**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      DC 20549








FORM
      10-Q


**(Mark
      One)**





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


**EXCHANGE
      ACT OF 1934**




**For
      the Quarterly Period Ended September 30, 2005**


**OR**





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


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





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









**Commission
      File Number: 000-25781**





**NET
      PERCEPTIONS, INC.**


(Exact
      Name of Registrant as Specified in its Charter)





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





**One
      Landmark Square**


**Stamford,
      Connecticut 06901**


(Address
      of principal executive offices, Zip Code)








**(203)
      428-2040**


(Registrant’s
      telephone number, including area code)





Indicate
      by check mark whether the registrant: (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes x No o





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). YES x NO o





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





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














**NET
      PERCEPTIONS, INC.**


FORM
      10-Q


For
      the
      Quarter Ended September 30, 2005









**TABLE
      OF CONTENTS**





******Page****PART
                I. FINANCIAL INFORMATION**Item
                1.     Financial StatementsConsolidated
                Balance Sheets as of September 30, 2005 and December 31,
                2004
            1Consolidated
                Statements of Operations for the Three and Nine Months Ended September
                30,
                2005 and 2004
            2Consolidated
                Statements of Cash Flows for the Nine Months Ended September 30,
                2005and
                2004
            3Notes
                to the Consolidated Financial Statements
            4Item
                2.    Management’s Discussion and Analysis of Financial
                Condition and Results of Operations
            9Item
                3.    Quantitative and Qualitative Disclosures
                about Market
                Risk
            14Item
                4.    Controls and Procedures
            14**PART
                II. OTHER INFORMATION**Item
                6.    Exhibits
            15**SIGNATURES**
            16**EXHIBIT
                INDEX**
            17









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


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





**NET
      PERCEPTIONS, INC.**





CONSOLIDATED
      BALANCE SHEETS


(in
      thousands)


September
                30,
              2005
            
            December
                31,
              2004(Unaudited)**Assets**Current
                assets:Cash
                and cash equivalents
            
            $
            3,349
            
            $
            14,444Marketable
                securities
            
            
            11,429
            
            
            —Prepaid
                expenses and other current assets
            
            
            94
            
            
            40Total
                current assets
            
            
            14,872
            
            
            14,484Other
                assets
            
            
            218
            
            
            239Total
                assets
            
            $
            15,090
            
            $
            14,723**Liabilities
                and Stockholders’ Equity**Current
                liabilities:Accounts
                payable and accrued liabilities
            
            $
            136
            
            $
            178Total
                current liabilities
            
            
            136
            
            
            178Note
                payable
            
            
            2,533
            
            
            2,517Total
                liabilities
            
            
            2,669
            
            
            2,695Commitments
                and contingenciesStockholders’
                equity:Common
                stock
            
            
            2
            
            
            2Additional
                paid-in capital
            
            
            234,400
            
            
            234,350Unearned
                stock compensation
            
            
            (128
            )
            
            (135
            )Accumulated
                other comprehensive loss
            
            
            (2
            )
            
            —Accumulated
                deficit
            
            
            (221,851
            )
            
            (222,189
            )Total
                stockholders’ equity
            
            
            12,421
            
            
            12,028Total
                liabilities and stockholders’ equity
            
            $
            15,090
            
            $
            14,723





See
      accompanying notes to the consolidated financial statements.




1




**NET
      PERCEPTIONS, INC.**





CONSOLIDATED
      STATEMENTS OF OPERATIONS


(Unaudited,
      in thousands, except per share amounts)








Three
                Months Ended
            
            Nine
                Months EndedSeptember
                30,
            
            September
                30,**2005**
            
            **2004**
            
            **2005**
            
            **2004**Revenues:Product
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            405Service,
                maintenance and royalties
            
            
            17
            
            
            25
            
            
            60
            
            
            492Total
                revenues
            
            
            17
            
            
            25
            
            
            60
            
            
            897Cost
                of revenues:Service
                and maintenance
            
            
            —
            
            
            11
            
            
            —
            
            
            216Total
                cost of revenues
            
            
            —
            
            
            11
            
            
            —
            
            
            216Gross
                margin
            
            
            17
            
            
            14
            
            
            60
            
            
            681Operating
                expenses:Research
                and development
            
            
            —
            
            
            —
            
            
            —
            
            
            250General
                and administrative
            
            
            108
            
            
            170
            
            
            277
            
            
            2,096Gain
                on sale of patents
            
            
            —
            
            
            —
            
            
            —
            
            
            (1,800
            )(Gain)
                loss on litigation settlement
            
            
            5
            
            
            —
            
            
            (224
            )
            
