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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 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 June 30, 2003                                            
|           |  |                                                                                         
|           |  | 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
(State or other jurisdiction of
incorporation or organization) |  | 41-1844584
(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 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 July 31, 2003, there were outstanding 27,466,096 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-3.2 Amended and Restated Bylaws                                                           
|EX-31 Certifications Pursuant to Section 302                                                 
|EX-32 Certifications Pursuant to Section 906                                                 



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NET PERCEPTIONS, INC.
FORM 10-Q
For the Quarter Ended June 30, 2003

TABLE OF CONTENTS

|                               |  |                                                                                       |    |                                                                                                 |    |      |   | 
|------------------------------ |  | ------------------------------------------------------------------------------------- | -- | ----------------------------------------------------------------------------------------------- | -- | ---- | - | 
|                               |  |                                                                                       |    |                                                                                                 |    | Page
|                               |  |                                                                                       |    |                                                                                                 |    |     
|PART I.  FINANCIAL INFORMATION |  |                                                                                       |    |                                                                                                
|Item 1.                        |  | Financial Statements                                                                  |    |                                                                                                 | 4  |     
|                               |  |                                                                                       |    | Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002                           |    |      | 4 | 
|                               |  |                                                                                       |    | Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2003 and 2002 |    |      | 5 | 
|                               |  |                                                                                       |    | Consolidated Statements of Cash Flows for the Six Months Ended June 30, 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                            |    |                                                                                                 | 25 |     
|Item 4.                        |  | Controls and Procedures                                                               |    |                                                                                                 | 25 |     
|PART II.  OTHER INFORMATION    |  |                                                                                       |    |                                                                                                
|Item 1.                        |  | Legal Proceedings                                                                     |    |                                                                                                 | 26 |     
|Item 2.                        |  | Changes in Securities and Use of Proceeds                                             |    |                                                                                                 | 26 |     
|Item 3.                        |  | Defaults Upon Senior Securities                                                       |    |                                                                                                 | 26 |     
|Item 4.                        |  | Submission of Matters to a Vote of Security Holders                                   |    |                                                                                                 | 27 |     
|Item 5.                        |  | Other Information                                                                     |    |                                                                                                 | 27 |     
|Item 6.                        |  | Exhibits and Reports on Form 8-K                                                      |    |                                                                                                 | 28 |     
|SIGNATURES                     |  |                                                                                       | 29 |                                                                                                
|EXHIBIT INDEX                  |  |                                                                                       | 30 |                                                                                                

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Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q (including exhibits and information
incorporated by reference herein) contains both historical and forward-looking
statements that involve risks, uncertainties and assumptions. The statements
contained in this report that are not purely historical are forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, including statements regarding our expectations, beliefs,
intentions or strategies for the future. All forward-looking statements
included in this Quarterly Report on Form 10-Q (including exhibits and
information incorporated by reference herein) are based on information
available to us on the date hereof, and we assume no obligation to update any
such forward-looking statements. Our actual results and actual events 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)

|                                     |                                           |                                            |                           |          |             |        |              |          |        |        | 
|------------------------------------ | ----------------------------------------- | ------------------------------------------ | ------------------------- | -------- | ----------- | ------ | ------------ | -------- | ------ | ------ | 
|                                     |                                           |                                            |                           |          | June 30,    |        | December 31,
|                                     |                                           |                                            |                           |          | 2003        |        | 2002        
|                                     |                                           |                                            |                           |          |             |        |             
|                                     |                                           |                                            |                           |          | (Unaudited) |        |              |          |       
|Assets                               |                                           |                                            |                           |          |             |        |              |         
|Current assets:                      |                                           |                                            |                           |          |             |        |              |         
|                                     | Cash and cash equivalents                 |                                            | $                         | 44,462   |             |        | $            | 39,729   |       
|                                     | Short-term investments                    |                                            |                           | 15,146   |             |        |              | 23,230   |       
|                                     | Accounts receivable, net                  |                                            |                           | 394      |             |        |              | 389      |       
|                                     | Prepaid expenses and other current assets |                                            |                           | 1,088    |             |        |              | 627      |       
|                                     |                                           |                                            |                           |          |             |        |              |          |       
|                                     |                                           |                                            | Total current assets      |          |             | 61,090 |              |          |        | 63,975 | 
|Property and equipment, net          |                                           |                                            | 252                       |          |             |        | 1,096        |         
|Other assets                         |                                           |                                            | 620                       |          |             |        | 725          |         
|                                     |                                           |                                            |                           |          |             |        |              |          |       
|                                     |                                           |                                            | Total assets              |          | $           | 61,962 |              |          | $      | 65,796 | 
|                                     |                                           |                                            |                           |          |             |        |              |          |       
|Liabilities and Stockholders Equity |                                           |                                            |                           |          |             |        |              |         
|Current liabilities:                 |                                           |                                            |                           |          |             |        |              |         
|                                     | Accounts payable                          |                                            | $                         |         |             |        | $            | 52       |       
|                                     | Accrued liabilities                       |                                            |                           | 576      |             |        |              | 1,470    |       
|                                     | Deferred revenue                          |                                            |                           | 572      |             |        |              | 750      |       
|                                     | Accrued restructuring costs               |                                            |                           | 4,843    |             |        |              | 4,672    |       
|                                     |                                           |                                            |                           |          |             |        |              |          |       
|                                     |                                           |                                            | Total current liabilities |          |             | 5,991  |              |          |        | 6,944  | 
|Deferred Rent                        |                                           |                                            | 161                       |          |             |        | 510          |         
|                                     |                                           |                                            |                           |          |             |        |              |          |       
|                                     |                                           |                                            | Total liabilities         |          |             | 6,152  |              |          |        | 7,454  | 
|                                     |                                           |                                            |                           |          |             |        |              |          |       
|Commitments
and contingencies       
|Stockholders equity:                |                                           |                                            |                           |          |             |        |             
|                                     | Common stock                              |                                            |                           | 2        |             |        |              | 2        |       
|                                     | Additional paid-in capital                |                                            |                           | 275,168  |             |        |              | 275,053  |       
|                                     | Accumulated other comprehensive income    |                                            |                           | 90       |             |        |              | 122      |       
|                                     | Accumulated deficit                       |                                            |                           | (219,450 | )           |        |              | (216,835 | )     
|                                     |                                           |                                            |                           |          |             |        |              |          |       
|                                     |                                           | Total stockholders equity                 |                           |          | 55,810      |        |              |          | 58,342 |       
|                                     |                                           |                                            |                           |          |             |        |              |          |       
|                                     |                                           | Total liabilities and stockholders equity |                           | $        | 61,962      |        |              | $        | 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 |       | Six Months Ended
|                                                              |  |                               |                                   |   | June 30,           |       | June 30,        
|                                                              |  |                               |                                   |   |                    |       |                 
|                                                              |  |                               |                                   |   | 2003               |       | 2002             |   | 2003   |       | 2002  
|                                                              |  |                               |                                   |   |                    |       |                  |   |        |       |       
|Revenues:                                                     |  |                               |                                   |   |                    |       |                  |   |        |       |        |   |       |       |        |  
|                                                              |  | Product                       |                                   | $ | 343                |       |                  | $ | 902    |       |        | $ | 481   |       |        | $ | 945    |      
|                                                              |  | Service and maintenance       |                                   |   | 570                |       |                  |   | 697    |       |        |   | 1,048 |       |        |   | 1,794  |      
|                                                              |  |                               |                                   |   |                    |       |                  |   |        |       |        |   |       |       |        |   |        |      
|                                                              |  |                               | Total revenues                    |   |                    | 913   |                  |   |        | 1,599 |        |   |       | 1,529 |        |   |        | 2,739 |  
|Cost of revenues:                                             |  |                               |                                   |   |                    |       |                  |   |        |       |        |   |       |       |        |  
|                                                              |  | Product                       |                                   |   | 8                  |       |                  |   | 63     |       |        |   | 8     |       |        |   | 186    |      
|                                                              |  | Service and maintenance       |                                   |   | 255                |       |                  |   | 539    |       |        |   | 471   |       |        |   | 1,309  |      
|                                                              |  |                               |                                   |   |                    |       |                  |   |        |       |        |   |       |       |        |   |        |      
|                                                              |  |                               | Total cost of revenues            |   |                    | 263   |                  |   |        | 602   |        |   |       | 479   |        |   |        | 1,495 |  
|Gross Margin                                                  |  |                               | 650                               |   |                    |       | 997              |   |        |       | 1,050  |   |       |       | 1,244  |  
|Operating expenses:                                           |  |                               |                                   |   |                    |       |                  |   |        |       |        |   |       |       |        |  
|                                                              |  | Sales and marketing           |                                   |   | 481                |       |                  |   | 1,376  |       |        |   | 1,187 |       |        |   | 2,857  |      
|                                                              |  | Research and development      |                                   |   | 524                |       |                  |   | 1,624  |       |        |   | 1,189 |       |        |   | 3,584  |      
|                                                              |  | General and administrative    |                                   |   | 276                |       |                  |   | 935    |       |        |   | 712   |       |        |   | 1,677  |      
|                                                              |  | Restructuring related charges |                                   |   |                   |       |                  |   | 401    |       |        |   | 1,200 |       |        |   | 768    |      
|                                                              |  | Amortization of intangibles   |                                   |   |                   |       |                  |   | 27     |       |        |   |      |       |        |   | 55     |      
|                                                              |  |                               |                                   |   |                    |       |                  |   |        |       |        |   |       |       |        |   |        |      
|                                                              |  |                               | Total operating expenses          |   |                    | 1,281 |                  |   |        | 4,363 |        |   |       | 4,288 |        |   |        | 8,941 |  
|                                                              |  |                               |                                   |   |                    |       |                  |   |        |       |        |   |       |       |        |   |        |      
|Loss from operations                                          |  |                               | (631                              | ) |                    |       | (3,366           | ) |        |       | (3,238 | ) |       |       | (7,697 | )
|Other income (expense):                                       |  |                               |                                   |   |                    |       |                  |   |        |       |        |   |       |       |        |  
|                                                              |  | Interest income               |                                   |   | 279                |       |                  |   | 566    |       |        |   | 495   |       |        |   | 1,347  |      
|                                                              |  | Interest expense              |                                   |   |                   |       |                  |   | (2     | )     |        |   |      |       |        |   | (13    | )    
|                                                              |  | Other income (expense)        |                                   |   | 136                |       |                  |   | (1,536 | )     |        |   | 128   |       |        |   | (1,447 | )    
|                                                              |  |                               |                                   |   |                    |       |                  |   |        |       |        |   |       |       |        |   |        |      
|                                                              |  |                               | Total other income (expense), net |   |                    | 415   |                  |   |        | (972  | )      |   |       | 623   |        |   |        | (113  | )
|                                                              |  |                               |                                   |   |                    |       |                  |   |        |       |        |   |       |       |        |   |        |      
|Net loss                                                      |  | $                             | (216                              | ) |                    | $     | (4,338           | ) |        | $     | (2,615 | ) |       | $     | (7,810 | )
|                                                              |  |                               |                                   |   |                    |       |                  |   |        |       |        |   |       |       |        |   |        |      
|Net loss per share:                                           |  |                               |                                   |   |                    |       |                  |   |        |       |        |   |       |       |        |  
|Basic and diluted                                             |  | $                             | (0.01                             | ) |                    | $     | (0.16            | ) |        | $     | (0.10  | ) |       | $     | (0.29  | )
|Shares used in computing basic and
diluted net loss per share |  |                               | 27,429                            |   |                    |       | 27,257           |   |        |       | 27,389 |   |       |       | 27,200 |  
|                                                              |  |                               |                                   |   |                    |       |                  |   |        |       |        |   |       |       |        |   |        |      

