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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 March 31, 2003

OR

| |      |                                                                    
| | ---- | -------------------------------------------------------------------
| | [  ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
| |      | EXCHANGE ACT OF 1934                                               

For the Transition Period From         to         .



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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)

7700 France Avenue South
Edina, 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 [  ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

As of April 30, 2003, there were outstanding 27,420,700 shares of the
registrants Common Stock, $0.0001 par value.



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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                           
|                                                 | Item 4. Controls and Procedures                                                              
|PART II. OTHER INFORMATION                      
|                                                 | Item 1. Legal Proceedings                                                                    
|                                                 | 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                                   
|EX-99.1 Certification of Chief Executive Officer
|EX-99.2 Certification of Chief Financial Officer



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NET PERCEPTIONS, INC.
FORM 10-Q
For the Quarter Ended March 31, 2003

TABLE OF CONTENTS

|                              |         |                                                                                          |    |      |    | 
|----------------------------- | ------- | ---------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                              |         |                                                                                          |    | Page
|PART I. FINANCIAL
INFORMATION |         |                                                                                          |    |     
|                              | Item 1. | Financial Statements                                                                     |    |      |    | 
|                              |         | Consolidated Balance Sheets as of March 31, 2003
and December 31, 2002                   |    |      | 4  | 
|                              |         | Consolidated Statements of Operations for the Three
Months Ended March 31,
2003 and 2002 |    |      | 5  | 
|                              |         | Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2003
and 2002 |    |      | 6  | 
|                              |         | Notes to the Consolidated Financial
Statements                                           |    |      | 7  | 
|                              | Item 2. | Managements Discussion and Analysis of Financial Condition and Results of
Operations    |    |      | 11 | 
|                              | Item 3. | Quantitative and Qualitative Disclosures about Market Risk                               |    |      | 24 | 
|                              | Item 4. | Controls and Procedures                                                                  |    |      | 24 | 
|PART II. OTHER
INFORMATION    |         |                                                                                          |    |     
|                              | Item 1. | Legal Proceedings                                                                        |    |      | 25 | 
|                              | Item 2. | Changes in Securities and Use of Proceeds                                                |    |      | 25 | 
|                              | Item 3. | Defaults Upon Senior Securities                                                          |    |      | 25 | 
|                              | Item 4. | Submission of Matters to a Vote of Security Holders                                      |    |      | 25 | 
|                              | Item 5. | Other Information                                                                        |    |      | 25 | 
|                              | Item 6. | Exhibits and Reports on Form 8-K                                                         |    |      | 26 | 
|SIGNATURES                    |         |                                                                                          | 27 |     
|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.

References in this Quarterly Report on Form 10-Q to
Net Perceptions, the
Company, we, our and us refer to Net Perceptions, Inc. and, if so
indicated or the context so requires, includes our wholly owned subsidiary
Knowledge Discovery One, Inc. (which we refer to in this report as KD1).

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements




NET PERCEPTIONS, INC.

CONSOLIDATED BALANCE SHEETS
(in thousands)

|                                     |                                           |                                            |     |             |        |              |       |          |        | 
|------------------------------------ | ----------------------------------------- | ------------------------------------------ | --- | ----------- | ------ | ------------ | ----- | -------- | ------ | 
|                                     |                                           |                                            |     | March 31,   |        |              |       |         
|                                     |                                           |                                            |     | 2003        |        | December 31,
|                                     |                                           |                                            |     | (Unaudited) |        | 2002        
|                                     |                                           |                                            |     |             |        |             
|Assets                               |                                           |                                            |     |             |        |              |       |         
|Current assets:                      |                                           |                                            |     |             |        |              |       |         
|                                     | Cash and cash
equivalents                 |                                            | $   | 30,262      |        |              | $     | 39,729   |       
|                                     | Short-term investments                    |                                            |     | 31,273      |        |              |       | 23,230   |       
|                                     | Accounts receivable,
net                  |                                            |     | 136         |        |              |       | 389      |       
|                                     | Prepaid expenses and other current
assets |                                            |     | 603         |        |              |       | 627      |       
|                                     |                                           |                                            |     |             |        |              |       |          |       
|                                     |                                           | Total current assets                       |     |             | 62,274 |              |       |          | 63,975 | 
|Property and equipment,
net          |                                           |                                            | 396 |             |        |              | 1,096 |         
|Other assets                         |                                           |                                            | 700 |             |        |              | 725   |         
|                                     |                                           |                                            |     |             |        |              |       |          |       
|                                     |                                           | Total assets                               |     | $           | 63,370 |              |       | $        | 65,796 | 
|                                     |                                           |                                            |     |             |        |              |       |          |       
|Liabilities and Stockholders
Equity |                                           |                                            |     |             |        |              |       |         
|Current liabilities:                 |                                           |                                            |     |             |        |              |       |         
|                                     | Accounts payable                          |                                            | $   | 2           |        |              | $     | 52       |       
|                                     | Accrued liabilities                       |                                            |     | 1,158       |        |              |       | 1,470    |       
|                                     | Deferred revenue                          |                                            |     | 821         |        |              |       | 750      |       
|                                     | Accrued restructuring
costs               |                                            |     | 5,212       |        |              |       | 4,672    |       
|                                     |                                           |                                            |     |             |        |              |       |          |       
|                                     |                                           | Total current liabilities                  |     |             | 7,193  |              |       |          | 6,944  | 
|Deferred Rent                        |                                           |                                            | 167 |             |        |              | 510   |         
|                                     |                                           |                                            |     |             |        |              |       |          |       
|                                     |                                           | Total liabilities                          |     |             | 7,360  |              |       |          | 7,454  | 
|                                     |                                           |                                            |     |             |        |              |       |          |       
|Commitments and
contingencies        |                                           |                                            |     |             |        |              |       |         
|Stockholders
equity:                |                                           |                                            |     |             |        |              |       |         
|                                     | Common stock                              |                                            |     | 2           |        |              |       | 2        |       
|                                     | Additional paid-in
capital                |                                            |     | 275,122     |        |              |       | 275,053  |       
|                                     | Accumulated other comprehensive
income    |                                            |     | 120         |        |              |       | 122      |       
|                                     | Accumulated deficit                       |                                            |     | (219,234    | )      |              |       | (216,835 | )     
|                                     |                                           |                                            |     |             |        |              |       |          |       
|                                     |                                           | Total stockholders equity                 |     |             | 56,010 |              |       |          | 58,342 | 
|                                     |                                           |                                            |     |             |        |              |       |          |       
|                                     |                                           | Total liabilities and stockholders
equity |     | $           | 63,370 |              |       | $        | 65,796 | 
|                                     |                                           |                                            |     |             |        |              |       |          |       

See accompanying notes to the consolidated financial statements.

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NET PERCEPTIONS, INC.

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

|                                                              |                        |                               |                          |     |                    |       |        |     |       |       | 
|------------------------------------------------------------- | ---------------------- | ----------------------------- | ------------------------ | --- | ------------------ | ----- | ------ | --- | ----- | ----- | 
|                                                              |                        |                               |                          |     | Three Months Ended
|                                                              |                        |                               |                          |     | March 31,         
|                                                              |                        |                               |                          |     | 2003               |       | 2002  
|                                                              |                        |                               |                          |     |                    |       |       
|Revenues:                                                     |                        |                               |                          |     |                    |       |        |    
|                                                              |                        | Product                       |                          | $   | 138                |       |        | $   | 43    |      
|                                                              |                        | Service and maintenance       |                          |     | 478                |       |        |     | 1,097 |      
|                                                              |                        |                               |                          |     |                    |       |        |     |       |      
|                                                              |                        |                               | Total revenues           |     |                    | 616   |        |     |       | 1,140 | 
|Cost of revenues:                                             |                        |                               |                          |     |                    |       |        |    
|                                                              |                        | Product                       |                          |     |                   |       |        |     | 123   |      
|                                                              |                        | Service and maintenance       |                          |     | 216                |       |        |     | 770   |      
|                                                              |                        |                               |                          |     |                    |       |        |     |       |      
|                                                              |                        |                               | Total cost of revenues   |     |                    | 216   |        |     |       | 893   | 
|Gross Margin                                                  |                        |                               | 400                      |     |                    |       | 247    |    
|Operating expenses:                                           |                        |                               |                          |     |                    |       |        |    
|                                                              |                        | Sales and marketing           |                          |     | 706                |       |        |     | 1,481 |      
|                                                              |                        | Research and
development      |                          |     | 665                |       |        |     | 1,960 |      
|                                                              |                        | General and
administrative    |                          |     | 436                |       |        |     | 742   |      
|                                                              |                        | Restructuring related
charges |                          |     | 1,200              |       |        |     | 367   |      
|                                                              |                        | Amortization of
intangibles   |                          |     |                   |       |        |     | 28    |      
|                                                              |                        |                               |                          |     |                    |       |        |     |       |      
|                                                              |                        |                               | Total operating expenses |     |                    | 3,007 |        |     |       | 4,578 | 
|                                                              |                        |                               |                          |     |                    |       |        |     |       |      
|Loss from operations                                          |                        |                               | (2,607                   | )   |                    |       | (4,331 | )  
|Other income, net:                                            |                        |                               |                          |     |                    |       |        |    
|                                                              | Interest income        |                               |                          | 216 |                    |       |        | 780 |      
|                                                              | Interest expense       |                               |                          |    |                    |       |        | (11 | )    
|                                                              | Other income (expense) |                               |                          | (8  | )                  |       |        | 90  |      
|                                                              |                        |                               |                          |     |                    |       |        |     |       |      
|                                                              |                        |                               | Total other income, net  |     |                    | 208   |        |     |       | 859   | 
|                                                              |                        |                               |                          |     |                    |       |        |     |       |      
|Net loss                                                      |                        | $                             | (2,399                   | )   |                    | $     | (3,472 | )  
|                                                              |                        |                               |                          |     |                    |       |        |     |       |      
|Net loss per share:                                           |                        |                               |                          |     |                    |       |        |    
|Basic and diluted                                             |                        | $                             | (0.09                    | )   |                    | $     | (0.13  | )  
|Shares used in computing basic and
diluted net
loss per share |                        |                               | 27,365                   |     |                    |       | 27,161 |    
|                                                              |                        |                               |                          |     |                    |       |        |     |       |      

