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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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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 September 30, 2001

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)



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

7700 France Avenue South
Minneapolis, Minnesota 55435
(Address of principal executive offices, Zip Code)

(952) 842-5000
(Registrants telephone number, including area code)

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

Yes [X] No [  ]

The number of shares of the registrants common stock outstanding as of October
31, 2001 was 27,068,582.





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TABLE OF CONTENTS



|                              |                                                                                               |                                                |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | Item 1. Financial Statements                                                                 
|                              |                                                                                               | CONSOLIDATED BALANCE SHEETS                   
|                              |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS         
|                              |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS         
|                              |                                                                                               | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 3. Quantitative and Qualitative Disclosures about Market Risk                           
|PART II. OTHER INFORMATION   
|                              | Item 2. Changes in Securities and Use of Proceeds                                            
|                              | Item 3. Defaults Upon Senior Securities                                                      
|                              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                              | Item 5. Other Information                                                                    
|                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                   
|EXHIBIT INDEX                



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NET PERCEPTIONS, INC.
FORM 10-Q
For the Quarter Ended September 30, 2001

TABLE OF CONTENTS

|                              |                                                                                               |                                                                                                       |    |      |   | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------- | -- | ---- | - | 
|                              |                                                                                               |                                                                                                       |    | Page |  
|                              |                                                                                               |                                                                                                       |    |      |  
|PART I. FINANCIAL INFORMATION |                                                                                               |                                                                                                       |    |     
|                              | Item 1. Financial Statements                                                                  |                                                                                                       |    |      |  
|                              |                                                                                               | Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000                            |    |      | 4 | 
|                              |                                                                                               | Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 2001 and 2000 |    |      | 5 | 
|                              |                                                                                               | Consolidated Statements of Cash Flows for the Nine Months Ended September
30, 2001 and 2000           |    |      | 6 | 
|                              |                                                                                               | Notes to the Consolidated Financial Statements                                                        |    |      | 7 | 
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations |                                                                                                       |    | 9    |  
|                              | Item 3. Quantitative and Qualitative Disclosures about Market Risk                            |                                                                                                       |    | 26   |  
|PART II. OTHER INFORMATION    |                                                                                               |                                                                                                       |    |     
|                              | Item 1. Legal Proceedings                                                                     |                                                                                                       |    | 27   |  
|                              | Item 2. Changes in Securities and Use of Proceeds                                             |                                                                                                       |    | 27   |  
|                              | Item 3. Defaults Upon Senior Securities                                                       |                                                                                                       |    | 27   |  
|                              | Item 4. Submission of Matters to a Vote of Security Holders                                   |                                                                                                       |    | 27   |  
|                              | Item 5. Other Information                                                                     |                                                                                                       |    | 27   |  
|                              | Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                       |    | 27   |  
|SIGNATURES                    |                                                                                               |                                                                                                       | 29 |     
|EXHIBIT INDEX                 |                                                                                               |                                                                                                       | 30 |     

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Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q (including exhibits and information
incorporated by reference herein) contains both historical and forward-looking
statements that involve risks, uncertainties and assumptions. The statements
contained in this report that are not purely historical are forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, including statements regarding our expectations, beliefs,
intentions or strategies for the future. All forward-looking statements
included in this Quarterly Report on Form 10-Q (including exhibits and
information incorporated by reference herein) are based on information
available to us on the date hereof, and we assume no obligation to update any
such forward-looking statements. Our actual results could differ materially
from those described in our forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed in Item 2  Managements Discussion and Analysis of Financial
Condition and Results of Operations under the heading Risks That May Affect
Future Results and those described in our previous filings with the Securities
and Exchange Commission. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date that they
were made. We undertake no obligation to publicly release any revisions to
these forward-looking statements to reflect events or circumstances after the
date of this Quarterly Report on Form 10-Q or to reflect the occurrence of
unanticipated events.

3



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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements




NET PERCEPTIONS, INC.

CONSOLIDATED BALANCE SHEETS
(in thousands)

|                                              |                                           |                                            |                           |          |               |        |        |              |         |         | 
|--------------------------------------------- | ----------------------------------------- | ------------------------------------------ | ------------------------- | -------- | ------------- | ------ | ------ | ------------ | ------- | ------- | 
|                                              |                                           |                                            |                           |          | September 30, |        |        | December 31, |        
|                                              |                                           |                                            |                           |          | 2001          |        |        | 2000         |        
|                                              |                                           |                                            |                           |          |               |        |        |              |        
|                                              |                                           |                                            |                           |          | (Unaudited)   |        |        |              |         |        
|Assets                                        |                                           |                                            |                           |          |               |        |        |             
|Current assets:                               |                                           |                                            |                           |          |               |        |        |             
|                                              | Cash and cash equivalents                 |                                            | $                         | 23,252   |               |        | $      | 16,396       |        
|                                              | Short-term investments                    |                                            |                           | 53,150   |               |        |        | 52,484       |        
|                                              | Accounts receivable, net                  |                                            |                           | 1,099    |               |        |        | 6,339        |        
|                                              | Royalties receivable, net                 |                                            |                           |         |               |        |        | 671          |        
|                                              | Prepaid expenses and other current assets |                                            |                           | 3,119    |               |        |        | 1,839        |        
|                                              |                                           |                                            |                           |          |               |        |       
|                                              |                                           |                                            | Total current assets      |          |               | 80,620 |        |              |         | 77,729  | 
|Marketable securities                         |                                           |                                            |                          |          |               |        | 27,356 |             
|Property and equipment, net                   |                                           |                                            | 5,798                     |          |               |        | 12,760 |             
|Goodwill and other intangible assets, net     |                                           |                                            | 7,637                     |          |               |        | 92,194 |             
|Other assets                                  |                                           |                                            | 1,354                     |          |               |        | 1,795  |             
|                                              |                                           |                                            |                           |          |               |        |       
|                                              |                                           |                                            | Total assets              |          | $             | 95,409 |        |              | $       | 211,834 | 
|                                              |                                           |                                            |                           |          |               |        |       
|Liabilities and Stockholders Equity          |                                           |                                            |                           |          |               |        |        |             
|Current liabilities:                          |                                           |                                            |                           |          |               |        |        |             
|                                              | Accounts payable                          |                                            | $                         | 337      |               |        | $      | 1,426        |        
|                                              | Accrued expenses                          |                                            |                           | 3,901    |               |        |        | 5,614        |        
|                                              | Deferred revenue                          |                                            |                           | 2,057    |               |        |        | 3,743        |        
|                                              | Accrued restructuring costs               |                                            |                           | 9,774    |               |        |        |             |        
|                                              | Current portion of long-term liabilities  |                                            |                           | 277      |               |        |        | 582          |        
|                                              |                                           |                                            |                           |          |               |        |       
|                                              |                                           |                                            | Total current liabilities |          |               | 16,346 |        |              |         | 11,365  | 
|Long-term liabilities, net of current portion |                                           |                                            | 610                       |          |               |        | 1,951  |             
|                                              |                                           |                                            |                           |          |               |        |       
|                                              |                                           |                                            | Total liabilities         |          |               | 16,956 |        |              |         | 13,316  | 
|                                              |                                           |                                            |                           |          |               |        |       
|Commitments and contingencies                 |                                           |                                            |                           |          |               |        |        |             
|Stockholders equity:                         |                                           |                                            |                           |          |               |        |        |             
|                                              | Common stock                              |                                            |                           | 2        |               |        |        | 2            |        
|                                              | Additional paid-in capital                |                                            |                           | 274,783  |               |        |        | 274,458      |        
|                                              | Accumulated other comprehensive income    |                                            |                           | 757      |               |        |        | 361          |        
|                                              | Accumulated deficit                       |                                            |                           | (197,089 | )             |        |        | (76,303      | )      
|                                              |                                           |                                            |                           |          |               |        |       
|                                              |                                           | Total stockholders equity                 |                           |          | 78,453        |        |        |              | 198,518 |        
|                                              |                                           |                                            |                           |          |               |        |       
|                                              |                                           | Total liabilities and stockholders equity |                           | $        | 95,409        |        |        | $            | 211,834 |        
|                                              |                                           |                                            |                           |          |               |        |       

See accompanying notes to the consolidated financial statements.

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NET PERCEPTIONS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)

|                                                              |                                                |                          |            |                    |       |   |                   |       |        |      |            |        |         |   |            |        |        | 
|------------------------------------------------------------- | ---------------------------------------------- | ------------------------ | ---------- | ------------------ | ----- | - | ----------------- | ----- | ------ | ---- | ---------- | ------ | ------- | - | ---------- | ------ | ------ | 
|                                                              |                                                |                          |            | Three Months Ended |       |   | Nine Months Ended |      
|                                                              |                                                |                          |            | September 30,      |       |   | September 30,     |      
|                                                              |                                                |                          |            | 2001               |       |   | 2000              |       |        | 2001 |            |        | 2000    |  
|                                                              |                                                |                          |            |                    |       |   |                   |       |        |      |            |        |         |  
|                                                              |                                                |                          |            | (Unaudited)        |       |   | (Unaudited)       |      
|Revenues:                                                     |                                                |                          |            |                    |       |   |                   |       |        |      |            |        |         |   |            |       
|                                                              | Product                                        |                          | $          | 674                |       |   | $                 | 4,424 |        |      | $          | 2,068  |         |   | $          | 21,456 |       
|                                                              | Service and maintenance                        |                          |            | 1,509              |       |   |                   | 3,301 |        |      |            | 5,753  |         |   |            | 8,162  |       
|                                                              |                                                |                          |            |                    |       |   |                   |       |        |      |            |        |        
|                                                              |                                                | Total revenues           |            |                    | 2,183 |   |                   |       | 7,725  |      |            |        | 7,821   |   |            |        | 29,618 | 
|Cost of revenues:                                             |                                                |                          |            |                    |       |   |                   |       |        |      |            |        |         |   |            |       
|                                                              | Product                                        |                          |            | 158                |       |   |                   | 526   |        |      |            | 679    |         |   |            | 1,354  |       
|                                                              | Service and maintenance                        |                          |            | 739                |       |   |                   | 3,019 |        |      |            | 4,153  |         |   |            | 7,551  |       
|                                                              |                                                |                          |            |                    |       |   |                   |       |        |      |            |        |        
|                                                              |                                                | Total cost of revenues   |            |                    | 897   |   |                   |       | 3,545  |      |            |        | 4,832   |   |            |        | 8,905  | 
|Gross profit                                                  |                                                |                          | 1,286      |                    |       |   | 4,180             |       |        |      | 2,989      |        |         |   | 20,713     |       
|Operating expenses:                                           |                                                |                          |            |                    |       |   |                   |       |        |      |            |        |         |   |            |       
|                                                              | Sales and marketing                            |                          |            | 2,454              |       |   |                   | 6,372 |        |      |            | 13,465 |         |   |            | 18,736 |       
|                                                              | Research and development                       |                          |            | 2,121              |       |   |                   | 5,582 |        |      |            | 8,416  |         |   |            | 14,229 |       
|                                                              | General and administrative                     |                          |            | 1,014              |       |   |                   | 2,647 |        |      |            | 5,430  |         |   |            | 7,700  |       
|                                                              | Lease abandonment expense                      |                          |            |                   |       |   |                   |      |        |      |            | 225    |         |   |            | 800    |       
|                                                              | Restructuring charges                          |                          |            | 1,771              |       |   |                   |      |        |      |            | 15,691 |         |   |            |       |       
|                                                              | Amortization of goodwill and other intangibles |                          |            | 798                |       |   |                   | 7,255 |        |      |            | 8,852  |         |   |            | 18,139 |       
|                                                              | Impairment of goodwill and other intangibles   |                          |            |                   |       |   |                   |      |        |      |            | 75,298 |         |   |            |       |       
|                                                              |                                                |                          |            |                    |       |   |                   |       |        |      |            |        |        
|                                                              |                                                | Total operating expenses |            |                    | 8,158 |   |                   |       | 21,856 |      |            |        | 127,377 |   |            |        | 59,604 | 
|                                                              |                                                |                          |            |                    |       |   |                   |       |        |      |            |        |        
|Loss from operations                                          |                                                |                          | (6,872     | )                  |       |   | (17,676           | )     |        |      | (124,388   | )      |         |   | (38,891    | )     
|Other income, net                                             |                                                |                          | 714        |                    |       |   | 1,907             |       |        |      | 3,602      |        |         |   | 3,812      |       
|                                                              |                                                |                          |            |                    |       |   |                   |       |        |      |            |        |        
|Net loss                                                      |                                                | $                        | (6,158     | )                  |       | $ | (15,769           | )     |        | $    | (120,786   | )      |         | $ | (35,079    | )     
|                                                              |                                                |                          |            |                    |       |   |                   |       |        |      |            |        |        
|Net loss per share:                                           |                                                |                          |            |                    |       |   |                   |       |        |      |            |        |         |   |            |       
|Basic and diluted                                             |                                                | $                        | (0.23      | )                  |       | $ | (0.60             | )     |        | $    | (4.49      | )      |         | $ | (1.41      | )     
|Shares used in computing basic and diluted net
loss per share |                                                |                          | 27,037,320 |                    |       |   | 26,339,150        |       |        |      | 26,917,459 |        |         |   | 24,892,510 |       
|                                                              |                                                |                          |            |                    |       |   |                   |       |        |      |            |        |        

See accompanying notes to the consolidated financial statements.

