****


****




**SECURITIES
AND EXCHANGE COMMISSION**


Washington,
DC 20549











FORM
10-Q




**(Mark
One)**


****


x
    **QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES **EXCHANGE
      ACT OF 1934****




**For
the Quarterly Period Ended March 31, 2005**




**OR**




o
    **TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES **EXCHANGE
      ACT OF 1934********




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








****


**Commission
File Number: 000-25781**





**NET
PERCEPTIONS, INC.**


(Exact
Name of Registrant as Specified in its Charter)




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





**One
Landmark Square**


**Stamford,
Connecticut 06901**


(Address
of principal executive offices, Zip Code)






**(203)
428-2040**


(Registrant’s
telephone number, including area code)







Indicate
by check mark 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 o




Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes oNo x




As of May
1, 2005, there were outstanding 28,917,745 shares of the registrant’s Common
Stock, $0.0001 par value.











**NET
PERCEPTIONS, INC.**


FORM
10-Q


For the
Quarter Ended March 31, 2005








**TABLE
OF CONTENTS**







**Page****PART
      I. FINANCIAL INFORMATION**Item
      1. Financial StatementsConsolidated
      Balance Sheets as of March 31, 2005 and December 31, 2004
    3Consolidated
      Statements of Operations for the Three Months Ended March 31, 2005 and
      2004
    4Consolidated
      Statements of Cash Flows for the Three Months Ended March 31, 2005 and
      2004
    5Notes
      to the Consolidated Financial Statements
    6Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
    10Item
      3. Quantitative and Qualitative Disclosures about Market
    Risk
    14Item
      4. Controls and Procedures
    14**PART
      II. OTHER INFORMATION**Item
      6. Exhibits
    15**SIGNATURES**
    15**EXHIBIT
      INDEX**
    16







-2-





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




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




**NET
PERCEPTIONS, INC.**





CONSOLIDATED
BALANCE SHEETS


(in
thousands)


March
      31,
      2005
    
    December
      31,
      2004(Unaudited)**Assets**Current
      assets:Cash
      and cash equivalents
    
    $
    14,699
    
    $
    14,444Accounts
      receivable, net
    
    
    5
    
    
    --Prepaid
      expenses and other current assets
    
    
    92
    
    
    40Total
      current assets
    
    
    14,796
    
    
    14,484Other
      assets
    
    
    232
    
    
    239Total
      assets
    
    $
    15,028
    
    $
    14,723**Liabilities
      and Stockholders’ Equity**Current
      liabilities:Accounts
      payable & accrued liabilities
    
    
    195
    
    
    178Total
      current liabilities
    
    
    195
    
    
    178Note
      Payable
    
    
    2,531
    
    
    2,517Total
      liabilities
    
    
    2,726
    
    
    2,695Commitments
      and contingenciesStockholders’
      equity:Common
      stock
    
    
    2
    
    
    2Additional
      paid-in capital
    
    
    234,350
    
    
    234,350Unearned
      stock compensation
    
    
    (120
    )
    
    (135
    )Accumulated
      deficit
    
    
    (221,930
    )
    
    (222,189
    )Total
      stockholders’ equity
    
    
    12,302
    
    
    12,028Total
      liabilities and stockholders’ equity
    
    $
    15,028
    
    $
    14,723







See
accompanying notes to the consolidated financial statements.




-3-





**NET
PERCEPTIONS, INC.**





CONSOLIDATED
STATEMENTS OF OPERATIONS


(Unaudited,
in thousands, except per share amounts)


Three
      Months EndedMarch
      31,2005
    
    2004Revenues:Product
    
    $
    --
    
    $
    354Service,
      maintenance and royalties
    
    
    10
    
    
    146Total
      revenues
    
    
    10
    
    
    500Cost
      of revenues:Service
      and maintenance
    
    
    --
    
    
    102Total
      cost of revenues
    
    
    --
    
    
    102Gross
      Margin
    
    
    10
    
    
    398Operating
      expenses:Research
      and development
    
    
    --
    
    
    250General
      and administrative
    
    
    60
    
    
    1,028Gain
      on sale of patents
    
    
    --
    
    
    (1,800
    )Gain
      on litigation settlement
    
    
    (229
    )
    