See accompanying notes to the consolidated financial statements.

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NET PERCEPTIONS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)

|                                                 |                                                                      |                                                                      |                                               |                                                     |         |                    |        |        |         |     |        |  
|------------------------------------------------ | -------------------------------------------------------------------- | -------------------------------------------------------------------- | --------------------------------------------- | --------------------------------------------------- | ------- | ------------------ | ------ | ------ | ------- | --- | ------ | -
|                                                 |                                                                      |                                                                      |                                               |                                                     |         | Three Months Ended
|                                                 |                                                                      |                                                                      |                                               |                                                     |         | March 31,         
|                                                 |                                                                      |                                                                      |                                               |                                                     |         | 2003               |        | 2002  
|                                                 |                                                                      |                                                                      |                                               |                                                     |         |                    |        |       
|Cash flows from operating
activities:            |                                                                      |                                                                      |                                               |                                                     |         |                    |        |       
|                                                 | Net loss                                                             |                                                                      | $                                             | (2,399                                              | )       |                    | $      | (3,472 | )      
|                                                 | Reconciliation of net loss to net cash
used in operating activities: |                                                                      |                                               |                                                     |         |                    |        |        |        
|                                                 |                                                                      |                                                                      | Depreciation and
amortization                 |                                                     |         | 274                |        |        |         | 669 |       
|                                                 |                                                                      |                                                                      | Provision for doubtful
accounts               |                                                     |         | 6                  |        |        |         | 55  |       
|                                                 |                                                                      |                                                                      | Compensation expense related to stock
options |                                                     |         |                   |        |        |         | 15  |       
|                                                 |                                                                      |                                                                      | Restructuring related
charges                 |                                                     |         | 1,200              |        |        |         | 367 |       
|                                                 |                                                                      |                                                                      | Amortization of premiums on
investments       |                                                     |         | 77                 |        |        |         | 23  |       
|                                                 |                                                                      |                                                                      | Changes in assets and
liabilities:            |                                                     |         |                    |        |        |         |     |       
|                                                 |                                                                      |                                                                      |                                               | Accounts receivable                                 |         |                    | 247    |        |         |     | 713    |  
|                                                 |                                                                      |                                                                      |                                               | Prepaid expenses & other current
assets             |         |                    | 24     |        |         |     | (1     | )
|                                                 |                                                                      |                                                                      |                                               | Other assets                                        |         |                    | 25     |        |         |     | (69    | )
|                                                 |                                                                      |                                                                      |                                               | Accounts payable                                    |         |                    | (50    | )      |         |     | 2      |  
|                                                 |                                                                      |                                                                      |                                               | Accrued expenses                                    |         |                    | (880   | )      |         |     | (1,588 | )
|                                                 |                                                                      |                                                                      |                                               | Deferred revenue                                    |         |                    | 71     |        |         |     | (176   | )
|                                                 |                                                                      |                                                                      |                                               | Other long-term liabilities                         |         |                    | (9     | )      |         |     | (17    | )
|                                                 |                                                                      |                                                                      |                                               |                                                     |         |                    |        |        |        
|                                                 |                                                                      |                                                                      |                                               | Total
adjustments                                   |         |                    | 985    |        |         |     | (7     | )
|                                                 |                                                                      |                                                                      |                                               |                                                     |         |                    |        |        |        
|                                                 |                                                                      |                                                                      |                                               | Net cash used in operating
activities               |         |                    | (1,414 | )      |         |     | (3,479 | )
|Cash flows from investing
activities:            |                                                                      |                                                                      |                                               |                                                     |         |                    |        |       
|                                                 |                                                                      | Purchases of short-term
investments                                  |                                               |                                                     | (16,121 | )                  |        |        | (13,585 | )  
|                                                 |                                                                      | Sales and maturities of short-term
investments                       |                                               |                                                     | 8,000   |                    |        |        | 11,608  |    
|                                                 |                                                                      |                                                                      |                                               |                                                     |         |                    |        |        |        
|                                                 |                                                                      |                                                                      |                                               | Net cash used in investing
activities               |         |                    | (8,121 | )      |         |     | (1,977 | )
|Cash flows from financing
activities:            |                                                                      |                                                                      |                                               |                                                     |         |                    |        |       
|                                                 |                                                                      | Proceeds from exercise of stock options,
net of stock repurchases    |                                               |                                                     | 68      |                    |        |        | 14      |    
|                                                 |                                                                      | Principal payments under capital lease
obligations and notes payable |                                               |                                                     |        |                    |        |        | (72     | )  
|                                                 |                                                                      |                                                                      |                                               |                                                     |         |                    |        |        |        
|                                                 |                                                                      |                                                                      |                                               | Net cash provided by (used in) financing
activities |         |                    | 68     |        |         |     | (58    | )
|                                                 |                                                                      |                                                                      |                                               |                                                     |         |                    |        |        |        
|Net decrease in cash and cash
equivalents        |                                                                      |                                                                      | (9,467                                        | )                                                   |         |                    | (5,514 | )     
|Cash and cash equivalents at beginning of
period |                                                                      |                                                                      | 39,729                                        |                                                     |         |                    | 14,929 |       
|                                                 |                                                                      |                                                                      |                                               |                                                     |         |                    |        |        |        
|Cash and cash equivalents at end of
period       |                                                                      | $                                                                    | 30,262                                        |                                                     |         | $                  | 9,415  |       
|                                                 |                                                                      |                                                                      |                                               |                                                     |         |                    |        |        |        

See accompanying notes to the consolidated financial statements.

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NET PERCEPTIONS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(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, 2002, 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.

Accumulated other comprehensive income (loss) consists
entirely of
unrealized gain (loss) on available-for-sale investments. Changes in unrealized
gain (loss) on available-for-sale investments were $(2) and $(704) for the
first quarter of 2003 and 2002, respectively. Comprehensive loss was $2,401 and
$4,176 for the three months ended March 31, 2003 and 2002, respectively.

Note 2. Recently Issued Accounting Pronouncements

In June 2002, the Financial Accounting Standards Board
(FASB) issued
SFAS No. 146, Accounting for Exit or Disposal Activities. The new statement
addresses the accounting for costs associated with exit or disposal activities.
The provisions of the statement will be effective for disposal activities
initiated after December 31, 2002. The adoption of this statement is not
expected to have a material impact on the Companys consolidated financial
position, results of operations or cash flows.

In January 2003, the FASB issued Interpretation No. 46,
Consolidation of
Variable Interest Entities. This interpretation addresses the requirements for
business enterprises to consolidate related entities in which they are
determined to be the primary beneficiary as a result of their variable economic
interest. The interpretation is intended to provide guidance in judging
multiple economic interests in an entity and in determining the primary
beneficiary. The interpretation outlines disclosure requirements for Variable
Interest Entities in existence prior to January 31, 2003, and outlines
consolidation requirements for Variable Interest Entities created after January
31, 2003. This interpretation is not expected to have a material impact on the
Companys consolidated financial statements.