            —Restructuring
                related charges
            
            
            —
            
            
            —
            
            
            —
            
            
            (7
            )Total
                operating expenses
            
            
            113
            
            
            170
            
            
            53
            
            
            539Operating
                income (loss)
            
            
            (96
            )
            
            (156
            )
            
            7
            
            
            142Other
                income (expense):Interest
                income
            
            
            125
            
            
            48
            
            
            312
            
            
            106Interest
                expense
            
            
            (13
            )
            
            (26
            )
            
            (55
            )
            
            (48
            )Other
                income (expense), net
            
            
            2
            
            
            41
            
            
            74
            
            
            95Total
                other income (expense), net
            
            
            114
            
            
            63
            
            
            331
            
            
            153Net
                income (loss)
            
            $
            18
            
            $
            (93
            )
            $
            338
            
            $
            295Net
                income (loss) per share:Basic
            
            $
            0.00
            
            $
            0.00
            
            $
            0.01
            
            $
            0.01Diluted
            
            $
            0.00
            
            $
            0.00
            
            $
            0.01
            
            $
            0.01Shares
                used in computing basic and dilutednet income (loss) per
                share:Basic
            
            
            28,918
            
            
            28,669
            
            
            28,918
            
            
            28,460Diluted
            
            
            34,894
            
            
            28,669
            
            
            32,987
            
            
            28,863





See
      accompanying notes to the consolidated financial statements.





2





**NET
      PERCEPTIONS, INC.**





CONSOLIDATED
      STATEMENTS OF CASH FLOWS


(Unaudited,
      in thousands)





Nine
                Months Ended
              September
                30,2005
            
            2004**Cash
                flows from operating activities:**Net
                income
            
            $
            338
            
            $
            295Reconciliation
                of net income to net cash provided by (used in) operating
                activities:Gain
                on sale of patents
            
            
            —
            
            
            (1,800
            )Provision
                for (recovery of) doubtful accounts
            
            
            —
            
            
            (28
            )Restructuring
                related charges (reversals)
            
            
            —
            
            
            (15
            )Amortization
                of debt issuance costs
            
            
            21
            
            
            13Amortization
                of discount on debt
            
            
            16
            
            
            26Stock-based
                compensation
            
            
            57
            
            
            43Amortization
                of discounts on securities
            
            
            (64
            )
            
            —Changes
                in assets and liabilities:Accounts
                receivable
            
            
            —
            
            
            358Prepaid
                expenses and other assets
            
            
            (54
            )
            
            363Accounts
                payable and accrued liabilities
            
            
            (42
            )
            
            (482
            )Deferred
                revenue
            
            
            —
            
            
            (377
            )Net
                cash provided by (used in) operating activities
            
            
            272
            
            
            (1,604
            )**Cash
                flows from investing activities:**Proceeds
                from sale of patents
            
            
            —
            
            
            1,800Purchase
                of marketable securities
            
            
            (11,367
            )
            
            —Net
                cash provided by (used in) investing activities
            
            
            (11,367
            )
            
            1,800**Cash
                flows from financing activities:**Proceeds
                from issuance of convertible subordinated note, net of offering costs
                of
                $288
            
            
            —
            
            
            2,245Proceeds
                from exercise of stock options, net of stock repurchases
            
            
            —
            
            
            153Net
                cash provided by financing activities
            
            
            —
            
            
            2,398Net
                increase (decrease) in cash and cash equivalents
            
            
            (11,095
            )
            
            2,594Cash
                and cash equivalents at beginning of period
            
            
            14,444
            
            
            11,932Cash
                and cash equivalents at end of period
            
            $
            3,349
            
            $
            14,526





See
      accompanying notes to the consolidated financial statements.





3





NET
      PERCEPTIONS, INC.