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NET PERCEPTIONS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

|                                                     |                                                                      |                                                                          |                                                                              |                                                     |          |                   |         |         |          |        |         |  
|---------------------------------------------------- | -------------------------------------------------------------------- | ------------------------------------------------------------------------ | ---------------------------------------------------------------------------- | --------------------------------------------------- | -------- | ----------------- | ------- | ------- | -------- | ------ | ------- | -
|                                                     |                                                                      |                                                                          |                                                                              |                                                     |          | Nine months Ended |        
|                                                     |                                                                      |                                                                          |                                                                              |                                                     |          | September 30,     |        
|                                                     |                                                                      |                                                                          |                                                                              |                                                     |          | 2001              |         |         | 2000     |       
|                                                     |                                                                      |                                                                          |                                                                              |                                                     |          |                   |         |         |          |       
|                                                     |                                                                      |                                                                          |                                                                              |                                                     |          | (Unaudited)       |        
|Cash flows from operating activities:                |                                                                      |                                                                          |                                                                              |                                                     |          |                   |         |        
|                                                     | Net loss                                                             |                                                                          | $                                                                            | (120,786                                            | )        |                   | $       | (35,079 | )       
|                                                     | Reconciliation of net loss to net cash used by operating activities: |                                                                          |                                                                              |                                                     |          |                   |         |         |         
|                                                     |                                                                      |                                                                          | Depreciation and amortization                                                |                                                     |          | 11,960            |         |         |          | 21,213 |        
|                                                     |                                                                      |                                                                          | Provision for doubtful accounts                                              |                                                     |          | 1,039             |         |         |          | 1,249  |        
|                                                     |                                                                      |                                                                          | Lease abandonment expense                                                    |                                                     |          | 225               |         |         |          | 800    |        
|                                                     |                                                                      |                                                                          | Stock compensation expense                                                   |                                                     |          | 211               |         |         |          | 564    |        
|                                                     |                                                                      |                                                                          | Restructuring costs                                                          |                                                     |          | 15,691            |         |         |          |       |        
|                                                     |                                                                      |                                                                          | Impairment of goodwill and other intangibles                                 |                                                     |          | 75,298            |         |         |          |       |        
|                                                     |                                                                      |                                                                          | Equity in losses of joint venture                                            |                                                     |          |                  |         |         |          | 197    |        
|                                                     |                                                                      |                                                                          | Changes in operating assets and liabilities, net of effect from
acquisition: |                                                     |          |                   |         |         |          |        |        
|                                                     |                                                                      |                                                                          |                                                                              | Accounts receivable                                 |          |                   | 4,201   |         |          |        | 1,739   |  
|                                                     |                                                                      |                                                                          |                                                                              | Royalties receivable                                |          |                   | 671     |         |          |        | 617     |  
|                                                     |                                                                      |                                                                          |                                                                              | Prepaid expenses & other current assets             |          |                   | (1,295  | )       |          |        | (840    | )
|                                                     |                                                                      |                                                                          |                                                                              | Other non-current assets                            |          |                   | 441     |         |          |        | (894    | )
|                                                     |                                                                      |                                                                          |                                                                              | Accounts payable                                    |          |                   | (1,089  | )       |          |        | (2,146  | )
|                                                     |                                                                      |                                                                          |                                                                              | Accrued expenses                                    |          |                   | (4,467  | )       |          |        | 2,463   |  
|                                                     |                                                                      |                                                                          |                                                                              | Deferred revenue                                    |          |                   | (1,686  | )       |          |        | 1,018   |  
|                                                     |                                                                      |                                                                          |                                                                              | Other long-term liabilities                         |          |                   | (78     | )       |          |        | (297    | )
|                                                     |                                                                      |                                                                          |                                                                              |                                                     |          |                   |        
|                                                     |                                                                      |                                                                          |                                                                              | Total adjustments                                   |          |                   | 101,122 |         |          |        | 25,683  |  
|                                                     |                                                                      |                                                                          |                                                                              |                                                     |          |                   |        
|                                                     |                                                                      |                                                                          |                                                                              | Net cash used in operating activities               |          |                   | (19,664 | )       |          |        | (9,396  | )
|Cash flows from investing activities:                |                                                                      |                                                                          |                                                                              |                                                     |          |                   |         |        
|                                                     |                                                                      | Purchases of property and equipment                                      |                                                                              |                                                     | (197     | )                 |         |         | (8,508   | )     
|                                                     |                                                                      | Purchase of short-term investments and marketable securities             |                                                                              |                                                     | (111,428 | )                 |         |         | (115,569 | )     
|                                                     |                                                                      | Sales and maturities of short-term investments and marketable securities |                                                                              |                                                     | 138,516  |                   |         |         | 49,164   |       
|                                                     |                                                                      | Cash paid in acquisition, net of cash acquired                           |                                                                              |                                                     |         |                   |         |         | (1,156   | )     
|                                                     |                                                                      |                                                                          |                                                                              |                                                     |          |                   |        
|                                                     |                                                                      |                                                                          |                                                                              | Net cash provided by (used in) investing activities |          |                   | 26,891  |         |          |        | (76,069 | )
|Cash flows from financing activities:                |                                                                      |                                                                          |                                                                              |                                                     |          |                   |         |        
|                                                     |                                                                      | Proceeds from issuance of common stock, net of issuance costs            |                                                                              |                                                     |         |                   |         |         | 84,661   |       
|                                                     |                                                                      | Proceeds from exercise of stock options and warrants, net of redemptions |                                                                              |                                                     | 42       |                   |         |         | 731      |       
|                                                     |                                                                      | Proceeds from issuance of stock under employee stock purchase plan       |                                                                              |                                                     | 86       |                   |         |         | 713      |       
|                                                     |                                                                      | Repayment of acquired entity bank loan                                   |                                                                              |                                                     |         |                   |         |         | (1,000   | )     
|                                                     |                                                                      | Principal payments under capital leases and notes payable                |                                                                              |                                                     | (499     | )                 |         |         | (488     | )     
|                                                     |                                                                      |                                                                          |                                                                              |                                                     |          |                   |        
|                                                     |                                                                      |                                                                          |                                                                              | Net cash (used in) provided by financing activities |          |                   | (371    | )       |          |        | 84,617  |  
|                                                     |                                                                      |                                                                          |                                                                              |                                                     |          |                   |        
|Net increase (decrease) in cash and cash equivalents |                                                                      |                                                                          | 6,856                                                                        |                                                     |          |                   | (848    | )      
|Cash and cash equivalents at beginning of period     |                                                                      |                                                                          | 16,396                                                                       |                                                     |          |                   | 17,457  |        
|                                                     |                                                                      |                                                                          |                                                                              |                                                     |          |                   |        
|Cash and cash equivalents at end of period           |                                                                      | $                                                                        | 23,252                                                                       |                                                     |          | $                 | 16,609  |        
|                                                     |                                                                      |                                                                          |                                                                              |                                                     |          |                   |        
|Supplemental schedule of non-cash activities:        |                                                                      |                                                                          |                                                                              |                                                     |          |                   |         |        
|                                                     |                                                                      | Non-cash restructuring activity                                          |                                                                              | $                                                   | 3,309    |                   |         | $       |         |       

See accompanying notes to the consolidated financial statements.

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NET PERCEPTIONS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)

Note 1. Basis of Presentation

In the opinion of management, the accompanying unaudited financial
statements contain all adjustments necessary to fairly present the Companys
financial position, results of operations and cash flows for the periods
presented. The preparation of financial statements in conformity with
generally accepted accounting principles 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, 2000, which are contained in the
Companys Annual Report on Form 10-K (File No. 000-25781). 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 the accounts of the Company
and its wholly owned subsidiaries. All significant inter-company accounts and
transactions have been eliminated. The equity method of accounting is used to
account for the Companys equity investment in a Japanese joint venture.

Note 2. Recently Issued Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) approved
Statements of Financial Accounting Standards (SFAS) No. 141, Business
Combinations and No. 142, Goodwill and Other Intangible Assets. The
statements eliminate the pooling-of-interests method of accounting for business
combinations and require that goodwill and certain intangible assets not be
amortized. Instead, the statements provide that these assets should be
tested, at least annually, for impairment with any related losses recognized as
incurred. SFAS No. 141 is generally effective for business combinations
completed after June 30, 2001. SFAS No. 142 is effective January 1, 2002 for
existing goodwill and intangible assets and July 1, 2001 for business
combinations completed after June 30, 2001. The adoption of these statements
is expected to reduce 2002 annual amortization by approximately $3.1 million.
However, as noted above, the remaining unamortized goodwill and intangible
asset balances will be subject to periodic impairment analysis, which could
require a write-down of these assets upon the adoption of SFAS No. 142 or
thereafter. The Company is currently evaluating the impairment requirements,
as provided by SFAS No. 142, on the Companys financial statements.

In October 2001, the Financial Accounting Standards Board issued SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets. This
statement addresses financial accounting and reporting for the impairment of
long-lived assets and for long-lived assets to be disposed of and supersedes
SFAS No. 121 and APB Opinion No. 30. SFAS No. 144 is effective for the Company
beginning January 1, 2002. The Company is currently evaluating the impact of
this standard on its financial position and results of operations.

Note 3. Net Loss Per Share

Basic net loss per share is computed using the weighted-average number of
shares of common stock outstanding, excluding shares of common stock subject to
repurchase. Such shares of common stock subject to repurchase totaled 15,014
and 275,981 at September 30, 2001 and 2000, respectively. Diluted net loss per
share does not differ from basic net loss per share since potential shares of
common stock issuable upon the exercise of stock options and outstanding shares
of common stock subject to repurchase are anti-dilutive for all periods
presented. Outstanding options excluded from the diluted net loss per share
calculations for the periods ended September 30, 2001 and 2000 totaled
3,466,020 and 3,292,652, respectively.

Note 4. Acquisition and Impairment

In February 2000, we acquired Knowledge Discovery One, Inc. (KD1), a
developer and marketer of advanced data analysis solutions for multi-channel
retailers. In this transaction, we acquired all of the outstanding shares of
KD1

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in exchange for 1,969,630 shares of our common stock, and KD1 became our
wholly owned subsidiary. The value of the Companys common stock issued for
the KD1 acquisition was determined by the average of the Companys stock price
over a period ending shortly before the announcement of the acquisition. The
Company also assumed all outstanding options to purchase KD1 common stock. The
Company reserved 265,514 shares of its common stock for issuance upon the
exercise of these options.

The KD1 acquisition was accounted for under the purchase method of
accounting. Accordingly, the total purchase price of $117,815 was allocated to
the acquired assets and liabilities assumed at their fair market values as of
the transaction closing date, and the Companys consolidated statements of
operations do not include any revenues or expenses related to the acquisition
prior to the closing date. Such acquired assets included intangible assets
related to acquired technology, customer list, workforce and goodwill of
$4,000, $3,000, $1,000 and $110,755, respectively. We also assumed net
liabilities of approximately $940.