Note 3. Net Loss Per Share

Net loss per share is computed under SFAS No. 128,
Earnings 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 aggregated 1 and
5 shares at March 31, 2003 and 2002, respectively. Diluted net loss per share
does not differ from basic net loss per share since potential shares of common
stock from conversion of preferred stock, stock options and warrants and
outstanding shares of common stock subject to repurchase are anti-dilutive
for all periods presented. Diluted net loss per share for the three months
ended March 31, 2003 and 2002 excluded 2,499 and 3,426, respectively, of
potential shares of common stock from the conversion of stock options as they
were anti-dilutive.

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Note 4. 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 is choosing to continue with its current practice of
applying the recognition and measurement principles of APB 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 are not being 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 loss and loss per share would have been adjusted to the pro forma
amounts indicated below:

|                                                                                                                |             |   |          |       |      |   |        |       |  
|--------------------------------------------------------------------------------------------------------------- | ----------- | - | -------- | ----- | ---- | - | ------ | ----- | -
|                                                                                                                |             |   | March 31
|                                                                                                                |             |   |         
|                                                                                                                |             |   | 2003     |       | 2002
|                                                                                                                |             |   |          |       |     
|Net loss, as reported                                                                                           |             | $ | (2,399   | )     |      | $ | (3,472 | )    
|Add: Stock-based employee compensation
expense
included in reported net loss                                    |             |   |         |       |      |   | 28     |      
|Deduct: Total stock-based employee
compensation
expense determined under fair value based method for
all awards |             |   | (485     | )     |      |   | (590   | )    
|                                                                                                                |             |   |          |       |      |   |        |      
|Pro forma net loss                                                                                              |             | $ | (2,884   | )     |      | $ | (4,034 | )    
|                                                                                                                |             |   |          |       |      |   |        |      
|Basic and diluted net loss per
share:                                                                           |             |   |          |       |      |   |        |      
|                                                                                                                | As reported |   | $        | (0.09 | )    |   | $      | (0.13 | )
|                                                                                                                |             |   |          |       |      |   |        |      
|                                                                                                                | Pro forma   |   | $        | (0.11 | )    |   | $      | (0.15 | )
|                                                                                                                |             |   |          |       |      |   |        |      

Note 5. Restructuring Related Charges

The Company recorded restructuring related charges of $1,200 in
the first
quarter of 2003 related primarily to the closure of operations in three
satellite offices, and employee termination costs due to a reduction of
workforce by 22 positions. The charge was recorded in accordance with SFAS No.
146, Accounting for Exit or Disposal Activities. During 2002 and 2001, the
Company instituted certain restructuring plans to better align its cost
structure with its business outlook and general economic conditions. Under the
restructuring plans, the Company recorded restructuring related charges
totaling $15,551 in 2001 and $768 in 2002, of which $367 was recorded in the
first quarter of 2002.

A total of $660 was applied against the restructuring reserve
during the
first quarter of 2003 and $383 of accrued lease exit costs for the Eden
Prairie, Minnesota space was reclassified from accrued expenses to the
restructuring reserve during the first quarter of 2003, adjusting the accrued
restructuring liability to $5,212. Charges against the reserve during the three
months ended March 31, 2003 included $227 in employee severance payments, $908
in rent payments, $157 of non-cash leasehold write-offs, $269 of other non-cash
fixed asset write-offs, and $16 in various costs relating to the closure of our
satellite facilities. These charges were partially offset by $531 of sublease
income, $52 in proceeds from the sale of fixed assets and a $334 non-cash
reversal of deferred rent. In conjunction with the restructuring related
charges recorded, the Company made certain estimates regarding future sublease
income that have a significant impact on its anticipated cash obligations and
related restructuring reserves. Although the Company believes that the lease
commitment estimates are appropriate in the current circumstances, future
changes in real estate markets could impact the ultimate amount of cash paid to
resolve these obligations. As of April 30, 2003, the Company has signed
agreements to sublease approximately 110,000 square feet of its existing
facilities. The Company is actively seeking to sublease its remaining excess
facilities.

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Specifically, the Company is currently seeking to sublease an additional
portion of its Minneapolis, Minnesota and San Francisco, California office
space, and its entire Roseland, New Jersey and Austin, Texas facilities.
However, there is a risk that the Company may not be able to sublease these
facilities under favorable terms, if at all, which would negatively impact its
cash flow and future operating results. In addition, if the Companys existing
sub-tenants fail to make sublease payments required under their respective
sublease agreements, it may experience greater than anticipated operating
expenses in the future. As of March 31, 2003, management estimated total
future sublease income of $15,127 of which $13,478 is covered by known sublease
arrangements.

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The following table presents a summary of the restructuring
related
activities and accrued restructuring charges as of March 31, 2003:

|                                                           |  |             |        |             |  |          |        |       |  |             |        |   |  |   |        |   |  |   |        |  
|---------------------------------------------------------- |  | ----------- | ------ | ----------- |  | -------- | ------ | ----- |  | ----------- | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                                           |  |             |        |             |  | Employee |        |       |  |             |        |   |  |   |        |   |  |  
|                                                           |  | Lease       |        | Severance   |  |          |        |       |  | Fixed Asset |        |   |  |  
|                                                           |  | Commitments |        | and         |  |          |        |       |  | Disposals   |        |   |  |  
|                                                           |  | and Related |        | Termination |  |          |        |       |  | and Other   |        |   |  |  
|                                                           |  | Items       |        | Costs       |  | Subtotal |        | Costs |  | Total      
|                                                           |  |             |        |             |  |          |        |       |  |            
|Restructuring Charges Net of
Reversal                      |  | $           | 10,649 |             |  | $        | 1,634  |       |  | $           | 12,283 |   |  | $ | 3,268  |   |  | $ | 15,551 |  
|Restructuring
Payments                                     |  |             | (2,233 | )           |  |          | (1,523 | )     |  |             | (3,756 | ) |  |   | (195   | ) |  |   | (3,951 | )
|Sublease Income and proceeds from the
Sale of Fixed
Assets |  |             | 280    |             |  |          |       |       |  |             | 280    |   |  |   | 261    |   |  |   | 541    |  
|Non-Cash Asset Disposals and Deferred
Rent
Write-Off       |  |             | (1,800 | )           |  |          |       |       |  |             | (1,800 | ) |  |   | (2,908 | ) |  |   | (4,708 | )
|                                                           |  |             |        |             |  |          |        |       |  |             |        |   |  |   |        |   |  |   |        |  
|Accrued Restructuring as of December 31,
2001              |  | $           | 6,896  |             |  | $        | 111    |       |  | $           | 7,007  |   |  | $ | 426    |   |  | $ | 7,433  |  
|                                                           |  |             |        |             |  |          |        |       |  |             |        |   |  |   |        |   |  |   |        |  
|Restructuring
Charges                                      |  |             |       |             |  |          | 506    |       |  |             | 506    |   |  |   | 262    |   |  |   | 768    |  
|Restructuring
Payments                                     |  |             | (4,024 | )           |  |          | (547   | )     |  |             | (4,571 | ) |  |   | (66    | ) |  |   | (4,637 | )
|Sublease Income and Proceeds from the
Sale of Fixed
Assets |  |             | 1,299  |             |  |          |       |       |  |             | 1,299  |   |  |   | 68     |   |  |   | 1,367  |  
|Non Cash Asset
Disposals                                   |  |             |       |             |  |          |       |       |  |             |       |   |  |   | (642   | ) |  |   | (642   | )
|Reclassification of Accrued Lease Exit
Costs               |  |             | 383    |             |  |          |       |       |  |             | 383    |   |  |   |       |   |  |   | 383    |  
|                                                           |  |             |        |             |  |          |        |       |  |             |        |   |  |   |        |   |  |   |        |  
|Accrued Restructuring as of December 31,
2002              |  | $           | 4,554  |             |  | $        | 70     |       |  | $           | 4,624  |   |  | $ | 48     |   |  | $ | 4,672  |  
|                                                           |  |             |        |             |  |          |        |       |  |             |        |   |  |   |        |   |  |   |        |  
|Restructuring
Charges                                      |  |             | 604    |             |  |          | 183    |       |  |             | 787    |   |  |   | 413    |   |  |   | 1,200  |  
|Restructuring
Payments                                     |  |             | (908   | )           |  |          | (227   | )     |  |             | (1,135 | ) |  |   | (16    | ) |  |   | (1,151 | )
|Sublease Income and Proceeds from the
Sale of Fixed
Assets |  |             | 531    |             |  |          |       |       |  |             | 531    |   |  |   | 52     |   |  |   | 583    |  
|Non Cash Asset Disposals and Deferred
Rent
Write-Off       |  |             | 177    |             |  |          |       |       |  |             | 177    |   |  |   | (269   | ) |  |   | (92    | )
|                                                           |  |             |        |             |  |          |        |       |  |             |        |   |  |   |        |   |  |   |        |  
|Accrued Restructuring as of March 31,
2003                 |  | $           | 4,958  |             |  | $        | 26     |       |  | $           | 4,984  |   |  | $ | 228    |   |  | $ | 5,212  |  
|                                                           |  |             |        |             |  |          |        |       |  |             |        |   |  |   |        |   |  |   |        |  

Note 6. Commitments and Contingencies

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 initial public offering, several other underwriters who
participated in the Companys initial public offering, Steven J. Snyder, the
Companys then president and chief executive officer, and Thomas M. Donnelly,
the Companys chief operating officer and chief financial officer. An amended
class action complaint 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 the Companys 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 initial public offering and the
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 the Companys initial public offering and in the Companys follow-on
public offering by requiring their customers, in exchange for receiving
allocations of shares of common stock sold in the Companys initial public
offering, to pay excessive commissions on transactions in other securities and
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 the
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 through 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 and the case may proceed to
discovery.

