<PAGE>

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

-------------------------------------------------------------------------------

                                    FORM 10-Q


     [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

                              EXCHANGE ACT OF 1934

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999





     [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

                              EXCHANGE ACT OF 1934

                 FOR THE TRANSITION PERIOD FROM ________, TO _______.

-------------------------------------------------------------------------------

                        COMMISSION FILE NUMBER: 000-25781


                              NET PERCEPTIONS, INC.
             (Exact name of Registrant as specified in its charter)

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


                             7901 FLYING CLOUD DRIVE
                          MINNEAPOLIS, MINNESOTA 55344
               (Address of principal executive offices, Zip Code)


                                 (612) 903-9424
              (Registrant's telephone number, including area code)


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

     THE NUMBER OF SHARES OF THE REGISTRANT'S COMMON STOCK OUTSTANDING AS OF
JULY 31, 1999 WAS 21,963,857.

<PAGE>

                              NET PERCEPTIONS, INC.
                                    FORM 10-Q


                       FOR THE QUARTER ENDED JUNE 30, 1999


-------------------------------------------------------------------------------
-------------------------------------------------------------------------------

                                      INDEX
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                                                            PAGE
                                                                                                           --------

<S>                                                                                                        <C>
PART I.  FINANCIAL INFORMATION

      Item 1.  Financial Statements

            Condensed Balance Sheets as of June 30, 1999 and December 31, 1998                                   3

            Condensed Statements of Operations for the Three and Six Months Ended June 30, 1999 and 1998         4

            Condensed Statements of Cash Flows for the Six Months Ended June 30, 1999 and 1998                   5

            Notes to Condensed Financial Statements                                                              6

      Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations             8


PART II.  OTHER INFORMATION

      Item 2.  Changes in Securities and Use of Proceeds                                                        25

      Item 4.  Submission of Matters to a Vote of Security Holders                                              26

      Item 6.  Exhibits and Reports on Form 8-K                                                                 26


SIGNATURES                                                                                                      27

</TABLE>

<PAGE>



PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                              NET PERCEPTIONS, INC.

                            CONDENSED BALANCE SHEETS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                                June 30,             December 31,
                                                                                  1999                  1998
                                                                              -----------            ------------
                                                                              (Unaudited)
<S>                                                                           <C>                    <C>
 ASSETS
 Current assets:
      Cash and cash equivalents                                               $   40,460             $     972
      Short-term investments                                                       5,588                     -
      Accounts receivable                                                          3,554                 3,382
      Prepaid expenses and other current assets                                      619                   142
                                                                              -----------            ------------
            Total current assets                                                  50,221                 4,496

 Marketable securities                                                             8,631                     -
 Property and equipment, net                                                       2,022                 1,019
 Other assets                                                                        227                   122
                                                                              -----------            ------------
            Total assets                                                      $   61,101             $   5,637
                                                                              -----------            ------------
                                                                              -----------            ------------

 LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED STOCK AND
    STOCKHOLDERS' EQUITY
 Current liabilities:
      Accounts payable and accrued expenses                                   $    4,185             $   1,666
      Deferred revenue                                                             2,278                 2,107
      Current portion of long-term liabilities                                       478                   255
                                                                              -----------            ------------
            Total current liabilities                                              6,941                 4,028

 Long-term liabilities, net of current portion                                       845                   538
                                                                              -----------            ------------
            Total liabilities                                                      7,786                 4,566
                                                                              -----------            ------------

 Commitments and contingencies

 Series A Convertible Redeemable Preferred Stock at redemption value                   -                   650

 Stockholders' equity:
      Series B Convertible Preferred Stock                                             -                     -
      Series C Convertible Preferred Stock                                             -                     -
      Common Stock                                                                     2                     1
      Additional paid-in capital                                                  70,029                11,137
      Accumulated deficit                                                        (16,716)              (10,717)
                                                                              -----------            ------------
           Total stockholders' equity                                             53,315                   421
                                                                              -----------            ------------
           Total liabilities, convertible redeemable preferred stock
                and stockholders' equity                                      $   61,101             $   5,637
                                                                              -----------            ------------
                                                                              -----------            ------------
</TABLE>

               See accompanying notes to the financial statements.


                                       3
<PAGE>

                              NET PERCEPTIONS, INC.

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

<TABLE>
<CAPTION>
                                                Three Months Ended               Six Months Ended
                                                     June 30,                        June 30,
                                             ----------------------------   --------------------------
                                                1999              1998         1999            1998
                                             ----------        ----------   ----------     -----------
                                                      (Unaudited)                  (Unaudited)
<S>                                          <C>               <C>          <C>            <C>
 Revenues:
    Product                                  $    2,104        $      889   $    3,665     $    1,506
    Service and maintenance                         710               100        1,044            153
                                             ----------        ----------   ----------     -----------
       Total revenues                             2,814               989        4,709          1,659

 Cost of revenues:
    Product                                          59                 9           95             15
    Service and maintenance                         491                65          804            100
                                             ----------        ----------   ----------     -----------
       Total cost of revenues                       550                74          899            115

 Gross margin                                     2,264               915        3,810          1,544

 Operating expenses:
    Sales and marketing                           2,558             1,107        4,295          2,039
    Research and development                      2,033               507        3,569            875
    General and administrative                      813               292        1,387            518
    Stock compensation expense                      364                59          867             66
                                             ----------        ----------   ----------     -----------
       Total operating expenses                   5,768             1,965       10,118          3,498
                                             ----------        ----------   ----------     -----------

 Loss from operations                            (3,504)           (1,050)      (6,308)        (1,954)

 Other income, net                                  381                38          309             66
                                             ----------        ----------   ----------     -----------
 Net loss                                    $   (3,123)       $   (1,012)  $   (5,999)    $   (1,888)
                                             ----------        ----------   ----------     -----------
                                             ----------        ----------   ----------     -----------


 Net loss per share:

 Basic and diluted                           $    (0.20)       $    (0.31)  $    (0.60)    $    (0.61)

 Shares used in computing basic and
    diluted net loss per share               15,476,110         3,265,926   10,007,654      3,073,587
                                             ----------        ----------   ----------     -----------
                                             ----------        ----------   ----------     -----------

 Pro forma basic and                         $    (0.17)       $    (0.07)  $    (0.35)    $    (0.14)
     diluted net loss per share

 Shares used in computing pro forma
    basic and diluted net loss per share     18,676,720        13,934,626   16,942,309     13,503,417
                                             ----------        ----------   ----------     -----------
                                             ----------        ----------   ----------     -----------
</TABLE>

               See accompanying notes to the financial statements.


                                       4
<PAGE>

                              NET PERCEPTIONS, INC.

