and were recognized ratably over the term of the
      agreement. On April 1, 2004, we entered into an agreement with Tornago, Inc.
      to
      fulfill our existing prepaid customer support obligations. Royalty revenues
      are
      derived from resales of our product by Tornago, Inc. Service, maintenance and
      royalty revenues increased 90% to $19,000 for the quarter ended March 31, 2006
      compared to $10,000 for the same period of 2005. Royalty revenues comprised
      100%
      and 100% of total revenues for the quarters ended March 31, 2006 and 2005,
      respectively *.* We
      do not
      anticipate entering into additional service and maintenance agreements with
      customers as the Company terminated its revenue generating operations as
      discussed above. Therefore, we expect there will be no service and maintenance
      revenues in 2006. The agreement with Tornago, Inc. has the potential to generate
      royalty revenue through April 2006.




14


COST
      OF
      REVENUES





*Cost
      of service and maintenance revenues* .
      Cost of
      service and maintenance revenues consisted primarily of personnel-related and
      infrastructure costs incurred in providing telephone and Web-based support
      of
      our software products, as well as professional, consulting and educational
      related services to customers. As we had no service and maintenance revenues
      in
      the quarters ended March 31, 2006 and 2005, cost of service and maintenance
      revenues for both quarters was zero. We do not expect to incur costs of product
      revenues for the foreseeable future.





OPERATING
      EXPENSES





At
      March
      31, 2006, we had six employees, two of whom are executive officers. As described
      in this Item 2 under "Overview", we are no longer actively marketing our
      products and do not expect to incur any operating expenses in 2006 relating
      to
      sales and marketing of our products.





As
      part
      of our asset redeployment strategy, we are currently working to identify
      suitable merger or acquisition opportunities that can serve as a platform for
      future growth. Although we are not targeting specific business industries for
      potential mergers or acquisitions, we plan to seek businesses with cash flow,
      experienced management teams, and operations in markets offering stability
      and
      growth potential. We anticipate that we may incur significant expenses in
      connection with this process, consisting principally of professional fees and
      expenses, as well as costs associated with maintaining our public company
      status.





*General
      and administrative* .
      General
      and administrative expenses consist primarily of salaries, other
      employee-related costs and professional service fees and expenses. General
      and
      administrative expenses increased 47% to $88,000 for the period ended March
      31,
      2006 compared to $60,000 for the period ended March 31, 2005. General and
      administrative expenses were 463% and 600% of total revenue for the periods
      ended March 31, 2006 and 2005, respectively. The increase in general and
      administrative expenses for the period ended March 31, 2006 was primarily due
      to
      salaries for current management, deferred compensation and professional fees
      and
      expenses. Although we expect personnel-related and other general and
      administrative expenses to remain stable in 2006 compared to the previous year,
      continued high levels of outside professional fees, and other costs associated
      with continuing as a public reporting company, such as directors and officers
      liability insurance, may offset some of these decreases.





*Gain
      on litigation settlement.* In
      February 2005, the Company received $229,000 from the settlement of its lawsuit
      for a breach of contract claim with i2 Technologies Inc. The Company recorded
      the gain on this settlement in the first quarter of 2005. There is no comparable
      gain for the first quarter of 2006.





*Interest
      income.* Interest
      income increased to $159,000 for the quarter ended March 31, 2006 from $83,000,
      in the quarter ended March 31, 2005. The increase in interest income was due
      to
      an increase in the interest rates we received on our cash and cash equivalents
      and marketable securities.





*Interest
      expense* Interest
      expense decreased to $13,000 for the quarter ended March 31, 2006 from $27,000,
      in the quarter ended March 31, 2005. The decrease in interest expense was due
      to
      the beneficial conversion portion of the note to Olden Acquisition LLC being
      fully expensed during 2005.





*Other
      income (expense)* Other
      income (expense) consists of miscellaneous non-income based tax expenses
      partially offset by other miscellaneous income. Other income (expense) decreased
      33% to $16,000 for the period ended March 31, 2006 compared to $24,000 for
      the
      period ended March 31, 2005.





PROVISION
      FOR INCOME TAXES





We
      have
      incurred significant operating losses for all periods from inception through
      March 31, 2006. For income tax purposes, the Company has available federal
      net
      operating loss carry-forwards of approximately $120.7 million and research
      and
      development credit carry-forwards of $151,000 at March 31, 2006. The net
      operating loss and research and development credit carry-forwards expire in
      2011
      through 2022 if not previously utilized. The utilization of these carry-forwards
      may be subject to limitations based on past and future changes in ownership
      of
      the Company pursuant to Internal Revenue Code Section 382. If the Company
      were to be acquired at its recent stock value such that Section 382 is
      applicable, this would eliminate the ability to use a substantial majority
      of
      these carry-forwards. Future tax benefits have not been recognized in the
      financial statements, as their utilization is not considered probable based
      on
      the weight of available information.