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Management believes that the allegations against the Company are
without
merit, and the Company intends to vigorously defend against the plaintiffs
claims. As this litigation is in an initial stage, management is unable to
predict its outcome or its ultimate effect, if any, on the Companys financial
condition.

As permitted under Delaware law, the Company has agreements
whereby it
indemnifies its officers and directors for certain events or occurrences while

the officer or director is, or was serving, at its request in such capacity.
The term of the indemnification period is for the officers or directors
lifetime. The maximum potential amount of future payments the Company could be
required to make under these indemnification agreements is unlimited; however,
the Company has insurance that limits its exposure and enables the Company to
recover a portion of any future amounts paid. As a result of the insurance
coverage, the Company believes the estimated fair value of these
indemnification agreements is minimal. All of these indemnification agreements
were grandfathered under the provisions of FIN No. 45 as they were in effect
prior to December 31, 2002. Accordingly, the Company believes the liability for
these agreements as of December 31, 2002 is not material.

The Company enters into standard indemnification agreements in
the
ordinary course of business. Pursuant to these agreements, the Company
indemnifies, holds harmless, and agrees to reimburse the indemnified party for
losses suffered or incurred by the indemnified party, generally the business
partners or customers, in connection with any U.S. patent, or any copyright or
other intellectual property infringement claim by any third party with respect
to the products. The term of these indemnification agreements is generally
perpetual any time after execution of the agreement. The maximum potential
amount of future payments the Company could be required to make under these
indemnification agreements is unlimited. The Company has never incurred costs
to defend lawsuits or settle claims related to these indemnification
agreements. As a result, the Company believes the estimated fair value of
these agreements is minimal. Accordingly, the Company believes the liability
for these agreements as of December 31, 2002 is not material.




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

OVERVIEW

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

We develop and market software solutions that enable our
customers to
interact more intelligently with their customers. Our solutions integrate and
analyze information about customers, products and transaction activity to
generate specific actions our customers can take to improve their marketing,
selling and merchandising effectiveness, leading to increased revenue, improved
profit, decreased costs and enhanced customer satisfaction. We combine our
software products with industry expertise and professional services to create
highly-focused, industry-specific solutions that are designed to integrate with
and add value to existing custom or purchased CRM systems and processes.

We sell our solutions worldwide primarily through a direct sales
force. We
license our products under various pricing plans, such as per user, per CPU,
per site and per enterprise. We generally grant licenses on a perpetual basis.
License fees for our products range from $50,000 to in excess of $1.0 million.
We provide product maintenance pursuant to service agreements, the pricing of
which is typically based on a percentage of the related product license fee and
is generally paid in advance. Professional service fees for business
consulting, implementation support, data processing and educational services
are generally priced on a time and materials basis.

We were incorporated in Delaware in July 1996, and our initial
product was
shipped in January 1997. From 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 315 on December
31, 2000. During 2003, 2002 and 2001, we instituted certain restructuring plans
to align our cost structure with our business outlook and
general economic conditions. In connection with our restructuring
activities, our total number of employees was reduced to 98 as of December 31,
2001, 52 as of December 31, 2002 and 29 as of March 31, 2003.

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We have sustained losses on a quarterly and annual basis since
inception.
As of March 31, 2003, we had an accumulated deficit of $219 million. Our net
loss was $2.4 million in the first quarter of 2003 (including $1.2 million of
restructuring related charges), compared to a net loss of $3.5 million in the
first quarter of the prior year (including $367,000 of restructuring charges
and $80,000 of 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 which, based
upon current marked conditions and other factors, is likely to continue in
2003. We anticipate that our operating expenses will also continue to decline
in 2003 and 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 in 2003.

In February 2003, in response to continued uncertainties in the
marketplace and the difficulties we are likely to continue facing as a small
public company, we engaged U.S. Bancorp Piper Jaffray, Inc. to assist us in the
exploration of near-term strategic alternatives. Based on the outcome of this
process, we expect to determine in the near term how best to proceed to
maximize stockholder value. However, we cannot predict whether or when a
transaction will result from this process, or otherwise. Accordingly, it is
currently not feasible for management to make estimates as to our future
operating results with any certainty.

In addition, 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 identified below under the
heading Risks That May Affect Future Results. We may not be successful in
addressing these risks.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of financial condition and results
of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to bad debts, investments, intangible assets, restructuring
liabilities, contingencies and litigation. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

We believe the following critical accounting policies affect
significant
judgments and estimates used in the preparation of our consolidated financial
statements:

Revenue Recognition.Our revenues are recognized in
accordance with the
American Institute of Certified Public Accountants Statement of Position
(SOP) 97-2, Software Revenue Recognition, as amended by SOP 98-4 and SOP
98-9, as well as Technical Practice Aids issued from time to time by the
American Institute of Certified Public Accountants 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
project planning and management, implementation and testing, data analysis,
user and partner training, consulting, product hosting and ongoing customer
support.

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 of undelivered elements, revenue
is deferred until the earlier of when vendor-specific objective evidence is
determined for the undelivered elements or when all elements
for which we do not have vendor-specific objective evidence have been
delivered.

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Revenues from license fees are recognized when a non-cancelable
agreement
has been executed, the product has been shipped or electronically delivered,
there are no uncertainties surrounding product acceptance, the fee is fixed or
determinable and collection of the related receivable is considered 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.

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
products and services on a hosted basis, up front set-up fees are deferred and
recognized ratably over the estimated service period.

We recognize revenues allocable to maintenance ratably over the
term of
the agreement. 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 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 the revenues
allocable to the services as they are performed.

Revenue recognition rules for software companies are very
complex. We
follow specific and detailed guidelines in determining the proper amount of
revenue to be recorded; however, certain judgments affect the application of
our revenue recognition policy. Revenue results are difficult to predict, and
any shortfall in revenue or delay in recognizing revenue could cause our
operating results to vary significantly from quarter to quarter.

The most significant judgments for revenue recognition typically
involve
whether there are any significant uncertainties regarding customer acceptance
and whether collectibility can be considered probable. In addition, our
transactions often consist of multiple element arrangements which must be
analyzed to determine the relative fair value of each element, the amount of
revenue to be recognized upon shipment, if any, and the period and conditions
under which deferred revenue should be recognized.

Sublease income.In conjunction with the restructuring
related charges
recorded in 2003, 2002 and 2001, we made certain estimates regarding future
sublease income that have a significant impact on our anticipated cash
obligations. Although we believe that our lease commitment estimates are
appropriate in the current circumstances, future changes in real estate markets
could impact the ultimate amount of cash paid to resolve these obligations. As
of March 31, 2003, we estimated total future sublease income of $15.1 million
of which $13.5 million is covered by known sublease arrangements.

Allowance for doubtful accounts.We maintain allowances
for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. Actual collection results could differ
materially from those estimated and have a significant impact on our
consolidated financial statements.

Litigation. We have not recorded an estimated liability
related to the
class action lawsuit in which we are named. For a discussion of this matter,
see the section of this report entitled Legal Proceedings. Due to the
uncertainties related to both the likelihood and the amount of any potential
loss, we are unable to make a reasonable estimate of the liability that could
result from an unfavorable outcome. As additional information becomes
available, we will assess the potential liability and revise our estimates
accordingly. Revisions in our estimates of the potential liability could
materially impact our results of operations and financial position.