                       CONDENSED STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                          Six Months Ended   Six Months Ended
                                                                              June 30,           June 30,
                                                                                1999               1998
                                                                          ----------------   ----------------
                                                                             (Unaudited)        (Unaudited)
<S>                                                                       <C>                <C>
 CASH FLOWS FROM OPERATING ACTIVITIES:
    Net loss                                                              $      (5,999)     $        (1,888)
    Reconciliation of net loss to net cash used by operating
       activities:
       Depreciation and amortization                                                307                  112
       Stock compensation expense                                                   867                   66
       Changes in operating assets and liabilities:
         Accounts receivable                                                       (173)              (1,357)
         Accounts payable and accrued expenses                                    2,594                  359
         Deferred revenue                                                           171                  629
         Other                                                                     (256)                  56
                                                                          ----------------   ----------------
          Net cash used in operating activities                                  (2,489)              (2,023)
                                                                          ----------------   ----------------

 CASH FLOWS FROM INVESTING ACTIVITIES:
     Maturity (purchase) of short-term investments and marketable               (14,219)               3,439
      securities
    Purchases of property and equipment                                          (1,317)                 (96)
                                                                          ----------------   ----------------
         Net cash provided by (used in) investing activities                    (15,536)               3,343
                                                                          ----------------   ----------------

 CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from sale of stock                                                  53,558                1,091
    Proceeds from exercise of stock options, net of redemptions                      93                    1
    Proceeds from issuance of (principal payments under) debt
       obligations                                                                3,862                  (60)
                                                                          ----------------   ----------------
         Net cash provided by financing activities                               57,513                1,032
                                                                          ----------------   ----------------

 Net increase in cash and cash equivalents                                       39,488                2,352
 Cash and cash equivalents at beginning of period                                   972                1,407
                                                                          ----------------   ----------------
 Cash and cash equivalents at end of period                               $      40,460      $         3,759
                                                                          ----------------   ----------------
                                                                          ----------------   ----------------
</TABLE>

               See accompanying notes to the financial statements.


                                       5
<PAGE>

                              NET PERCEPTIONS, INC.

                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                                   (Unaudited)


NOTE 1.  BASIS OF PRESENTATION

In the opinion of management, the accompanying unaudited financial statements
contain all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the Company's financial position, results of
operations and cash flows for the periods presented. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could 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, 1998, which are contained in the Company's Registration
Statement on Form S-1, declared effective by the Securities and Exchange
Commission on April 22, 1999 (File No. 333-71919). 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.

NOTE 2.  RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new standard establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
We do not expect SFAS No. 133 to have a significant effect on our financial
condition or results of operations.

In November 1998, the FASB cleared for issuance SOP 98-9, "Modification of SOP
97-2, Software Revenue Recognition, With Respect to Certain Transactions," which
will retain the limitations of SOP 97-2 on what constitutes vendor specific
objective evidence of fair value. SOP 98-9 will be effective for transactions
entered into in fiscal 2000. We believe that our current revenue recognition
policies and practices for perpetual licenses are consistent with the
provisions of the new guidance. However, with respect to term licenses, the
effect of SOP 98-9 would be to recognize a portion of term license fees
ratably over the license term beginning January  1, 2000 for term licenses
which are sold with maintenance. We are currently addressing the impact of
this SOP and anticipate that further guidance will be issued. Our current
pricing practices for term licenses may need to change so that this SOP does
not have a material effect on our financial position or results of operations.

NOTE 3.  ALLOWANCE FOR DOUBTFUL ACCOUNTS

The allowance for doubtful accounts was $381,000 and $135,000 at June 30, 1999
and 1998, respectively.

NOTE 4. NOTES PAYABLE

On February 4, 1999, we borrowed $4.0 million from a foreign corporate investor
pursuant to a convertible promissory note due January 31, 2000 and bearing
interest at the rate of 8% per annum. The note automatically converted into
shares of our common stock upon the closing of our initial public offering (See
Note 7). Accordingly, on April 28, 1999, the principal and accrued interest on
the note were converted into 290,911 shares of common stock at $14 per share.

In June 1999, we entered into a commercial loan agreement with a financing
company related to the purchase of a three-year term directors and officers
insurance policy. The $450,000 note accrues interest at 5.98% per annum and is
payable in monthly installments through June 2001.


                                       6
<PAGE>

NOTE 5.  STOCK SPLIT

On April 20, 1999, we effected a 2-for-1 stock split of the then issued and
outstanding capital stock. All references to common stock and preferred stock
amounts, shares and per share data included in the financial statements and
related notes have been adjusted to give retroactive effect to the stock split.

NOTE 6.  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, which consisted
primarily of founders' shares, aggregated 1,588,909 and 3,058,660 at June 30,
1999 and 1998, respectively. Diluted net loss per share does not differ from
basic net loss per share, since potential shares of common stock from the
exercise of stock options and warrants and outstanding shares of common stock
subject to repurchase are anti-dilutive for all periods presented. Pro forma
basic and diluted net loss per share have been calculated assuming the
conversion of all outstanding shares of preferred stock into shares of common
stock, as if the shares had converted immediately upon their issuance (See Note
7).

NOTE 7.  INITIAL PUBLIC OFFERING

On April 28, 1999, we completed an initial public offering, selling 3,650,000
shares of common stock at a price of $14 per share, raising a total of
$46,094,000 in net proceeds after payment of underwriting discounts and
commissions and estimated offering expenses. Concurrent with the closing of the
initial public offering, all shares of preferred stock outstanding were
converted on a 1-to-1 basis into 10,668,700 shares of common stock.

On May 20, 1999, the underwriters on our initial public offering exercised their
right to purchase additional shares of common stock to cover over-allotments.
Accordingly, on May 25, 1999, we sold 547,500 shares of common stock, generating
an additional $7,113,000 in net proceeds after payment of underwriting discounts
and commissions and estimated offering expenses. Including the over-allotment
shares, we sold a total of 4,197,500 shares of common stock in our initial
public offering, raising a total of $53,207,000, net of underwriting discounts
and commissions and estimated offering expenses.

NOTE 8.  SUBSEQUENT EVENT

On July 23, 1999, we completed the formation of Net Perceptions Japan K.K., a
joint venture between Net Perceptions, Inc. and the Japanese companies of Trans
Cosmos, Inc., NTT Software and Toyo Information Systems. Under the terms of the
agreement, we have granted Net Perceptions Japan K.K. the exclusive rights to
sell, market, distribute and support Net Perceptions' products in Japan. We are
obligated to invest 45 million Yen (approximately $400,000) in the joint venture
no later than August 31,1999 in return for a 45% ownership interest in the joint
venture.


                                       7
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

The discussion in this report on Form 10-Q contains forward-looking statements
that involve risks and uncertainties. The statements contained in this Report
that are not purely historical are forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including statements regarding our
expectations, beliefs, intentions or strategies regarding the future. All
forward-looking statements included in this document are based on information
available to us on the date hereof, and we assume no obligation to update any
such forward-looking statements. Our actual results could differ materially from
those described in our forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
under the heading "Risk Factors" and the risks and factors discussed in our
Registration Statement on Form S-1 declared effective on April 22,1999 by the
Securities and Exchange Commission (File No. 333-71919).

OVERVIEW

Net Perceptions is a leading provider of marketing solutions that enable
Internet and traditional retailers to market to customers on a personalized,
one-to-one-basis in real time. With our software solutions, a retailer learns
from each customer interaction and, based on the information received, adjusts
marketing messages or product offerings to that customer in real time. We define
our product offerings as "real-time personalization solutions." Our products
enable effective real-time personalization by analyzing past and current
customer behavior, including purchase history, stated preferences, demographic
information and Internet browsing behavior. Based on this analysis, our products
use proprietary collaborative filtering technology to anticipate other
merchandise or information a customer is likely to be interested in purchasing
or viewing. We believe that retailers that implement our solutions can attract
more customers, generate more products per order and increase customer loyalty.