NOTES
      TO
      THE CONSOLIDATED FINANCIAL STATEMENTS


(dollars
      in thousands, except per share amounts)




**Note
      1. Basis of Presentation**





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





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





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





The
      Company accounts for its marketable securities under the provisions of Statement
      of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
      Investments in Debt and Equity Securities". Pursuant to the provisions of SFAS
      No. 115, the Company has classified its marketable securities as
      available-for-sale. Available-for-sale securities have been recorded at fair
      value and related unrealized gains and losses have been excluded from earnings
      and are reported as a separate component of accumulated other comprehensive
      income (loss) until realized.





**Note
      2. Stock-based compensation**




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




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





4




Three
                Months Ended
            
            Nine
                Months EndedSeptember
                30,
            
            September
                30,2005
            
            2004
            
            2005
            
            2004Net
                income (loss), as reported
            
            $
            18
            
            $
            (93
            )
            $
            338
            
            $
            295Add:
                Stock-based employee compensation expense included in reported net
                loss
            
            
            21
            
            
            24
            
            
            57
            
            
            43Deduct:
                Total stock-based employee compensation expense determined under
                fair
                value based method for all awards
            
            
            (23
            )
            
            (26
            )
            
            (69
            )
            
            (73
            )Pro
                forma net income (loss)
            
            $
            16
            
            $
            (95
            )
            $
            326
            
            $
            265Net
                income (loss) per share:BasicAs reported
            
            $
            0.00
            
            $
            0.00
            
            $
            0.01
            
            $
            0.01Pro forma
            
            $
            0.00
            
            $
            0.00
            
            $
            0.01
            
            $
            0.01DilutedAs reported
            
            $
            0.00
            
            $
            0.00
            
            $
            0.01
            
            $
            0.01Pro forma
            
            $
            0.00
            
            $
            0.00
            
            $
            0.01
            
            $
            0.01





**Note
      3. Per Share Data**




Basic
      earnings per share is computed using net income (loss) and the weighted average
      number of common shares outstanding. Diluted earnings per share reflects the
      weighted average number of common shares outstanding plus any potentially
      dilutive shares outstanding during the period. Potentially dilutive shares
      consist of shares issuable upon the exercise of stock options, convertible
      notes, and restricted stock awards. Shares used in the diluted net income (loss)
      per share computation for the three months ended September 30, 2005, include
      the
      impact of 348 potential common shares from the exercise of stock options and
      5,628 potential common shares from the convertible note all of which were
      dilutive. Shares used in the diluted net income (loss) per share computation
      for
      the nine months ended September 30, 2005, include the impact of 317 potential
      common shares from the exercise of stock options and restricted stock awards
      and
      3,752 potential common shares from the convertible note all of which were
      dilutive. Shares used in the diluted net income(loss) per share computation
      for
      the nine months ended September 30, 2004 include the impact of 403 potential
      common shares from the exercise of stock options which were dilutive. Shares
      used in the diluted net income (loss) per share computation for the three months
      ended September 30, 2004, exclude the impact of 350 potential common shares
      from
      the exercise of stock options which were anti-dilutive.





5




Three
                  Months Ended
              
              Nine
                  Months EndedSeptember
                  30,
              
              September
                  30,2005
              
              2004
              
              2005
              
              2004**Basic
                  earnings per share calculation:**Net
                  income (loss)
              
              $
              18
              
              $
              (93
              )
              $
              338
              
              $
              295Weighted
                  averagecommon
                  shares - basic
              
              
              28,918
              
              
              28,669
              
              
              28,918
              
              
              28,460Basic
                  net income (loss)per
                  share
              
              $
              0.00
              
              $
              0.00
              
              $
              0.01
              
              $
              0.01**Diluted
                  earnings per share calculation:**Net
                  income (loss)
              
              $
              18
              
              $
              (93
              )
              $
              338
              
              $
              295Weighted
                  averagecommon
                  shares - basic
              
              
              28,918
              
              
              28,669
              
              
              28,918
              
              
              28,460Effect
                  of dilutive stockoptions
              
              
              67
              
              
              —
              
              
              60
              
              
              403Effect
                  of restrictedstock
                  awards
              
              
              281
              
              
              —
              
              
              257
              
              
              —Effect
                  of convertible note
              
              
              5,628
              
              
              —
              
              
              3,752
              
              
              —Weighted
                  averagecommon
                  sharesdiluted
              
              
              34,894
              
              
              28,669
              
              
              32,987
              
              
              28,863Diluted
                  net income
                (loss)
                  per share
              
              $
              0.00
              
              $
              0.00
              
              $
              0.01
              
              $
              0.01




**Note
      4. Commitments & Contingencies**





Contingencies





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





Litigation





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





6


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





On
      August
      31, 2005, the Court gave preliminary approval to a settlement reached by the
      parties and has scheduled a fairness hearing for April 24, 2006, to hear
      objections and to make a final determination whether to approve the settlement
      as fair, adequate and reasonable. In the opinion of management, the ultimate
      disposition of this matter will not have a material effect on the Company’s
      financial position, results of operation or cash flows.