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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND MARCH 31,
2002

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,         
|                     |                               |                          |      | 2003               |     | 2002
|                     |                               |                          |      |                    |     |     
|Revenues:            |                               |                          |      |                    |     |      |      |    
|                     | Product                       |                          |      | 22                 | %   |      |      | 4   | %  
|                     | Service and maintenance       |                          |      | 78                 |     |      |      | 96  |    
|                     |                               |                          |      |                    |     |      |      |     |    
|                     |                               | Total revenues           |      |                    | 100 |      |      |     | 100 | 
|Cost of revenues:    |                               |                          |      |                    |     |      |      |    
|                     | Product                       |                          |      |                   |     |      |      | 11  |    
|                     | Service and maintenance       |                          |      | 35                 |     |      |      | 67  |    
|                     |                               |                          |      |                    |     |      |      |     |    
|                     |                               | Total cost of revenues   |      |                    | 35  |      |      |     | 78  | 
|Gross Margin         |                               |                          | 65   |                    |     |      | 22   |    
|Operating expenses:  |                               |                          |      |                    |     |      |      |    
|                     | Sales and marketing           |                          |      | 115                |     |      |      | 130 |    
|                     | Research and
development      |                          |      | 108                |     |      |      | 172 |    
|                     | General and
administrative    |                          |      | 71                 |     |      |      | 65  |    
|                     | Restructuring related
charges |                          |      | 195                |     |      |      | 32  |    
|                     | Amortization of
intangibles   |                          |      |                   |     |      |      | 3   |    
|                     |                               |                          |      |                    |     |      |      |     |    
|                     |                               | Total operating expenses |      |                    | 489 |      |      |     | 402 | 
|                     |                               |                          |      |                    |     |      |      |     |    
|Loss from operations |                               |                          | (424 | )                  |     |      | (380 | )  
|Other income, net    |                               |                          | 34   |                    |     |      | 75   |    
|                     |                               |                          |      |                    |     |      |      |     |    
|Net loss             |                               |                          | (390 | )%                 |     |      | (305 | )% 
|                     |                               |                          |      |                    |     |      |      |     |    

REVENUES

Total revenues. Total revenues decreased 46% to $616,000
in the quarter
ended March 31, 2003, from $1.1 million in the first quarter of 2002. Revenues
from sales in the United States were $541,000 or 88% of total revenues in the
first quarter of 2003 compared to $973,000 or 85% of total revenues in the
first quarter of 2002. Revenues from international sales in the first quarter
of 2003 were $75,000 or 12% of total revenues compared to $167,000 or 15% of
total revenues in the first quarter of the prior year. The majority of
international sales were made in Europe by our direct sales organizations based
in the United States. In connection with the restructuring plan described
elsewhere in Managements Discussion and Analysis of Financial Condition and
Results of Operations and the Notes to the Consolidated Financial Statements,
we no longer maintain a direct sales force in the United Kingdom. International
sales are generally denominated in United States dollars.

During the first quarter of 2003 as part of our strategy to
focus our
marketing and development efforts on our primary product NetP 7, we continued
to wind-down our non-strategic product and service offerings, including
Advertising Advisor, which in the past accounted for a significant portion of
our total revenues. NetP 7 incorporates certain key components from our
non-strategic product offerings, including components from Personalization
Manager and Distribution Analyst.

Product revenues.Product revenues increased 221% to
$138,000 in the
first quarter of 2003 compared to $43,000 for the same period in the prior
year. Product revenues comprised 22% of total revenues for the first
quarter of 2003 compared to 4% for the same period in 2002. The increase
in product revenues in absolute dollars is attributable to increased sales.
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.

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Service and maintenance revenues.Service and maintenance
revenues
consist primarily of professional and maintenance services and, secondarily,
product hosting 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. Service and maintenance
revenues decreased 56% to $478,000 in the first quarter of 2003 from $1.1
million in the first quarter of 2002. Service and maintenance revenues
comprised 78% and 96% of total revenues in the first quarter of 2003 and 2002,
respectively.The decrease in service and maintenance revenues in absolute
dollars reflected the lower levels of consulting and maintenance services due
to the combined effect of fewer new customer acquisitions and a decline in our
customer base, particularly Internet retailers. 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 100% to $0 in the
first quarter of 2003 from $123,000 in the first quarter of 2002, representing
0% and 286% of the related product revenues, respectively. The decrease in cost
of product revenues in absolute dollars is due to no royalties payable to third
parties and no amortization expense related to intangible assets. 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 hosted product related
services to customers. Cost of service and maintenance revenues decreased 72%
to $216,000 in the first quarter of 2003, from $770,000 in the first quarter of
the prior year, representing 45% and 70% of the related service and maintenance
revenues, respectively. The decrease in cost of services and maintenance
revenues in absolute dollars and as a percentage of revenues is primarily due
to continued headcount reductions in our service organization as a result of
our restructuring efforts and decreased use of third-party consultants to staff
consulting engagements. 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

In the first quarter of 2003, we further reduced our operating
expenses
through the closure of three remote offices and a reduction in workforce
affecting 22 employees. We anticipate continuing to vigorously manage expense
levels. Quarterly operating expenses attributable to our directors and
officers liability insurance policy will increase by approximately $150,000
beginning in the second fiscal quarter of 2003 as a result of obtaining the
policy described below under the heading Managements Discussion and Analysis
of Financial Condition and Results of Operations  Liquidity and Capital
resources.

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 52% to $706,000 in the first
quarter of 2003, compared to $1.5 million recorded in the first quarter of
2002. Sales and marketing expenses were 115% and 130% of total revenues in the
first quarter of 2003 and 2002, respectively. The decrease in sales and
marketing expenses in absolute dollars is primarily due to headcount reductions
as a result of our restructuring efforts 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 decreased
66% to $665,000 in the first quarter of 2003, compared to $2.0 million recorded
in the first quarter of 2002. Research and development expenses were 108% and
172% of total revenues in the first quarter of 2003 and 2002, respectively.
The decrease in research and development expenses in absolute dollars is
primarily due to continued
headcount reductions as a result of our restructuring efforts.

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General and administrative. General and administrative
expenses consist
primarily of salaries, other employee-related costs, provision for doubtful
accounts and professional service fees. General and administrative expenses
were $436,000 in the first quarter of 2003, a decrease of 41% from the $742,000
recorded in the first quarter of 2002. General and administrative expenses were
71% and 65% of total revenue in the first quarter of 2003 and 2002,
respectively. The decrease in general and administrative expenses in absolute
dollars is primarily due to headcount reductions as a result of our
restructuring efforts.

Restructuring related charges.We recorded restructuring
related charges
totaling $1.2 million in the first quarter of 2003 related primarily to the
closure of operations in three satellite offices, and employee termination
costs due to a reduction of our workforce by 22 positions. The charge was
recorded in accordance with SFAS No. 146, Accounting for Exit or Disposal
Activities. During 2002 and 2001, we instituted certain restructuring plans to
better align our cost structure with our business outlook and general economic
conditions. Under the restructuring plans, we recorded restructuring related
charges totaling $15.6 million in 2001 and $768,000 in 2002 of which $367,000
was recorded in the first quarter of 2002 relating to employee termination
costs.

Amortization of intangibles.Amortization expense related
to intangibles
acquired in the February 2000 acquisition of KD1 was $0 during the first
quarter of 2003 compared to $65,000 (including $37,000 of amortization of
goodwill and other intangibles included in the cost of product revenues) during
the first quarter of 2002. This represented 0% and 6% of 2003 and 2002 first
quarter total revenues, respectively. Total amortization is expected to be $0
for the remainder of 2003 due to the $6.5 million impairment charge recorded in
the fourth quarter of 2002 to reduce goodwill and other intangible assets to
zero value.

Stock compensation expense.Compensation charges related
to stock options
were $0 in the first quarter of 2003 and $15,000 in the first quarter of 2002,
comprising 0% and 1% of total revenues in each of the respective periods. Stock
compensation expense represents the amortization of deferred compensation
related to stock options granted in 1999 and 1998. Such compensation is
amortized over the four-year repurchase period of the common stock underlying
the related options. Stock compensation expense was recorded in the functional
operating expense categories as follows:

|                           |  |                    |   |      |  |   |        | 
|-------------------------- |  | ------------------ | - | ---- |  | - | ------ | 
|                           |  | Three Months Ended
|                           |  | March 31,         
|                           |  |                   
|                           |  | 2003               |   | 2002
|                           |  |                    |   |     
|Sales and marketing        |  | $                  |  |      |  | $ | 8,000  | 
|Research and development   |  |                    |  |      |  |   | 3,000  | 
|General and administrative |  |                    |  |      |  |   | 4,000  | 
|                           |  |                    |   |      |  |   |        | 
|                           |  | $                  |  |      |  | $ | 15,000 | 
|                           |  |                    |   |      |  |   |        | 

Other income, net. Other income, net, consists of
interest income,
interest expense, foreign currency transaction losses or gains and other
expense. Net other income was $208,000 in the first quarter of 2003 compared to
net other income of $859,000 in the same period in 2002. The decrease in net
other income for the three months ended March 31, 2003 compared to the same
period in 2002 was primarily due to a decrease in interest income.