See accompanying notes to the consolidated financial statements.

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NET PERCEPTIONS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)

|                                                     |                                                                      |   |                                               |                                           |   |                  |        |         |   |       |        |  
|---------------------------------------------------- | -------------------------------------------------------------------- | - | --------------------------------------------- | ----------------------------------------- | - | ---------------- | ------ | ------- | - | ----- | ------ | -
|                                                     |                                                                      |   |                                               |                                           |   | Six Months Ended
|                                                     |                                                                      |   |                                               |                                           |   | June 30,        
|                                                     |                                                                      |   |                                               |                                           |   |                 
|                                                     |                                                                      |   |                                               |                                           |   | 2003             |        | 2002   
|                                                     |                                                                      |   |                                               |                                           |   |                  |        |        
|Cash flows from operating activities:                |                                                                      |   |                                               |                                           |   |                  |        |        
|                                                     | Net loss                                                             |   | $                                             | (2,615                                    | ) |                  | $      | (7,810  | )
|                                                     | Reconciliation of net loss to net cash used in operating activities: |   |                                               |                                           |   |                  |        |         |  
|                                                     |                                                                      |   | Depreciation and amortization                 |                                           |   | 418              |        |         |   | 1,262 |       
|                                                     |                                                                      |   | Provision for doubtful accounts               |                                           |   | (44              | )      |         |   | 65    |       
|                                                     |                                                                      |   | Compensation expense related to stock options |                                           |   |                 |        |         |   | 26    |       
|                                                     |                                                                      |   | Restructuring related charges                 |                                           |   | 1,200            |        |         |   | 768   |       
|                                                     |                                                                      |   | Amortization of premiums on investments       |                                           |   | 153              |        |         |   | 201   |       
|                                                     |                                                                      |   | Changes in assets and liabilities:            |                                           |   |                  |        |         |   |       |       
|                                                     |                                                                      |   |                                               | Accounts receivable                       |   |                  | 39     |         |   |       | (524   | )
|                                                     |                                                                      |   |                                               | Prepaid expenses & other assets           |   |                  | (356   | )       |   |       | 163    |  
|                                                     |                                                                      |   |                                               | Accounts payable                          |   |                  | (52    | )       |   |       | 257    |  
|                                                     |                                                                      |   |                                               | Accrued expenses and other liabilities    |   |                  | (1,846 | )       |   |       | (2,844 | )
|                                                     |                                                                      |   |                                               | Deferred revenue                          |   |                  | (178   | )       |   |       | (45    | )
|                                                     |                                                                      |   |                                               |                                           |   |                  |        |         |  
|                                                     |                                                                      |   |                                               | Total adjustments                         |   |                  | (666   | )       |   |       | (671   | )
|                                                     |                                                                      |   |                                               |                                           |   |                  |        |         |  
|                                                     |                                                                      |   |                                               | Net cash used in operating activities     |   |                  | (3,281 | )       |   |       | (8,481 | )
|Cash flows from investing activities:                |                                                                      |   |                                               |                                           |   |                  |        |        
|                                                     | Purchases of short-term investments                                  |   |                                               | (16,121                                   | ) |                  |        | (22,535 | )
|                                                     | Sales and maturities of short-term investments                       |   |                                               | 24,020                                    |   |                  |        | 29,192  |  
|                                                     |                                                                      |   |                                               |                                           |   |                  |        |         |  
|                                                     |                                                                      |   |                                               | Net cash provided by investing activities |   |                  | 7,899  |         |   |       | 6,657  |  
|Cash flows from financing activities:                |                                                                      |   |                                               |                                           |   |                  |        |        
|                                                     | Proceeds from exercise of stock options, net of stock repurchases    |   |                                               | 103                                       |   |                  |        | 62      |  
|                                                     | Proceeds from issuance of stock under employee stock purchase plan   |   |                                               | 12                                        |   |                  |        | 38      |  
|                                                     | Principal payments under capital lease obligations and notes payable |   |                                               |                                          |   |                  |        | (89     | )
|                                                     |                                                                      |   |                                               |                                           |   |                  |        |         |  
|                                                     |                                                                      |   |                                               | Net cash provided by financing activities |   |                  | 115    |         |   |       | 11     |  
|                                                     |                                                                      |   |                                               |                                           |   |                  |        |         |  
|Net increase (decrease) in cash and cash equivalents |                                                                      |   | 4,733                                         |                                           |   |                  | (1,813 | )      
|Cash and cash equivalents at beginning of period     |                                                                      |   | 39,729                                        |                                           |   |                  | 14,929 |        
|                                                     |                                                                      |   |                                               |                                           |   |                  |        |         |  
|Cash and cash equivalents at end of period           |                                                                      | $ | 44,462                                        |                                           |   | $                | 13,116 |        
|                                                     |                                                                      |   |                                               |                                           |   |                  |        |         |  

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. The Company views its operations and
manages its business as one segment, the developing and marketing of computer
software and related services. Factors used to identify the Companys single
operating segment include the organizational structure of the Company and the
financial information available for evaluation by the chief operating decision
maker in making decisions about how to allocate resources and assess
performance. In addition, the Company does not allocate operating expenses to
any segments nor does it allocate specific assets to any segments. Therefore,
segment information is identical to the consolidated balance sheet and
consolidated statement of operations.

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 $(30) and $390 for the
second quarter of 2003 and 2002 and $(32) and $(314) for the six months ended
June 30, 2003 and 2002, respectively. Comprehensive loss was $246 and $3,948
for the three months ended June 30, 2003 and 2002, respectively, and $2,647 and
$8,124 for the six months ended June 30, 2003 and 2002.

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 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.