We also provide our customers with a comprehensive array of services, including
training and consulting services, software updates, documentation updates,
telephone support and web-based support. We market our products and services
through our direct sales organization and through indirect distribution
channels, including resellers, systems integrators and original equipment
manufacturers.

To date, we have focused on providing solutions to electronic commerce retailers
and substantially all of our product revenues through June 30, 1999 were
attributable to our Net Perceptions for E-commerce product. We anticipate that
Net Perceptions for E-commerce will continue to account for a substantial
portion of our product revenues for the foreseeable future. Consequently, a
decline in the price of or demand for Net Perceptions for E-commerce, or its
failure to achieve broad market acceptance, would seriously harm our business,
financial condition and results of operations.

We market the majority of our products through our direct sales force. Sales
derived through indirect channels accounted for approximately 14% and 8% of our
total revenues for the three months ended June 30, 1999 and 1998, respectively.
We expect that sales derived through indirect channels will increase as a
percentage of total revenues. Sales through indirect channels have lower average
selling prices and gross margins than direct sales. As a result, we expect that
our gross margins on product sales will decline if sales through indirect
channels increase.

We have sustained losses on a quarterly and an annual basis since inception. As
of June 30, 1999, we had an accumulated deficit of $16.7 million. Our net loss
was $3.1 million for the three months ended June 30, 1999, $6.0 million for the
six months ended June 30, 1999, $5.0 million in 1998 and $4.7 million in 1997.
These losses resulted from significant costs incurred in the development and
sale of our products and services. We expect to experience significant growth in
our operating expenses for the foreseeable future, particularly research and
development and sales and marketing expenses. As a result, we anticipate that
such operating expenses, as well as planned capital expenditures, will
constitute a material use of our cash resources. As a result, we expect to incur
additional losses and continued negative cash flow from operations for the
foreseeable future, and such losses are anticipated to increase significantly
from current levels. We do not expect to achieve profitability in 1999 or 2000.

Our limited operating history makes the prediction of future operating results
very difficult. We believe that period-to-period comparisons of our operating
results should not be relied upon as predictive of future performance. Our
prospects must be considered in light of the risks, expenses and difficulties
encountered by companies at an early


                                       8
<PAGE>

stage of development, particularly companies in new and rapidly evolving
markets. We may not be successful in addressing these risks and difficulties. We
have experienced significant percentage growth in revenues in recent periods;
however, we do not believe that prior growth rates are sustainable or indicative
of future growth rates.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                                 Three Months Ended            Six Months Ended
                                                                      June 30,                     June 30,
                                                                  1999         1998          1999          1998
                                                                --------     --------      --------      --------
<S>                                                             <C>          <C>           <C>           <C>
 Revenues:
    Product                                                        75%           90%           78%           91%
    Service and maintenance                                        25            10            22             9
                                                                --------     --------      --------      --------
       Total revenues                                             100           100           100           100

 Cost of revenues:
    Product                                                         2             1             2             1
    Service and maintenance                                        17             7            17             6
                                                                --------     --------      --------      --------
       Total cost of revenues                                      19             8            19             7

 Gross margin                                                      81            92            81            93

 Operating expenses:
    Sales and marketing                                            91           112            91           123
    Research and development                                       72            51            76            53
    General and administrative                                     29            30            29            31
    Stock compensation expense                                     13             6            18             4
                                                                --------     --------      --------      --------
       Total operating expenses                                   205           199           214           211
                                                                --------     --------      --------      --------

 Loss from operations                                            (124)         (107)         (133)         (118)

 Other income, net                                                 14             4             7             4
                                                                --------     --------      --------      --------
 Net loss                                                        (110)%        (103)%        (126)%        (114)%
                                                                --------     --------      --------      --------
                                                                --------     --------      --------      --------
</TABLE>


                                       9
<PAGE>

REVENUES

TOTAL REVENUES. Total revenues were $2.8 million and $989,000 for the three
months ended June 30, 1999 and 1998, respectively. International sales accounted
for approximately 24% and 6% of our total revenues for the quarters ended June
30, 1999 and 1998, respectively. International sales accounted for approximately
22% and 9% of our total revenues for the six months ended June 30, 1999 and
1998, respectively. The majority of international sales to-date were made in
Canada, Europe and Asia by our direct sales force located in the United States
and London.

We recognize revenue in accordance with the Statement of Position 97-2,
"Software Revenue Recognition" (SOP 97-2), as amended by Statement of Position
98-4, "Deferral of the Effective Date of a Provision of SOP 97-2." We derive
revenues from the sale of software licenses, post-contract support ("support")
and consulting services. Support includes telephone and web-based technical
support, bug fixes, and rights to unspecified upgrades on a when-and-if
available basis. Services include implementation, training, and consulting. In
software arrangements that include rights to multiple software products,
specified upgrades, support and/or services, we allocate the total arrangement
fee among each deliverable based on the relative fair value of each of the
deliverables determined based on vendor-specific objective evidence. Revenues
from license fees are recognized when persuasive evidence of an agreement
exists, delivery of the product has occurred, no significant Company obligations
with regard to implementation remain, the fee is fixed or determinable and
collectibility is probable. If the fee due from the customer is not fixed or
determinable, revenue is recognized as payments become due from the customer. If
collectibility is not considered probable, revenue is recognized when the fee is
collected. Revenue allocable to support is recognized on a straight-line basis
over the periods in which the support is provided. Arrangements that include
consulting services are evaluated to determine whether those services are
essential to the functionality of other elements of the arrangement. When
services are considered essential, revenue under the arrangement is recognized
using contract accounting. When services are not considered essential, the
revenue allocable to the software services is recognized as the services are
performed.

LICENSE REVENUES. We currently derive substantially all of our license revenues
from our Net Perceptions for E-commerce product. Revenues from licenses
increased by 137% from $889,000 for the quarter ended June 30, 1998 to $2.1
million in the comparable quarter in 1999. Software license fees increased 143%
from $1.5 million for the six months ended June 30, 1998 to $3.7 million in the
comparable period in 1999. The growth of revenues in absolute dollars is largely
a result of our sales and marketing efforts, specifically the expansion of our
direct sales force, and the increased market acceptance of our products. While
higher unit sales volumes accounted for the majority of the growth in revenues,
we have also achieved an increase in our average order size through sales
efforts focused on larger accounts. We intend to continue to enhance our current
software products as well as develop new software products. As a result, we
anticipate that revenues from product licenses will continue to represent a
majority of our revenues in the foreseeable future. We expect that prior
percentage growth rates of our license revenues will not be sustainable in the
future.

SERVICE AND MAINTENANCE REVENUES. Service and maintenance revenues increased by
610% from $100,000 for the quarter ended June 30, 1998 to $710,000 in the
comparable quarter in 1999. Services and maintenance revenues increased by 580%
from $153,000 for the six months ended June 30, 1998 to $1.0 million in the
comparable period in 1999. This growth is due to increased licensing activity,
which has resulted in increased revenues from maintenance and support, training
and consulting services and to the expansion of our services capabilities
through the hiring of additional services personnel. Prior growth rates of our
installed base and, consequently, in our service revenues, may not be
sustainable in the future.