PROVISION FOR INCOME TAXES

We have incurred significant operating losses for all periods
from
inception through March 31, 2003. As of December 31, 2002, we had net operating
loss carry-forwards of approximately $107.4 million available to reduce future
taxable income expiring at various dates beginning in 2011. In addition, as of
December 31, 2002, we had $146,000 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.

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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. At March 31, 2003, we had $61.5 million of cash,
cash equivalents and short-term investments, compared to $69.3 million at March
31, 2002.

Cash used in operations was $1.4 million for the three
months ended March
31, 2003, compared to $3.5 million for the same period in 2002. Cash used in
operations in both periods resulted primarily from net losses, as adjusted for
non-cash expenses. The decrease in cash used in operations in the first quarter
of 2003 as compared to the first quarter of 2002 is principally a function of
the reduced operating expenses and cost of revenues that have resulted from the
restructuring plans described below, as adjusted for non-cash expenses. In
April 2000, we signed a ten-year lease for a new corporate facility in Edina,
Minnesota, with annual total rent payments beginning at $1.4 million per year,
excluding operating expenses. In April 2003, our directors and officers
liability insurance policy came up for renewal and we obtained a policy at a
cost of approximately $1 million.

A total of $8.1 million in net cash was used in investing
activities for
the three months ended March 31, 2003, compared to $2.0 million of cash used in
the same period for 2002. Our investing activities consisted primarily of net
purchases of short-term investments and marketable securities. Our investment
portfolio as of March 31, 2003, was invested as a percentage of total cash and
investments as follows: 49% in money market accounts, 6% in corporate bonds and
papers, 2% in municipal bonds and 43% in federal agency securities. We are
presently investing cash in excess of current requirements in investment grade,
interest-bearing securities and plan to continue this policy.

Capital expenditures were $0 for the three months ended
March 31, 2003 and
for the three months ended March 31, 2002. Capital expenditures were higher in
years prior to 2002 and reflected our rapidly growing employee base and
expanded operations.

Net cash provided from financing activities was $68,000 for the
three
months ended March 31, 2003 and net cash used for financing activities was
$58,000 for the same period in 2002.

During 2002 and 2001, we instituted certain restructuring plans
to better
align our cost structure with our business outlook and general economic
conditions. Under the restructuring plans, we recorded restructuring related
charges totaling $768,000 and $15.7 million for the year ended December 31,
2002 and 2001, respectively. In the first quarter of 2003 an additional $1.2
million restructuring charge was recorded related primarily to the closure of
operations in three satellite offices, and employee termination costs due to a
reduction of workforce by 22 positions. A total of approximately $660,000 was
charged against the restructuring reserve during the first quarter of 2003,
adjusting the accrued restructuring liability to approximately $5.2 million.
See the table below summarizing our contractual obligations as of March 31,
2003 and the related discussion regarding our operating lease obligations and
related sublease agreements.

Of the $5.2 million restructuring reserve remaining as of
March 31, 2003,
management estimates that approximately $5.1 million will be a use of cash in
future periods through July, 2010, for remaining rent commitments and other
carrying costs, less estimated sublease income, related to facilities we have
vacated. The remaining $100,000 relates to other restructuring related costs.

Of the $1.2 million restructuring charge recorded during
the first quarter
of 2003 approximately $604,000 was related to lease commitments. Although we
believe that our lease commitment estimates are appropriate in the current
circumstances, future changes in real estate markets could impact the ultimate
amount of cash paid to resolve these obligations.

As of March 31, 2003, we had no material long-term
commitments for capital
expenditures and we do not anticipate entering into any material commitments
for capital expenditures in 2003.

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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
March 31, 2003, we had $167,000 in long-term liabilities, all comprised of
deferred rent credits.

The following summarizes our contractual obligations at
March 31, 2003,
and the effect such obligations are expected to have on our liquidity and cash
flow in future periods (in thousands). See the discussion below regarding our
operating lease obligations and related sublease agreements.

|                                |  |      |       |      |  |      |       |      |  |      |       |           |  |       |       |  |  |   |       |  |  |   |       |  |  |   |        | 
|------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ----- | --------- |  | ----- | ----- |  |  | - | ----- |  |  | - | ----- |  |  | - | ------ | 
|                                |  | 2003 |       | 2004 |  | 2005 |       | 2006 |  | 2007 |       | 20082010 |  | Total
|                                |  |      |       |      |  |      |       |      |  |      |       |           |  |      
|Operating leases                |  | $    | 3,166 |      |  | $    | 3,362 |      |  | $    | 3,155 |           |  | $     | 2,917 |  |  | $ | 2,960 |  |  | $ | 7,843 |  |  | $ | 23,403 | 
|Executed sublease agreements    |  |      | 1,931 |      |  |      | 1,972 |      |  |      | 1,688 |           |  |       | 1,688 |  |  |   | 1,710 |  |  |   | 4,489 |  |  |   | 13,478 | 
|                                |  |      |       |      |  |      |       |      |  |      |       |           |  |       |       |  |  |   |       |  |  |   |       |  |  |   |        | 
|Net contractual cash obligation |  | $    | 1,235 |      |  | $    | 1,390 |      |  | $    | 1,467 |           |  | $     | 1,229 |  |  | $ | 1,250 |  |  | $ | 3,354 |  |  | $ | 9,925  | 
|                                |  |      |       |      |  |      |       |      |  |      |       |           |  |       |       |  |  |   |       |  |  |   |       |  |  |   |        | 

Operating lease obligations relate to our existing facilities.
As of April
30, 2003, we have signed agreements to sublease approximately 110,000 square
feet of our existing facilities. We are actively seeking to sublease our
remaining excess facilities. Specifically, we are currently seeking to sublease
an additional portion of our Minneapolis, Minnesota and San Francisco,
California office space, and our entire Roseland, New Jersey and Austin, Texas
facilities. However, there is a risk that we may not be able to sublease these
facilities under favorable terms, if at all, which would negatively impact our
cash flow and future operating results. In addition, if our existing
sub-tenants fail to make sublease payments required under their respective
sublease agreements, we may experience greater than anticipated operating
expenses in the future. As of March 31, 2003, we estimated total future
sublease income of $15.1 million of which $13.5 million is covered by known
sublease arrangements.

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.

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 which 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 may not be able to enter into an acceptable strategic or other transaction in the near
term.

As discussed above, under Managements Discussion and
Analysis of
Financial Condition and Results of Operations  Overview, we have engaged U.S.
Bancorp Piper Jaffray, Inc. to assist us in the exploration of strategic
alternatives. Based on the outcome of this process, we expect to determine in
the near term how best to proceed to maximize stockholder value. However, we
cannot predict whether, or when, a transaction will result from this process,
or otherwise. If a suitable transaction resolving the Companys future on
acceptable terms does not become available in the relatively near term, we will
need to consider other alternatives, which could include the sale of some or
all of our operating assets and dissolution and liquidation. If the Company
were to liquidate, we cannot predict when we would be able to make a
distribution to our stockholders; nor can we assure you that the amount that
you would receive in liquidation would equal the price or prices at which our
common stock has recently traded or may trade in the future. Any distributions
in liquidation would be reduced by cash expenditures and by additional
liabilities we may incur, and by the ultimate amounts paid in settlement of our
liabilities.

We do not expect to generate an operating profit prior to engaging in a strategic or other
transaction.

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 related to the acquisition of KD1 and
non-cash stock compensation expense) and $123.8 million for the year ended
December 31, 2001 (including $15.6 million in restructuring related charges,
$10.3 million of amortization of goodwill and other intangibles and non-
18Table of Contents

cash stock compensation expense and a $75.3 million charge for the
impairment of goodwill and other intangibles). Our net loss was $16.7 million
for the year ended December 31, 2002 (including $768,000 in restructuring
related charges, $299,000 of amortization of intangibles and non-cash stock
compensation expense and a $6.5 million charge for the impairment of goodwill
and other intangibles). As of March 31, 2003, we had an accumulated deficit of
$219.2 million. We have not had a profitable quarter and do not expect to have
a profitable quarter in 2003. We will need to generate significant revenues to
achieve profitability. We do not expect that we will generate an operating
profit prior to the time that we engage in a strategic or other transaction, or
pursue the other alternatives referenced above.

Our ability to consummate a strategic or other transaction may be impaired if we lose
certain of our key personnel.