At March 31, 2001, we performed an impairment assessment of the goodwill
and other intangible assets recorded in connection with the acquisition of KD1.
The assessment was performed primarily due to lower than expected revenues in
the first quarter of 2001 (product revenues declined 87% from the same period
in 2000 and 72% from the fourth quarter of 2000) and a downward revision in the
first quarter of 2001 of our internal revenue projections based on the general
economic conditions in the information technology sector, combined with changes
in valuation models for technology companies, a continued decline in our first
quarter 2001 stock price and our March 2001 plan of restructuring. As a result
of our review, we recorded a $75.3 million impairment charge to reduce goodwill
and other intangible assets to their estimated fair values. The charge was
determined based upon our estimated discounted cash flows over the estimated
remaining useful life of the goodwill and other intangible assets, a terminal
value at the end of this estimated life and using a discount rate of 40%. The
assumptions supporting the cash flows, including the discount rate and
estimated terminal value were determined using managements best estimates
available at the time the impairment assessment was made. The estimated cash
flows were consistently based on our internal operating plan. The discount
rate was based upon the historical time-weighted returns for venture capital
type investments for the last ten years  a rate considered appropriate given
our recent revenue levels. The estimated terminal value was based on our
recent revenue multiple based on trailing twelve months revenues as objectively
observed from the stock markets valuation of the Company. The remaining
intangible asset balance of $7.6 million is being amortized on a straight-line
basis over the remaining estimated useful lives of two to three years through
December 2001. In accordance with FAS No. 142, beginning January 1, 2002,
goodwill will no longer be amortized. Instead, these assets will be tested at
least annually for impairment, resulting in a reduction of annual amortization
expense of approximately $3.1 million in 2002. After 2001, amortization
expense will continue for the KD1 acquired technology and customer list.
Amortization expense related to goodwill and other intangible assets is
expected to be $835, $257, $32 for the remainder of 2001, 2002 and the first
quarter of 2003, respectively. However, as noted above, the remaining
unamortized goodwill and intangible asset balances are subject to periodic
impairment analysis, which could require a write-down of these assets in the
future.

The following table presents the consolidated results of operations on an
unaudited pro forma basis as if the acquisition of KD1 had taken place at the
beginning of fiscal 2000:

|                   |  |                    |         |  
|------------------ |  | ------------------ | ------- | -
|                   |  |                    |        
|                   |  | Nine Months Ended  |        
|                   |  | September 30, 2000 |        
|                   |  |                    |        
|                   |  | (unaudited)        |        
|Total revenues     |  | $                  | 30,082  |  
|Net loss           |  | $                  | (40,438 | )
|Net loss per share |  | $                  | (1.60   | )

The unaudited pro forma results of operations are for comparative purposes
only and do not necessarily reflect the results that would have occurred had
the acquisition occurred at the beginning of the periods presented or the
results which may occur in the future.

Note 5. Restructuring Charges

In March 2001, we instituted a restructuring plan to better align our cost
structure with our business outlook and general economic conditions. Under the
restructuring plan, our workforce was reduced by approximately 46%, or 124
positions throughout the organization, and a restructuring charge of $13.9
million was recorded to reorganize the company and exit certain facilities in
various United States and international locations. The $13.9 million
restructuring charge included $10.2 million related to facility consolidation,
$1.2 million of employee termination costs and $2.5 million of losses on the
disposal of assets and other restructuring charges.

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Approximately $3.4 million of the $13.9 million was a non-cash charge and
the remaining $10.5 million is expected to be a use of cash over the next few
years. Approximately 78% of the cash portion of the restructuring charge is an
estimate of the remaining rent commitments and other carrying costs, less
estimated sublease income, related to facilities we have vacated. Although we
believe that our lease commitment estimates are appropriate in the
circumstances, future changes in real estate markets could impact the ultimate
amount of cash paid to resolve these obligations. During the third quarter of
2001, we reduced our workforce by 45 employees and recorded an additional $1.8
million restructuring charge. The $1.8 million restructuring charge included
$878,000 for estimated losses on the disposal of fixed assets, $449,000 for
leasehold write-offs related to facility consolidation and $444,000 for
employee severance payments. A summary of the payments and accrued
restructuring charges as of September 30, 2001 is included in the table below.

|                                         |  |               |        |  |               |         |       |               |  |   |              |               |            |               |               |       |                    |               |         |   |  |   |       | 
|---------------------------------------- |  | ------------- | ------ |  | ------------- | ------- | ----- | ------------- |  | - | ------------ | ------------- | ---------- | ------------- | ------------- | ----- | ------------------ | ------------- | ------- | - |  | - | ----- | 
|                                         |  |               |        |  |               |         |       |               |  |   |              |               |            | Sublease      |               |       | Non-Cash           |               |         |   |  |  
|                                         |  |               |        |  |               | 3Q 2001 |       |               |  |   |              |               | Income and |               |               | Asset |                    |               | Accrued |  
|                                         |  | Initial       |        |  | Additional    |         |       |               |  |   |              | Proceeds from |            |               | Disposals and |       |                    | Restructuring |        
|                                         |  | Restructuring |        |  | Restructuring |         |       | Restructuring |  |   | the Sale of  |               |            | Deferred Rent |               |       | as of              |              
|Description                              |  | Charge        |        |  | Charge        |         |       | Payments      |  |   | Fixed Assets |               |            | Write-Off     |               |       | September 30, 2001 |              
|                                         |  |               |        |  |               |         |       |               |  |   |              |               |            |               |               |       |                    |              
|Lease commitments
and related items      |  | $             | 10,200 |  |               | $       | 449   |               |  | $ | (1,413       | )             |            | $             | 148           |       |                    | $             | (1,154  | ) |  | $ | 8,230 | 
|Employee severance
and termination costs |  |               | 1,190  |  |               |         | 444   |               |  |   | (1,423       | )             |            |               |              |       |                    |               |        |   |  |   | 211   | 
|Fixed asset
disposals and other
costs    |  |               | 2,530  |  |               |         | 878   |               |  |   | (91          | )             |            |               | 171           |       |                    |               | (2,155  | ) |  |   | 1,333 | 
|                                         |  |               |        |  |               |         |       |               |  |   |              |               |            |               |               |       |                    |              
|                                         |  | $             | 13,920 |  |               | $       | 1,771 |               |  | $ | (2,927       | )             |            | $             | 319           |       |                    | $             | (3,309  | ) |  | $ | 9,774 | 
|                                         |  |               |        |  |               |         |       |               |  |   |              |               |            |               |               |       |                    |              




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

OVERVIEW

Net Perceptions develops and markets software that integrates and analyzes
information about customers, products and promotional activity, enabling our
customers to improve their marketing, merchandising and advertising
effectiveness. Our solutions harness the power of advanced data mining,
reporting and campaign management capabilities to recommend specific actions
intended to increase the profitability of marketers and merchants.

Net Perceptions, Inc. was incorporated in Delaware in July 1996 and our
initial product was shipped in January 1997. Through September 30, 2001, we
have focused on providing solutions to electronic commerce and brick-and-mortar
retailers, and the majority of our product revenues through September 30, 2001
were attributable to our Net Perceptions for E-commerce product and our Net
Perceptions Recommendation Engine product, which is designed for other software
and solution providers on an original equipment manufacturer (OEM) basis. In
1999, we expanded our product suite by introducing new applications for
Internet sales channels and other markets, including Net Perceptions for Call
Centers. In the second quarter of 2000, we recognized initial product revenues
from our Knowledge Refinery and Retail Discovery Suite products (the successor
products are now called the Knowledge Discovery Engine and Business
Intelligence Engine, respectively) which were acquired through our acquisition
of Knowledge Discovery One (KD1) discussed below.

Since our inception through late 2000, we expanded our organization by
hiring personnel in key areas, particularly marketing, sales and research and
development. Our total number of employees was 34, 70, 213 and 315 on December
31, 1997, 1998, 1999 and 2000, respectively. In March 2001, we instituted a
restructuring plan to better align our cost structure with our business outlook
and general economic conditions. Under the restructuring plan, we reduced our
workforce by approximately 46%, or 124 positions throughout the organization,
and recorded a charge of $13.9 million to reorganize the company and exit
certain facilities in various United States and international locations. This
restructuring charge consisted of $10.2 million related to facility
consolidation, $1.2 million of employee termination costs, and $2.5 million of
losses on the disposal of assets and other restructuring charges. Of the $13.9
million, approximately $3.4 million was a non-cash charge. During the third
quarter of 2001, we reduced our workforce by 45 employees and recorded an
additional $1.8 million restructuring charge. This $1.8 million restructuring
charge included $878,000 for losses on the disposal of fixed assets, $449,000
for leasehold write-offs related to facility consolidation and $444,000 for
employee severance payments. As of September 30, 2001, we had 100 employees.

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We sell our products and services worldwide primarily through a direct
sales force and resellers. Sales derived through indirect channels accounted
for approximately 13% of our total revenues in the third quarter of 2001
compared to 45% of our total revenues in the third quarter of 2000. Sales
through indirect channels have lower average selling prices and gross margins
than direct sales.

We license our products under various pricing plans, such as per stored
profile, per user, per CPU, per site and per enterprise. We grant licenses on
both a term and perpetual basis. License fees for our products range from
$50,000 to in excess of $1,000,000. The price of our annual maintenance
contracts is typically based on a percentage of the related product license fee
and is generally paid in advance. Professional service fees for implementation
support and training are generally priced on a per hour basis. In addition, we
offer some of our products on a hosted basis. Charges for hosted services vary
across service offerings, but generally include an initial set-up fee and a
recurring monthly charge based on usage.

Our revenues are recognized in accordance with the Statement of Position
97-2, Software Revenue Recognition, as amended by Statement of Position 98-4,
Deferral of the Effective Date of a Provision of Statement of Position 97-2
and Statement of Position 98-9, Modification of SOP 97-2, Software Revenue
Recognition, with Respect to Certain Transactions and in accordance with the
Securities and Exchange Commission Staff Accounting Bulletin (SAB) No. 101,
Revenue Recognition in Financial Statements. We derive revenues from
software licenses, software maintenance and professional services. Maintenance
includes telephone and Web-based technical support, bug fixes and rights to
unspecified upgrades on a when-and-if available basis. Professional services
include implementation, training and consulting, data warehousing and
application provider services.

For software arrangements that include multiple software products,
maintenance or services, we allocate the total arrangement fee using the
residual method. Under the residual method, the fair value of the undelivered
maintenance and services elements, as determined by vendor-specific objective
evidence, is deferred and the remaining (residual) arrangement fee is
recognized as software product revenue. For software arrangements in which we
do not have vendor-specific objective evidence, revenue is deferred until the
earlier of when vendor-specific objective evidence is determined for the
undelivered elements or when all elements have been delivered.

Revenues from license fees are recognized when persuasive evidence of an
agreement exists, delivery of the product has occurred, no significant company
implementation obligations remain, the fee is fixed or determinable and
collection is probable. If the fee due from the customer is not fixed or
determinable, revenues are recognized as payments become due from the customer.
If we do not consider collection to be probable, then revenues are recognized
when the fee is collected.

We recognize revenues allocable to maintenance on a straight-line basis
over the periods in which it is provided. We evaluate arrangements that include
professional and/or data processing services to determine whether those
services are essential to the functionality of other elements of the
arrangement. If professional services are considered essential, revenues from
the arrangement are recognized using contract accounting, generally on a
percentage-of-completion basis. When we do not consider the professional
services to be essential, we recognize revenues allocable to the services as
they are performed.

License revenues related to license terms of less than twenty-four months
are recognized ratably over the term of the license period. When we offer our
products on a hosted basis, up front set-up fees are deferred and recognized
ratably over the estimated service period.

We have sustained losses on a quarterly and annual basis since inception.
As of September 30, 2001, we had an accumulated deficit of $197.1 million. Our
net loss was $6.2 million in the third quarter of 2001 (including $1.8 million
in restructuring charges, $888,000 of amortization of goodwill and other
intangibles and non-cash stock compensation expense), compared to a net loss of
$15.8 million in the third quarter of the prior year (including $7.8 million of
amortization of goodwill and other intangibles and non-cash stock compensation
expense). For the nine months ended September 30, 2001, our net loss was
$120.8 million (including $15.7 million in restructuring charges, $9.5 million
of amortization of goodwill and other intangibles and non-cash stock
compensation expense and a $75.3 million charge for the impairment of goodwill
and other intangibles), compared to a $35.1 million net loss in the same period
in 2000 (including $19.5 million in amortization of goodwill and other
intangibles and non-cash stock compensation expense). These losses resulted
from significant costs incurred in the development and sale of our products and
services as well as a decline in our product revenues since the third quarter
of 2000. We anticipate that our operating expenses will continue to constitute
a material use of our cash resources. We also expect to incur additional losses
and continued negative cash flow from operations for the foreseeable future. We
do not expect to achieve profitability (including restructuring charges,
amortization and impairment of goodwill and other intangibles and stock
compensation) in 2001.

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Our relatively limited operating history makes the prediction of future
operating results very difficult. We believe that period-to-period comparisons
of our operating results should not be relied upon as predictive of future
performance. Our prospects must be considered in light of the risks, expenses
and difficulties encountered by companies in relatively new and rapidly
evolving markets. We may not be successful in addressing these risks and
difficulties. Prior to the third quarter of 2000, we experienced significant
sequential percentage quarterly growth in revenues. We do not believe that
prior revenue growth rates are indicative of future growth rates.