**Note
      5. Income Taxes**





The
      Company has incurred significant operating losses for all periods from inception
      through September 30, 2005. For income tax purposes, the Company has available
      federal net operating loss carry-forwards of approximately $120,900 and research
      and development credit carry-forwards of $151 at September 30, 2005. The net
      operating loss and research and development credit carry-forwards expire in
      2001
      through 2022 if not previously utilized. The utilization of these carry-forwards
      may be subject to limitations based on past and future changes in ownership
      of
      the Company pursuant to Internal Revenue Code Section 382. If the Company
      were to be acquired at its recent stock value such that Section 382 is
      applicable, this would eliminate the ability to use a substantial majority
      of
      these carry-forwards. Future tax benefits have not been recognized in the
      financial statements, as their utilization is considered uncertain based on
      the
      weight of available information.





**Note
      6. Recently Issued Accounting Pronouncements**





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





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





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





**Note
      8. Gain on litigation settlement**





In
      February 2005, the Company received $229 from the settlement of its lawsuit
      with
      i2 Technologies Inc., resulting from a breach of contract claim. The Company
      recorded the gain on the settlement in the first quarter of 2005. During
      the third quarter of 2005, the Company incurred $5 in additional costs
      associated with the litigation settlement.





7


**Note
      9. Note Payable**





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





**Note
      10. Restricted Stock**





On
      April
      1, 2005, Mr. Nigel Ekern, the Company’s Chief Administrative Officer, received a
      restricted stock grant of 66,667 shares of the Company’s common stock under the
      Company’s 1999 Equity Plan, having an aggregate value of $50 based upon the
      average stock price of the Company’s closing stock on such date of $0.75 per
      share. The shares underlying the grant vest in two years. On April 21, 2004,
      Mr.
      Ekern received a restricted stock grant of 364,583 shares of the Company’s
      common stock under the Company’s 1999 Equity Plan, having an aggregate value of
      $175 based upon the closing price of the Company’s common stock on such date of
      $0.48 per share. The shares underlying the grant will vest over three years.
      The
      Company recorded compensation expense of $21 and $57 relating to the restricted
      stock grants during the three- and nine-month periods ended September 30, 2005,
      respectively. The Company recorded compensation expense of $24 and $43 relating
      to the restricted stock grants during the three- and nine-month periods ended
      September 30, 2004, respectively.





**Note
      11. Related Party Transactions**





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


8


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




**Forward-Looking
      Statements**





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





These
      and
      other statements, which are not historical facts, are based largely upon our
      current expectations and assumptions and are subject to a number of risks and
      uncertainties that could cause actual results to differ materially from those
      contemplated by such forward-looking statements. These risks and uncertainties
      include, among others, our planned effort to redeploy our assets and use our
      substantial cash and cash equivalents and marketable securities to enhance
      stockholder value following the sale of substantially all of our electronic
      commerce business, which represented substantially all of our revenue generating
      operations and related assets, and the risks and uncertainties set forth in
      the
      section headed "Factors That May Affect Our Future Results" of Part 1 of our
      Annual Report on Form 10-K, as amended, for the fiscal year ended December
      31,
      2004 and described below. The Company cannot guarantee its future performance.