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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:

|                                                                                                                |             |   |                    |       |                  |   |        |       |      |   |        |       |   |   |        |       |  
|--------------------------------------------------------------------------------------------------------------- | ----------- | - | ------------------ | ----- | ---------------- | - | ------ | ----- | ---- | - | ------ | ----- | - | - | ------ | ----- | -
|                                                                                                                |             |   | Three Months Ended |       | Six Months Ended
|                                                                                                                |             |   | June 30,           |       | June 30,        
|                                                                                                                |             |   |                    |       |                 
|                                                                                                                |             |   | 2003               |       | 2002             |   | 2003   |       | 2002
|                                                                                                                |             |   |                    |       |                  |   |        |       |     
|Net loss, as reported                                                                                           |             | $ | (216               | )     |                  | $ | (4,338 | )     |      | $ | (2,615 | )     |   | $ | (7,810 | )    
|Add: Stock-based employee
compensation expense included in
reported net loss                                    |             |   |                   |       |                  |   | 11     |       |      |   |       |       |   |   | 26     |      
|Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards |             |   | (427               | )     |                  |   | (590   | )     |      |   | (853   | )     |   |   | (1,180 | )    
|                                                                                                                |             |   |                    |       |                  |   |        |       |      |   |        |       |   |   |        |      
|Pro forma net loss                                                                                              |             | $ | (643               | )     |                  | $ | (4,917 | )     |      |   | (3,468 | )     |   | $ | (8,964 | )    
|                                                                                                                |             |   |                    |       |                  |   |        |       |      |   |        |       |   |   |        |      
|Basic and diluted net loss per share:                                                                           |             |   |                    |       |                  |   |        |       |      |   |        |       |   |   |        |      
|                                                                                                                | As reported |   | $                  | (0.01 | )                |   | $      | (0.16 | )    |   | $      | (0.10 | ) |   | $      | (0.29 | )
|                                                                                                                |             |   |                    |       |                  |   |        |       |      |   |        |       |   |   |        |      
|                                                                                                                | Pro forma   |   | $                  | (0.02 | )                |   | $      | (0.18 | )    |   | $      | (0.13 | ) |   | $      | (0.33 | )
|                                                                                                                |             |   |                    |       |                  |   |        |       |      |   |        |       |   |   |        |      

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
2 shares at June 30, 2003 and 2002, respectively. Diluted net loss per share
does not differ from basic net loss per share since potential issuances of
shares of common stock upon the exercise of stock options and potential
reductions in outstanding shares of common stock subject to repurchase are
anti-dilutive for all periods presented. Diluted net loss per share for the
three and six months ended June 30, 2003 and 2002 excluded 2,367 and 3,073,
respectively, of potential shares of common stock from the conversion of stock
options as they were anti-dilutive.

Note 4. 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

these restructuring plans, the Company recorded restructuring related charges
totaling $768 and $15,551 during 2002 and 2001, respectively.

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 and other factors could impact the ultimate amount of cash paid to resolve these
obligations. As of July 31, 2003, the Company has signed agreements to sublease
approximately 106,000 square feet of its existing facilities and has terminated
its lease commitment for its New York, New York facility. In the third quarter
of 2003, the Company terminated its lease for the Berkshire, United Kingdom
location. The Company is actively seeking to sublease or terminate the leases
relating to its remaining facilities. Specifically, the Company is currently
seeking to sublease the remainder of its Minneapolis, Minnesota facility while
also engaging in discussions to terminate this lease. The Company is also
seeking to sublease the remainder of its San Francisco, California office space
and its entire Roseland, New Jersey facility and is negotiating the termination
of its office space in Austin, Texas. However, the Company may not be able to
find suitable sub-tenants for these properties in a timely manner, if at all.
If the Company is unable to find suitable sub-tenants in a timely manner, or
its existing sub-tenants fail to make sublease payments required under their
respective sublease agreements, it may be more difficult to terminate or settle
these leases on favorable terms, if at all, and the Company may experience
greater than anticipated operating expenses or liabilities which must be
satisfied. As of June 30, 2003, management estimated total future sublease
income of $14,188 of which $12,408 is covered by existing sublease
arrangements.

The Company expects to record a $400,000 restructuring charge in the third
quarter of 2003 relating to employee termination costs due to the August 6,
2003 reduction of its workforce by 12 positions, including a severance payment payable
to Donald C. Peterson, the Companys former President and Chief Executive
Officer, under his previously disclosed employment contract, in connection with
his cessation of employment on August 5, 2003. The Company is currently
analyzing potential additional restructuring charges in the third quarter of
2003 related to real estate obligations; the amount of such additional
restructuring changes, if any, has not yet been quantified.

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The following table presents a summary of the restructuring related
activities and accrued restructuring charges as of June 30, 2003:

|                                                           |  |             |        |             |  |          |        |       |  |           |        |       |  |   |        |   |  |   |        |  
|---------------------------------------------------------- |  | ----------- | ------ | ----------- |  | -------- | ------ | ----- |  | --------- | ------ | ----- |  | - | ------ | - |  | - | ------ | -
|                                                           |  |             |        |             |  | Employee |        |       |  |           |        | Fixed |  |   |        |  
|                                                           |  | Lease       |        | Severance   |  |          |        |       |  | Asset     |        |       |  |  
|                                                           |  | Commitments |        | and         |  |          |        |       |  | Disposals |        |       |  |  
|                                                           |  | and Related |        | Termination |  |          |        |       |  | and Other |        |       |  |  
|                                                           |  | Items       |        | Costs       |  | Subtotal |        | Costs |  | Total    
|                                                           |  |             |        |             |  |          |        |       |  |          
|Restructuring Related 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 Related 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 Related Charges                              |  |             | 604    |             |  |          | 183    |       |  |           | 787    |       |  |   | 413    |   |  |   | 1,200  |  
|Restructuring Payments                                     |  |             | (1,795 | )           |  |          | (253   | )     |  |           | (2,048 | )     |  |   | (51    | ) |  |   | (2,099 | )
|Sublease Income and Proceeds from the Sale of
Fixed Assets |  |             | 1,079  |             |  |          |       |       |  |           | 1,079  |       |  |   | 83     |   |  |   | 1,162  |  
|Non Cash Asset Disposals and Deferred Rent
Write-Off       |  |             | 334    |             |  |          |       |       |  |           | 334    |       |  |   | (426   | ) |  |   | (92    | )
|                                                           |  |             |        |             |  |          |        |       |  |           |        |       |  |   |        |   |  |   |        |  
|Accrued Restructuring as of June 30, 2003                  |  | $           | 4,776  |             |  | $        |       |       |  | $         | 4,776  |       |  | $ | 67     |   |  | $ | 4,843  |  
|                                                           |  |             |        |             |  |          |        |       |  |           |        |       |  |   |        |   |  |   |        |  

Note 5. 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 current president 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. A special committee of the Companys Board of Directors has
authorized the Company to negotiate a
settlement of the pending claims substantially consistent with a memorandum of
understanding negotiated among class plaintiffs, all issuer defendants and
their insurers. Any such settlement would be subject to approval by the Court.

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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 June 30, 2003 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 June 30, 2003 is not material.

Note 6. Income Taxes

For income tax purposes, the Company has available federal net operating
loss carry-forwards of approximately $107,400 and research and development
credit carry-forwards of $146 at December 31, 2002. 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 future changes in ownership of the Company pursuant to
Internal Revenue Code Section 382. 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 7. 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 were 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 November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. This interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
It also clarifies (for guarantees issued after January 1, 2003) that a
guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligations undertaken in issuing the
guarantee. This interpretation does not have a material impact on the Companys
consolidated financial statements.

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 does not have a material impact on the Companys
consolidated financial statements.

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Note 8. Subsequent Events

On August 6, 2003, the Company announced that its Board of Directors had
unanimously approved a cash distribution to its stockholders in the amount of
$1.50 per share, payable on September 2, 2003 to stockholders of record as of
August 18, 2003.

The Company also announced a reduction in its workforce of twelve
positions, leaving the Company with ten full-time employees, including certain
senior management and administrative employees and, in an effort to preserve
the value of the Companys technology and products, certain key engineers
familiar with these assets. As part of the personnel reduction, Donald C.
Peterson, the Companys President and Chief Executive Officer, left the Company
and will receive certain severance benefits under his previously disclosed
employment contract. Mr. Peterson also resigned as a director effective August
6, 2003.

On August 5, 2003, the Companys Board of Directors, in connection with
the proposed cash distribution payable on September 2, 2003, approved an
adjustment to the exercise price of all of its outstanding options to take
effect on the close of business on September 3, 2003. The adjustment will in
no event reduce the exercise price of any options to less than $0.01 per share
or increase the number of shares subject to such options to a number exceeding
the number of shares of common stock that are registered and available for
issuance.




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 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 2001, 2002 and 2003, 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 25 as of June 30, 2003.