COST OF REVENUES

COST OF LICENSE REVENUES. Cost of license revenues consists primarily of the
costs of royalties paid to third-party vendors, product media and duplication,
manuals, packaging materials, personnel-related costs and shipping expenses.
Cost of license revenues increased from $9,000 for the quarter ended June 30,
1998 to $59,000 for the comparable quarter in 1999, representing 1% and 3% of
the related license revenues in such quarters. Cost of license revenues
increased from $15,000 for the six months ended June 30, 1998 to $95,000 in the
comparable 1999 period, representing 1% and 3% of related license revenues in
the such periods. The increases in the dollar amount of cost of license were
primarily due to higher volumes of product shipped. Because all 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


                                       10
<PAGE>

costs. We believe that the cost of license revenues will increase in dollar
amounts and as a percentage of license revenues in the future.


COST OF SERVICE AND MAINTENANCE REVENUES. Cost of service and maintenance
revenues consists primarily of personnel-related costs incurred in providing
telephone and web-based support, consulting services and training to customers.
Cost of service and maintenance revenues increased from $65,000 for the quarter
ended June 30, 1998 to $491,000 in the comparable quarter in 1999, representing
65% and 69% of the related services and maintenance revenues in such quarters.
Cost of service and maintenance revenues increased from $100,000 for the six
months ended June 30, 1998 to $804,000 in the comparable period in 1999,
representing 65% and 77% of the related services and maintenance revenues in
such periods. Cost of service and maintenance revenues increased significantly
in absolute dollars and as a percentage of revenue primarily due to increased
personnel-related costs incurred as we continue to build our customer support,
education and training, and consulting services organization. We believe that
the cost of service and maintenance revenues will increase in dollar amounts but
decrease as a percentage of service and maintenance revenues in the future due
to higher utilization of our services personnel.

OPERATING EXPENSES

Operating expenses were $5.8 million in the quarter ended June 30, 1999 and $2.0
million in the comparable quarter of 1998. Operating expenses were $10.1 million
in the six months ended June 30, 1999 and $3.5 million in the comparable quarter
of 1998.

SALES AND MARKETING. Sales and marketing expenses consist primarily of salaries
and incentive compensation for sales and marketing personnel and promotional
expenses. Sales and marketing expenses were $2.6 million and $1.1 million, or
91% and 112% of total revenues, for the quarters ended June 30, 1999 and 1998,
respectively. Sales and marketing expenses were $4.3 million and $2.0 million,
or 91% and 123% of total revenues, for the six months ended June 30, 1999 and
1998, respectively. The increases in sales and marketing expenses in absolute
dollar amounts were primarily attributable to increased personnel-related costs
related to increased headcount in our sales and marketing organizations and a
related increase in incentive compensation paid to sales personnel. We believe
that sales and marketing expenses will continue to increase in absolute dollar
amounts in the future as we continue to expand our direct sales force and
further promote our products.

RESEARCH AND DEVELOPMENT. Research and development costs consist primarily of
personnel-related costs, contractor expenses and related equipment costs.
Research and development expenses were $2.0 million and $507,000, or 72% and 51%
of total revenues, for the quarters ended June 30, 1999 and 1998, respectively.
Research and development expenses were $3.6 million and $875,000, or 76% and 53%
of total revenues, for the six months ended June 30, 1999 and 1998,
respectively. The increases in research and development in absolute dollar
amounts were primarily attributable to increased staffing and associated support
for software engineers required to expand and enhance our product line. We
believe that continued investment in research and development expenses is
critical to attaining our strategic objectives and, as a result, expect research
and development expenses to increase in absolute dollars in future periods.

GENERAL AND ADMINISTRATIVE. General and administrative expenses were $813,000
and $292,000, or 29% and 30% of total revenues, for the quarters ended June 30,
1999 and 1998, respectively. General and administrative expenses increased from
$518,000 for the six months ended June 30, 1998 to $1.4 million in the
comparable period in 1999, or 29% and 31% of total revenues, respectively. The
increases in dollar amounts were primarily the result of increased staffing and
associated expenses necessary to manage and support our growth. We believe that
general and administrative expenses will increase in dollar amount as we
continue to increase staffing to manage expanding operations.

STOCK COMPENSATION. Compensation related to stock options granted through June
30, 1999 was approximately $3,146,000. Of this amount, we recorded stock
compensation expense of $364,000 and $59,000 in the three months ended June 30,
1999 and 1998, respectively. These amounts represent the difference between the
exercise price of certain stock option grants and the deemed fair value of the
common stock at the time of such grants. Stock compensation expense is
recognized over the vesting period of the options, generally four years. As a
result, the recognition of stock compensation will impact our reported results
of operations through early 2003.


                                       11
<PAGE>

OTHER INCOME, NET. Other income, net consists of interest income, interest
expense and other expense. Other income, net was $381,000 and $38,000 for the
three months ended June 30, 1999 and 1998, respectively. Other income for the
three months ended June 30, 1999 consists primarily of interest earned on
proceeds from the Company's initial public offering.

PROVISION FOR INCOME TAXES

We have incurred significant operating losses for all periods from inception
through June 30, 1999. As the future realization of the tax benefit resulting
from these losses is not sufficiently assured, we have recorded a valuation
allowance for the full amount of our deferred tax assets.


                                       12
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

During the six months ended June 30, 1999 and 1998, cash used by operating
activities was $2.5 million and $2.0 million, respectively. Net cash used in
operations for the six months ended June 30, 1999 was primarily attributable to
the net loss generated during the period offset by non-cash charges and an
increase in accounts payable and accrued expenses resulting from increased
operating activities.

During the six months ended June 30, 1999 and 1998, our investing activities
consisted primarily of purchases of marketable securities and property and
equipment. To date, we have not invested in financial instruments that involve a
high level of complexity or risk. We expect that, in the future, cash in excess
of current requirements will continue to be invested in investment grade,
interest-bearing securities.

Cash used to purchase property and equipment was $1.3 million and $96,000 during
the six months ended June 30, 1999 and 1998, respectively, primarily for
furniture and computer equipment for our growing employee base. During the six
months ended June 30, 1998, we generally funded the purchase of property and
equipment with capital leases. We expect that the rate of purchases of property
and equipment will continue to increase as our employee base grows. Our
principal commitments consist primarily of leases on our facilities.

The net cash provided by financing activities during the six months ended June
30, 1999 and 1998 was $57.5 million and $1.0 million, respectively. On April 28,
1999, we completed an initial public offering, selling 3,650,000 shares of
common stock at a price of $14 per share, raising a total of $46,094,000 in net
proceeds after payment of underwriting discounts and commissions and estimated
offering expenses. On May 20, 1999, the underwriters on our initial public
offering exercised their right to purchase additional shares of common stock to
cover over-allotments. Accordingly, on May 25, 1999, we sold 547,500 shares of
common stock, generating an additional $7,113,000 in net proceeds after payment
of underwriting discounts and commissions and estimated offering expenses.
Including the over-allotment shares, we sold a total of 4,197,500 shares of
common stock in our initial public offering, raising a total of $53,207,000, net
of underwriting discounts and commissions and estimated offering expenses.