    --Restructuring
      related charges
    
    
    --
    
    
    (7
    )Total
      operating expenses
    
    
    (169
    )
    
    (529
    )Operating
      income
    
    
    179
    
    
    927Other
      income (expense):Interest
      income
    
    
    83
    
    
    26Interest
      expense
    
    
    (27
    )
    
    --Other
      income
    
    
    24
    
    
    25Total
      other income, net
    
    
    80
    
    
    51Net
      income
    
    $
    259
    
    $
    978Net
      income per share:Basic
    
    $
    0.01
    
    $
    0.03Diluted
    
    $
    0.01
    
    $
    0.03Shares
      used in computing basic and diluted net income per share:Basic
    
    
    28,918
    
    
    28,206Diluted
    
    
    29,172
    
    
    28,641





See
accompanying notes to the consolidated financial statements.




-4-





NET
PERCEPTIONS, INC.





CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited,
in thousands)







Three
      Months Ended
      March
      31,2005
    
    2004**Cash
      flows from operating activities:**Net
      income
    
    $
    259
    
    $
    978Reconciliation
      of net income to net cash provided by (used in) operating
      activities:Gain
      on sale of patents
    
    
    --
    
    
    (1,800
    )Recovery
      of doubtful accounts
    
    
    --
    
    
    (25
    )Amortization
      of debt issuance costs
    
    
    7
    
    
    --Amortization
      of discount on notes payable
    
    
    14
    
    
    --Stock
      based compensation
    
    
    15
    
    
    --Changes
      in assets and liabilities:Accounts
      receivable
    
    
    (5
    )
    
    345Prepaid
      expenses and other current assets
    
    
    (52
    )
    
    258Accounts
      payable & accrued liabilities
    
    
    17
    
    
    (391
    )Deferred
      revenue
    
    
    --
    
    
    (121
    )Net
      cash provided by (used in) operating activities
    
    
    255
    
    
    (756
    )**Cash
      flows from investing activities:**Proceeds
      from sale of patents
    
    
    --
    
    
    1,800Net
      cash provided by investing activities
    
    
    --
    
    
    1,800**Cash
      flows from financing activities:**Proceeds
      from exercise of stock options, net of stock repurchases
    
    
    --
    
    
    28Net
      cash provided by financing activities
    
    
    --
    
    
    28Net
      increase in cash and cash equivalents
    
    
    255
    
    
    1,072Cash
      and cash equivalents at beginning of period
    
    
    14,444
    
    
    11,932Cash
      and cash equivalents at end of period
    
    $
    14,699
    
    $
    13,004





See
accompanying notes to the consolidated financial statements.







-5-


NET PERCEPTIONS, INC.






NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS


(dollars
in thousands, except per share amounts)





**Note
1. Basis of Presentation**





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





Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. These financial statements should be read in conjunction
with the Company’s financial statements and notes thereto for the year ended
December 31, 2004, which are contained in the Company’s Annual Report on Form
10-K filed with the Securities and Exchange Commission on March 31, 2005. The
results of operations for the interim periods presented are not necessarily
indicative of results that may be expected for any other interim period or for
the full fiscal year *.*





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





**Note
2. Stock-based compensation**




In
December 2002, the FASB issued SFAS 148, “Accounting for Stock-Based
Compensation—Transition and Disclosure, an Amendment to FASB Statement No. 123.”
The Company has chosen to continue with its current practice of applying the
recognition and measurement principles of Accounting Principles Board Opinion
No. 25, “Accounting for Stock Issued to Employees.” The Company has adopted the
disclosure requirements of SFAS No. 148 in its discussion of stock-based
employee compensation but the alternative transition options made available by
the standard have not been implemented.