The loss of the services of one or more of our key management
personnel
could seriously harm our ability to enter into or consummate a strategic or
other transaction referred to above under the heading Risks that May Affect
Future Results  We may not be able to enter into an acceptable strategic or
other transaction in the near term. We do not carry any key person life
insurance policies for any of our key management personnel.

Our quarterly operating results are volatile and difficult to predict.

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.

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



| |  |  | we do not know when we will be able to complete on of the strategic
or other transactions described above under the heading Risks that May
Affect Future Results  We may not be able to enter into an acceptable
strategic or other transaction in the near term, or what form it may
take;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | we operate with a limited order backlog, and revenues in any quarter
are substantially dependent on orders booked in that quarter;                                                                                                                                                            
|
| |  |  | 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 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
or failure in generating or recognizing revenues could cause significant
variations in our operating results from quarter to quarter and could result in
increased operating losses.

Our business could be materially adversely affected as a result of general economic and
market conditions.

We are subject to the effects of general global economic and
market
conditions. The current general economic slowdown has had negative consequences
for our business and operating results and is likely to continue to do so. For
example, the economic slowdown may cause some current or potential customers to
defer purchases, to go out of business or to have insufficient capital to buy
our products. Continued economic slowdown could also cause a significant
reduction in the value of our investments.

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NetP 7 may not achieve broad market acceptance, which would continue to harm
our business.

Recently, we have derived a substantial portion of our revenues from one
product  NetP 7. We anticipate that NetP 7 will account for a substantial
majority of any revenues for the foreseeable future. Consequently, if NetP 7
continues to fail to achieve broad market acceptance, our business and results
of operations will continue to be materially adversely affected.

Securities or other litigation could result in substantial expense and distraction.

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 chief operating officer. For a discussion of this matter,
see the section of this report entitled Legal Proceedings. We may in the
future be the target of other similar litigation. Securities or other
litigation could result in substantial costs and divert managements attention
and resources and could reduce the value received by stockholders in a
strategic or other transaction referred to above under the heading Risks that
May Affect Future Results  We may not be able to enter into an acceptable
strategic or other transaction in the near term.

Our common stock may be delisted from NASDAQ.

During 2002, the closing price of our common stock was below
$1.00 for as
many as 14 consecutive business days. We may fail to maintain the minimum
closing bid price of $1.00 for 30 consecutive business days as required by the
NASDAQ National Market. If we are unable to demonstrate compliance with this or
any other NASDAQ requirement, NASDAQ may take action with respect to a
potential delisting of our common stock. We may appeal any such decision by
NASDAQ to the NASDAQ Listing Qualifications Panel. If our common stock were
delisted from NASDAQ this could result in a number of negative implications,
including, among other things, reduced liquidity in our common stock as a
result of the loss of market efficiencies associated with NASDAQ, as well as
the potential loss of confidence by suppliers, customers and employees and the
loss of analyst coverage and institutional investor interest.

We face intense competition and our competitive position may continue to decline.

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 principal competitive factors for our products
include:
quality, breadth and depth of application offerings, product scalability, core
technology and architecture, ease of deployment and maintenance, customer
service and support, vendor viability and price. Although we believe our
products currently compete favorably with respect to certain factors, our
market is relatively new and is rapidly evolving. Our competitive position
against current and potential competitors, especially those with significantly
greater financial, marketing, sales, service, support, technical and other
resources, may continue to decline.

Most 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. 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. 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 and
may cause our competitive position to further decline.

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

Our solutions are relatively new to the marketplace. 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 and the length of the
sales cycle can increase depending on the size of the proposed transaction and
the potential customer. This makes it difficult to predict the quarter in which
a sale may occur.

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.

We have licensed one or more of our products to more than 200
customers.
However, only a small number of these customers have a fully deployed operating
application that utilizes our products. In addition, a significant number of
our Internet retail customers have gone out of business and are no longer
utilizing our products. Because many 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.

Our business may continue to decline if we fail to generate repeat or expanded
business from our current customers or secure new customers.

During 2002 and the first quarter of 2003, we were unable to
expand our
customer base and we may not be able to do so in the future. We have lost

potential customers to competitors for various reasons, including lower prices
and other incentives not matched by us. Our business may continue to decline if
we are unable to generate business from our existing customers and secure new
customers.

If we fail to retain skilled salespeople and qualified service personnel as
needed, we may be unable to sustain sales of our products and services.

Sales of our products and services generally depend on a
sophisticated
sales effort targeted at the senior management of our prospective customers and
on our ability to offer support, training, consulting and implementation
services. As of March 31, 2003, our direct sales organization and our
professional services and customer support organization each consisted of 5
employees. We do not expect to increase the size of either organization and,
accordingly, our sales may continue to decline. Furthermore, we may not be able
to retain our existing sales, service and support personnel, which could
materially impair our ability to sell our products and services.

We may be unable to sublease or find suitable sub-tenants for a portion of our
principal executive offices and some of our other offices, and tenants may fail
to make sublease payments.

In April 2000, we executed a ten-year lease for a new facility
for our
principal executive offices in Minneapolis, 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 have also sublet all of
the space at our Berkshire, United Kingdom facility and a portion of the space
at our San Francisco, California facility, and we terminated our lease at our
New York, New York location. We are also currently seeking to sublease our
Roseland, New Jersey office space and 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, or if our existing sub-tenants fail to make
sublease payments required under their respective sublease agreements, we
may experience greater than anticipated operating expenses or liabilities which
must be satisfied.

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If our intellectual property is not protected adequately, our business and
value could be adversely affected.

We are a technology company. Our business depends in large part
on
protecting our intellectual property, which is one of our most important
assets. 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 seven pending United States patent applications and four
issued
United States patents. We also have exclusive license rights to three issued
United States patents from the University of Minnesota. We plan to continue the
prosecution process for only four of our seven pending applications. It is
possible that no patents will issue from the currently pending patent
applications that we intend to pursue. 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.

We own a number of trademarks that we consider to be of
substantial
importance to our ability to market NetP 7 and future products and to our
business generally. These include Net Perceptions and NetP. The Net
Perceptions mark is federally registered for a term of ten years and the
NetP mark is expected to be federally registered within six months to a year.

Our efforts to protect our proprietary rights may not succeed.
Copyright,
trade secret and trademark laws afford only limited protection for our
proprietary rights in our software, documentation and other written materials
and our trademarks. Unauthorized parties may be able to copy aspects of our
products, obtain and use information that we regard as confidential and
proprietary and infringe upon our trademarks. Policing unauthorized use of our
products and trademarks is difficult. 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 business and value may
suffer.

Third-party infringement claims against us or our technology suppliers could
result in 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,
including under issued patents. 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 adverse impact on our ability to carry
on our operations and market our products and on the value of our operations
and assets.

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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.

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 and could reduce the
value received by stockholders in a strategic or other transaction referred to
above under the heading Risks that May Affect Future Results  We may not be
able to enter into an acceptable strategic or other transaction in the near
term.

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.

Provisions of our corporate organizational 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, bylaws and rights agreement could reduce the
price that investors might be willing to pay for shares of our common stock in
the future and result in the market price being lower than it would be without
these provisions.

Increasing government regulation could limit the market for our products and
services, which could seriously harm 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 and adversely
affect our business.

23



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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Through March 31, 2003, 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. However, future product license and service revenues could
increasingly be derived from international markets and denominated in the
currency of the applicable market. As a result, our operating results could
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. A
hypothetical 100 basis point increase in interest rates would result in an
approximate $152,000 decrease in the fair value of our investments as of March
31, 2003. The same hypothetical increase in interest rates as of December 31,
2002 would have resulted in a decrease in the fair value of our investments of
approximately $141,000. Our objective in managing our exposure to interest rate
risk is to preserve principal while at the same time maximizing the income we
receive from our investments. To minimize this risk, we maintain our portfolio
of cash equivalents and short-term investments in a variety of securities in
addition to debt and have adopted practices and policies to ensure that our
portfolio remains adequately diversified. Due to the conservative nature of our
investments and relatively short duration, interest risk is mitigated.
Furthermore, we place our investments with high-quality issuers and limit the
amount of credit exposure to any one issuer. We do not have any derivative
financial instruments and do not hold any instruments for trading purposes.




Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures.Our
Chief Executive
Officer and Chief Financial Officer have evaluated the effectiveness of our
disclosure controls and procedures (as such term is defined in Rules 13a-14(c)
and 15d-14(c) under the Exchange Act) as of an evaluation date within 90 days
prior to the filing date of this Quarterly Report on Form 10-Q. Based on this
evaluation, they have concluded that, as of the evaluation date, our disclosure
controls and procedures are effective in alerting them on a timely basis to
material information relating to the Company (including our consolidated
subsidiaries) required to be included in our reports filed or submitted under
the Exchange Act.