15


LIQUIDITY
      AND CAPITAL RESOURCES





Since
      inception, we have financed our operations primarily through the sale of equity
      securities. The Company's cash and cash equivalents remained stable at $199,000
      at March 31, 2006 compared to $203,000 at December 31, 2005. Marketable
      securities also remained stable at $14.7 million at March 31, 2006 compared
      to
      $14.7 million at December 31, 2005. The overall decrease of $83,000 in cash
      and
      cash equivalents and marketable securities is due to payment of expenses
      incurred during the quarter ended March 31, 2006.





Cash
      used
      in operations was $34,000 for the three months ended March 31, 2006, compared
      to
      cash provided by operations of $255,000 for the same period of 2005. Cash used
      in operations for the first quarter of 2006 resulted primarily from non-cash
      expenses, an increase in other assets and a decrease in accrued expenses
      partially offset by net income and a decrease in prepaids and other current
      assets. Cash provided by operations for the period ended March 31, 2005 resulted
      primarily from the settlement of the i2 Technologies Inc. lawsuit. We currently
      do not expect to receive any significant amounts of cash from future operations
      until our assets are redeployed. We expect that we will continue to incur legal
      fees, transaction costs and other ongoing costs that will constitute a material
      use of cash.





Cash
      provided by investing activities was approximately $30,000 during the quarter
      ended March 31, 2006 compared to zero used by investing activities during the
      quarter ended March 31, 2005. During the quarter ended March 31, 2006, cash
      was
      provided by the maturity of marketable securities primarily offset by the
      purchase of marketable securities.





There
      was
      no cash used or provided by financing activities for the periods ended March
      31,
      2006 or 2005.





We
      believe that existing cash and investments will be sufficient to meet our
      expected working capital needs for at least the next twelve months. However,
      uncertainties exist as to the costs of implementing our asset redeployment
      strategy.








**Item
      3. Quantitative and Qualitative Disclosures about Market
      Risk**





We
      do not
      have any derivative financial instruments and do not hold any instruments for
      trading purposes.





**Item
      4. Controls and Procedures**




**Evaluation
      of Disclosure Controls and Procedures**





The
      Company's management carried out an evaluation, under the supervision and with
      the participation of the Company's Chief Administrative Officer and Controller,
      its principal executive officer and principal financial officer, respectively,
      of the design and operation of the Company's disclosure controls and procedures
      (as such term is defined in Rules 13a-15 (e) and 15d-15(e) under the Securities
      Exchange Act of 1934 (the "Exchange Act") as of March 31, 2006, pursuant to
      Exchange Act Rule 13a-15. Based upon that evaluation, the Company's Chief
      Administrative Officer and Controller, concluded that the Company's disclosure
      controls and procedures as of March 31, 2006 are effective.





**Changes
      in Internal Control over Financial Reporting**





There
      have not been any changes in the Company’s internal control over financial
      reporting that have come to management’s attention during the first quarter
      ended March 31, 2006 evaluation that have materially affected, or are reasonably
      likely to materially affect the Company’s internal control over financial
      reporting.




16


**PART
      II. OTHER INFORMATION**





**Item
      6.**  **Exhibits**





Exhibit


Number
            Exhibit





31.1
            Certification
                of Principal Executive Officer pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.





31.2
            Certification
                of Principal Financial Officer pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.





32.1
            Certification
                of Principal Executive Officer pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002.





32.2
            Certification
                of Principal Financial Officer pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002.











**SIGNATURES**





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










Net Perceptions, Inc.Date:
              May 15, 2006
            By:
            /s/
              Nigel P. EkernNigel P. EkernChief
              Administrative Officer(Principal Executive Officer)/s/ Susan LuckfieldSusan LuckfieldController(Principal Financial
              Officer)


17


**EXHIBIT
      INDEX**




Number
              Exhibit


31.1
              Certification
                  of Principal Executive Officer pursuant to Section 302 ofthe
                  Sarbanes-Oxley Act of
                  2002.


31.2
              Certification
                  of Principal Financial Officer pursuant to Section 302 ofthe
                  Sarbanes-Oxley Act of
                  2002.


32.1
              Certification
                  of Principal Executive Officer pursuant to Section 906 ofthe
                  Sarbanes-Oxley Act of
                  2002.


32.2
              Certification
                  Principal Financial Officer pursuant to Section 906 ofthe
                  Sarbanes-Oxley Act of
                  2002.


18