**OVERVIEW**





**AS
      PART OF OUR PREVIOUSLY ANNOUNCED STRATEGY TO LIMIT OPERATING LOSSES AND ENABLE
      THE COMPANY TO REDEPLOY ITS ASSETS AND USE ITS CASH AND CASH EQUIVALENTS AND
      MARKETABLE SECURITIES TO ENHANCE STOCKHOLDER VALUE, ALL OF OUR OPERATIONS OTHER
      THAN ADMINISTRATIVE FUNCTIONS HAVE BEEN TERMINATED. THE INFORMATION APPEARING
      BELOW, WHICH RELATES TO PRIOR PERIODS, IS THEREFORE NOT INDICATIVE OF THE
      RESULTS THAT MAY BE EXPECTED FOR ANY SUBSEQUENT PERIODS. THE THREE- AND
      NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2005 PRIMARILY REFLECT, AND FUTURE
      PERIODS PRIOR TO A REDEPLOYMENT OF OUR ASSESTS ARE EXPECTED TO PRIMARILY
      REFLECT, GENERAL AND ADMINISTRATIVE EXPENSES AND TRANSACTION EXPENSES ASSOCIATED
      WITH THE CONTINUING ADMINISTRATION OF THE COMPANY AND ITS EFFORTS TO REDEPLOY
      ITS ASSETS.**





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





CRITICAL
      ACCOUNTING POLICIES AND ESTIMATES





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




9


The
      Company accounts for its marketable securities under the provisions of Statement
      of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
      Investments in Debt and Equity Securities". Pursuant to the provisions of SFAS
      No. 115, the Company has classified its marketable securities as
      available-for-sale. Available-for-sale securities have been recorded at fair
      value and related unrealized gains and losses have been excluded from earnings
      and are reported as a separate component of accumulated other comprehensive
      income (loss) until realized.





A
      description of the Company’s critical accounting polices was provided in the
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations section of the Company’s Annual Report on Form 10-K for the year
      ended December 31, 2004.





RESULTS
      OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND
      SEPTEMBER 30, 2004




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





Three
                Months Ended
            
            Nine
                Months EndedSeptember
                30,
            
            September
                30,2005
            
            2004
            
            2005
            
            2004Revenues:Product
            
            
            —
            %
            
            —
            %
            
            —
            %
            
            45
            %Service,
                maintenance and royalties
            
            
            100
            
            
            100
            
            
            100
            
            
            55Total
                revenues
            
            
            100
            
            
            100
            
            
            100
            
            
            100Cost
                of revenues:Service
                and maintenance
            
            
            —
            
            
            44
            
            
            —
            
            
            24Total
                cost of revenues
            
            
            —
            
            
            44
            
            
            —
            
            
            24Gross
                margin
            
            
            100
            
            
            56
            
            
            100
            
            
            76Operating
                expenses:Research
                and development
            
            
            —
            
            
            —
            
            
            —
            
            
            28General
                and administrative
            
            
            635
            
            
            680
            
            
            462
            
            
            234Gain
                on sale of patents
            
            
            —
            
            
            —
            
            
            —
            
            
            (201
            )(Gain)
                loss on litigation settlement
            
            
            30
            
            
            —
            
            
            (373
            )
            
            —Restructuring
                related charges
            
            
            —
            
            
            —
            
            
            —
            
            
            (1
            )Total
                operating expenses
            
            
            665
            
            
            680
            
            
            89
            
            
            60Operating
                income (loss)
            
            
            (565
            )
            
            (624
            )
            
            11
            
            
            16Interest
                income
            
            
            735
            
            
            192
            
            
            520
            
            
            12Interest
                expense
            
            
            (76
            )
            
            (104
            )
            
            (91
            )
            
            (5
            )Other
                income, net:
            
            
            12
            
            
            164
            
            
            123
            
            
            10Net
                income (loss)
            
            
            106
            %
            
            (372
            )%
            
            563
            %
            
            33
            %





REVENUES




*Total
      revenues* .
      Total
      revenues decreased 32% to $17,000 for the three months ended September 30,
      2005
      from $25,000 for the same period in 2004. Total revenues decreased 93% to
      $60,000 for the nine months ended September 30, 2005 from $897,000 for the
      same
      period in 2004. Revenues in the United States were $17,000 in the third quarter
      of 2005 compared to $25,000 in the same period of 2004, representing 100% and
      100% of total revenues, respectively. Revenues in the United States were $60,000
      for the nine-month period ended September 30, 2005 compared to $849,000 in
      the
      same period of 2004, representing 100% and 95% of total revenues respectively.
      There were no revenues from international sales in the third quarter of 2005
      and
      2004. Revenues from international sales for the nine months ended September
      30,
      2005 were zero compared to $48,000, or 5% of total revenues in the same period
      of 2004. As a result of our downsizing of our business and operations, we no longer maintain a direct sales force and there currently
      is
      no sales generating activity. International sales have generally been
      denominated in United States dollars.