THE KD1 ACQUISITION

In February 2000, we acquired KD1, a developer and marketer of advanced
data analysis solutions for multi-channel retailers. In this transaction, we
acquired all of the outstanding shares of KD1 in exchange for 1,969,630 shares
of our common stock, and KD1 became our wholly owned subsidiary. In addition,
stock options of KD1 were converted into options to purchase approximately
265,514 shares of our common stock.

Refer to Note 4.   Acquisition and Impairment in the Notes to Consolidated
Financial Statements and to the Impairment of goodwill and other intangibles
section in the Managements Discussion and Analysis of Financial Condition and
Results of Operations for a discussion on the impairment of goodwill and other
intangible assets.

RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001
AND SEPTEMBER 30, 2000

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 |     |  | Nine Months Ended |   
|                     |                                                |                          |      | September 30,      |     |  | September 30,     |   
|                     |                                                |                          |      | 2001               |     |  | 2000              |    |     | 2001 |        |     | 2000  | 
|                     |                                                |                          |      |                    |     |  |                   |    |     |      |        |     |       | 
|Revenues:            |                                                |                          |      |                    |     |  |                   |    |     |      |        |     |       |  |      |   
|                     | Product                                        |                          |      | 31                 | %   |  |                   | 57 | %   |      |        | 26  | %     |  |      | 72 | %  
|                     | Service and maintenance                        |                          |      | 69                 |     |  |                   | 43 |     |      |        | 74  |       |  |      | 28 |    
|                     |                                                |                          |      |                    |     |  |                   |    |     |      |        |     |      
|                     |                                                | Total revenues           |      |                    | 100 |  |                   |    | 100 |      |        |     | 100   |  |      |    | 100 | 
|Cost of revenues:    |                                                |                          |      |                    |     |  |                   |    |     |      |        |     |       |  |      |   
|                     | Product                                        |                          |      | 7                  |     |  |                   | 7  |     |      |        | 9   |       |  |      | 5  |    
|                     | Service and maintenance                        |                          |      | 34                 |     |  |                   | 39 |     |      |        | 53  |       |  |      | 25 |    
|                     |                                                |                          |      |                    |     |  |                   |    |     |      |        |     |      
|                     |                                                | Total cost of revenues   |      |                    | 41  |  |                   |    | 46  |      |        |     | 62    |  |      |    | 30  | 
|Gross margin         |                                                |                          | 59   |                    |     |  | 54                |    |     |      | 38     |     |       |  | 70   |   
|Operating expenses:  |                                                |                          |      |                    |     |  |                   |    |     |      |        |     |       |  |      |   
|                     | Sales and marketing                            |                          |      | 113                |     |  |                   | 83 |     |      |        | 172 |       |  |      | 63 |    
|                     | Research and development                       |                          |      | 97                 |     |  |                   | 72 |     |      |        | 107 |       |  |      | 48 |    
|                     | General and administrative                     |                          |      | 46                 |     |  |                   | 34 |     |      |        | 69  |       |  |      | 26 |    
|                     | Lease abandonment expense                      |                          |      |                   |     |  |                   |   |     |      |        | 3   |       |  |      | 3  |    
|                     | Restructuring charges                          |                          |      | 81                 |     |  |                   |   |     |      |        | 201 |       |  |      |   |    
|                     | Amortization of goodwill and other intangibles |                          |      | 37                 |     |  |                   | 94 |     |      |        | 113 |       |  |      | 61 |    
|                     | Impairment of goodwill and other intangibles   |                          |      |                   |     |  |                   |   |     |      |        | 963 |       |  |      |   |    
|                     |                                                |                          |      |                    |     |  |                   |    |     |      |        |     |      
|                     |                                                | Total operating expenses |      |                    | 374 |  |                   |    | 283 |      |        |     | 1,628 |  |      |    | 201 | 
|                     |                                                |                          |      |                    |     |  |                   |    |     |      |        |     |      
|Loss from operations |                                                |                          | (315 | )                  |     |  | (229              | )  |     |      | (1,590 | )   |       |  | (131 | ) 
|Other income, net    |                                                |                          | 33   |                    |     |  | 25                |    |     |      | 46     |     |       |  | 13   |   
|Net loss             |                                                |                          | (282 | )%                 |     |  | (204              | )% |     |      | (1,544 | )%  |       |  | (118 | )%
|                     |                                                |                          |      |                    |     |  |                   |    |     |      |        |     |      

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REVENUES

Total revenues.   Revenues declined 72% to $2.2 million in the quarter
ended September 30, 2001, from $7.7 million in the third quarter of 2000.
Revenue decreased 74% to $7.8 million for the nine months ended September 30,
2001, from $29.6 million for the same period in 2000. Revenues from sales in
the United States were $1.7 million in the third quarter of 2001 compared to
$6.4 million in the third quarter of 2000, representing 80% and 83% of total
revenues, respectively. Revenues from sales in the United States were $5.9
million and $22.7 million, or 76% and 77% of revenues, for the first nine
months of 2001 and 2000, respectively. Revenues from international sales in
the third quarter of 2001 were $443,000 or 20% of total revenues compared to
$1.3 million or 17% of total revenues in the third quarter of the prior year.
Revenues from international sales were $1.9 million and $6.9 million, or 24%
and 23% of total revenues, for the nine months ended September 30, 2001 and
2000, respectively. The majority of international sales were made in Europe
and Asia by our direct sales organizations located in the United States and the
United Kingdom. International sales are generally denominated in United States
dollars.

Product revenues.   Product revenues declined 85% to $674,000 in the third
quarter of 2001 compared to $4.4 million for the same period in the prior year.
Product revenues decreased 90% to $2.1 million for the nine months ended
September 30, 2001 from $21.5 million in the same period of 2000. These
decreases in product revenue were attributable to a combination of factors,
including the rapid deterioration of pure dot-com e-tailers, a longer sales
cycle for larger contracts with multi-channel retailers, increased competition,
and the deferral of purchase decisions by our current and potential customers
due to economic uncertainty. Due to product revenue declines and the reduced
outlook for the foreseeable future, we instituted a restructuring plan in March
2001 to consolidate operations in various United States and international
locations and reduce our workforce by approximately 46%, or 124 employees.
During the third quarter of 2001, we reduced our workforce by an additional 45
employees. Prior percentage growth rates of our product revenues have not been
sustainable and we do not currently expect to achieve such prior percentage
growth rates in the future.

Service and maintenance revenues.   Service and maintenance revenues
consist primarily of professional and maintenance services and hosted product
related services. Our professional service revenues include business
consulting, implementation support, data warehousing and processing and
educational services, and are generally offered on a time and materials basis.
Maintenance revenues are generally derived from annual service agreements and
are recognized ratably over the term of the agreement. Total service and
maintenance revenues decreased 54% to $1.5 million in the third quarter of 2001
from $3.3 million in the third quarter of 2000. Service and maintenance
revenues comprised 69% and 43% of total revenues in the third quarter of 2001
and 2000, respectively. Total service and maintenance revenues decreased 30%
to $5.8 million for the nine months ended September 30, 2001, from $8.2 million
in the same period in 2000. Service and maintenance revenues comprised 74% and
28% of total revenues for the nine months ended September 30, 2001 and 2000,
respectively. The decrease in service and maintenance revenues in absolute
dollars reflects lower levels of consulting services and maintenance support
due to a decline in our dot-com customer base and in a reduction in product
revenues. As noted above, we believe the product revenue decline is primarily
attributable to a lengthening in our sales cycle as we seek larger contracts
with multi-channel retail customers and reduced information technology spending
in a slowing economy. Prior percentage growth rates of our service and
maintenance revenues have not been sustainable and we do not currently expect
to achieve such prior percentage growth rates in the future.

COST OF REVENUES

Cost of product revenues.   Cost of product revenues consists primarily of
the cost of royalties paid to third-party vendors, amortization of acquired
technology costs, product media and duplication, manuals, packaging materials
and shipping expenses. Cost of product revenues decreased 70% to $158,000 in
the third quarter of 2001 from $526,000 in the third quarter of 2000,
representing 23% and 12% of the related product revenues, respectively. Cost of
product revenues were 33% and 6% of total product revenues for the nine months
ended September 30, 2001 and 2000, respectively. The decrease in cost of
product revenues in absolute dollars in 2001 compared to 2000 is primarily
attributable to reduced product revenues and royalties payable to third parties
and a decrease in amortization of acquired technology cost in connection with
our acquisition of KD1 in February 2000. Since all internal development costs
incurred in the research and development of new software products and
enhancements to existing software products have been expensed as incurred, cost
of product revenues includes no amortization of capitalized software
development costs.

Cost of service and maintenance revenues.   Cost of service and maintenance
revenues consists primarily of personnel-related and infrastructure costs
incurred in providing telephone and Web-based support of our software products,
as well as professional, consulting, educational and product hosting services
to customers. Cost of service and

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maintenance revenues decreased 76% to $739,000 in the third quarter of
2001, from $3.0 million in the third quarter of the prior year, representing
49% and 92% of the related services and maintenance revenues, respectively.
The cost of service and maintenance revenues were 72% and 93% of the related
service and maintenance revenues for the nine months ended September 30, 2001
and 2000, respectively. The decrease in cost of services and maintenance
revenues in absolute dollars and as a percentage of revenues in 2001 compared
to 2000 is primarily due to decreased use of third-party consultants to staff
consulting engagements and headcount reductions in our service organization as
a result of our March 2001 and third quarter 2001 restructuring. Cost of
service and maintenance revenues may vary significantly from quarter to quarter
depending upon the mix of services that we provide and the utilization rate of
our service personnel.

OPERATING EXPENSES

Sales and marketing.   Sales and marketing expenses consist primarily of
salaries, other employee-related costs, commissions and other incentive
compensation, travel and entertainment and expenditures for marketing programs
such as collateral materials, trade shows, public relations and creative
services. Sales and marketing expenses decreased 62% to $2.5 million in the
third quarter of 2001, compared to $6.4 million in the third quarter of 2000.
Sales and marketing expenses were 113% and 83% of total revenues in the third
quarter of 2001 and 2000, respectively. Sales and marketing expenses were
$13.5 million and $18.7 million, or 172% and 63% of total revenues, for the
nine months ended September 30, 2001 and 2000, respectively. The decreases in
sales and marketing expenses in absolute dollars were primarily due to
headcount reductions as a result of our March 2001 and third quarter 2001
restructuring and decreased spending on marketing programs.

Research and development.   Research and development expenses consist
primarily of salaries, other employee-related costs and consulting fees related
to the development of our products. Research and development expenses were $2.1
million in the third quarter of 2001, a decrease of 62% from the $5.6 million
in the third quarter of 2000. Research and development expenses were 97% and
72% of total revenues in the third quarter of 2001 and 2000, respectively.
Research and development expenses decreased 41% to $8.4 million from $14.2
million, representing 107% and 48% of the total revenues for the nine months
ended September 30, 2001 and 2000, respectively. The decrease in research and
development expenses in absolute dollars is primarily due to headcount
reductions as a result of our March 2001 and third quarter 2001 restructuring.

General and administrative.   General and administrative expenses consist
primarily of salaries, other employee-related costs and professional service
fees. General and administrative expenses decreased 62% to $1.0 million from
$2.6 million, representing 46% and 34% of total revenue in the third quarter of
2001 and 2000, respectively. General and administrative expenses were $5.4
million and $7.7 million, or 69% and 26% of total revenues for the nine months
ended September 30, 2001 and 2000, respectively. General and administrative
expenses decreased in absolute dollars in 2001 compared to 2000 due primarily
to lower headcount as a result of our March 2001 and third quarter 2001
restructuring.

Lease abandonment expenses.Lease abandonment expenses relate to our
August 2000 abandonment of our previous headquarters facility upon our move to
new corporate headquarters. For the nine months ended September 30, 2001,
lease abandonment charges were $225,000 compared to $800,000 in the same period
in 2000. Lease abandonment charges represented 3% of total revenues for the
nine months ended September 30, 2001 and 2000. An additional $225,000 of lease
abandonment expense was recorded in the first quarter of 2001 in response to
declining conditions in the Minneapolis area real estate market. In late
October 2001, we entered into an agreement to sublease the majority of our
previous headquarters facility to a third party.