The
intrinsic value method is used to account for stock-based compensation plans. If
compensation expense had been determined based on the fair value method, net
income and net income per share would have been adjusted to the pro forma
amounts indicated below:




**Three
      Months Ended****March
      31,****2005**
    
    **2004**Net
      income, as reported
    
    $
    259
    
    $
    978Add:
      Stock-based employee compensation expense included in reported net
      income
    
    
    15
    
    
    --Deduct:
      Total stock-based employee compensation expense determined under fair
      value based method for all awards
    
    
    (20
    )
    
    (62
    )Pro
      forma net income
    
    $
    254
    
    $
    916Net
      income per share:BasicAs reported
    
    $
    0.01
    
    $
    0.03Pro forma
    
    $
    0.01
    
    $
    0.03DilutedAs reported
    
    $
    0.01
    
    $
    0.03Pro forma
    
    $
    0.01
    
    $
    0.03






-6-


****


**Note
3. Per Share Data**




Basic
earnings per share is computed using net income and the weighted average number
of common shares outstanding. Diluted earnings per share reflects the weighted
average number of common shares outstanding plus any potentially dilutive shares
outstanding during the period. Potentially dilutive shares consist of shares
issuable upon the exercise of stock options and restricted stock awards. Shares
used in the diluted net income per share for the three months ended March 31,
2005 and 2004, respectively, exclude the impact of zero and 289 potential common
shares from exercise of stock options, respectively, which were
anti-dilutive.




**Three
      Months Ended****March
      31,****2005**
    
    **2004****Basic
      earnings per share calculation:**Net
      income
    
    $
    259
    
    $
    978Weighted
      average common shares - basic
    
    
    28,918
    
    
    28,206Basic
      net income per share
    
    $
    0.01
    
    $
    0.03**Diluted
      earnings per share calculation:**Net
      income
    
    $
    259
    
    $
    978Weighted
      average common shares - basic
    
    
    28,918
    
    
    28,206Effect
      of dilutive stock options
    
    
    46
    
    
    --Effect
      of restricted stock awards
    
    
    208
    
    
    435Weighted
      average common shares - diluted
    
    
    29,172
    
    
    28,641Diluted
      net income per share
    
    $
    0.01
    
    $
    0.03





**Note
4. Commitments and Contingencies**




Contingencies




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





Initial
and Follow-On Public Securities Litigation





On
November 2, 2001, Timothy J. Fox filed a purported class action lawsuit against
the Company, FleetBoston Robertson Stephens, Inc., the lead underwriter of the
Company’s April 1999 initial public offering, several other underwriters who
participated in the initial public offering, Steven J. Snyder, the Company’s
then president and chief executive officer, and Thomas M. Donnelly, the
Company’s chief financial officer. The lawsuit 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 300 other issuers. An amended class action
complaint, captioned *In re
Net Perceptions, Inc. Initial Public Offering Securities*  *Litigation,* 01 Civ.
9675 (SAS), was filed on April 22, 2002, expanding the basis for the action to
include allegations relating to the Company’s March 2000 follow-on public
offering in addition to those relating to its initial public
offering.





The
amended complaint generally alleges that the defendants violated federal
securities laws by not disclosing certain actions taken by the underwriter
defendants in connection with the Company’s initial public offering and
follow-on public offering. The amended complaint alleges specifically that the
underwriter defendants, with the Company’s direct participation and agreement
and without disclosure thereof, conspired to and did raise and increase their
underwriters’ compensation and the market prices of the Company’s common stock
following its initial public offering and in its follow-on public offering by
requiring their customers, in exchange for receiving allocations of shares of
the Company’s common stock sold in its initial public offering, to pay excessive
commissions on transactions in other securities, to purchase additional shares
of the Company’s common stock in the initial public offering aftermarket at
pre-determined prices above the initial public offering price, and to purchase
shares of the Company’s common stock in its follow-on public offering. The
amended complaint seeks unspecified monetary damages and certification of a
plaintiff class consisting of all persons who acquired the Company’s common
stock between April 22, 1999 and December 6, 2000. The plaintiffs have since
agreed to dismiss the claims against Mr. Snyder and Mr. Donnelly without
prejudice, in return for their agreement to toll any statute of limitations
applicable to those claims; and those claims have been dismissed without
prejudice. On July 15, 2002, all of the issuer defendants filed a joint motion
to dismiss the plaintiffs’ claims in all of the related cases. On February 19,
2003, the court ruled against the Company on this motion.