10




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





*Product
      revenues* .
      Product
      revenues decreased 100% to zero for the nine-month period ended September 30,
      2005, compared to $405,000 for the same period in 2004. There were no product
      revenues for the three month periods ended September 30, 2005 and 2004. Product
      revenues comprised 0% and 45% of total revenues for the three- and nine-month
      periods ended September 30, 2004. The decrease in product revenues is
      attributable to the termination of the Company’s revenue generating operations
      in connection with its efforts to redeploy its assets as discussed above.
      Therefore, we expect there will be no product revenues in 2005.





*Service,
      maintenance and royalties.* Service
      and maintenance revenues consisted primarily of professional and maintenance
      services. Our professional service revenues included business consulting,
      implementation support and educational services and were generally offered
      on a
      time and materials basis. Maintenance revenues were generally derived from
      annual service agreements and were recognized ratably over the term of the
      agreement. On April 1, 2004, we entered into an agreement with Tornago, Inc.
      to
      fulfill our existing prepaid customer support obligations. Royalty revenues
      are
      derived from resales of our product by Tornago, Inc. Service, maintenance and
      royalty revenues decreased 32% to $17,000 for the quarter ended September 30,
      2005 from $25,000 for the quarter ended September 30, 2004. Service, maintenance
      and royalty revenues decreased 88% to $60,000 for the nine-month period ended
      September 30, 2005 from $492,000 for the nine-month period ended September
      30,
      2004. Service, maintenance and royalty revenues comprised 100% of total revenues
      for the quarters ended September 30, 2005 and 2004, respectively *.* Service,
      maintenance and royalty revenues comprised 100% and 55% of total revenues for
      the nine-month periods ended September 30, 2005 and 2004,
      respectively. ** We
      do not
      anticipate entering into additional service and maintenance agreements with
      customers as the Company terminated its revenue generating operations as
      discussed above. Therefore, we expect there will be no service and maintenance
      revenues in 2005. The agreement with Tornago, Inc. has the potential to generate
      royalty revenue through April 2006.





COST
      OF
      REVENUES





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





*Cost
      of service and maintenance revenues* .
      Cost of
      service and maintenance revenues consisted primarily of personnel-related and
      infrastructure costs incurred in providing telephone and Web-based support
      of
      our software products, as well as professional, consulting and educational
      related services to customers. Cost of service and maintenance revenues
      decreased 100% to zero for the quarter ended September 30, 2005 from $11,000
      for
      the quarter ended September 30, 2004. Cost of service and maintenance revenues
      decreased 100% to zero for the nine-month period ended September 30, 2005 from
      $216,000 for the nine-month period ended September 30, 2004. Cost of service
      and
      maintenance revenue for the third quarter of 2005 and 2004 represented 0% and
      44% of the related service and maintenance revenues, respectively. Cost of
      service and maintenance revenue for the nine-month periods ending September
      30,
      2005 and 2004 represented 0% and 24% of the related service and maintenance
      revenues, respectively. The decrease in cost of services and maintenance
      revenues is a result of the termination of the Company’s revenue generating
      operations in connection with its efforts to redeploy its assets as discussed
      above. We do not expect to incur costs of product revenues for the foreseeable
      future.





OPERATING
      EXPENSES





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





11


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





*Research
      and development* .
      Research and development expenses consisted primarily of salaries, other
      employee-related costs and consulting fees related to the development of our
      products. There were no research and development expenses for the three months
      ended September 30, 2005 and 2004. Research and development expenses decreased
      100% to zero for the nine months ended September 30, 2005 compared to $250,000
      for the nine months ended September 30, 2004. Research and development expenses
      were 0% of total revenues for the three months ended September 30, 2005 and
      2004, respectively. Research and development expenses were 0% and 28% of total
      revenues for the nine months ended September 30, 2005 and 2004, respectively.
      The decrease in research and development expenses is due to our restructuring
      efforts. We do not expect to incur any research and development expenses for
      the
      foreseeable future.