We have sustained losses on a quarterly and annual basis since inception.
As of June 30, 2003, we had an accumulated deficit of $219 million. Our net
loss was $216,000 in the second quarter of 2003, compared to a net loss of $4.3
million in the second quarter of the prior year (including $401,000 of
restructuring charges and $74,000 of amortization of goodwill and other
intangibles and non-cash stock compensation expense). For the six months ended

June 30, 2003, our net loss was $2.6 million (including $1.2 million of
restructuring related charges), compared to a net loss of $7.8 million in the
same period of the prior year (including $768,000 in restructuring related
charges and $154,000 of amortization of intangible assets and non-cash stock
compensation expense). These losses resulted from significant costs incurred in
the development and marketing of our products and services as well as a decline
in our product revenues since the third quarter of 2000.

In February 2003, we engaged U.S. Bancorp Piper Jaffray, Inc. to assist us
in the exploration of near-term strategic alternatives, including the possible
sale of the Company. However, to date, we have been unable to identify and
consummate a strategic transaction on acceptable terms. On August 6, 2003, we
announced a cash distribution to our stockholders of $1.50 per share, payable
on September 2, 2003 to stockholders of record as of August 18, 2003, and
reduced our workforce by 12 positions to 10 full-time employees. As of August
6, 2003, we had 7 full-time employees in engineering and 3 in general and
administrative. Although no decision has been made regarding a future
dissolution and liquidation, we are considering this as a possible course of
action, while also seeking to settle or otherwise resolve, as soon and to the
extent reasonably practicable, our existing obligations and liabilities, and
continuing to explore asset dispositions and any other third party proposals
which may be presented, with a view to resolving the Companys future and
providing maximum additional value to stockholders as soon as possible.

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We currently expect to be able to continue to service our existing customers for a period of time and may continue
to derive a declining level of revenues from software licenses, software
maintenance and professional services relating to existing customers. However, we are no
longer actively marketing our products and have not retained any employees to
do so. We expect that the size of our customer base will decline and we do not
expect that future product or service revenues, if any, will be significant.
We anticipate that our operating expenses will continue to decline in 2003, but
will continue to constitute a material use of our cash resources. We expect to
incur additional losses and continued negative cash flow for the foreseeable
future. We do not expect to be profitable as an independent company.

If our Board of Directors adopts a plan of dissolution and liquidation,
and the plan is approved by our stockholders, then, pursuant to Delaware
General Corporation Law, we will continue to exist for three years after the
dissolution becomes effective or for such longer period as the Delaware Court
of Chancery shall direct, for the purpose of prosecuting and defending suits
against us and enabling us gradually to close our business, to dispose of our
property, to discharge our liabilities and to distribute to our stockholders
any remaining assets.

On August 5, 2003, our Board of Directors, in connection with the proposed
cash distribution payable on September 2, 2003, approved an adjustment to the
exercise price of all of our outstanding options to take effect on the close of
business on September 3, 2003. The adjustment will in no event reduce the
exercise price of any options to less than $0.01 per share or increase the
number of shares subject to such options to a number exceeding the number of
shares of common stock that are registered and available for issuance. We
believe that there will be no accounting consequences of the changes made to
the exercise price of, or the number of shares subject to, such options other than future potential dilution
to stockholders.

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 is 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. Events occurring subsequent to the preparation of the consolidated
financial statements, such as those described in the section of this report
entitled Managements Discussion and Analysis of Financial Condition and
Results of Operations  Overview, may cause us to re-evaluate these policies.

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.

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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.

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 had a significant impact on our anticipated cash
obligations. Although we believe that our lease commitment estimates were
appropriate when made, changes in real estate markets and other factors could
impact the ultimate amount of cash paid to resolve these obligations. As of
June 30, 2003, we estimated total future sublease income of $14.1 million of
which $12.4 million is covered by existing sublease arrangements. See Note 4 to our unaudited financial statements included in this report.

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, no estimate was made of the liability that could result from an
unfavorable outcome. As additional information becomes available, we will
assess the potential liability and make or revise our estimate(s) accordingly,
which could materially impact our results of operations and financial position.

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RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND JUNE
30, 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 |     | Six Months Ended
|                             |                               |                          |     | June 30,           |     | June 30,        
|                             |                               |                          |     |                    |     |                 
|                             |                               |                          |     | 2003               |     | 2002             |      | 2003 |     | 2002
|                             |                               |                          |     |                    |     |                  |      |      |     |     
|Revenues:                    |                               |                          |     |                    |     |                  |      |      |     |      |      |    |     |  |      |    
|                             | Product                       |                          |     | 38                 | %   |                  |      | 56   | %   |      |      | 31 | %   |  |      | 35  | %  
|                             | Service and maintenance       |                          |     | 62                 |     |                  |      | 44   |     |      |      | 69 |     |  |      | 65  |    
|                             |                               |                          |     |                    |     |                  |      |      |     |      |      |    |     |  |      |     |    
|                             |                               | Total revenues           |     |                    | 100 |                  |      |      | 100 |      |      |    | 100 |  |      |     | 100 | 
|Cost of revenues:            |                               |                          |     |                    |     |                  |      |      |     |      |      |    |     |  |      |    
|                             | Product                       |                          |     | 1                  |     |                  |      | 4    |     |      |      | 1  |     |  |      | 7   |    
|                             | Service and maintenance       |                          |     | 28                 |     |                  |      | 34   |     |      |      | 30 |     |  |      | 48  |    
|                             |                               |                          |     |                    |     |                  |      |      |     |      |      |    |     |  |      |     |    
|                             |                               | Total cost of revenues   |     |                    | 29  |                  |      |      | 38  |      |      |    | 31  |  |      |     | 55  | 
|Gross Margin                 |                               |                          | 71  |                    |     |                  | 62   |      |     |      | 69   |    |     |  | 45   |    
|Operating expenses:          |                               |                          |     |                    |     |                  |      |      |     |      |      |    |     |  |      |    
|                             | Sales and marketing           |                          |     | 53                 |     |                  |      | 86   |     |      |      | 78 |     |  |      | 104 |    
|                             | Research and development      |                          |     | 57                 |     |                  |      | 101  |     |      |      | 78 |     |  |      | 131 |    
|                             | General and administrative    |                          |     | 30                 |     |                  |      | 58   |     |      |      | 47 |     |  |      | 61  |    
|                             | Restructuring related charges |                          |     |                   |     |                  |      | 25   |     |      |      | 78 |     |  |      | 28  |    
|                             | Amortization of intangibles   |                          |     |                   |     |                  |      | 2    |     |      |      |   |     |  |      | 2   |    
|                             |                               |                          |     |                    |     |                  |      |      |     |      |      |    |     |  |      |     |    
|                             |                               | Total operating expenses |     |                    | 140 |                  |      |      | 272 |      |      |    | 281 |  |      |     | 326 | 
|                             |                               |                          |     |                    |     |                  |      |      |     |      |      |    |     |  |      |     |    
|Loss from operations         |                               |                          | (69 | )                  |     |                  | (210 | )    |     |      | (212 | )  |     |  | (281 | )  
|Other income (expense), net: |                               |                          | 45  |                    |     |                  | (61  | )    |     |      | 41   |    |     |  | (4   | )  
|                             |                               |                          |     |                    |     |                  |      |      |     |      |      |    |     |  |      |     |    
|Net loss                     |                               |                          | (24 | )%                 |     |                  | (271 | )%   |     |      | (171 | )% |     |  | (285 | )% 
|                             |                               |                          |     |                    |     |                  |      |      |     |      |      |    |     |  |      |     |    

REVENUES

Total revenues. Total revenues decreased 43% to $913,000 in the quarter
ended June 30, 2003, from $1.6 million in the second quarter of 2002. Revenues
decreased 44% to $1.5 million for the six months ended June 30, 2002, from $2.7
million for the same period in 2002. Revenues from sales in the United States
were $857,000 or 94% of total revenues in the second quarter of 2003 compared
to $1.5 million or 94% of total revenues in the second quarter of 2002.
Revenues from sales in the United States were $1.4 million or 91% of total
revenues for the six months ended June 30, 2003 compared to $2.5 million or 90%
of total revenues for the six months ended June 30, 2002. Revenues from
international sales in the second quarter of 2003 were $56,000 or 6% of total
revenues compared to $99,000 or 6% of total revenues in the second quarter of
the prior year. Revenues from international sales were $131,000 and $266,000,
or 9% and 10% of total revenues, for the six months ended June 30, 2003 and
2002, respectively. 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.

As described in the section of this report entitled Managements
Discussion and Analysis of Financial Condition and Results of Operations 
Overview, we are no longer actively marketing our products, and we do not
expect that future product or service revenues, if any, will be significant.