-7-




The
parties have negotiated a settlement that is subject to approval by the Court.
On February 15, 2005, the Court issued an Opinion and Order preliminarily
approving the settlement, provided that the defendants and plaintiffs agree to a
modification narrowing the scope of the bar order set forth in the original
settlement agreement.





**Note
5. Income Taxes**





The
Company has incurred significant operating losses for all periods from inception
through March 31, 2005. For income tax purposes, the Company has available
federal net operating loss carry-forwards of approximately $121,100 and research
and development credit carry-forwards of $151 at March 31, 2005. The net
operating loss and research and development credit carry-forwards expire in 2011
through 2022 if not previously utilized. The utilization of these carry-forwards
may be subject to limitations based on past and future changes in ownership of
the Company pursuant to Internal Revenue Code Section 382. If the Company
were to be acquired at its recent stock value such that Section 382 is
applicable, this would eliminate the ability to use a substantial majority of
these carry-forwards. Future tax benefits have not been recognized in the
financial statements, as their utilization is not considered probable based on
the weight of available information.





**Note
6. Note Payable**





On April
21, 2004, the Company closed on an investment into the Company by Olden
Acquisition LLC (“Olden”) , an
affiliate of Kanders & Company, Inc., an entity owned and controlled by the
Company’s Executive Chairman, Warren B. Kanders, for the
purpose of initiating a strategy to redeploy the Company’s assets and use the
Company’s cash and cash equivalent assets to enhance stockholder value. The
Company issued and sold to Olden a 2% ten-year Convertible Subordinated Note,
which is convertible after one year (or
earlier upon a call by the Company and in certain other circumstances) at a
conversion price of $0.45 per share of Company common stock into approximately
19.9% of the outstanding common equity of the Company as of the closing date.
Proceeds to the Company from this transaction totaled approximately $2,533
before transaction costs of $288. The transaction costs are being amortized over
ten years, the term of the debt. Interest on the note accrues semi-annually but
is not payable currently or upon conversion of the note. The note matures on
April 21, 2014. The convertible subordinated note was deemed to include a
beneficial conversion feature. At the date of issue, the Company allocated $56
to the beneficial conversion feature and is amortizing the beneficial conversion
feature over one year (the period after which the note is convertible). As of
March 31, 2005, $2 remains to be amortized of the note discount due to the
beneficial conversion feature. Also in connection with this transaction, the
Company entered into a Registration Rights Agreement, which requires the
Company, upon request of the purchaser of the note or its assignee, to register
under the Securities Act of 1933, as amended, the resale of the shares of common
stock into which the note is convertible. In connection with this transaction,
the board of directors adopted an amendment to the Company’s Rights Agreement
such that the transaction would not trigger the rights thereunder.





**Note
7. Recently Issued Accounting Pronouncements**





In
December 2004, the Financial Accounting Standards Board issued SFAS 123(R),
"Share Based Payment". SFAS 123(R) requires that the compensation cost relating
to share-based payment transactions be recognized in financial statements. That
cost will be measured based on the fair value of the equity or liability
instruments issued. In April 2005, the SEC adopted a rule that amended the
compliance dates for SFAS 123(R) such that the Company will be required to apply
Statement 123(R) in the first quarter of fiscal year 2006. We are currently
evaluating the impact of this statement. We believe the adoption of this
statement, effective January 1, 2006, will have an impact on our consolidated
financial statements.