As of June 30, 1999, we had $40.5 million in cash and cash equivalents, $14.2
million in short-term investments and marketable securities and $43.3 million of
working capital. We expect to experience significant growth in our operating
expenses for the foreseeable future, particularly research and development and
sales and marketing expenses. As a result, we anticipate that such operating
expenses, as well as planned capital expenditures, will constitute a material
use of our cash resources. In addition, we may utilize cash resources to fund
acquisitions or investments in complementary businesses, technologies or product
lines. We believe that current cash and investment balances will be sufficient
to meet our working capital and capital expenditure requirements for at least
the next 12 months. Thereafter, we may find it necessary to obtain additional
equity or debt financing. In the event additional financing is required, we may
not be able to raise it on acceptable terms or at all.

YEAR 2000 READINESS

"Year 2000 Issues" refer generally to the problems that some software may have
in determining the correct century for the year. For example, software with
date-sensitive functions that is not Year 2000 compliant may not be able to
distinguish whether "00" means 1900 or 2000, which may result in failures or the
creation of erroneous results.

     We have defined Year 2000 compliant as the ability to:

     -    Correctly handle date information needed for the December 31, 1999 to
          January 1, 2000 date change;

     -    Function according to the product documentation provided for this date
          change, without changes in operation resulting from the advent of a
          new century, assuming correct configuration;

     -    Respond to two-digit date input in a way that resolves the ambiguity
          as to century in a disclosed, defined and predetermined manner;

     -    Store and provide output of date information in ways that are
          unambiguous as to century if the date elements in interfaces and data
          storage specify the century; and


                                       13
<PAGE>

     -    Recognize the Year 2000 as a leap year.

We designed our current products to be Year 2000 compliant when configured and
used in accordance with the related documentation, and provided that the
underlying operating system of the host machine and any other software used with
or in the host machine or our products are Year 2000 compliant. We continue to
respond to customer questions about non-current versions of our products on a
case-by-case basis.

We have not tested all software obtained from third parties. However, we are
seeking assurances from our vendors that licensed software is Year 2000
compliant. Despite assurances from developers of products incorporated into our
products, our products may contain undetected errors or defects associated with
Year 2000 date functions.

Known or unknown errors or defects in our products could result in delay or loss
of revenues, diversion of development resources, damage to our reputation, or
increased service and warranty costs, any of which could seriously harm our
business, financial condition and results of operations. Some commentators have
predicted significant litigation regarding Year 2000 compliance issues, and we
are aware of such lawsuits against other software vendors. Because of the
unprecedented nature of such litigation, it is uncertain whether or to what
extent we may be affected by it.

We are assessing our material internal information and non-information
technology systems, including both our own software products and third-party
software and hardware technology. We expect to complete testing of our
information technology systems later in 1999. To the extent that we are not able
to test the technology provided by third-party vendors, we are seeking
assurances from such vendors that their systems are Year 2000 compliant. We are
not currently aware of any significant operational issues or costs associated
with preparing our internal information technology and non-information
technology systems for the Year 2000. However, we may experience significant
unanticipated problems and costs caused by undetected errors or defects in the
technology used in our internal information technology and non-information
technology systems.

We do not currently have any information concerning the Year 2000 compliance
status of our customers. Our current or future customers may incur significant
expenses to achieve Year 2000 compliance. If our customers are not Year 2000
compliant, they may experience material costs to remedy problems, they may face
litigation costs and they may delay purchases or implementation of our products.
Year 2000 issues could reduce or eliminate the budgets that current or potential
customers could have for purchases of our products and services. As a result,
our business, financial condition and results of operations could be seriously
harmed.

We have funded our Year 2000 plan from cash balances and have not separately
accounted for these costs in the past. To date, these costs have not been
significant. We will incur additional costs related to the Year 2000 plan for
administrative personnel to manage the project, outside contractor assistance,
technical support for our products and product engineering. In addition, we may
experience material problems and costs with Year 2000 compliance that could
seriously harm our business, financial condition and results of operations.

We have not yet fully developed a contingency plan to address situations that
may result if we are unable to achieve Year 2000 readiness of our critical
operations. The cost of developing and implementing such a plan may itself be
significant. Finally, we are also subject to external forces that might
generally affect industry and commerce, such as utility or transportation
company interruptions caused by Year 2000 compliance failures.

RISK FACTORS

In addition to the other information in this Report, the following risk factors
should be carefully considered in evaluating our business and us:

NET PERCEPTIONS IS AN EARLY-STAGE COMPANY AND WE EXPECT TO ENCOUNTER RISKS AND
DIFFICULTIES FREQUENTLY ENCOUNTERED BY EARLY-STAGE COMPANIES IN NEW AND RAPIDLY
EVOLVING MARKETS.

       Net Perceptions was founded in July 1996. We began shipping product in
the first quarter of 1997. The market for our products is unproven. Our limited
operating history makes an evaluation of our future prospects very difficult. We
will encounter risks and difficulties frequently encountered by early-stage
companies in new and


                                       14
<PAGE>

rapidly evolving markets. We may not successfully address any of these risks. If
we do not successfully address these risks, our business, financial condition
and results of operations would be seriously harmed.

OUR QUARTERLY OPERATING RESULTS ARE VOLATILE AND DIFFICULT TO PREDICT. IF WE
FAIL TO MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS, THE
MARKET PRICE OF OUR COMMON STOCK MAY DECREASE SIGNIFICANTLY.

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

       Our quarterly operating results will vary depending on a number of
factors, including:

     -    Demand for our products and services;

     -    Amount and timing of sales transactions for our products and services;

     -    Actions taken by our competitors, including new product introductions;

     -    Our ability to develop, introduce and market new products and
          enhancements to our existing products on a timely basis;

     -    Market readiness for our products;

     -    Changes in our pricing policies or those of our competitors; - o Our
          ability to expand our sales and marketing operations, including hiring
          additional sales personnel;

     -    Our success in developing indirect sales channels;

     -    The deferral of significant revenues until acceptance of software or
          delivery of services as required by an individual license transaction;

     -    Our ability to control costs;

     -    Technological changes in our markets;

     -    The mix of sales among our direct and indirect channels and between
          domestic and international markets;

     -    Deferrals of customer orders in anticipation of product enhancement or
          new products;

     -    The rate of growth in the use of the Internet for commerce and
          communication;

     -    Customer budget cycles and changes in these budget cycles;

     -    Difficulties experienced by our customers or us as a result of Year
          2000 issues; and

     -    General economic factors.


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

     -    Product revenues in any quarter are substantially dependent on orders
          booked and shipped in that quarter, because we operate with very
          little order backlog;

     -    The market in which we compete is relatively new and rapidly evolving;

     -    We expect that, for the foreseeable future, revenues will come from
          licenses to a small number of customers, so delays or cancellations of
          orders by a few customers can significantly impact revenues within a
          quarter;

     -    Our sales cycle varies substantially from customer to customer; and

     -    The timing of large orders can significantly affect revenues within a
          quarter.


                                       15
<PAGE>

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

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

WE HAVE A HISTORY OF LOSSES AND EXPECT TO INCUR LOSSES IN THE FUTURE.