*General
      and administrative* .
      General
      and administrative expenses consist primarily of employee-related costs,
      provision for doubtful accounts and professional service fees and expenses.
      Current executive management did not receive salaries in the quarter ended
      September 30, 2005 or during the nine-month period ended September 30, 2005.
      General and administrative expenses decreased 36% to $108,000 for the three
      months ended September 30, 2005 compared to $170,000 for the three months ended
      September 30, 2004. General and administrative expenses decreased 87% to
      $277,000 for the nine months ended September 30, 2005 compared to $2.1 million
      for the nine months ended September 30, 2004. General and administrative
      expenses were 635% and 680% of total revenue for the three months ended
      September 30, 2005 and 2004, respectively. General and administrative expenses
      were 462% and 234% of total revenue for the nine months ended September 30,
      2005
      and 2004, respectively. The decrease in general and administrative expenses
      during the three and nine months ended September 30, 2005 was primarily due
      to
      the lack of salaries for current executive management and a significant
      reduction in professional fees and expenses and administrative costs that were
      associated with our evaluation of strategic alternatives. Although we expect
      personnel-related and other general and administrative expenses to decline
      in
      2005, compared to 2004, continued high levels of outside professional fees,
      and
      other costs associated with continuing as a public reporting company, such
      as
      directors and officers liability insurance, may offset some of these
      decreases.





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





*Gain
      on litigation settlement.* In
      February 2005, the Company received $229,000 from the settlement of its lawsuit
      for a breach of contract claim with i2 Technologies Inc. The Company recorded
      the gain on this settlement in the first quarter of 2005. During the third
      quarter of 2005, the Company incurred $5,000 in additional costs associated
      with
      the litigation settlement.





*Restructuring
      related charges.* There
      were no restructuring related charges for the three-and nine-month periods
      ended
      September 30, 2005.





12


*Interest
      income.* Interest
      income increased 160% to $125,000 for the three months ended September 30,
      2005
      compared to $48,000 for the three-month period ended September 30, 2004. For
      the
      nine months ended September 30, 2005, interest income increased 194% to $312,000
      compared to $106,000 for the same period in September 30, 2004. The increase
      in
      interest income was due to an increase in the interest rates we received on
      our
      cash and cash equivalents and marketable securities.





*Interest
      expense.* Interest
      expense decreased 50% to $13,000 for the quarter ended September 30, 2005
      compared to $26,000 in the quarter ended September 30, 2004. For the nine months
      ended September 30, 2005 interest expense increased 15% to $55,000 compared
      to
      $48,000 for the same period in 2004. The increase in interest expense was due
      to
      the issuance of long-term debt related to the investment in the Company in
      the
      second quarter of 2004 by Olden Acquisition LLC, an affiliate of Kanders &
      Company, Inc., an entity owned and controlled by the Company’s Executive
      Chairman, Warren B. Kanders.





*Other
      income, net* .
      Other
      income consists of miscellaneous tax refunds partially offset by other
      miscellaneous expenses. Net other income decreased 95% for the quarter ended
      September 30, 2005 to $2,000 from $41,000 in 2004. Net other income decreased
      22% for the nine-month period ended September 30, 2005 to $74,000 from $95,000
      in 2004.





PROVISION
      FOR INCOME TAXES





We
      have
      incurred significant operating losses from inception through September 30,
      2005.
      For income tax purposes, the Company has available federal net operating loss
      carry-forwards of approximately $120.9 million and research and development
      credit carry-forwards of approximately $151,000 at September 30, 2005. The
      net
      operating loss and research and development credit carry-forwards expire in
      2011
      through 2022 if not previously utilized. The utilization of these carry-forwards
      may be subject to limitations based on past and future changes in ownership
      of
      the Company pursuant to Internal Revenue Code Section 382. If the Company were
      to be acquired at its recent stock value such that Section 382 is applicable,
      this would eliminate the ability to use a substantial majority of these
      carry-forwards. Future tax benefits have not been recognized in the financial
      statements, as their utilization is not considered probable based on the weight
      of available information.





LIQUIDITY
      AND CAPITAL RESOURCES





Since
      inception, we have financed our operations primarily through the sale of equity
      securities. At September 30, 2005, we had $3.3 million of cash and cash
      equivalents compared to $14.4 million for the same period of 2004. Marketable
      securities totaled $11.4 million at September 30, 2005. There was no comparable
      number at September 30, 2004. The decrease in cash and cash equivalents was
      due
      to the investment in marketable securities during the quarter ended September
      30, 2005.