Restructuring charges.In March 2001, we instituted a restructuring plan
to better align our cost structure with our business outlook and general
economic conditions. Under the restructuring plan, we reduced our workforce by
approximately 46%, or 124 positions throughout the organization, and recorded a
restructuring charge of $13.9 million to reorganize the company and exit
certain facilities in various United States and international locations. This
$13.9 million restructuring charge included $10.2 million related to facility
consolidation, $1.2 million of employee termination costs and $2.5 million of
losses on the disposal of assets and other restructuring charges.
Approximately $3.4 million of the $13.9 million was a non-cash charge and the
remaining $10.5 million is expected to be a use of cash over the next few
years. Approximately 78% of the cash portion of the restructuring charge is an
estimate of the remaining rent commitments and other carrying costs, less
estimated sublease income, related to facilities we have vacated. Although we
believe that our lease commitment estimates are appropriate in the
circumstances, future changes in real estate markets could impact the ultimate
amount of cash paid to resolve these obligations. During the third quarter of
2001, we reduced our workforce by 45 employees and recorded an additional $1.8
million restructuring charge. This $1.8 million restructuring charge included
$878,000 for estimated losses on the disposal of fixed assets, $449,000 for
leasehold write-offs related to facility consolidation and $444,000 for
employee severance payments.

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A total of $5.9 million was charged against the restructure reserve as of
September 30, 2001, lowering the accrued restructure liability to $9.8 million.
These charges included $2.2 million of non-cash leasehold write-offs, $2.2
million of other non-cash fixed assets write-offs, $1.4 million in severance
payments, $1.2 million in rent payments, $168,000 of real estate broker fees
and $129,000 in other office consolidation expenses. These charges were
partially offset by a $1.1 million non-cash reversal of deferred rent, $171,000
of proceeds on the sale of fixed assets and $148,000 of sublease income.

Amortization of goodwill and other intangibles.   Amortization of
intangibles, related to goodwill and other intangibles acquired in the February
2000 acquisition of KD1 was $835,000 and $7.6 million (including $37,000 and
$333,000 of amortization of goodwill and other intangibles included in the cost
of product revenues) during the third quarter of 2001 and 2000, respectively.
We recorded $9.3 million and $19.0 million of related amortization expense on
these intangible assets (including $407,000 and $833,000 of amortization of
goodwill and other intangibles included in the cost of product revenues) for
the nine months ended September 30, 2001 and 2000, respectively. Total
amortization of goodwill and other intangibles is expected to be significantly
lower for the remainder of 2001 through the first quarter of 2003 due to the
$75.3 million impairment of goodwill and other intangibles charge recorded in
the first quarter of 2001 as discussed below and our adoption of FAS No. 142 on
January 1, 2002, under which we will no longer amortize goodwill.

Impairment of goodwill and other intangibles.   At March 31, 2001, we
performed an impairment assessment of the goodwill and other intangible assets
recorded in connection with the acquisition of KD1. The assessment was
performed primarily due to lower than expected revenues in the first quarter of
2001 (product revenues declined 87% from the same period in 2000 and 72% from
the fourth quarter of 2000) and a downward revision in the first quarter of
2001 of our internal projections based on the general economic conditions in
the information technology sector, combined with changes in valuation models
for technology companies, a continued decline in our first quarter 2001 stock
price and our March 2001 plan of restructuring. As a result of our review, we
recorded a $75.3 million impairment charge to reduce goodwill and other
intangible assets to their estimated fair values. The charge was determined
based upon our estimated discounted cash flows over the estimated remaining
useful life of the goodwill and other intangible assets, a terminal value at
the end of this estimated life and using a discount rate of 40%. The
assumptions supporting the cash flows, including the discount rate and
estimated terminal value were determined using managements best estimates
available at the time the impairment assessment was made. The estimated cash
flows were consistently based on our internal operating plan. The discount
rate was based upon the historical time-weighted returns for venture capital
type investments for the last ten years  a rate considered appropriate given
our recent revenue levels. The estimated terminal value was based on our
recent revenue multiple based on trailing twelve months revenues as objectively
observed from the stock markets valuation of the Company. The remaining
intangible asset balance of $7.6 million is being amortized on a straight-line
basis over the remaining estimated useful lives of two to three years through
December 2001. In accordance with FAS No. 142, beginning January 1, 2002,
goodwill and certain other intangibles will no longer be amortized resulting in
a reduction of annual amortization expense of approximately $3.1 million in
2002. Amortization expense related to goodwill and other intangible assets is
expected to be $835, $257, $32 for the remainder of 2001, 2002 and the first
quarter of 2003, respectively. However, as noted above, the remaining
unamortized goodwill and intangible asset balances are subject to periodic
impairment analysis, which could require a write-down of these assets in the
future.

Stock compensation expense.   Compensation charges related to granted stock
options were $53,000 in the third quarter of 2001 and $198,000 in the third
quarter of 2000, comprising 2% of total revenues in both periods. Stock
compensation expense was $211,000 and $564,000, or 3% and 2% of total revenues,
for the nine months ended September 30, 2001 and 2000, respectively. Stock
compensation expense was recorded in the functional operating expense
categories as follows:

|                           |  |                    |        |  |                   |   |         |      |  |   |         |  |  |   |         | 
|-------------------------- |  | ------------------ | ------ |  | ----------------- | - | ------- | ---- |  | - | ------- |  |  | - | ------- | 
|                           |  | Three Months Ended |        |  | Nine Months Ended |  
|                           |  | September 30,      |        |  | September 30,     |  
|                           |  |                    |        |  |                   |  
|                           |  | 2001               |        |  | 2000              |   |         | 2001 |  |   | 2000    | 
|                           |  |                    |        |  |                   |   |         |      |  |   |         | 
|Sales and marketing        |  | $                  | 9,000  |  |                   | $ | 61,000  |      |  | $ | 34,000  |  |  | $ | 246,000 | 
|Research and development   |  |                    | 37,000 |  |                   |   | 118,000 |      |  |   | 146,000 |  |  |   | 255,000 | 
|General and administrative |  |                    | 7,000  |  |                   |   | 19,000  |      |  |   | 31,000  |  |  |   | 63,000  | 
|                           |  |                    |        |  |                   |   |         |      |  |   |         | 
|                           |  | $                  | 53,000 |  |                   | $ | 198,000 |      |  | $ | 211,000 |  |  | $ | 564,000 | 
|                           |  |                    |        |  |                   |   |         |      |  |   |         | 

Stock compensation expense included $38,000 related to accelerated vesting
during the first quarter of 2001. Compensation related to stock options
granted in 1999 and 1998 below fair market value was $2.1 million as of
September 30, 2001. Such compensation is considered deferred compensation and
is amortized over the vesting period

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of the options, which is generally four years. As a result, the
recognition of stock compensation will impact our reported results of
operations through early 2003.

Other income, net.   Other income, net consists of interest income,
interest expense, the companys share in gains or losses of a joint venture,
foreign currency transaction losses or gains and other expense. Net other
income was $714,000 in the third quarter of 2001 compared to $1.9 million in
the same period in 2000, representing 33% and 25% of total revenues,
respectively. Net other income was $3.6 million compared to $3.8 million for
the nine months ended September 30, 2001 and 2000, respectively. The decrease
in net other income for the nine months ended September 30, 2001 compared to
the same period in 2000 was primarily due to a decrease in interest income
earned on the proceeds from our follow-on public offering completed in March
2000.

PROVISION FOR INCOME TAXES

We have incurred significant operating losses for all periods from
inception through September 30, 2001. As of December 31, 2000, we had net
operating loss carry-forwards of approximately $45.0 million available to
reduce future taxable income expiring at various dates beginning in 2011. In
addition, as of December 31, 2000, we had $195,000 of tax credit carry-forwards
expiring at various dates beginning in 2011. Under the provisions of the
Internal Revenue Code of 1986, as amended, if certain substantial changes in
our ownership were to occur, we could be limited in the future in the amount of
net operating loss and tax credit carry-forwards that could be utilized
annually to offset future taxable income.

We have recorded a valuation allowance for the full amount of our net
deferred tax assets, as the realization of the future tax benefit is presently
not likely.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have financed our operations primarily through the
sale of equity securities. In March 2000 we completed a follow-on public
offering, selling 2,000,000 shares of common stock at a price of $45.25 per
share, raising a total of $84.6 million in net proceeds after payment of
underwriting discounts and commissions and offering expenses. At September 30,
2001, we had $76.4 million of cash, cash equivalents and short-term
investments, compared to $68.9 million at December 31, 2000. At September 30,
2001 we held no marketable securities compared to $27.4 million held at
December 31, 2000.

Cash used in operations was $19.7 million for the nine months ended
September 30, 2001, compared to $9.4 million for the same period in 2000. Cash
used in operations in both periods resulted primarily from net losses, as
adjusted for non-cash expenses.

A total of $26.9 million in net cash was provided from investing
activities during the nine months ended September 30, 2001 compared to a cash
use of $76.1 million in the same period of 2000. Our investing activities
consisted primarily of purchases and sales of short-term investments and
marketable securities and property and equipment. To date, we have not invested
in financial instruments that involve a high level of complexity or risk. We
will continue to invest cash in excess of current requirements in investment
grade, interest-bearing securities.

Capital expenditures were $197,000 and $8.5 million for the nine months
ended September 30, 2001 and 2000, respectively. Our capital expenditures
consisted of leasehold improvements and purchases of property and equipment,
primarily computer equipment, software and furniture. Capital expenditures
were higher in 2000 and reflect our rapidly growing employee base and expanding
operations infrastructure. In April 2000, we signed a ten-year lease for a new
corporate facility in Edina, Minnesota, with total annual rent payments
beginning at $1.4 million per year, excluding operating expenses. The move to
the new headquarters facility was completed in August 2000 and required a net
investment in the third quarter of 2000 of approximately $3.0 million in
leasehold improvements, furniture and equipment.

As a part of our March 2001 and third quarter 2001 restructuring, we have
consolidated domestic employees within our headquarters and Austin, Texas
facilities and are attempting to sublease the excess space and sell surplus
furniture and equipment. Cash payments related to our restructuring totaled
$2.9 million through September 30, 2001 including $1.4 million in employee
severance and termination costs, $1.4 million in lease related payments and
$91,000 in other facility consolidation costs. These restructuring related
payments were offset by $171,000 of proceeds from the sale of fixed assets and
$148,000 of sublease income. Beginning in the third quarter of 2001, cash
payments related to the restructuring are expected to total up to $750,000 per
quarter for the next few years, less any benefit from real estate

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subleasing activities. Approximately 78% of the cash portion of the
restructuring charge is an estimate of the remaining rent commitments and other
carrying costs, less estimated sublease income, related to facilities we have
vacated. Although we believe that our lease commitment estimates are
appropriate in the circumstances, future changes in real estate markets could
impact the ultimate amount of cash paid to resolve these obligations.

As of November 10, 2001, we have signed agreements to sublease
approximately 60,000 square feet, or 46%, of our headquarters facility
beginning December 1, 2001 through the remaining term of the lease. In July
2001, we subleased the excess space in our San Francisco facility through the
remaining term of the lease. In addition, we subleased our United Kingdom
facility from August 2001 through January 2005. In March 2005, we have the
option to terminate the ten-year United Kingdom facility lease. We are
actively seeking to sublease our remaining excess facilities to minimize the
cash impact. Specifically, we are currently seeking to sublease an additional
portion of our headquarters facility, our entire Roseland, New Jersey office
space and a portion of our office space in Austin, Texas. However, there is a
risk that we may not be able to sublease these facilities under favorable
terms, if at all, which could negatively impact our cash flow and future
operating results. As of September 30, 2001, we had no material long-term
commitments for capital expenditures.

Since 1999, we have purchased property and equipment with cash. From
inception through 1998, we generally funded the purchase of property and
equipment with capital leases. At September 30, 2001, we had $887,000 in short
and long-term liabilities, of which $610,000 comprised deferred rent credits.
Approximately $277,000 of the short and long-term liabilities represents loans
and notes payable, consisting primarily of capital lease obligations. These
obligations include installment loans with third-party financing sources that
are secured by the equipment financed by the third parties. The loans bear
interest at rates between 14.4% and 15.9% and mature between October 2001 and
August 2002.

We believe that existing cash and investments will be sufficient to meet
our working capital and capital expenditure needs for at least the next 12
months. If we needed to raise additional funds, we might not be able to do so
on favorable terms or at all. If we raised additional funds through the
issuance of equity securities, the percentage ownership of our stockholders
would be reduced.

RISKS THAT MAY AFFECT FUTURE RESULTS

The risks and uncertainties described below are not the only ones we face.
Additional risks and uncertainties not presently known to us or that are
currently deemed immaterial may also impair our business, financial condition
and results of operations. If any of these risks actually occur, our business,
financial condition and results of operations could be materially adversely
affected.

We are an early-stage company and we expect to encounter risks and difficulties
frequently encountered by early-stage companies in new and rapidly evolving
markets.