       We had net losses of $3.1 million in the three months ended June 30,
1999, $6.0 million for the six months ended June 30, 1999, $5.0 million in
1998 and $4.7 million in 1997. As of June 30, 1999, we had an accumulated
deficit of $16.7 million. We have not had a profitable quarter and do not
expect to have a profitable quarter in 1999 or 2000. We expect that our
losses will continue to increase in 1999. We expect to continue to incur
significant sales and marketing, research and development and general and
administrative expenses. As a result, we will need to generate significant
quarterly revenues to achieve profitability. We may never achieve
profitability. Although our revenues have grown, we do not believe that we
can sustain these growth rates, or that such growth rates are indicative of
future revenue growth rates.

WE DEPEND ON OUR NET PERCEPTIONS FOR E-COMMERCE PRODUCT. A DECLINE IN THE PRICE
OF, OR DEMAND FOR, OR MARKET ACCEPTANCE OF NET PERCEPTIONS FOR E-COMMERCE WOULD
SERIOUSLY HARM OUR BUSINESS.

       We currently derive a substantial portion of our revenues from our Net
Perceptions for E-commerce product. We anticipate that Net Perceptions for
E-commerce will continue to account for a substantial portion of our revenues
for the foreseeable future. Consequently, a decline in the price of or demand
for Net Perceptions for E-commerce, or its failure to achieve broad market
acceptance, would seriously harm our business, financial condition and results
of operations.

WE FACE INTENSE COMPETITION AND IF WE ARE UNABLE TO COMPETE SUCCESSFULLY OUR
BUSINESS WILL BE SERIOUSLY HARMED.

       The market for our products is intensely competitive, evolving and
subject to rapid technological change. We expect the intensity of competition to
increase in the future. Competitors vary in size and in the scope and breadth of
the products and services offered. In the license of electronic commerce
products, we primarily encounter competition from the LikeMinds division of
Andromedia, the Aptex division of HNC Software and Personify. Microsoft
Corporation recently acquired FireFly Network Inc., a company with collaborative
filtering technology and, as a result, we expect that we will encounter
competition from Microsoft in the future. We expect that if we are successful in
our strategy to leverage our technology into new vertical markets, we will
encounter many additional, market-specific competitors. In addition, because
there are relatively low barriers to entry in the software market, we expect
additional competition from other established and emerging companies as the
Internet software market continues to develop and expand.

       Many of our competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources, significantly
greater name recognition and a larger installed base of customers than we have.
In addition, many of our competitors have well-established relationships with
current and potential customers of ours, have extensive knowledge of our
industry and are capable of offering a single-vendor solution. As a result, our
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements, or to devote greater resources to the
development, promotion and sale of their products than we can. In addition,
current and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products to address customer needs. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. We also expect that competition will increase as a
result of software industry consolidations.

       Increased competition is likely to result in price reductions, reduced
gross margins and loss of market share, any of which could seriously harm our
business, financial condition and results of operations. We may not be able to
compete successfully against current and future competitors.


                                       16
<PAGE>

OUR PRODUCTS HAVE A LENGTHY SALES CYCLE. AS A RESULT, IT IS DIFFICULT TO PREDICT
THE QUARTER IN WHICH A SALE MAY OCCUR.

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

WE HAVE A LENGTHY IMPLEMENTATION CYCLE. IN ADDITION, ONLY A SMALL NUMBER OF OUR
CUSTOMERS HAVE A DEPLOYED AND OPERATING APPLICATION UTILIZING OUR PRODUCTS. AS A
RESULT, WE CANNOT BE CERTAIN THAT OUR PRODUCTS WILL PERFORM AND BE RECEIVED AS
WE EXPECT.

       The implementation, including application design and deployment, of our
products requires a significant commitment of resources by our customers. The
time required for implementation of Net Perceptions for E-commerce and Net
Perceptions for Call Centers has varied depending on the customer's application
of the product. Additionally, implementation of Net Perceptions for E-Commerce
often does not begin until a customer otherwise undertakes to update its web
site, which generally occurs only once or twice per year.

       We have currently licensed our products to more than 110 customers.
However, only a limited number of these customers have a deployed and operating
application utilizing our products. Because most of our customers have not yet
fully implemented and deployed our products, we cannot be certain that our
products will:

     -    Perform as designed;

     -    Deliver the desired level of economic benefit to our customers;

     -    Meet the other expectations and needs of our customers;

     -    Achieve any significant degree of market acceptance; or

     -    Perform to the level necessary to generate good customer references
          and repeat customers.

       If implementation services constitute a significant part of a product
sales transaction, we recognize a substantial portion of our revenues from such
sales transaction upon the delivery of these services. As a result, delays in
service delivery could cause significant reduction in our license revenues and
operating results for any particular period. The occurrence of any of these
events could seriously harm our business, financial condition and results of
operations.

WE NEED TO SUBSTANTIALLY EXPAND OUR DIRECT SALES OPERATIONS IF WE ARE TO
INCREASE MARKET AWARENESS AND SALES OF OUR PRODUCTS AND SERVICES. IF WE FAIL TO
DO SO, OUR BUSINESS WILL BE SERIOUSLY HARMED.

       We need to substantially expand our direct sales operations if we are to
increase market awareness and sales of our products and services. If we fail to
increase our direct sales capabilities as we have planned, our business,
financial condition and results of operations would be seriously harmed. Our
products and services require a sophisticated sales effort targeted at senior
management of our prospective customers. We have recently expanded our direct
sales force and plan to hire additional sales personnel. As of June 30, 1999,
our direct sales organization consisted of 35 employees. Competition for
qualified sales personnel is intense, and we might not be able to hire the kind
and number of sales personnel we are targeting. New hires will require extensive
training and typically take several months to achieve productivity. We cannot be
certain that our recent hires will be as productive as necessary.

WE ARE DEPENDENT ON AND PLAN TO INCREASE THE SIZE OF OUR PROFESSIONAL SERVICES
ORGANIZATION. IF WE DO NOT ADD MORE CUSTOMER SUPPORT PERSONNEL, OUR BUSINESS
WILL BE SERIOUSLY HARMED.

       Customers that license our software typically engage our professional
services organization to assist with support, training, consulting and
implementation. We believe that growth in our product sales depends on our
ability to provide our clients with these services and to educate resellers on
how to use our products. From time to time,


                                       17
<PAGE>

we receive customer complaints about the timeliness and accuracy of our customer
support. We plan to add more customer support personnel in order to address
current customer support needs. If we are not successful hiring such personnel,
our business, financial condition and results of operations could be seriously
harmed. As of June 30, 1999, our professional services organization consisted of
14 employees. We are in a new market and there are a limited number of people
who have the skills needed to provide the services that our customers demand.
Competition for qualified service personnel is intense. We cannot be certain
that we can attract or retain a sufficient number of the highly-qualified
service personnel that our business needs.

OUR BUSINESS COULD BE SERIOUSLY IMPACTED BY THE PRIVACY CONCERNS OF ELECTRONIC
COMMERCE USERS.

       Typically, our Net Perceptions for E-commerce product captures customer
preference and profile information each time a customer visits a web site or
volunteers information in response to survey questions. Privacy concerns may
cause visitors to resist providing the personal data necessary to support this
profiling capability. More importantly, even the perception of privacy concerns,
whether or not valid, may indirectly inhibit market acceptance of our products.
In addition, legislative or regulatory requirements may heighten such concerns
if web site users must be notified that the data captured after visiting web
sites may be used by marketing entities to unilaterally direct product promotion
and advertising to that user. We are not aware of any such legislation or
regulatory requirements currently in effect in the United States. Various other
countries and political entities, such as the European Economic Community, have
adopted such legislation or regulatory requirements. The United States may adopt
similar legislation or regulatory requirements. If customer privacy concerns are
not adequately addressed or if restrictive legislation is adopted in the United
States, our business, financial condition and results of operations could be
seriously harmed.