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Product revenues.Product revenues decreased 62% to $343,000 in the
second quarter of 2003 compared to $902,000 for the same period in the prior
year. Product revenues decreased 49% to $481,000 for the six months ended June
30, 2003 from $945,000 in the same period in 2002. Product revenues comprised
38% of total revenues for the second quarter of 2003 compared to 56% for the
same period in 2002. Product revenues comprised 31% of total revenues for the
six months ended June 30, 2003 compared to 35% for the same period in 2002. The
decrease in product revenues in absolute dollars is attributable to the further
deterioration of Internet retailers, a longer sales cycle due to our pursuit of
larger transactions with larger organizations, greater competition and
increased deferral of purchase decisions by our current and potential customers
due to worsening economic and political uncertainty.

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 18% to $570,000 in the second quarter of 2003 from $697,000
in the second quarter of 2002. Service and maintenance revenues comprised 62%
and 44% of total revenues in the second quarter of 2003 and 2002, respectively.
Total service and maintenance revenues decreased 42% to $1.0 million for the
six months ended June 30, 2003 from $1.8 million in the same period of 2002.
Service and maintenance revenues comprised 69% and 65% of total revenues for
the six months ended June 30, 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.

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 87% to $8,000 in the
second quarter of 2003 from $63,000 in the second quarter of 2002, representing
2% and 7% of the related product revenues, respectively. Cost of product
revenues decreased 96% to $8,000 for the six months ended June 30, 2003 from
$186,000 for the six months ended June 30, 2002, representing 2% and 20% 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 in the first six
months of 2003. 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. We do not expect any
future costs of product revenues to be significant.

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 53%
to $255,000 in the second quarter of 2003, from $539,000 in the second quarter
of the prior year, representing 45% and 77% of the related service and
maintenance revenues, respectively. Cost of service and maintenance revenues
decreased 64% to $471,000 for the six months ended June 30, 2003 from $1.3
million for the same period in the prior year, representing 45% and 73% 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. Due to the further
headcount reductions undertaken on August 6, 2003, and because we have ceased
to actively market our products, we expect that our cost of service and
maintenance revenues will decrease for the remainder of 2003.

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. Quarterly operating expenses attributable to our directors and
officers liability insurance policy increased by approximately $263,000
beginning in April of 2003 as a result of obtaining the policy described in the
section of this report entitled Managements Discussion and Analysis of
Financial Condition and Results of Operations  Liquidity and Capital
Resources. On August 6, 2003, we reduced our workforce by an additional 12
employees, leaving the Company with 10 full-time employees. As described in
the section of this report entitled Managements Discussion and Analysis of
Financial Condition and Results of Operations  Overview, we are no longer
actively marketing our products and do not expect to incur significant
operating expenses in 2003 relating to sales and marketing. We anticipate
continuing to vigorously manage expense levels.

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Based on events during the second quarter of 2003 and recent operating
history, the Company recorded one-time accrual reversals benefiting results by
approximately $460,000. The adjustments, primarily related to accrued but
unpaid 2002 bonuses and reductions to certain customer reserves, reduced
expense in all operating categories and provided for $126,000 in other income.

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 65% to $481,000 in the second
quarter of 2003, compared to $1.4 million recorded in the second quarter of
2002. Sales and marketing expenses were 53% and 86% of total revenues in the
second quarter of 2003 and 2002, respectively. Sales and marketing expenses
were $1.2 million and $2.9 million, or 78% and 104% of total revenues, for the
six months ended June 30, 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. Due to the August 6, 2003 headcount reduction, we expect
sales and marketing expenses to continue to continue to decline in the third
quarter of 2003.

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
68% to $524,000 in the second quarter of 2003, compared to $1.6 million
recorded in the second quarter of 2002. Research and development expenses were
57% and 101% of total revenues in the second quarter of 2003 and 2002,
respectively. Research and development expenses were $1.2 million and $3.6
million, or 78% and 131% of total revenues, for the six months ended June 30,
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. Due to the August 6, 2003 headcount
reduction, we expect research and development expenses to continue to continue
to decline in the third quarter of 2003.

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 $276,000 in the second quarter of 2003, a decrease of 71% from the
$935,000 recorded in the second quarter of 2002. General and administrative
expenses were 30% and 58% of total revenue in the second quarter of 2003 and
2002, respectively. General and administrative expenses were $712,000 and $1.7
million, or 47% and 61% of total revenues, for the six months ended June 30,
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. Although we expect general and
administrative expenses to decline due to the August 6, 2003 headcount
reductions, any such decrease may be offset by professional and service fees
associated with the declaration and payment of the cash distribution described
above, the settlement or other resolution of our existing obligations and
liabilities and our continued exploration of asset dispositions and any other
third party proposals which may be presented, as described in the section of
this report entitled Managements Discussion and Analysis of Financial
Condition and Results of Operations  Overview.

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 $768,000 and $15.6 million during 2002 and 2001, respectively.
We expect to record a $400,000 restructuring charge in the third quarter of
2003 relating to employee termination costs due to a reduction of our workforce
by 12 positions described above, including a severance payment payable to Donald C.
Peterson, our former President and Chief Executive Officer, under his
previously disclosed employment contract, in connection with his cessation of
employment on August 5, 2003. The Company is currently analyzing potential
additional restructuring charges in the third quarter of 2003 related to real
estate obligations; the amount of such additional restructuring charges, if
any, has not yet been quantified.

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Amortization of intangibles.Amortization expense related to intangibles
acquired in the February 2000 acquisition of KD1 was $0 during the second
quarter of 2003 compared to $63,000 (including $36,000 of amortization of
goodwill and other intangibles included in the cost of product revenues) during
the second quarter of 2002. This represented 0% and 4% of 2003 and 2002 second
quarter total revenues, respectively. Amortization expense was $0 for the first
six months of 2003 compared to $128,000 (including $73,000 of amortization and
goodwill and other intangibles included in cost of product revenues) for the
six months ended June 30, 2002. This represented 0% and 5% of total revenues
for the six months ended June 30, 2003 and 2002, 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 second quarter of 2003 and $11,000 in the second quarter of
2002, comprising 0% and .7% of total revenues in each of the respective
periods. Stock compensation was $0 and $26,000, or 0% and .9% of total
revenues, for the first half of 2003 and 2002, respectively. 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 |   | Six Months Ended
|                           |  | June 30,           |   | June 30,        
|                           |  |                    |   |                 
|                           |  | 2003               |   | 2002             |  | 2003 |        | 2002
|                           |  |                    |   |                  |  |      |        |     
|Sales and marketing        |  | $                  |  |                  |  | $    | 8,000  |      |  | $ |  |  |  | $ | 16,000 | 
|Research and development   |  | $                  |  |                  |  |      |       |      |  | $ |  |  |  |   | 3,000  | 
|General and administrative |  | $                  |  |                  |  |      | 3,000  |      |  | $ |  |  |  |   | 7,000  | 
|                           |  |                    |   |                  |  |      |        |      |  |   |   |  |  |   |        | 
|                           |  | $                  |  |                  |  | $    | 11,000 |      |  | $ |  |  |  | $ | 26,000 | 
|                           |  |                    |   |                  |  |      |        |      |  |   |   |  |  |   |        | 

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 $415,000 in the second quarter of 2003 compared
to net other expense of $972,000 in the same period in 2002. Net other income
was $623,000 compared to net other expense of $113,000 for the six months ended
June 30, 2003 and 2002, respectively. The increase in net other income for the
three months ended June 30, 2003 compared to the same period in 2002 was
primarily due to a $1.6 million loss on investment in 2002 resulting from our
sale of $2.1 million in WorldCom bonds upon announcement of accounting issues
by WorldCom.

PROVISION FOR INCOME TAXES

We have incurred significant operating losses for all periods from
inception through June 30, 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.

We have recorded a valuation allowance for the full amount of our net
deferred tax assets, as we do not expect to realize the future tax benefit.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have financed our operations primarily through the
sale of equity securities. At June 30, 2003, we had $59.6 million of cash, cash
equivalents and short-term investments, compared to $64.6 million at June 30,
2002.

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Cash used in operations was $3.3 million for the six months ended June 30,
2003, compared to $8.5 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 six
months of 2003 as compared to the same period in 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 2003, our directors and officers liability insurance policy came up for
renewal and we obtained a policy at a cost of approximately $1 million. We do
not expect to receive any significant future cash from operations and, as we
settle, or otherwise resolve, our existing obligations and liabilities, and
continue to explore asset dispositions and third party proposals which may be
presented to us, we will continue to incur legal fees, salary expenses and
other ongoing costs that will constitute a material use of cash and decrease
the amount of cash available for distribution to stockholders.

A total of $7.9 million in net cash was provided by investing activities
for the six months ended June 30, 2003, compared to $6.7 million of cash
provided 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 June 30, 2003, was invested as a percentage of
total cash and investments as follows: 75% in money market accounts, 6% in
corporate bonds and papers, 2% in municipal bonds and 17% in federal agency
securities. Since June 30, 2003, to minimize portfolio risk, we converted our
holdings of corporate and municipal bonds to cash, which was invested in money
market accounts. We plan to convert our holdings of federal agency securities
to cash as required to fund our operating expenses.