We were founded in July 1996.   We began shipping products in the first
quarter of 1997. The market for our products is unproven and our limited
operating history makes an evaluation of our future prospects very difficult.
We will encounter risks and difficulties frequently encountered by early-stage
companies in new and rapidly evolving markets. We may not successfully address
any of these risks. If we do not successfully address these risks, we may not
achieve profitability and we could suffer increased operating losses.

Our quarterly operating results are volatile and difficult to predict. If we
fail to meet the expectations of public market analysts and investors, the
market price of our common stock may decrease significantly.

Our quarterly operating results have varied in the past and may vary
significantly in the future. Because our operating results are volatile and
difficult to predict, we believe that period-to-period comparisons of our
results of operations are not a good indication of our future performance.
Historically, our operating results have been below the expectations of public
market analysts and investors and it is likely that in some future quarter or
quarters our operating results will again be below the expectations of public
market analysts and investors. In this event, the market price of our common
stock may decrease significantly.

We cannot predict our future quarterly revenues with any degree of
certainty for a variety of reasons, because:



| |  | we operate with a limited order backlog, and revenues in any quarter are substantially dependent on orders booked and
shipped in that quarter;
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------

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| |  | the market in which we compete is relatively new and rapidly evolving and has many new entrants;                                                                                                                        
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | we expect that, for the foreseeable future, revenues will come from licenses to a small number of customers, so delays or
cancellations of orders by a few customers can significantly impact revenues within a quarter;
| 
| |  | our sales cycle varies substantially from customer to customer; and                                                                                                                                                     
| 
| |  | the timing of large orders can significantly affect revenues within a quarter.                                                                                                                                          

Historically, we have recognized a substantial portion of our revenues in
the last month of a quarter, with these revenues frequently concentrated in the
last two weeks of the quarter. Accordingly, we cannot predict our financial
results for any quarter until very late in the quarter. A delay in an
anticipated sale or revenue recognition near the end of a quarter can seriously
harm our operating results for that quarter.

Our expense levels are relatively fixed in the short term and are based,
in part, on our expectations as to our future revenues. As a result, any delay
in generating or recognizing revenues could cause significant variations in our
operating results from quarter to quarter and could result in increased
operating losses.

We have a history of losses and expect to incur losses in the future.

We had net losses of $4.7 million in 1997, $5.0 million in 1998, $12.0
million in 1999, $53.5 million in 2000 (including $27.6 million of amortization
of goodwill and other intangibles and non-cash stock compensation expense
related to the acquisition of KD1) and $120.8 million (including $15.7 million
in restructuring charges, $9.5 million of amortization of goodwill and other
intangibles and non-cash stock compensation expense and a $75.3 million charge
for the impairment of goodwill and other intangibles related to the acquisition
of KD1) for the nine months ended September 30, 2001. As of September 30,
2001, we had an accumulated deficit of $197.1 million. We have not had a
profitable quarter and do not expect to have a profitable quarter in 2001. We
expect to continue to incur significant sales and marketing, research and
development and general and administrative expenses. As a result of the KD1
acquisition, we will continue to have substantial expenses associated with the
amortization of goodwill and other intangible assets. We will need to generate
significant additional revenues to achieve profitability. We may never achieve
profitability.

A decline in the price of, demand for, or market acceptance of our products
would seriously harm our business.

We currently derive a substantial portion of our revenues from several
products including Advertising Advisor, Retail Analyst, Personalization Manager
and Net Perceptions for Call Centers. We anticipate that these products will
continue to account for a substantial portion of our revenues for the
foreseeable future. Consequently, a decline in the price of or demand for
these products, or their failure to achieve broad market acceptance, would
result in decreased revenues and increased operating losses.

We face intense competition and, if we are unable to compete successfully, we
may be unable to increase our product sales and market share.

The market for our products is intensely competitive, evolving and subject
to rapid technological change. We expect the intensity of competition to
increase in the future. Competitors vary in size and in the scope and breadth
of the products and services offered.

We believe that the principal competitive factors affecting our market
include core technology, product features, product quality and performance,
customer service and price. Although we believe that our products currently
compete favorably with respect to such factors, our market is relatively new
and is rapidly evolving. We may not be able to maintain our competitive
position against current and potential competitors, especially those with
significantly greater financial, marketing, service, support, technical and
other resources.

Many of our competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources, significantly
greater name recognition and a larger installed base of customers than we have.
In addition, many of our competitors have well-established relationships with
current and potential customers of ours, have extensive knowledge of our
industry and are capable of offering a single-vendor solution. As a result,
our competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the development, promotion and sale of their products than we can.

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In addition, current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties to
increase the ability of their products to address customer needs. Also,
relationships with large systems integrators such as Accenture, large public
accounting firms and others are an important factor in successfully achieving
widespread deployment of these solutions. Many of our competitors have such
relationships in place today, and this may hinder our ability to gain
equivalent access to systems integration resources. Accordingly, it is possible
that new competitors or alliances among competitors may emerge and rapidly
acquire significant market share. We also expect that competition will
increase as a result of software industry consolidations. Increased
competition is likely to result in price reductions, reduced gross margins and
loss of market share. We may not be able to compete successfully against
current and future competitors.

Our products have a lengthy sales cycle. As a result, it is difficult to
predict the quarter in which a sale may occur.

We are one of the first companies to market real time personalization and
precision marketing solutions. As a result, we must use significant resources
to educate potential customers on the use and benefits of our products. In
addition, we believe that the purchase of our products is relatively
discretionary and involves a significant commitment of capital and other
resources by a customer. As a result, it usually takes our sales organization
several months to finalize a sale. This makes it difficult to predict the
quarter in which a sale may occur.

Our products have a lengthy implementation cycle. In addition, only a limited
number of our customers have a deployed and operating application that utilizes
our products. As a result, we cannot be certain that our products will perform
and be received as expected.

The implementation, including application design and deployment, of our
products requires a commitment of resources by our customers. The time
required for implementation of our products has varied depending on the
customers application of the product.

We have currently licensed one or more of our products to more than 200
customers. However, only a limited number of these customers have fully
deployed an operating application that utilizes our products. In addition, a
significant number of dot-com customers have gone out of business, and are no
longer utilizing our products. Because most of our customers have not yet
fully implemented and deployed our products, we cannot be certain that our
products will:



| |  | perform as designed;                                                                
|- |  | ------------------------------------------------------------------------------------
| 
| |  | deliver the desired level of economic benefit to our customers;                     
| 
| |  | meet the other expectations and needs of our customers;                             
| 
| |  | achieve any significant degree of market acceptance; or                             
| 
| |  | perform to the level necessary to generate repeat customers and customer references.

If implementation services performed by us constitute a significant part
of a product sales transaction, we recognize a substantial portion of our
revenues from the sales transaction upon the delivery of the implementation
services. As a result, delays in service delivery could cause significant
reduction in our license revenues and operating results for any particular
period.

We have several new products which may not achieve market acceptance.

Since January 2000, we have announced the commercial launch of several new
or enhanced products including Advertising Advisor, Retail Analyst, Net
Perceptions for Call Centers and Personalization Manager.

These products have not received any degree of market acceptance. There
are significant risks inherent in product introductions such as these. These
products may not address some or all of the needs of customers and may contain
undetected errors or failures. A lack of necessary features or errors or
failures in the products will likely result in loss or delay of market
acceptance. We expect that our future financial performance will depend
significantly on the successful sales, implementation and market acceptance of
these new or enhanced products which may not occur on a timely basis or at all.

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Our new products are subject to significant technical risks. We may fail
to introduce or deploy new products on a timely basis, or at all. In the past,
we have experienced some delays in the commencement of commercial shipments of
our new releases and new products. These delays caused customer frustrations
and delay or loss of product revenues. Some of our competitors currently offer
products with features and functionality similar to those of some of our new
products. In the past, we have also experienced delays in purchases of our
products by customers anticipating our launch of new releases or new products.
We could experience increased expenses or lost revenues if customers defer
material orders in anticipation of new releases or new product introductions.

The software products we offer are complex and may contain undetected
errors or failures when first introduced, or as new versions are released. We
have in the past discovered software errors in our new releases and new
products after their introduction. We experienced delays in release and lost
revenues during the period required to correct these errors. We may discover
errors in new releases or new products after the commencement of commercial
shipments, despite testing by our personnel and our current and potential
customers. This may result in loss of or delay in market acceptance of our
products, which could seriously impair our ability to achieve profitability.

If we fail to generate repeat or expanded business from our current and future
customers, we may be unable to build a critical mass of customers necessary to
achieve increased sales and market share.

Our success is dependent on the continued growth of our customer base and
the retention of our customers. We currently depend on a limited number of
key, high-profile customers. Our ability to attract new customers will depend
on a variety of factors, including the accuracy, scalability, reliability and
cost-effectiveness of our products and services and our ability to effectively
market such products and services. In the past, we have lost potential
customers to competitors for various reasons, including lower prices and other
incentives not matched by us. Many of our current customers initially purchase
a limited license for our products and services for evaluation. If such
evaluation is successful, the customer may purchase a license to expand the use
of our products in its organization or license additional products and
services. If we fail to generate repeat and expanded business from our current
and future customers, we may be unable to build a critical mass of customers
necessary to achieve increased sales and market share.

If we fail to substantially expand our direct sales operations, we may be
unable to increase market awareness and sales of our products and services.

Our products and services require a sophisticated sales effort targeted at
the senior management of our prospective customers. As of September 30, 2001,
our direct sales organization consisted of 11 employees. We may need to hire
additional direct sales personnel in the future. Competition for qualified
sales personnel is intense, and we might not be able to hire the kind and
number of sales personnel we are targeting. New hires will require extensive
training and typically take several months to achieve productivity. We cannot
be certain that our recent hires will be as productive as necessary. If we are
unable to hire additional skilled sales personnel as needed, we may not be able
to capture increased market share for our products and services.

If we cannot expand our indirect sales channel, we may be unable to increase
our customer base and achieve profitability.

We intend to increase the proportion of our customers licensed through our
indirect channel, which includes resellers, systems integrators and original
equipment manufacturers. Our agreements with resellers are generally not
exclusive and in many cases may be terminated by either party without cause.
Many of these resellers do not have minimum purchase or resale requirements.
In addition, many of these resellers carry product lines that are competitive
with our product lines. These resellers may not give a high priority to the
marketing of our products or may not continue to carry our products. They may
give a higher priority to other products, including the products of
competitors. We may not retain any of our current resellers or successfully
recruit additional resellers. Events or occurrences of this nature could
seriously impair our ability to increase our sales and market share. In
addition, any sales through resellers will have lower gross margins than direct
sales.

We have established an effort dedicated to the development of the indirect
sales channel for our products. Competition for qualified sales personnel is
intense, and we might not be able to retain our existing personnel. We cannot
be certain that our recent hires will be as productive as necessary.

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If we are unsuccessful in improving and increasing the size of our professional
services organization, we may lose current customers or be unable to attract
new customers.

Customers that license our software typically engage our professional
services organization to assist with support, training, consulting and
implementation. We believe that growth in our product sales depends on our
ability to provide our customers with these services and to educate resellers
on how to use our products. From time to time, we receive customer complaints
about the timeliness and accuracy of our customer support. As of September 30,
2001, our professional services and customer support organization consisted of
20 employees. There are a limited number of people who have the skills needed
to provide the services that our customers demand. Competition for qualified
service personnel is intense. We cannot be certain that we can attract or
retain a sufficient number of the highly qualified service personnel that our
business needs.

We depend on international sales and, therefore, our business is susceptible to
numerous risks associated with international operations.

Licenses and services sold to customers outside of the United States
accounted for approximately 13% of our total revenues in 1998, 16% in 1999, 22%
in 2000 and 24% for the nine months ended September 30, 2001. We expect
international revenues to account for a significant percentage of total
revenues in the future, and we believe that we must continue to expand our
international sales and marketing activities in order to be successful. To
successfully expand international sales we must:



| |  | expand our international operations;                               
|- |  | -------------------------------------------------------------------
| 
| |  | hire international personnel; and                                  
| 
| |  | recruit additional international resellers and systems integrators.

This will require significant management attention and financial resources
and could seriously harm our operating margins. We have limited experience in
marketing, selling, distributing and supporting our products and services
internationally.

International operations are generally subject to a number of other risks
as well, including:



| |  | expenses associated with customizing products and services for foreign countries;
|- |  | ---------------------------------------------------------------------------------
| 
| |  | protectionist laws and business practices that favor local competition;          
| 
| |  | conflicting and changing governmental laws and regulations;                      
| 
| |  | longer sales cycles;                                                             
| 
| |  | difficulties in collecting accounts receivable;                                  
| 
| |  | foreign currency exchange rate fluctuations; and                                 
| 
| |  | political and economic instability.                                              

During the third quarter of 1999, we established operations in the United
Kingdom. Also during the third quarter of 1999, we established operations in
Japan through a joint venture that created Net Perceptions Japan. As of
September 30, 2001, we had 6 employees located in the United Kingdom. All
other employees were located in North America.