Changes in Internal Controls.Since the evaluation date
referred to
above, there have not been any significant changes in our internal controls or
in other factors that could significantly affect such controls.

24



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##### Table of Contents






PART II. OTHER INFORMATION




Item 1.     Legal Proceedings

On November 2, 2001, Timothy J. Fox filed a purported class
action lawsuit
against us, FleetBoston Robertson Stephens, Inc., the lead underwriter of our
April 1999 initial public offering, 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 operating officer and
chief financial officer. The lawsuit, Fox v. Net Perceptions, Inc., et al.,
Civil Action No. 01-CV-9675, 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 was
filed on April 22, 2002, expanding the basis for the action to include
allegations relating to our March 2000 follow-on public offering in addition to
those relating to our 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 our initial public offering and our
follow-on public offering. The amended complaint 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 and in our follow-on 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, to purchase additional shares of our common
stock in the initial public offering aftermarket at pre-determined prices above
the initial public offering price, and to purchase shares of our common stock
in our follow-on public offering. The amended complaint 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. 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 and the case may proceed to discovery.

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.

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Item 6.      Exhibits and Reports on Form 8-K

(a)    Exhibits

|        |     |             |                                                                                                                                                                     
|------- | --- | ----------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |     |            
|Number  |     | Description
|        |     |            
|3.1     | (a) |             | Amended and Restated Certificate of Incorporation(1).                                                                                                               
|        |     |             |                                                                                                                                                                     
|3.1     | (b) |             | Certificate of Amendment to the Amended and Restated Certificate of Incorporation (2).                                                                              
|        |     |             |                                                                                                                                                                     
|3.2     |     |             | Amended and Restated Bylaws as amended through April 18, 2001(3).                                                                                                   
|        |     |             |                                                                                                                                                                     
|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 (1).  
|        |     |             |                                                                                                                                                                     
|4.2     |     |             | Specimen common stock certificate (1).                                                                                                                              
|        |     |             |                                                                                                                                                                     
|4.3     |     |             | Specimen common stock certificate (including Rights Agreement Legend) (4).                                                                                          
|        |     |             |                                                                                                                                                                     
|4.4     |     |             | Rights Agreement between Net Perceptions, Inc. and Wells Fargo Bank Minnesota, as
Rights Agent (5).                                                                 
|        |     |             |                                                                                                                                                                     
|4.5     |     |             | Form of Certificate of Designation of Series A Junior Participating Preferred Stock
(attached as Exhibit A to the Rights Agreement filed as Exhibit 4.4 hereto) (5).
|        |     |             |                                                                                                                                                                     
|4.6     |     |             | Form of Rights Certificate (attached as Exhibit B to the Rights Agreement filed as
Exhibit 4.4 hereto) (5).                                                         
|        |     |             |                                                                                                                                                                     
|99.1    |     |             | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.              
|        |     |             |                                                                                                                                                                     
|99.2    |     |             | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.              



| | (1) |  | Incorporated by reference to Net Perceptions Registration
Statement on Form S-1 (Registration No. 333-71919).                        
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) |  | Incorporated by reference to Net Perceptions Annual Report on Form
10-K for the Year Ended December 31, 2002 (File No. 000-25781).   
|
| | (3) |  | Incorporated by reference to Net Perceptions Quarterly Report on
Form 10-Q for the Quarter Ended March 31, 2001 (File No. 000-25781).
|
| | (4) |  | Incorporated by reference to Net Perceptions Quarterly Report on
Form 10-Q for the Quarter Ended June 30, 2001 (File No. 000-25781). 
|
| | (5) |  | Incorporated by reference to Net Perceptions Registration
Statement on Form 8-A filed June 6, 2001 (File No. 000-25781).             

(b)  Reports on Form 8-K

During the first quarter of 2003 the Company did not file any
Current
Reports on Form 8-K.

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##### Table of Contents






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 14, 2003 |  | By: | /s/ Thomas M. Donnelly
|                   |  |     |                       
|                   |  |     |                        | Thomas M. DonnellyChief Financial Officer
(Duly authorized officer and
principal financial officer)

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##### Table of Contents



CERTIFICATIONS

I, Donald C. Peterson, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Net
Perceptions,
Inc.;

2.     Based on my knowledge, this quarterly report does not contain
any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;

3.     Based on my knowledge, the financial statements, and other
financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;

4.     The registrants other certifying officer and I are
responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)      designed such disclosure controls and procedures to ensure
that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;

b)      evaluated the effectiveness of the registrants
disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and

c)      presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5.     The registrants other certifying officer and I have
disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):

a)      all significant deficiencies in the design or operation of
internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and

b)      any fraud, whether or not material, that involves management
or other
employees who have a significant role in the registrants internal controls;
and

6.     The registrants other certifying officer and I have
indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

Date: May 14, 2003

| |                                          
| | -----------------------------------------
| | /s/ Donald C. Peterson                   
| |                                          
| | Donald C. PetersonChief Executive Officer

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##### Table of Contents



I, Thomas M. Donnelly, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Net
Perceptions,
Inc.;

2.     Based on my knowledge, this quarterly report does not contain
any untrue
statement of a material fact or omit to state a material fact necessary to
make t
he statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;

3.     Based on my knowledge, the financial statements, and other
financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;

4.     The registrants other certifying officer and I are
responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)      designed such disclosure controls and procedures to ensure
that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;

b)      evaluated the effectiveness of the registrants
disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and

c)      presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5.     The registrants other certifying officer and I have
disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):

a)      all significant deficiencies in the design or operation of
internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and

b)      any fraud, whether or not material, that involves management
or other
employees who have a significant role in the registrants internal controls;
and

6.     The registrants other certifying officer and I have
indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

Date: May 14, 2003

| |                                           
| | ------------------------------------------
| | /s/ Thomas M. Donnelly                    
| |                                           
| | Thomas M. Donnelly
Chief Financial Officer

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##### Table of Contents



NET PERCEPTIONS, INC.
FORM 10-Q
For the Quarter Ended March 31, 2003




EXHIBIT INDEX

|        |     |             |                                                                                                                                                                     
|------- | --- | ----------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |     |            
|Number  |     | Description
|        |     |            
|3.1     | (a) |             | Amended and Restated Certificate of Incorporation(1).                                                                                                               
|        |     |             |                                                                                                                                                                     
|3.1     | (b) |             | Certificate of Amendment to the Amended and Restated Certificate of Incorporation (2).                                                                              
|        |     |             |                                                                                                                                                                     
|3.2     |     |             | Amended and Restated Bylaws as amended through April 18, 2001(3).                                                                                                   
|        |     |             |                                                                                                                                                                     
|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 (1).  
|        |     |             |                                                                                                                                                                     
|4.2     |     |             | Specimen common stock certificate (1).                                                                                                                              
|        |     |             |                                                                                                                                                                     
|4.3     |     |             | Specimen common stock certificate (including Rights Agreement Legend) (4).                                                                                          
|        |     |             |                                                                                                                                                                     
|4.4     |     |             | Rights Agreement between Net Perceptions, Inc. and Wells Fargo Bank Minnesota, as
Rights Agent (5).                                                                 
|        |     |             |                                                                                                                                                                     
|4.5     |     |             | Form of Certificate of Designation of Series A Junior Participating Preferred Stock
(attached as Exhibit A to the Rights Agreement filed as Exhibit 4.4 hereto) (5).
|        |     |             |                                                                                                                                                                     
|4.6     |     |             | Form of Rights Certificate (attached as Exhibit B to the Rights Agreement filed as
Exhibit 4.4 hereto) (5).                                                         
|        |     |             |                                                                                                                                                                     
|99.1    |     |             | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.              
|        |     |             |                                                                                                                                                                     
|99.2    |     |             | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.              



|(1) |  | Incorporated by reference to Net Perceptions Registration
Statement on Form S-1 (Registration No. 333-71919).                        
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Incorporated by reference to Net Perceptions Annual Report on Form
10-K for the Year Ended December 31, 2002 (File No. 000-25781).   
|   
|(3) |  | Incorporated by reference to Net Perceptions Quarterly Report on
Form 10-Q for the Quarter Ended March 31, 2001 (File No. 000-25781).
|   
|(4) |  | Incorporated by reference to Net Perceptions Quarterly Report on
Form 10-Q for the Quarter Ended June 30, 2001 (File No. 000-25781). 
|   
|(5) |  | Incorporated by reference to Net Perceptions Registration
Statement on Form 8-A filed June 6, 2001 (File No. 000-25781).             

30