**Note
8. Gain on litigation settlement**





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




-8-




**Note
9. Gain on Sale of Patents**





On
March 31, 2004, the Company completed the sale of its patent portfolio to
Thalveg Data Flow LLC for $1,800 pursuant to a patent purchase agreement entered
into on December 30, 2003 and amended on March 31, 2004. The patent purchase
agreement includes a royalty-free, non-exclusive license back to the Company.
The license is transferable, subject to certain restrictions applicable to the
transferee relating to revenues that can be generated by products covered by the
license.





**Note
10. Related Party Transactions**





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





-9-




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




**Forward-Looking
Statements**





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





These and
other statements, which are not historical facts, are based largely upon our
current expectations and assumptions and are subject to a number of risks and
uncertainties that could cause actual results to differ materially from those
contemplated by such forward-looking statements. These risks and uncertainties
include, among others, our planned effort to redeploy our assets and use our
substantial cash and cash equivalent assets to enhance stockholder value
following the sale of substantially all of our electronic commerce business,
which represented substantially all of our revenue generating operations and
related assets, and the risks and uncertainties as set forth in "Factors That
May Affect Our Future Results" found in Part I of our Annual Report on Form
10-K, as amended, for the fiscal year ended December 31, 2004 and described
below. The Company cannot guarantee its future performance.





OVERVIEW





AS PART
OF OUR PREVIOUSLY ANNOUNCED STRATEGY TO LIMIT OPERATING LOSSES AND ENABLE THE
COMPANY TO REDEPLOY ITS ASSETS AND USE ITS CASH AND CASH EQUIVALENT ASSETS TO
ENHANCE STOCKHOLDER VALUE, ALL OF OUR OPERATIONS OTHER THAN ADMINISTRATIVE
FUNCTIONS HAVE BEEN TERMINATED. THE INFORMATION APPEARING BELOW, WHICH RELATES
TO PRIOR PERIODS, IS THEREFORE NOT INDICATIVE OF THE RESULTS THAT MAY BE
EXPECTED FOR ANY SUBSEQUENT PERIODS. THE THREE-MONTH PERIOD ENDED MARCH 31, 2005
PRIMARILY REFLECTS, AND FUTURE PERIODS PRIOR TO A REDEPLOYMENT OF OUR ASSETS ARE
EXPECTED TO PRIMARILY REFLECT, GENERAL AND ADMINISTRATIVE EXPENSES AND
TRANSACTION EXPENSES ASSOCIATED WITH THE CONTINUING ADMINISTRATION OF THE
COMPANY AND ITS EFFORTS TO REDEPLOY ITS ASSETS.





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





CRITICAL
ACCOUNTING POLICIES AND ESTIMATES





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





A description of the Company's critical accounting
policies was provided in the Management's Discussion and Analysis of Financial
Condition and Results of Operations section of the Company's Annual Report on
Form 10-K for the year ended December 31, 2004.  There were no changes to
these accounting policies during the quarter ended March 31, 2005.








-10-





RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND MARCH 31,
2004





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




**Three
      Months Ended****March
      31,****2005**
    
    **2004**Revenues:Product
    
    
    --
    %
    
    71
    %Service,
      maintenance and royalties
    
    
    100
    
    
    29Total
      revenues
    
    
    100
    
    
    100Cost
      of revenues:Service
      and maintenance
    
    
    --
    
    
    20Total
      cost of revenues
    
    
    --
    
    
    20Gross
      Margin
    
    
    100
    
    
    80Operating
      expenses:Research
      and development
    
    
    --
    
    
    50General
      and administrative
    
    
    600
    
    
    205Gain
      on litigation settlement
    
    
    (2,290
    )
    
    --Gain
      on sale of patent rights
    
    
    --
    
    
    (360
    )Restructuring
      related charges
    
    
    --
    
    
    (1
    )Total
      operating expenses
    
    
    (1,690
    )
    
    (106
    )Operating
      income
    
    
    1,790
    
    
    186Interest
      income
    
    
    830
    
    
    --Interest
      expense
    
    
    (270
    )
    