Net cash provided from financing activities was $115,000 for the six
months ended June 30, 2003 and net cash provided from financing activities was
$11,000 for the same period in 2002. Net cash from financing in both periods
was primarily attributable to proceeds from sales of our common stock pursuant
to the exercise of options. As described above, on August 6, 2003, we announced
a return of capital cash distribution to our stockholders of $1.50 per share,
payable on September 2, 2003 to stockholders of record as of August 18, 2003.
Amounts expected to be paid pursuant to this distribution will constitute a
material use of cash in financing 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 $768,000 and $15.6 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. Of the $1.2 million restructuring
charge recorded during the first quarter of 2003, approximately $604,000 was
related to lease commitments. We expect to record a $400,000 restructuring
charge in the third quarter of 2003 relating to employee termination costs due
to a reduction of our workforce by 12 positions, including a severance payment payable
to Donald C. Peterson, our former President and Chief Executive Officer, under
his previously disclosed employment contract, in connection with his cessation
of employment on August 5, 2003. We are currently analyzing potential
additional restructuring charges in the third quarter of 2003 related to real
estate obligations; the amount of such additional restructuring charges, if
any, has not yet been quantified. Although we believe that our lease
commitment estimates are appropriate in the current circumstances, future
changes in real estate markets and other factors could materially impact the
ultimate amount of cash paid to settle or otherwise resolve these obligations.

Of the $4.8 million restructuring reserve remaining as of June 30, 2003,
management estimates that approximately $4.7 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 $67,000 relates to other restructuring related costs.
See the table below summarizing our contractual obligations as of June 30, 2003
and the related discussion regarding our operating lease obligations and
related sublease agreements.

Capital expenditures were $0 for the six months ended June 30, 2003 and
for the six months ended June 30, 2002. Capital expenditures were higher in
years prior to 2002 and reflected our rapidly growing employee base and
expanded operations. As of June 30, 2003, we had no material long-term
commitments for capital expenditures and we do not anticipate entering into any
further material commitments for capital expenditures.

Since 1999, we have purchased property and equipment with cash. From
inception through 1998, we generally funded the purchase of property and
equipment with capital leases. At June 30, 2003, we had $161,000 in long-term
liabilities, all comprised of deferred rent credits.

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Our significant commitments consist primarily of obligations under our
operating leases. The following summarizes our contractual lease obligations
at June 30, 2003 (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                |  | $    | 2,020 |      |  | $    | 3,211 |      |  | $    | 3,119 |           |  | $     | 2,917 |  |  | $ | 2,960 |  |  | $ | 7,843 |  |  | $ | 22,070 | 
|Executed sublease agreements    |  |      | 1,152 |      |  |      | 1,704 |      |  |      | 1,666 |           |  |       | 1,687 |  |  |   | 1,710 |  |  |   | 4,489 |  |  |   | 12,408 | 
|                                |  |      |       |      |  |      |       |      |  |      |       |           |  |       |       |  |  |   |       |  |  |   |       |  |  |   |        | 
|Net contractual cash obligation |  | $    | 868   |      |  | $    | 1,507 |      |  | $    | 1,453 |           |  | $     | 1,230 |  |  | $ | 1,250 |  |  | $ | 3,354 |  |  | $ | 9,662  | 
|                                |  |      |       |      |  |      |       |      |  |      |       |           |  |       |       |  |  |   |       |  |  |   |       |  |  |   |        | 

Operating lease obligations relate to our existing facilities. We are
currently seeking to sublease and negotiate an early termination of our
obligations under these leases, and will incur additional legal fees and other
costs in connection therewith. As of July 30, 2003, we have sublet pursuant to
signed agreements approximately 106,000 square feet of our existing facilities
and have terminated our lease commitment for our New York, New York facility.
In the third quarter of 2003, we terminated our lease for the Berkshire, United
Kingdom location. We are actively seeking to sublease our remaining facilities.
Specifically, we are currently seeking to sublease the remainder of our
Minneapolis, Minnesota facility while also engaging in discussions to terminate
this lease. We are also currently seeking to sublease the remainder of our San
Francisco, California office space and our entire Roseland, New Jersey and are
negotiating the termination of our office space in Austin, Texas. However, 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 subtenants in a timely
manner, or if our existing subtenants fail to make sublease payments required
under their respective sublease agreements, it may be more difficult to
terminate or settle these leases on favorable terms, if at all, and we may
experience greater than anticipated operating expenses or liabilities which
must be satisfied. As of June 30, 2003, we estimated total future sublease
income of $14.1 million of which $12.4 million is covered by existing sublease
arrangements.

We believe that existing cash and investments will be sufficient to pay
the $1.50 cash distribution described above and to meet our expected working
capital needs until the Company is acquired, or its remaining assets are sold,
possibly as part of a plan of dissolution and liquidation, and to meet our
existing and future obligations and liabilities. However, uncertainties exist
as to the precise value of our existing obligations and liabilities, which may
exceed our available cash and cash equivalents. Furthermore, we may be unable
to settle or otherwise resolve our remaining obligations and liabilities, and
we may incur or be subject to additional obligations and liabilities, which
could collectively exceed our available cash and cash equivalents.

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.

Whether or not we pursue a plan of dissolution and liquidation, the value of your shares may decrease.

Although no decision has been made regarding a future dissolution and
liquidation of the Company, we are considering this as a possible course of
action, while also seeking to settle or otherwise resolve our existing
obligations and liabilities, and continuing to explore asset dispositions and
other third party proposals that may be presented to us, including, if
available, an acquisition of the entire Company. In the meantime, we will
continue to incur operating, legal and other expenses while we pursue these
possibilities, which will decrease cash available to pay our ongoing expenses
and, ultimately, for distribution to stockholders. We cannot predict whether,
or when, such a transaction or transactions will be available, and we cannot
assure you that we would be able to consummate such a transaction or
transactions or that such a transaction or transactions would provide you with
a positive return on your investment. Accordingly, whether or not we pursue a
plan of distribution or liquidation or other course to resolve the Companys
future as soon as possible, you may experience a substantial decrease in the
value of your stock.

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We do not expect to generate an operating profit as an independent company.

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-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 June 30, 2003, we had an accumulated deficit of $219.5
million. As described in the section of this report entitled Managements
Discussion and Analysis of Financial Condition and Results of Operations 
Overview, we have ceased to actively market our products and we do not expect
to generate significant future operating revenues. We have not had a
profitable quarter and do not expect to be profitable as an independent
company.

The proceeds from a sale of our assets may be less than anticipated.

If we sell our remaining assets, including pursuant to a plan of
dissolution and liquidation, such sales will be made on such terms as are
approved by the Board of Directors or the trustee of a liquidating trust if our
assets are transferred to a liquidating trust pursuant to a plan of dissolution
and liquidation. The prices at which we will be able to sell these assets will
depend largely on factors beyond our control, including, without limitation,
the extent of actual or perceived competition between, and the availability of
financing for, prospective purchasers of the assets and such prospective
purchasers plans for our intellectual property and products as integrated into
their existing businesses. Because some of our remaining assets may decline in
value over time, we may not be able to consummate the sale of these assets in
time to generate meaningful value.

If we pursue a plan of dissolution and liquidation, there may be no additional
cash to distribute to our stockholders and if there is additional cash to
distribute, the timing of any such future distribution is uncertain.

If we pursue and adopt a plan of dissolution and liquidation, there will
be no firm timetable for the distribution of proceeds to our stockholders
because of contingencies inherent in winding up and liquidating a business. Any
such liquidation should be concluded prior to the third anniversary of the
filing of the Certificate of Dissolution in Delaware. However, the actual
nature, amount and timing of all distributions will be determined by our Board
of Directors (or the trustee of a liquidating trust if our assets are
transferred to a liquidating trust pursuant to a plan of dissolution and
liquidation), in its sole discretion, and will depend, in part on our ability
to settle or otherwise resolve our remaining contingencies and convert any
remaining assets into cash.

If we pursue dissolution and liquidation, uncertainties as to the ultimate
amount of our liabilities make it impractical to predict the aggregate net
value ultimately distributable to our stockholders. Claims, liabilities and
expenses from operations (including costs associated with any retained firms
efforts to sell our remaining assets and settle our remaining liabilities,
taxes, legal and accounting fees and miscellaneous office expenses) will
continue to be incurred. These expenses will reduce the amount of cash
available for ultimate distribution to stockholders. No assurances can be
given that available cash and amounts received on the sale of assets will be
adequate to provide for our obligations, liabilities, expenses and claims and
to make cash distributions to stockholders. If such available cash and amounts
received from the sale of assets are not adequate to provide for our
obligations, liabilities, expenses and claims, we may not be able to distribute
meaningful cash, or any cash, to our stockholders. We can not assure you that
any distributions in liquidation would equal the price or prices at which our
common stock has recently traded or may trade in the future. We also can not
assure you that there will be any further cash distributions.