The acceptance and use of the personalization and precision marketing
products and the Internet is in an earlier stage of development in
international markets when compared to the United States, particularly the use
of the Internet as a method for conducting commerce. If the Internet or
electronic commerce and/or, personalization and precision marketing software
solutions fail to gain sufficient acceptance in international markets or we
fail to further expand our international operations in a timely manner, we may
be unable to generate sufficient revenues to cover our expenses related to
international operations. In addition, we may fail to maintain or increase
international market demand for our products.

20



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##### Table of Contents



We may be unable to sublease or find suitable tenants for a portion of our
principal executive offices and some of our other offices.

In April 2000, we executed a ten-year lease for a new facility for our
principal executive offices in Edina, Minnesota. We have sublet a significant
portion of this facility to third parties and are currently seeking to sublease
an additional portion of this facility. We are also currently seeking to
sublease our Roseland, New Jersey office space and a portion of our office
space in Austin, Texas. We may not be able to find suitable sub-tenants for
these properties in a timely manner, if at all. If we are unable to find
suitable sub-tenants in a timely manner, we may experience greater than
anticipated operating expenses in the future.

If our intellectual property is not protected adequately, we may lose our
competitive advantage in the market.

We are a technology company. Our success depends in large part on
protecting our intellectual property, which is our most important asset. We
rely upon a combination of trademark, copyright, patent and trade secret laws
to protect our rights in our technology. We license our software and require
our customers to enter into license agreements, which impose restrictions on
our customers ability to utilize the software. In addition, we seek to avoid
disclosure of our trade secrets, including but not limited to requiring those
persons with access to our proprietary information to execute confidentiality
agreements with us and restricting access to the source code for our software.

We have 18 pending United States patent applications. We also have
license rights to four issued United States patents, three of which are from
the University of Minnesota. In addition, we have two allowed United States
patent applications. It is possible that no patents will issue from the
currently pending patent applications. It is also possible that our current
patents and potential future patents may be invalid or unenforceable. It is
also possible that any patent issued to us may not provide us with any
competitive advantages. Moreover, we may not develop future proprietary
products or technologies that are patentable, and the patents of others may
seriously limit our ability to conduct our business. In this regard, we have
not performed any comprehensive analysis of patents of others that may limit
our ability to conduct our business.

Our efforts to protect our proprietary rights may not succeed. Copyright
and trade secret laws afford only limited protection for our proprietary rights
in our software, documentation and other written materials. Unauthorized
parties may be able to copy aspects of our products or to obtain and use
information that we regard as confidential and proprietary. Policing
unauthorized use of our products is difficult, and while we are unable to
determine the extent to which piracy of our software products exists, software
piracy can be expected to be a persistent problem. In addition, the laws of
some foreign countries do not protect our proprietary rights to as great an
extent as the laws of the United States. Our means of protecting our
proprietary rights may not be adequate and our competitors may independently
develop similar technology, duplicate our products or design around patents
issued to us or our other intellectual property. We may not be able to detect
infringement or enforce our patent or other rights and, as a result, our
competitive position in the market may suffer.

Third-party infringement claims against us or our technology suppliers could
result in delays in product development, the loss of customers, or costly and
time-consuming litigation.

There has been a substantial amount of litigation in the software industry
regarding intellectual property rights. We have from time to time received
claims that we are infringing third parties intellectual property rights. It
is possible that in the future third parties may claim that our current or
potential future products infringe their intellectual property rights. We
expect that software companies such as Net Perceptions will increasingly be
subject to infringement claims as the number of products and competitors in our
industry segment grows and the functionality of products in different industry
segments overlaps. Any such claims, with or without merit, could be
time-consuming, result in costly litigation, cause product shipment delays or
require us to enter into royalty or licensing agreements in order to secure
continued access to required technology. Royalty or licensing agreements, if
required, may not be available on terms acceptable to us or at all. Claims of
intellectual property infringement may also require us to pay significant
damages or subject us to an injunction against the use of our products. Any
successful claim of intellectual property infringement against us could have an
immediate and significant impact on our ability to carry on our business and
market our products.

In addition, in all of our paid software license agreements, we generally
indemnify our customers against losses attributable to intellectual property
infringement by our software. Should a third party bring a suit against a
customer alleging that the customers use of our software infringes its
intellectual property rights, we could incur substantial costs in defending and
resolving the suit.

21



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##### Table of Contents



If we are unable to continue to utilize technology licensed from third parties,
we may be unable to conduct our business.

We license technology from various third parties for integration into our
products. Licenses to such third-party technology may not continue to be
available to us on commercially reasonable terms. We may not be able to renew
existing agreements or to license or develop alternative technology. If we
cannot maintain license rights to key third-party software, develop similar
technology or license similar technology from another source on a timely or
commercially feasible basis, we may be unable to market our current products or
develop new products in a timely manner.

If we engage in future acquisitions, we will incur a variety of costs and may
never realize the anticipated benefits of the acquisition.

If appropriate opportunities become available, we may attempt to acquire
businesses, products or technologies that we believe are a strategic fit with
our business. We currently have no commitments or agreements for any
acquisitions. If we do undertake any transaction of this sort, the process of
integrating an acquired business, product or technology may result in
unforeseen operating difficulties and expenditures and may absorb significant
management attention that would otherwise be available for ongoing development
of our business. Moreover, we may fail to realize the anticipated benefits of
any acquisition. Future acquisitions could dilute existing stockholders
ownership interest in us and could cause us to incur debt, expose us to future
liabilities and result in amortization expenses related to goodwill and other
intangible assets.

Our ability to increase our customer base and our sales depends on the
continuing contribution of our key personnel and our ability to attract,
assimilate and retain other highly qualified personnel.

Our future success depends on the continued service of our key personnel.
The loss of the services of one or more of our key employees could seriously
harm our ability to increase our customer base and sales. As of September 30,
2001, we had 100 employees. We do not carry any significant key person life
insurance policies.

Our future success also depends on our continuing ability to attract,
hire, train and retain a substantial number of highly skilled managerial,
technical, sales, marketing and customer support personnel. Competition for
skilled personnel is intense, and we may fail to retain our key employees, or
attract, assimilate or retain other highly qualified personnel in the future.
If so, we may be unable to service our current customers, attract new customers
and increase our sales.

The market price of our common stock has been volatile and has fluctuated
significantly in the past. To the extent this volatility and fluctuation
continues, equity-based compensation policies and plans, which have
historically been significant in our attracting, hiring and retaining highly
skilled personnel, may not be as effective as in the past.

We may need to raise additional capital that may not be available on reasonable
terms, or at all.

We believe we have sufficient cash and investments to meet our working
capital and capital expenditure needs for at least the next 12 months. After
that, we may need to raise additional funds and we cannot be certain that we
will be able to obtain additional financing on favorable terms, or at all. If
we raise additional funds through the issuance of equity or convertible debt,
the percentage ownership of our stockholders will be reduced, and these newly
issued securities may have rights, preferences or privileges senior to those of
our existing stockholders. If we cannot raise funds as needed on acceptable
terms, we may not be able to develop or enhance our products, take advantage of
future opportunities or respond to competitive pressures or unanticipated
requirements.

Future sales of our common stock could depress its market price.

If our stockholders sell substantial amounts of our common stock, or there
is a belief that such sales could occur, the market price of our common stock
could fall. These factors could also make it more difficult for us to raise
funds through future offerings of common stock. As of September 30, 2001, we
had outstanding 27,066,582 shares of common stock and options to acquire an
aggregate of 3,466,020 shares of common stock, of which 1,148,569 were
exercisable. Substantially all of our outstanding shares are freely tradeable
and all shares acquired upon exercise of options will be freely tradeable.
Those shares which are not freely tradeable may be resold publicly at any time,
subject to the volume and other restrictions of Rule 144 under the Securities
Act. If large

22



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##### Table of Contents



numbers of these shares are sold over a short period of time, the price of our
common stock could be adversely affected.

The market price of our common stock may be volatile, which could result in
substantial losses for individual stockholders.

The market price for our common stock has been and is likely to continue
to be highly volatile and subject to wide fluctuations in response to factors
including the following, some of which are beyond our control:



| |  | actual or anticipated variations in our quarterly operating results;                                                                                        
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | announcements of new technological innovations, increased cost of operations or new products or services by us or our
competitors;                          
| 
| |  | changes in financial estimates by securities analysts;                                                                                                      
| 
| |  | conditions or trends in the Internet industry;                                                                                                              
| 
| |  | changes in the economic performance and/or market valuations of other Internet companies;                                                                   
| 
| |  | volatility in the stock markets, particularly with respect to Internet stocks, and decreases in the availability of capital
for Internet-related businesses;
| 
| |  | announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital
commitments;                          
| 
| |  | additions or departures of key personnel;                                                                                                                   
| 
| |  | sales of additional shares of common stock; and                                                                                                             
| 
| |  | potential litigation.                                                                                                                                       

From April 23, 1999 (the first day of public trading of our common stock),
through October 31, 2001, the high and low sales prices for our common stock
fluctuated between $66.50 and $0.85. On October 31, 2001, the last reported
sale price of our common stock on the Nasdaq National Market was $1.15. In the
past, securities class action litigation has often been brought against a
company following periods of volatility in the market price of its securities.
On November 2, 2001, Timothy J. Fox filed a purported class action lawsuit
against us, FleetBoston Robertson Stephens, Inc., the lead underwriter of our
initial public offering in April 1999, several other underwriters who
participated in our initial public offering, Steven J. Snyder, our then
president and chief executive officer, and Thomas M. Donnelly, our chief
financial officer and senior vice president of finance and administration. For
a discussion of this matter, please refer to the section of this report
entitled Legal Proceedings. We may in the future be the target of other
similar litigation. Securities litigation could result in substantial costs
and divert managements attention and resources.

We may be subject to potential product liability claims that could result in
costly and time-consuming litigation.

Because our customers use our products for important applications, errors
or defects in, or other performance problems with, our products could result in
financial or other damages to our customers. Our customers could seek damages
for losses from us. Although our license agreements typically contain
provisions designed to limit our exposure to product liability claims, existing
or future laws or unfavorable judicial decisions could negate these limitation
of liability provisions. Any product liability claim brought against us, even
if unsuccessful, would likely be time-consuming and costly, and potential
liabilities could exceed our available insurance coverage.

Our current revenue recognition practices may need to change, which could
seriously harm our business.

The American Institute of Certified Public Accountants issued Statement of
Position 97-2, Software Revenue Recognition, in October 1997 and amended it
by Statements of Position 98-4 and 98-9. There may be additional
pronouncements issued in the future. Our current revenue accounting practices
may need to change and such changes could seriously harm our future revenues
and earnings.

23



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##### Table of Contents



Provisions of our corporate charter documents and rights agreement could delay
or prevent a change of control, even if it would be beneficial to our
stockholders.

Various provisions of our certificate of incorporation and bylaws could
have the effect of delaying or preventing a change in control and make it more
difficult for a third party to acquire us, even if doing so would be beneficial
to our stockholders. In addition, the rights issued under our rights agreement
may be a substantial deterrent to a person acquiring 15% or more of our common
stock without the approval of our board of directors. These provisions in our
certificate of incorporation, by-laws and rights agreement could reduce the
price that investors might be willing to pay for shares of our shares of common
stock in the future and result in the market price being lower than it would be
without these provisions.

Our business could be seriously impacted by privacy and security concerns.

In some cases, our customers capture user preference and profile
information each time a user interacts with the application utilizing our
products or volunteers information in response to survey questions. Our
customers generally have implemented security measures to protect such customer
data from unauthorized disclosure or interception by third parties. However,
the security measures may not be effective against all potential security
threats. If a breach of customer data security were to be publicized, our
products may be perceived as less desirable, and our future sales could be
negatively impacted. More importantly, even the perception of privacy and
security concerns, whether or not valid, may indirectly inhibit market
acceptance of our products. In addition, legislative or regulatory
requirements may heighten such concerns if, for example, our customers were
required to notify users that the data captured after these interactions may be
used by marketing entities to direct product promotion and advertising to that
user. Legislation has been proposed at the federal and state levels that
address some aspect of the Internet, including a number of bills that
specifically address Internet privacy matters. Such proposed legislation
indicates that some federal and state legislators believe that certain aspects
of the Internet and e-commerce, including data privacy, are appropriate matters
for regulation and review. Various other countries and political entities,
such as the European Union, have adopted legislation or regulatory requirements
addressing issues, such as data privacy, that may directly impact some of our
customers. If user privacy concerns are not adequately addressed or if
restrictive legislation is adopted in the United States, our business could be
seriously harmed and we could experience increased operating losses.