    --Other
      income, net
    
    
    240
    
    
    10Net
      income
    
    
    2,590
    %
    
    196
    %
 REVENUES




*Total
revenues* . Total
revenues decreased 98% to $10,000 for the three months ended March 31, 2005 from
$500,000 for the same period in 2004. Revenues in the United States were $10,000
in the first quarter of 2005 compared to $462,000 in the same period of 2004,
representing 100% and 92% of total revenues, respectively. Revenues from
international sales in the first quarter of 2005 were $0, or 0% of total
revenues, compared to $38,000, or 8% of total revenues in the same period of
2004. As a result of the downsizing of our business and operations, we no longer
maintain a direct sales force and there currently is no sales generating
activity. International sales have generally been denominated in United States
dollars.





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





*Product
revenues* . Product
revenues decreased 100% to $0 for the three months ended March 31, 2005,
compared to $354,000 for the same period of 2004. Product revenues comprised 0%
of total revenues for the first quarter of 2005 compared to 71% for the same
period of 2004. The decrease in product revenues is primarily attributable to
the termination of the Company’s revenue generating operations in connection
with its efforts to redeploy its assets as discussed above. Therefore, we expect
there will be no product revenues in 2005.





-11-


**


*Service,
maintenance and royalty revenues.* Service
and maintenance revenues consisted primarily of professional and maintenance
services. Our professional service revenues included business consulting,
implementation support, and educational services and were generally offered on a
time and materials basis. Maintenance revenues were generally derived from
annual service agreements and were recognized ratably over the term of the
agreement. On April 1, 2004, we entered into an agreement with Tornago, Inc. to
fulfill our existing prepaid customer support obligations. Royalty revenues are
derived from resales of our product by Tornago, Inc. Service, maintenance and
royalty revenues decreased 93% to $10,000 for the quarter ended March 31, 2005
compared to $146,000 for the same period of 2004. Service, maintenance and
royalty revenues comprised 100% and 29% of total revenues for the quarters ended
March 31, 2005 and 2004, respectively *.* We do not
anticipate entering into additional service and maintenance agreements with
customers as the Company terminated its revenue generating operations as
discussed above. Therefore, we expect there will be no service and maintenance
revenues in 2005. The agreement with Tornago, Inc. has the potential to generate
royalty revenue through April 2006.





COST OF
REVENUES





*Cost
of product revenues* . Cost of
product revenues consisted primarily of the cost of royalties paid to
third-party vendors and amortization of acquired technology costs. No royalties
were payable to third parties and no amortization expense existed during the
periods presented related to intangible assets which historically represented
the costs of product revenues. We do not expect any future costs of product
revenues.





*Cost
of service and maintenance revenues* . Cost of
service and maintenance revenues consisted primarily of personnel-related and
infrastructure costs incurred in providing telephone and Web-based support of
our software products, as well as professional, consulting and educational
related services to customers. Cost of service and maintenance revenues
decreased 100% to $0 for the quarter ended March 31, 2005 from $102,000 for the
quarter ended March 31, 2004. Cost of service and maintenance revenue in 2005
and 2004 represented 0% and 70% of the related service and maintenance revenues,
respectively. The decrease in cost of services and maintenance revenues is a
result of the termination of the Company’s revenue generating operations in
connection with its efforts to redeploy its assets as discussed above. We do not
expect to incur costs of product revenues for the foreseeable
future.





OPERATING
EXPENSES





In the
first quarter of 2003, we reduced our operating expenses through the closure of
three remote offices and a reduction in workforce affecting 22 employees. On
August 6, 2003, we reduced our workforce by an additional 12 employees. At
December 31, 2003 we had nine full-time employees, which was determined to be
the minimum number necessary at that time to serve customers, preserve the value
of our intellectual property and administer our limited ongoing business
affairs. In March 2004, we terminated the employment of the remaining members of
our engineering staff. At March 31, 2005, we had five employees, two of whom are
executive officers. As described in this Item 2 under "Overview", we are no
longer actively marketing our products and do not expect to incur any operating
expenses in 2005 relating to sales and marketing of our products.