Our common stock may be delisted from the NASDAQ National Market.

We expect that the market price of our common stock will drop
significantly as a result of the $1.50 per share cash distribution to our
common stockholders which is scheduled to be paid on September 2, 2003. If the
closing bid price of our common stock remains below $1.00 for 30 consecutive
business days and then fails to exceed $1.00 for 10 consecutive business days
during the subsequent 180 calendar day period, we may be delisted from the
NASDAQ National Market. In addition, termination of the registration of our
common stock under the

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Securities Exchange Act of 1934, as described in the next paragraph of this
report under the caption Compliance with public company reporting requirements
is costly, and we may seek to terminate the applicability of such requirements
to us and our common stock, would result in the delisting of our common stock,
and our common stock would no longer be authorized for NASDAQ trading and
NASDAQ would cease to provide any quotations. We may also be delisted if we
fail to meet the other quantitative criteria for continued inclusion on the
NASDAQ National Market. Finally, we may be delisted if NASDAQ determines that
it is otherwise in the public interest to do so. If NASDAQ decides to delist
our common stock for reasons other than termination of registration of our
common stock under the Securities Exchange Act of 1934, we may appeal such
decision to the NASDAQ Listing Qualifications Panel.

If our common stock is delisted, the ability of stockholders to buy and
sell our shares will be materially impaired and trading will be limited to the
OTC Bulletin Board or the Pink Sheets, which handle high-risk ventures and are
not subject to the same degree of regulation by the Securities and Exchange
Commission as the NASDAQ National Market. However, our common stock will be
ineligible to be traded on the OTC Bulletin Board if it is deregistered under
the Securities Exchange Act of 1934. Many securities traded on the OTC
Bulletin Board and, to a greater extent, the Pink Sheets are relatively
illiquid, or thinly traded, which can enhance volatility in the share price
and make it difficult for investors to buy or sell without dramatically
affecting the quoted price or to increase or decrease their position at a later
date. Investors should not assume that our common stock will continue to be
listed and traded on the NASDAQ National Market or be authorized for NASDAQ
trading or traded on the OTC Bulletin Board.

Compliance with public company reporting requirements is costly, and we may
seek to terminate the applicability of such requirements to us and our common
stock.

Our common stock is currently registered under the Securities Exchange Act
of 1934, which requires that we, and our officers and directors with respect to
Section 16 of that Act, comply with certain public reporting and proxy
statement requirements thereunder. Compliance with these requirements is
costly and time-consuming, and we will likely continue, at least in the near
term, to be subject to these requirements. However, our Board of Directors may
in the future conclude that to curtail expenses thereby
conserving cash to increase possible distributions to stockholders, the
registration of our common stock under the Securities Exchange Act of 1934
should be terminated. Termination of such registration may occur following our
certification to the Securities and Exchange Commission that there are fewer
than 300 record holders of our common stock. As of July 31, 2003, there were
212 record holders of our common stock, and thus it is likely that our common
stock will be eligible for de-registration should the Board of Directors
determine that such action is necessary or otherwise in the best interests of
the Company and other relevant constituencies. Termination of such
registration of our common stock would reduce substantially the information
required to be furnished by us to our stockholders and to the Securities and
Commission and would make certain provisions of the Securities Exchange Act of
1934, such as the short-swing profit recovery provisions of Section 16(b), the
requirement of furnishing a proxy statement in connection with stockholders
meetings pursuant to Section 14(a) and the requirements of Rule 13e-3 under
that Act with respect to going private transactions no longer applicable to
us or our common stock. Furthermore, if the registration of our common stock
under the Securities Exchange Act of 1934 were to be terminated, the ability of
affiliates of the Company and persons holding restricted securities of the
Company to dispose of such securities pursuant to Rule 144 or 144A under the
Securities Act of 1933, as amended, may be impaired or eliminated. Also, as
noted above, if registration of our common stock under the Securities Exchange
Act of 1934 were terminated our common stock would be delisted from the NASDAQ
National Market, would no longer be eligible for NASDAQ trading and could not
be traded on the OTC Bulletin Board.

We may be unable to settle or otherwise resolve our existing obligations and
liabilities.

We are currently seeking to settle or otherwise resolve our existing
obligations and liabilities, which include our building and facilities leases
and the ongoing litigation matters described in the section of this report
entitled Legal Proceedings. Settling or otherwise resolving such obligations
and liabilities could result in substantial costs. If we are unable to
successfully negotiate the settlement or termination of these obligations on
acceptable terms, we will have less cash available to pay our ongoing expenses
and, ultimately, for distribution to our stockholders, and any such
distribution may be delayed. In addition, if we are unsuccessful in settling
or otherwise resolving our existing obligations and liabilities, it may be more
difficult for us to enter into a transaction or transactions to sell the entire
Company or its assets on favorable, or even reasonable, terms.

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Our inability to reach cash break-even could give rise to securities class
action claims against us, which could deplete the proceeds that are to be
distributed to stockholders.

Securities class action claims have been brought against companies in the
past where the market price of the companys securities has fallen due to an
inability of the company to achieve operational profitability. In addition,
the Company was named in a purported class action described in the section of
this report entitled Legal Proceedings. Any such litigation could be very
costly and divert our remaining resources from being available for distribution
to our stockholders. To the extent that we are unable to settle or resolve the
currently pending litigation, as described above, and we are not indemnified by
other parties, or in the absence of sufficient insurance coverage, any adverse
determination in this kind of litigation could deplete our cash position, and
reduce proceeds that might otherwise be available for distribution to our
stockholders, and any such distribution may be delayed.

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

As described above, we are currently seeking to settle or otherwise
resolve our existing obligations and liabilities, which include our building
and facilities leases. In the interim, we are attempting to sublease the
unused portions of our facilities. 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 the remainder of this facility
while also engaging in discussions to terminate this lease. We have also sublet
all of the space at our Eden Prairie, Minnesota facility and a portion of the
space at our San Francisco, California facility, and we terminated our lease
commitments at our New York, New York and our Berkshire, United Kingdom
locations. We are also currently seeking to sublease our Roseland, New Jersey
office space and we are negotiating the termination of the lease for 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, it
may be more difficult to terminate or settle these leases on favorable terms,
if at all, and we may experience greater than anticipated operating expenses or
liabilities which must be satisfied.  We cannot assure you that we will be successful in terminating or settling our remaining real estate leases on favorable terms, if at all.

Our ability to resolve our obligations, dispose of our assets, consummate a
transaction, or liquidate may be impaired if we lose certain of our key
personnel.

Following the August 6, 2003 headcount reduction, we retained only 3
full-time management and administrative personnel. The loss of the services of any of
such persons could seriously harm our ability to settle or otherwise resolve
our existing obligations and liabilities, consummate a sale of the Company or
its remaining assets on favorable, or even reasonable, terms or successfully pursue and implement a plan of dissolution and
liquidation.  Our inability to retain
certain key engineers familiar with our assets may make it difficult to
preserve the value of such assets and dispose of them. Any or all of our
remaining personnel may terminate their employment at any time.

Stockholders may be liable to our creditors for up to amounts received from us
if our reserves are inadequate.

If our Board of Directors adopts a plan of dissolution and liquidation, a
Certificate of Dissolution will be filed with the State of Delaware after such
plan is approved by our stockholders. Pursuant to the Delaware General
Corporation Law, we will continue to exist for three years after the
dissolution becomes effective or for such longer period as the Delaware Court
of Chancery shall direct, for the purpose of prosecuting and defending suits
against us and enabling us gradually to close our business, to dispose of our
property, to discharge our liabilities, and to distribute any remaining assets
to our stockholders. Under the Delaware General Corporation Law, in the event
we fail to create an adequate contingency reserve for payment of our expenses
and liabilities, each stockholder could be held liable for payment to our
creditors for such stockholders pro rata share of amounts owed to creditors in
excess of the contingency reserve. The liability of any stockholder would be
limited, however, to the amounts previously distributed to such stockholder by
us (and any liquidating trust or trusts), including, possibly, the previously
announced return of capital cash distribution of $1.50 per share. Accordingly, in such event a
stockholder could be required to return all such distributions made to such
stockholder. Moreover, in the event taxes are payable, and a stockholder has
paid taxes, on amounts previously received as a distribution, a repayment of
all or a portion of such amount could result in a stockholder incurring a net
tax cost if the stockholders repayment of an amount previously distributed
does not cause a commensurate reduction in taxes payable. There can be no
assurance that the amount of a contingency reserve established by us would be
adequate to cover any expenses and liabilities.