Cash
      provided by operations was $0.3 million for the nine months ended September
      30,
      2005, compared to cash used in operations of $1.6 million for the same period
      of
      2004. Cash provided by operations for the nine months ended September 30, 2005
      resulted primarily from net income, as adjusted for non-cash expenses and a
      decrease in prepaid and other current assets and accounts payable and accrued
      liabilities. We do not expect to receive any significant amounts of cash from
      current operations and we expect that we will continue to incur legal fees,
      transaction costs and other ongoing costs that will constitute a material use
      of
      cash.





A
      total
      of $11.4 million in net cash was used by investing activities for the nine
      months ended September 30, 2005, compared to $1.8 million of net cash provided
      by investing activities in the same period for 2004. Cash used by investing
      activities during the quarter ended September 30, 2005 was for the purchase
      of
      marketable securities. Cash provided by investing activities during the
      nine-month period ended September 30, 2004 was primarily attributable to the
      sale of our patent portfolio to Thalveg as described above.





There
      was
      no cash used or provided by financing activities for the period ended September
      30, 2005 compared to cash provided by financing activities of $2.4 million
      for
      the nine months ended September 30, 2004. Net cash was provided by financing
      activities in the nine-month period ended September 30, 2004 through the
      issuance of a convertible subordinated note in the amount of $2.5 million net
      of
      $288,000 of transaction costs and by proceeds received from the exercise of
      stock options.





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





13


RECENTLY
      ISSUED ACCOUNTING PRONOUNCEMENTS





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





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





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





**Item
      4. Controls and Procedures**





**Evaluation
      of Disclosure Controls and Procedures**





The
      Company's management carried out an evaluation, under the supervision and with
      the participation of the Company's Chief Administrative Officer and Controller,
      its principal executive officer and principal financial officer, respectively,
      of the design and operation of the Company's disclosure controls and procedures
      (as such term is defined in Rules 13a-15 (e) and 15d-15(e) under the Securities
      Exchange Act of 1934 (the "Exchange Act") as of September 30, 2005, pursuant
      to
      Exchange Act Rule 13a-15. Based upon that evaluation, the Company's Chief
      Administrative Officer and Controller, concluded that the Company's disclosure
      controls and procedures as of September 30, 2005 are effective.





**Changes
      in Internal Control over Financial Reporting**





There
      have not been any changes in the Company’s internal control over financial
      reporting that have come to management’s attention as of the September 30, 2005
      evaluation that have materially affected, or are reasonable likely to materially
      affect the Company’s internal control over financial reporting.


14


**PART
      II. OTHER INFORMATION**




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




**Exhibit****Number**
              **Exhibit**10.1
              Form
                  of Net Perceptions, Inc. 1999 Equity Incentive Plan Stock Option
                  Agreement10.2
              Form
                  of Net Perceptions, Inc. 2000 Stock Plan Stock Option
                  Agreement31.1
              Certification
                  of Principal Executive Officer pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 200231.2
              Certification
                  of Principal Financial Officer pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 200232.1
              Certification
                  of Principal Executive Officer pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 200232.2
              Certification
                  of Principal Financial Officer pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002




15





**SIGNATURES**




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




NET
        PERCEPTIONS, INC.
  Date:
                  November 9, 2005
              By:/s/
                  Nigel P.
                  EkernNigel
                  P. Ekern*Chief
                  Administrative Officer*(Principal
                  Executive Officer)By:/s/
                  Susan
                  LuckfieldSusan
                  Luckfield*Controller*(Principal
                  Financial Officer)




16





**EXHIBIT
      INDEX**


**Exhibit****Number**
                **Exhibit**10.1
                Form
                    of Net Perceptions, Inc. 1999 Equity Incentive Plan Stock Option
                    Agreement10.2
                Form
                    of Net Perceptions, Inc. 2000 Stock Plan Stock Option
                    Agreement31.1
                Certification
                    of Principal Executive Officer pursuant to Section 302 of the
                    Sarbanes-Oxley Act of 200231.2
                Certification
                    of Principal Financial Officer pursuant to Section 302 of the
                    Sarbanes-Oxley Act of 200232.1
                Certification
                    of Principal Executive Officer pursuant to Section 906 of the
                    Sarbanes-Oxley Act of 200232.2
                Certification
                    of Principal Financial Officer pursuant to Section 906 of the
                    Sarbanes-Oxley Act of 2002
  17