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





*Research
and development* .
Research and development expenses consisted primarily of salaries, other
employee-related costs and consulting fees related to the development of our
products. Research and development expenses decreased 100% to $0 for the three
months ended March 31, 2005 compared to $250,000 for the three months ended
March 31, 2004. Research and development expenses were 0% and 50% of total
revenues for the three months ended March 31, 2005 and 2004, respectively. The
decrease in research and development expenses is due to our restructuring
efforts. We do not expect to incur any research and development expenses for the
foreseeable future.





*General
and administrative* . General
and administrative expenses consist primarily of salaries, other
employee-related costs, provision for doubtful accounts and professional service
fees and expenses. Current executive management did not receive salaries in the
first quarter of 2005. General and administrative expenses decreased 94% to
$60,000 for the period ended March 31, 2005 compared to $1.0 million for the
period ended March 31, 2004. General and administrative expenses were 600% and
205% of total revenue for the periods ended March 31, 2005 and 2004,
respectively. The decrease in general and administrative expenses for the period
ended March 31, 2005 was primarily due to the lack of salaries for current
executive management and a significant reduction in professional fees and
expenses and administrative costs that were associated with our evaluation of
strategic alternatives. Although we expect personnel-related and other general
and administrative expenses to decline in 2005 compared to the previous year,
continued high levels of outside professional fees, and other costs associated
with continuing as a public reporting company, such as directors and officers
liability insurance, may offset some of these decreases.




-12-




*Gain
on sale of patents.* On
March 31, 2004, the Company completed the sale of its patent portfolio to
Thalveg Data Flow LLC for $1.8 million pursuant to a patent purchase agreement
entered into on December 30, 2003 and amended on March 31, 2004. The patent
purchase agreement includes a royalty-free, non-exclusive license back to the
Company. The license is transferable, subject to certain restrictions applicable
to the transferee relating to revenues that can be generated by products covered
by the license.





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





*Restructuring
related charges.* There
were no restructuring related charges for the period ended March 31, 2005. All
restructuring related charges have been paid as of December 31,
2004.





*Interest
Income.* Interest
income increased to $83,000 for the quarter ended March 31, 2005 from $26,000,
in the quarter ended March 31, 2004. The increase in interest income was due to
an increase in the interest rates we received on our cash and cash
equivalents.





*Interest
Expense* Interest
expense increased to $27,000 for the quarter ended March 31, 2005 from $0, in
the quarter ended March 31, 2004. The increase in interest expense was due to
the issuance of long-term debt related to the investment in the Company in the
second quarter of 2004 by Olden Acquisition LLC, an affiliate of Kanders &
Company, Inc., an entity owned and controlled by the Company’s Executive
Chairman, Warren B. Kanders.





*Other
income* Other
income consists of tax refunds partially offset by other miscellaneous expenses.
Other income decreased 4% for the quarter ended March 31, 2005 to $24,000 from
$25,000 in 2004.





PROVISION
FOR INCOME TAXES





We have
incurred significant operating losses for all periods from inception through
March 31, 2005. For income tax purposes, the Company has available federal net
operating loss carry-forwards of approximately $121.1 million and research and
development credit carry-forwards of $151,000 at March 31, 2005. The net
operating loss and research and development credit carry-forwards expire in 2011
through 2022 if not previously utilized. The utilization of these carry-forwards
may be subject to limitations based on past and future changes in ownership of
the Company pursuant to Internal Revenue Code Section 382. If the Company
were to be acquired at its recent stock value such that Section 382 is
applicable, this would eliminate the ability to use a substantial majority of
these carry-forwards. Future tax benefits have not been recognized in the
financial statements, as their utilization is not considered probable based on
the weight of available information.