       Our Net Perceptions for E-commerce product can use data captured with
"cookies" to track demographic information and user preferences. A "cookie" is a
bit of information keyed to a specific server, file pathway or directory
location that is stored on a computer user's hard drive, possibly without the
user's knowledge, but generally removable by the user. Some countries have
imposed laws limiting the use of cookies, and a number of Internet commentators,
advocates and governmental bodies in the United States and other countries have
urged passage of laws limiting or abolishing the use of cookies. If such laws
are passed, our business, financial condition and results of operations could be
seriously harmed.

WE RECENTLY ANNOUNCED NET PERCEPTIONS FOR CALL CENTERS, WHICH MAY NOT ACHIEVE
MARKET ACCEPTANCE.

       We announced the commercial launch of Net Perceptions for Call Centers in
November 1998 and made our initial shipments in early 1999. Net Perceptions for
Call Centers has not received any degree of market acceptance. There are
significant risks inherent in product introductions such as Net Perceptions for
Call Centers. This product may not address some or all of the needs of customers
and may contain undetected errors or failures. A lack of necessary features or
errors or failures in Net Perceptions for Call Centers will likely result in
loss or delay of market acceptance for this product. We expect that our future
financial performance will depend significantly on the successful sales,
implementation and market acceptance of Net Perceptions for Call Centers, which
may not occur on a timely basis or at all.

WE ARE DEPENDENT ON POTENTIAL NEW PRODUCTS. IF THESE POTENTIAL NEW PRODUCTS ARE
NOT LAUNCHED ON A TIMELY BASIS OR DO NOT ACHIEVE MARKET ACCEPTANCE, OUR BUSINESS
WILL BE SERIOUSLY HARMED.

       We currently have plans to introduce and market potential new products in
1999 and 2000. If these potential new products are not launched on a timely
basis or do not achieve market acceptance, our business, financial condition and
results of operations will be seriously harmed. Our potential new products are:

     -    Net Perceptions for Ad Targeting, which is being designed to be a tool
          for targeting online banner advertisements; and

     -    Net Perceptions for Marketing Campaigns, which is being designed to be
          a tool for producing targeted promotional electronic mail messages;
          and

     -    Net Perceptions for Knowledge Management, which is being designed to
          apply the real-time relationship management capabilities of our
          recommendation platform to knowledge management.


                                       18
<PAGE>

       Our potential new products are subject to significant technical risks. We
may fail to introduce or deploy such potential new products on a timely basis,
or at all. In the past, we have experienced significant delays in the
commencement of commercial shipments of our new releases and new products. These
delays caused customer frustrations and delay or loss of product revenues. Some
of our competitors currently offer products with features and functionality
similar to those that may be offered in our potential new products. In the past,
we have also experienced delays in purchases of our products by customers
anticipating our launch of new releases or new products. Our business, financial
condition and results of operations would be seriously harmed if customers defer
material orders in anticipation of new releases or new product introductions.

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

WE DEPEND ON THE CONTINUED GROWTH OF OUR CUSTOMER BASE AND THE RETENTION OF OUR
CUSTOMERS. IF WE FAIL TO GENERATE REPEAT OR EXPANDED BUSINESS FROM OUR CURRENT
AND FUTURE CUSTOMERS, OUR BUSINESS WILL BE SERIOUSLY HARMED.

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

IF WE DO NOT RESPOND TO RAPID TECHNOLOGICAL CHANGES, OUR PRODUCTS COULD BECOME
OBSOLETE AND OUR BUSINESS WILL BE SERIOUSLY HARMED.

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

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

     -    Keep pace with technological developments and emerging industry
          standards; and

     -    Address the increasingly sophisticated needs of our customers.

       In addition, we may:

     -    Fail to develop and market new products and enhancements to existing
          products that respond to technological changes or evolving industry
          standards;

     -    Experience difficulties that could delay or prevent the successful
          development, introduction and marketing of these new products and
          enhancements to existing products; and

     -    Fail to develop new products and enhancements to existing products
          that adequately meet the requirements of the marketplace or achieve
          market acceptance.


                                       19
<PAGE>

       In any such event, our business, financial condition and results of
operations would be seriously harmed.

WE RELY ON RESELLERS AND NEED TO DEVELOP THIS SALES CHANNEL. IF OUR RESELLER
CHANNEL DOES NOT PERFORM ADEQUATELY, OUR BUSINESS COULD BE SERIOUSLY HARMED.

       We intend to increase the proportion of our customers licensed through
our reseller channels, which include distributors, resellers and systems
integrators. Our failure to achieve this could seriously harm our business,
financial condition and results of operations. Our agreements with such
resellers are generally not exclusive and in many cases may be terminated by
either party without cause. Many of these resellers do not have minimum purchase
or resale requirements. Many of these resellers carry product lines that are
competitive with our product lines. These resellers may not give a high priority
to the marketing of our products or may not continue to carry our products. They
may give a higher priority to other products, including the products of
competitors. We may not retain any of our current resellers or successfully
recruit new resellers. Events or occurrences of this nature could seriously harm
our business, financial condition and results of operations. In addition, any
sales through resellers will have lower gross margins than direct sales.

WE RELY ON ORIGINAL EQUIPMENT MANUFACTURERS AND NEED TO DEVELOP THIS SALES
CHANNEL. IF OUR ORIGINAL EQUIPMENT MANUFACTURER CHANNEL DOES NOT PERFORM
ADEQUATELY, OUR BUSINESS COULD BE SERIOUSLY HARMED.

       We intend to increase sales through original equipment manufacturers. We
may fail to implement this strategy, which could seriously harm our business,
financial condition and results of operations. We are currently investing, and
intend to continue to invest, resources to develop this sales channel. Such
investments could seriously harm our operating margins. We depend on our
original equipment manufacturers' abilities to develop product enhancements or
new products on a timely and cost-effective basis that will meet changing
customer needs and respond to emerging industry standards and other
technological changes. Our original equipment manufacturers may not effectively
meet these technological challenges. These original equipment manufacturers:

     -    Are not within our control;

     -    May incorporate into their products the technologies of other
          companies in addition to or in place of our technologies; and

     -    Are not obligated to purchase our products.

Our original equipment manufacturers may not continue to carry our products. Our
inability to recruit, or our loss of, important original equipment manufacturers
could seriously harm our business, financial condition and results of
operations. In addition, any sales through original equipment manufacturers will
have lower gross margins than direct sales.

WE DEPEND ON INTERNATIONAL SALES AND, THEREFORE, OUR BUSINESS IS SUSCEPTIBLE TO
NUMEROUS RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS.

       Licenses and services sold to customers located outside of the United
States accounted for approximately 24% and 6% of our total revenues for the
quarters ended June 30, 1999 and 1998, respectively. International sales
accounted for approximately 22% and 9% of our total revenues for the six months
ended June 30, 1999 and 1998, respectively. We expect international revenues to
account for a significant percentage of total revenues in the future, and we
believe that we must continue to expand our international sales and marketing
activities in order to be successful. To successfully expand international
sales, we must:

     -    Establish international operations;

     -    Hire international personnel; and

     -    Recruit additional international resellers.