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Certain of our customers may cancel their contracts and we may be unable to
collect on our accounts receivable.

As a result of the announcement of the $1.50 per share cash
distribution to our common stockholders on September 2, 2003, some or all of
our existing customers may seek to cancel their product or services contracts
with us. If we choose to enforce our rights under such contracts, we could
incur substantial costs in doing so, and we may not be able to resolve such
claims in a timely manner, or at all.

We face and might face intellectual property infringement claims that might be
costly to resolve

There has been a substantial amount of litigation in the software industry
regarding intellectual property rights. It is possible that third parties may
claim that our products infringe their intellectual property rights, including
under issued patents. Such claims may result in our being involved in
litigation. We could incur substantial costs to defend any claims relating to
proprietary rights, which would deplete our remaining cash. 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. If
someone asserts a claim against us relating to proprietary technology or
information, we might seek settlement of such claim. We might not be able to
agree to a settlement on reasonable terms, or at all. The failure to obtain a
settlement on acceptable terms would decrease cash available to pay our ongoing
expenses and, ultimately, for distribution to our stockholders, and any such
distribution may be delayed.

If our intellectual property is not protected adequately, the value of such
assets could be adversely affected.

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

We have four 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. It is possible that no
patents will issue from the currently pending patent applications. It is also
possible that our current patents and potential future patents may be invalid
or unenforceable.

We also own a number of trademarks. 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.

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. If our means of protecting our
proprietary rights is seen as ineffective, our ability to complete a sale of
the Company or its remaining assets, which include our intellectual property
and other proprietary rights, on reasonable terms and in a timely manner, may
suffer. This, in turn, would tend to decrease or delay cash distributions to
our stockholders.

If our stock transfer books are closed on a final record date, we will not
record any trades.

If we pursue and adopt a plan of dissolution and liquidation, we will
close our stock transfer books and discontinue recording transfers of our
common stock at the close of business on the date of effectiveness, the final
record date, of the filing of the Certificate of Dissolution with the Delaware
Secretary of State. Thereafter, certificates representing our common stock
will not be assignable or transferable on our books except by will, intestate
succession or operation of law. The proportionate interests of all of our
stockholders will be fixed on the basis of their respective stock holdings at
the close of business on the final record date, and any distributions made by
us will be made solely to the stockholders of record at the close of business
on the final record date, except as may be necessary to reflect subsequent
transfers recorded on our books as a result of any assignments by will,
intestate succession or operation of law. For any other trades after the final
record date, the seller and purchaser of the stock will need to negotiate and
rely on due-bill contractual obligations between themselves with respect to
the allocation of stockholder proceeds arising from ownership of the shares.

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

Because our customers have used, and may continue to 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 to recover from us for such damages. 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. If someone asserts a claim against us relating to product
liability, we might seek settlement of such claim. We might not be able to
agree to a settlement on reasonable terms, or at all. The failure to obtain a
settlement on acceptable terms could make more difficult, or reduce the price
obtainable in, a sale of the Company or its remaining assets. This in turn,
would tend to decrease or delay cash distributions to our stockholders.

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.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Through June 30, 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. As described above in the section of this report entitled
Managements Discussion and Analysis of Financial Condition and Results of
Operations  Overview, we are no longer actively marketing our products.
Accordingly, we do not consider significant our exposure to foreign currency
exchange rate changes arising from revenues being denominated in foreign
currencies.

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 have resulted in
an approximate $252,000 decrease in the fair value of our investments as of
June 30, 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 have historically
maintained our portfolio of cash equivalents and short-term investments in a
variety of securities 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.
Since June 30, 2003, to minimize portfolio risk, we converted our holdings of
corporate and municipal bonds to cash. We plan to convert our holdings of
federal agency securities to cash as required to fund our operating expenses.




Item 4. Controls and Procedures

(a)  Disclosure Controls and Procedures. The Companys management, with
the participation of the Companys principal executive officer and principal financial officer, has
evaluated the effectiveness 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, as amended (the Exchange Act)) as of the end of the
period covered by this report. Based on such evaluation, the Companys
principal executive officer and principal financial officer concluded that, as of the end of such
period, the Companys disclosure controls and procedures are effective in
recording, processing, summarizing and reporting, on a timely basis,
information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act.

(b) Internal Control Over Financial Reporting. There have not been any
changes in the Companys internal control over financial reporting (as such
term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during
the fiscal quarter to which this report relates that have materially affected,
or are reasonably likely to materially affect, the Companys internal control
over financial reporting.

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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 current president and
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 Cit. 9675 (SAS), 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.

A special committee of our Board of Directors has authorized the Company
to negotiate a settlement of the pending claims substantially consistent with a
memorandum of understanding negotiated among class plaintiffs, all issuer
defendants and their insurers. Any such settlement would be subject to
approval by the Court.

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 or on the price obtainable in a sale of the Company or, if we pursue and adopt a plan of dissolution and liquidation, on the amount and timing of any future cash distributions to stockholders.




Item 2. Changes in Securities and Use of Proceeds

None.




Item 3. Defaults Upon Senior Securities

None.

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

The Companys Annual Meeting of Stockholders was held on May 29, 2003.
The number of votes cast by the Companys stockholders for the election of each
director and the number of votes withheld were as follows:

|                   |  |     |            |          |  |  |         | 
|------------------ |  | --- | ---------- | -------- |  |  | ------- | 
|Nominee            |  | For |            | Withheld
|                   |  |     |            |         
|John F. Kennedy    |  |     | 23,679,586 |          |  |  | 589,879 | 
|William Lansing    |  |     | 23,710,479 |          |  |  | 558,986 | 
|Donald C. Peterson |  |     | 23,667,962 |          |  |  | 601,503 | 
|John T. Riedl      |  |     | 23,710,715 |          |  |  | 558,750 | 
|Ann L. Winblad     |  |     | 23,708,334 |          |  |  | 561,131 | 

Each director will hold office until the next Annual Meeting of
Stockholders and until the directors successor is duly elected and qualified,
or until the directors earlier resignation or removal. Mr. Peterson resigned
as a director, effective August 6, 2003.

Also, at the same Annual Meeting, the stockholders ratified the
appointment of PricewaterhouseCoopers LLP as the Companys independent public
accountants for 2003 by the following vote:

|           |  |         |         |             |  |  |        | 
|---------- |  | ------- | ------- | ----------- |  |  | ------ | 
|For        |  | Against |         | Abstentions
|           |  |         |         |            
|24,155,480 |  |         | 102,166 |             |  |  | 11,819 | 




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 August 5, 2003.                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                        
|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) (3).                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                        
|4.4     |  | Rights Agreement between Net Perceptions, Inc. and Wells Fargo Bank Minnesota, as
Rights Agent (4).                                                                                                                                    
|        |  |                                                                                                                                                                                                                                        
|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) (4).                                                                   
|        |  |                                                                                                                                                                                                                                        
|4.6     |  | Form of Rights Certificate (attached as Exhibit B to the Rights Agreement filed as
Exhibit 4.4 hereto) (4).                                                                                                                            
|        |  |                                                                                                                                                                                                                                        
|31      |  | Certification of Principal Executive Officer and Principal Financial Officer required
by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|        |  |                                                                                                                                                                                                                                        
|32      |  | Certification of the Principal Executive Officer and Principal 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 June 30, 2001 (File No. 000-25781).
|
| | (4) |  | 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 second quarter of 2003, the Company furnished a Current Report
on Form 8-K on April 28, 2003, to furnish under Item 12 a copy of the Companys
press release announcing the Companys financial results for the first quarter
of 2003.

28



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

29



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##### Table of Contents



NET PERCEPTIONS, INC.
FORM 10-Q
For the Quarter Ended June 30, 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 August 5, 2003.                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                        
|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) (3).                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                        
|4.4     |  | Rights Agreement between Net Perceptions, Inc. and Wells Fargo Bank Minnesota, as
Rights Agent (4).                                                                                                                                    
|        |  |                                                                                                                                                                                                                                        
|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) (4).                                                                   
|        |  |                                                                                                                                                                                                                                        
|4.6     |  | Form of Rights Certificate (attached as Exhibit B to the Rights Agreement filed as
Exhibit 4.4 hereto) (4).                                                                                                                            
|        |  |                                                                                                                                                                                                                                        
|31      |  | Certification of Principal Executive Officer and Principal Financial Officer required
by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|        |  |                                                                                                                                                                                                                                        
|32      |  | Certification of the Principal Executive Officer and Principal 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 June 30, 2001 (File No. 000-25781).
|
| | (4) |  | Incorporated by reference to Net Perceptions Registration
Statement on Form 8-A filed June 6, 2001 (File No. 000-25781).            

30