LIQUIDITY
AND CAPITAL RESOURCES





Since
inception, we have financed our operations primarily through the sale of equity
securities. At March 31, 2005, we had $14.7 million of cash and cash equivalents
compared to $13.0 million at March 31, 2004. This increase is primarily due to
the investment by Olden Acquisition LLC and the settlement of the i2
Technologies Inc. lawsuit.





Cash
provided by operations was $255,000 for the three months ended March 31, 2005,
compared to cash used in operations of $756,000 for the same period of 2004.
Cash provided by operations for the period ended March 31, 2005 resulted
primarily from the settlement of the i2 Technologies Inc. lawsuit. Cash used in
operations for the first quarter of 2004 resulted primarily from net losses, as
adjusted for non-cash expenses and the gain on the sale of patent rights. We do
not expect to receive any significant amounts of cash from future operations and
we expect that we will continue to incur legal fees, transaction costs and other
ongoing costs that will constitute a material use of cash.





There was
no cash used or provided by investing activities for the period ended March 31,
2005 compared to $1.8 million in net cash provided by investing activities in
the same period for 2004. Cash provided by investing activities during the first
quarter of 2004 was attributable to the sale of our patent portfolio to
Thalveg.





-13-





There was
no cash used or provided by financing activities for the period ended March 31,
2005, compared to net cash provided by financing activities of $28,000 for the
three months ended March 31, 2004. Net cash provided by financing activities for
the quarter ended March 31, 2004 was from proceeds received from stock option
exercises.





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





RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS





In
December 2004, the Financial Accounting Standards Board issued SFAS 123(R),
"Share Based Payment". SFAS 123(R) requires that the compensation cost relating
to share-based payment transactions be recognized in financial statements. That
cost will be measured based on the fair value of the equity or liability
instruments issued. In April 2005, the SEC adopted a rule that amended the
compliance dates for SFAS 123(R) such that the Company will be required to apply
Statement 123(R) in the first quarter of fiscal year 2006. We are currently
evaluating the impact of this statement. We believe the adoption of this
statement, effective January 1, 2006, will have an impact on our consolidated
financial statements





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





We do not
hold derivative financial investments, derivative commodity investments, engage
in foreign currency hedging or other transactions that expose us to material
market risk.





**Item
4. Controls and Procedures**


****


**Evaluation
of Disclosure Controls and Procedures**





The
Company's management carried out an evaluation, under the supervision and with
the participation of the Company's Chief Administrative Officer and Controller,
its principal executive officer and principal financial officer, respectively,
of the design and operation of the Company's disclosure controls and procedures
(as such term is defined in Rules 13a-15 (e) and 15d-15(e) under the Securities
Exchange Act of 1934 (the "Exchange Act") as of March 31, 2005, pursuant to
Exchange Act Rule 13a-15. Based upon that evaluation, the Company's Chief
Administrative Officer and Controller, concluded that the Company's disclosure
controls and procedures as of March 31, 2005 are effective.





**Changes
in Internal Control over Financial Reporting**




There
have not been any changes in the Company’s internal control over financial
reporting that have come to management’s attention during the first quarter
ended March 31, 2005 evaluation that have materially affected, or are reasonably
likely to materially affect the Company’s internal control over financial
reporting.





-14-




**PART
II. OTHER INFORMATION**




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





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





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





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





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








**SIGNATURES**




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




**NET PERCEPTIONS,
      INC.**Date: May 13, 2005
    By:
    /s/ Nigel P.
  EkernNigel P. Ekern
      Chief Administrative Officer
      (Principal Executive
Officer)


By:
    /s/ Susan LuckfieldSusan Luckfield
      Controller
      (Principal Financial
Officer)






-15-


**EXHIBIT
INDEX**





Exhibit
 Number
    Exhibit
 
 31.1
    Certification
      of Principal Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.
 
 31.2
    Certification
      of Principal Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.
 
 32.1
    Certification
      of Principal Executive Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.
 
 32.2
    Certification
      of Principal Financial Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.
 
 -16-