Our products can use data captured with cookies to track demographic
information and user preferences. A cookie is a bit of information keyed to
a specific server, file pathway or directory location that is stored on a
computer users hard drive, possibly without the users knowledge. Some
countries have imposed laws limiting the use of cookies, and a number of
Internet commentators, advocates and governmental bodies in the United States
and other countries have proposed or urged passage of laws limiting or
abolishing the use of cookies. If laws of this type are passed, our business
could be adversely impaired and we could suffer increased operating losses. In
addition, Internet users can, if they choose, configure their Web browsers to
limit the collection of user data through cookies. If many Internet users
choose to limit the collection of user data in this matter, or if major
countries or regions adopt legislation or other restrictions on the use of
customer data, our software would be less useful to our customers and market
acceptance of our products could be adversely impacted.

If we do not respond to rapid technological changes, our products could become
obsolete and we could lose our competitive advantage in the market.

The life cycles of our products are difficult to predict because the
markets for our products are characterized by rapid technological change,
changing customer needs, frequent new software product introductions and
evolving industry standards.

The introduction of products embodying new technologies and the emergence
of new industry standards could render our existing products obsolete and
unmarketable. To be successful, we need to develop and introduce new software
products and enhancements to existing products on a timely basis that:



| |  | keep pace with technological developments and emerging industry standards; and
|- |  | ------------------------------------------------------------------------------
| 
| |  | address the increasingly sophisticated needs of our customers.                

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In addition, we may:



| |  | fail to develop and market new products and enhancements to existing products that respond to technological changes or
evolving industry standards;                        
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | experience difficulties that could delay or prevent the successful development, introduction and marketing of these new
products and enhancements to existing products; and
| 
| |  | fail to develop new products and enhancements to existing products that adequately meet the requirements of the marketplace
or achieve market acceptance.                  

If any of these events occur, we may be unable to compete successfully in
the market for our products and services, and as a result, our business could
fail.

The growth of the market for our products and services would be impaired if the
use of the Internet and electronic commerce do not grow as anticipated, and
third parties do not continue to develop and improve the Internet
infrastructure.

Our future revenues depend, in part, upon the increased acceptance and use
of the Internet and other on-line services as a medium of commerce. Rapid
growth in the use of the Internet, the Web and on-line services is a recent
phenomenon. Acceptance and use may not continue to develop at historical rates
and a sufficiently broad base of customers may not adopt or continue to use the
Internet and other on-line services as a medium of commerce. Demand and market
acceptance for recently-introduced services and products over the Internet are
subject to a high level of uncertainty and few proven services and products
exist.

In addition, the Internet may not be accepted as a viable long-term
commercial marketplace for a number of reasons, including potentially
inadequate development of the necessary network infrastructure or delayed
development of enabling technologies and performance improvements. To the
extent that the Internet continues to experience significant expansion in the
number of users, frequency of use or bandwidth requirements, the infrastructure
for the Internet may be unable to support the demands placed upon it. In
addition, the Internet could lose its viability as a commercial medium due to
delays in the development or adoption of new standards and protocols required
to handle increased levels of Internet activity, or due to increased
governmental regulation. Changes in, or insufficient availability of,
telecommunications services to support the Internet also could result in slower
response times and adversely affect usage of the Internet generally.

The growth of the market for our products and services would be impaired
if:



| |  | use of the Internet, the Web and other on-line services does not
continue to increase or increases more slowly than expected;                                                                                             
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | the infrastructure for the Internet, the Web and other on-line
services does not effectively support expansion that may occur; or                                                                                         
| 
| |  | the Internet, the Web and other on-line services do not become a
viable commercial marketplace, which would inhibit the development of
electronic commerce and of the need for our Net Perceptions for
E-commerce product.

Increasing government regulation could limit the market for our products and
services, which could seriously impair the growth of our business or expose us
to unanticipated liabilities.

As Internet commerce evolves, we expect that federal, state or foreign
governmental authorities will enact laws or adopt regulations covering issues
such as user privacy, pricing, content and quality of products and services.
If enacted, such laws, rules or regulations could limit the market for our
products and services. Although many of these regulations may not apply to our
business directly, we expect that laws regulating the solicitation, collection
or processing of personal/customer information could indirectly affect our
business.

25



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##### Table of Contents






Item 3. Quantitative and Qualitative Disclosures about Market Risk

Through September 30, 2001 the majority of our recognized revenues were
denominated in United States dollars and were primarily from customers in the
United States, and our exposure to foreign currency exchange rate changes has
been immaterial. We expect, however, that future product license and service
revenues may increasingly be derived from international markets and may be
denominated in the currency of the applicable market. As a result, our
operating results may become subject to significant fluctuations based upon
changes in the exchange rates of certain currencies in relation to the United
States dollar. Furthermore, to the extent that we engage in international
sales denominated in United States dollars, an increase in the value of the
United States dollar relative to foreign currencies could make our products
less competitive in international markets. Although we will continue to
monitor our exposure to currency fluctuations, and, when appropriate, may use
financial hedging techniques in the future to minimize the effect of these
fluctuations, exchange rate fluctuations may adversely affect our financial
results in the future.

Our exposure to market risk is otherwise limited to interest income
sensitivity, which is affected by changes in the general level of United States
interest rates, particularly because the majority of our investments are in
debt securities issued by corporations and the United States government. We
place our investments with high-quality issuers and limit the amount of credit
exposure to any one issuer. Due to the conservative nature of our investments,
we believe that we are not subject to any material market risk exposure. We do
not have any derivative financial instruments.

26



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##### Table of Contents






PART II. OTHER INFORMATION

Item 1.         Legal Proceedings

On or about November 2, 2001, Timothy J. Fox filed a purported class
action lawsuit against us, FleetBoston Robertson Stephens, Inc., the lead
underwriter of our initial public offering in April 1999, several other
underwriters who participated in our initial public offering, Steven J. Snyder,
our then president and chief executive officer, and Thomas M. Donnelly, our
chief financial officer and senior vice president of finance and
administration. The lawsuit, Fox v. Net Perceptions, Inc., et al., Civil
Action No. 01-CV-9675 (filed November 2, 2001), was filed in the United States
District Court for the Southern District of New York and has been assigned to
the judge who is also the pretrial coordinating judge for substantially similar
lawsuits involving more than 180 other issuers. The suit generally alleges
that the defendants violated federal securities laws by not disclosing certain
actions taken by the underwriter defendants in connection with our initial
public offering. The suit alleges specifically that the underwriter
defendants, with our direct participation and agreement and without disclosure
thereof, conspired to and did raise and increase their underwriters
compensation and the market prices of our common stock following our initial
public offering by requiring their customers, in exchange for receiving
allocations of shares of our common stock sold in our initial public offering,
to pay excessive commissions on transactions in other securities and to
purchase additional shares of our common stock in the initial public offering
aftermarket at pre-determined prices above the initial public offering price.
The suit seeks unspecified monetary damages and certification of a plaintiff
class consisting of all persons who acquired our common stock between April 22,
1999 through December 6, 2000.

We believe that the allegations are without merit, and we intend to
vigorously defend against the plaintiffs claims. As this litigation is in an
initial stage, we are unable to predict its outcome or its ultimate effect, if
any, on our financial condition.




Item 2.         Changes in Securities and Use of Proceeds



| |      
| | -----
| | None.




Item 3.         Defaults Upon Senior Securities



| |      
| | -----
| | None.




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



| |      
| | -----
| | None.




Item 5.         Other Information



| |      
| | -----
| | None.




Item 6.         Exhibits and Reports on Form 8-K



| | (a) |  | Exhibits
| | --- |  | --------

Exhibit No.



| | 3.1 |  | Amended and Restated Certificate of Incorporation. (1)                                                                                                            
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 3.2 |  | Amended and Restated Bylaws, as amended through April 18, 2001. (2)                                                                                               
|
| | 4.1 |  | Amended and Restated Investor Rights Agreement, dated December 18, 1997,
among Net Perceptions, Inc. and the investors and founders named therein,
as amended. (3)
|
| | 4.2 |  | Registration Rights Agreement, dated February 14, 2000, by and among Net
Perceptions, Inc. and the stockholders named therein. (4)                                

27



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##### Table of Contents





| | 4.3   |  | Specimen Common Stock Certificate. (3)                                                                
| | ----- |  | ------------------------------------------------------------------------------------------------------
|
| | 4.4   |  | Specimen Common Stock Certificate (including Rights Agreement Legend).                                
|
| | 4.5   |  | Rights Agreement between Net Perceptions, Inc. and Wells Fargo Bank Minnesota, as Rights Agent.(5)    
|
| | 10.12 |  | Employment Agreement, dated as of May 24, 2001, between Net Perceptions,
Inc. and Don C. Peterson. (6)



|(1) |  | Incorporated by reference to Net Perceptions Quarterly Report on Form
10-Q for the quarter Ended June 30, 2000 (File No. 000-25781). 
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Incorporated by reference to Net Perceptions Quarterly Report on Form
10-Q for the quarter Ended March 31, 2001 (File No. 000-25781).
|   
|(3) |  | Incorporated by reference to Net Perceptions Registration Statement on
Form S-1 (Registration No. 333-71919).                        
|   
|(4) |  | Incorporated by reference to Net Perceptions Registration Statement on
Form S-1 (Registration No. 333-31230).                        
|   
|(5) |  | Incorporated by reference to Net Perceptions Registration Statement on
Form 8-A filed June 6, 2001 (File No. 000-25781).             
|   
|(6) |  | Incorporated by reference to Net Perceptions Quarterly Report on Form
10-Q for the quarter ended June 30, 2001 (File No. 000-25781). 



| | (b) |  | Reports on Form 8-K. During the third quarter of 2001, the
Company filed a Current Report on Form 8-K on July 25, 2001, to file
under Item 5 a copy of the Companys press release announcing the
Companys financial results for the second quarter of 2001.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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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: November 13, 2001 | By: | /s/ Thomas M. Donnelly
|                        |     |                        |                       | Thomas M. DonnellyChief Financial Officer                               
|                        |     |                        |                       | (Duly authorized officer
and principal financial
and accounting officer)

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##### Table of Contents



NET PERCEPTIONS, INC.
FORM 10-Q
For the Quarter Ended September 30, 2001




EXHIBIT INDEX

|            |  |                                                                                                                                                                   
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                                                            
|            |  |                                                                                                                                                                   
|3.1         |  | Amended and Restated Certificate of Incorporation. (1)                                                                                                            
|           
|3.2         |  | Amended and Restated Bylaws, as amended through April 18, 2001. (2)                                                                                               
|           
|4.1         |  | Amended and Restated Investor Rights Agreement, dated December 18, 1997,
among Net Perceptions, Inc. and the investors and founders named therein,
as amended. (3)
|           
|4.2         |  | Registration Rights Agreement, dated February 14, 2000, by and among Net
Perceptions, Inc. and the stockholders named therein. (4)                                
|           
|4.3         |  | Specimen Common Stock Certificate. (3)                                                                                                                            
|           
|4.4         |  | Specimen Common Stock Certificate (including Rights Agreement Legend).                                                                                            
|           
|4.5         |  | Rights Agreement between Net Perceptions, Inc. and Wells Fargo Bank Minnesota, as Rights Agent. (5)                                                               
|           
|10.12       |  | Employment Agreement, dated as of May 24, 2001, between Net Perceptions, Inc. and Don C. Peterson. (6)                                                            



---

|(1) |  | Incorporated by reference to Net Perceptions Quarterly Report on Form
10-Q for the quarter Ended June 30, 2000 (File No. 000-25781). 
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Incorporated by reference to Net Perceptions Quarterly Report on Form
10-Q for the quarter Ended March 31, 2001 (File No. 000-25781).
|   
|(3) |  | Incorporated by reference to Net Perceptions Registration Statement on
Form S-1 (Registration No. 333-71919).                        
|   
|(4) |  | Incorporated by reference to Net Perceptions Registration Statement on
Form S-1 (Registration No. 333-31230).                        
|   
|(5) |  | Incorporated by reference to Net Perceptions Registration Statement on
Form 8-A filed June 6, 2001 (File No. 000-25781).             
|   
|(6) |  | Incorporated by reference to Net Perceptions Quarterly Report on Form
10-Q for the quarter ended June 30, 2001 (File No. 000-25781). 

30