                                       20
<PAGE>

       This will require significant management attention and financial
resources and could seriously harm our operating margins. We have very limited
experience in marketing, selling and distributing our products and services
internationally. We currently have four employees located in the United Kingdom.
All other employees are located in the United States.

       The acceptance and use of the Internet in international markets are in
earlier stages of development than in the United States, particularly with the
Internet as a method for conducting commerce. If the Internet or electronic
commerce fail to gain sufficient acceptance in international markets or we fail
to further expand our international operations in a timely manner, our business,
financial condition and results of operations could be seriously harmed. In
addition, we may fail to maintain or increase international market demand for
our products.

WE DEPEND ON TECHNOLOGY LICENSED FROM OTHER PARTIES. IF WE ARE UNABLE TO
CONTINUE TO UTILIZE SUCH TECHNOLOGY, OUR BUSINESS WOULD BE SERIOUSLY HARMED.

       We license personalization screening and collaborative filtering
technology known as the "GroupLens" technology from the University of Minnesota
pursuant to an exclusive, worldwide, license agreement. The exclusive rights
granted are subject to non-exclusive rights retained by:

     -    AT&T Corporation, for portions of the technology funded by AT&T;

     -    The United States government, for government-funded aspects of the
          technology, but solely for government purposes; and

     -    The University of Minnesota, for its own educational and research
          purposes.

       The license agreement also provides that for the three academic years
ending in the spring of 2000, we will pay research fees to the University of
Minnesota for exclusive rights to commercial applications that the research may
produce related to improvements to the GroupLens technology. If the agreement is
terminated prior to the end of the 1999-2000 academic year or if we are unable
to renew the agreement, we will no longer have access to the research conducted
by the University of Minnesota, which could result in an increased burden on our
product development department, as well as a reduction in improvements to our
core technology. We may not be able to renew the agreement, hire adequate
personnel to meet any increased demands on our product development department,
or continue to advance our technology on a timely basis. If we are unable to
renew the agreement, hire sufficient personnel or develop product improvements
in a timely manner, our business, financial condition and results of operations
would be seriously harmed.

       We integrate third-party software in our software products. For instance,
we license the Orbix object request broker from IONA Technologies for use in our
Net Perceptions for E-commerce, Net Perceptions for Call Centers and Net
Perceptions Recommendation Engine products. The agreement expires in July 2001.
The third-party software may not continue to be available to us on commercially
reasonable terms. We may not be able to renew this agreement or develop
alternative technology. If we cannot maintain licenses to key third-party
software, such as Orbix, develop similar technology or license similar
technology from another source on a timely or commercially feasible basis, our
business, financial condition and results of operations could be seriously
harmed.

WE ARE DEPENDENT UPON KEY PERSONNEL. THE LOSS OF THE SERVICES OF ONE OR MORE OF
OUR KEY PERSONNEL, OR OUR FAILURE TO ATTRACT, ASSIMILATE AND RETAIN OTHER HIGHLY
QUALIFIED PERSONNEL IN THE FUTURE WOULD SERIOUSLY HARM OUR BUSINESS.

       Our future success depends on the continued service of our senior
management, product development and sales personnel. The loss of the services of
one or more of our key personnel could seriously harm our business, financial
condition and results of operations. None of these persons is bound by an
employment agreement. As of June 30, 1999, Net Perceptions consisted of 130
employees. We only carry key person life insurance on Steven J. Snyder, our
President and Chief Executive Officer. The amount of such policy is $1,000,000.
Our future success also depends on our continuing ability to attract, hire,
train and retain a substantial number of highly skilled managerial, technical,
sales, marketing and customer support personnel. Competition for such personnel
is intense, and we may fail to retain our key employees, or attract, assimilate
or retain other highly qualified personnel in the future. If so, our business,
financial condition and results of operations could be seriously harmed.


                                       21
<PAGE>

WE DEPEND ON INCREASING USE OF THE INTERNET AND ON THE GROWTH OF ELECTRONIC
COMMERCE. IF THE USE OF THE INTERNET AND ELECTRONIC COMMERCE DO NOT GROW AS
ANTICIPATED, OUR BUSINESS WILL BE SERIOUSLY HARMED.

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

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

       Our business, financial condition and results of operations would be
seriously harmed if:

     -    Use of the Internet, the web and other online services does not
          continue to increase or increases more slowly than expected;

     -    The infrastructure for the Internet, the web and other online services
          does not effectively support expansion that may occur; or

     -    The Internet, the web and other online services do not become a viable
          commercial marketplace, which would inhibit the development of
          electronic commerce and of the need for our Net Perceptions for
          E-commerce product.

PROTECTION OF OUR INTELLECTUAL PROPERTY MAY NOT BE ADEQUATE.

       We are a technology company. Our success depends on protecting our
intellectual property, which are our most important assets. If we do not
adequately protect our intellectual property, our business, financial condition
and results of operations will be seriously harmed.

       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 our source code. We seek to protect our software,
documentation and other written materials under trade secret and copyright laws,
which afford only limited protection.

       We have four pending U.S. patent applications. We also have license
rights to one issued U.S. patent and two allowed U.S. patent applications from
the University of Minnesota. We have no issued international patents. We have
two pending international patent applications. It is possible that no patents
will issue from the currently pending patent applications. It is also possible
that our current patents or potential future patents may be found invalid or
unenforceable, or otherwise be successfully challenged. It is also possible that
any patent issued to us may not provide us with any competitive advantages. It
is also possible that we may not develop future proprietary products or
technologies that are patentable, and that the patents of others may seriously
limit our ability to do business. In this regard, we have not performed any
comprehensive analysis of patents of others that may limit our ability to do
business.

       Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy aspects of our products or to obtain and use
information that we regard as proprietary. Policing unauthorized use of our
products is


                                       22
<PAGE>

difficult, and while we are unable to determine the extent to which piracy of
our software products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of some foreign countries do not protect our
proprietary rights to as great an extent as do the laws of the United States.
Our means of protecting our proprietary rights may not be adequate and our
competitors may independently develop similar technology, duplicate our products
or design around patents issued to us or our other intellectual property.

       There has been a substantial amount of litigation in the software
industry regarding intellectual property rights. We have from time to time
received claims that we are infringing third parties' intellectual property
rights. It is possible that in the future third parties may claim that our
current or potential future products infringe their intellectual property. We
expect that software developers will increasingly be subject to infringement
claims as the number of products and competitors in our industry segment grows
and the functionality of products in different industry segments overlaps. Any
such claims, with or without merit, could be time-consuming, result in costly
litigation, cause product shipment delays or require us to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required, may not
be available on terms acceptable to us or at all, which could seriously harm our
business, financial condition and results of operations.

IN ORDER TO MANAGE OUR GROWTH AND EXPANSION, WE WILL NEED TO IMPROVE AND
IMPLEMENT NEW SYSTEMS, PROCEDURES AND CONTROLS.

       We have recently experienced a period of significant expansion of our
operations that has placed a significant strain upon our management systems and
resources. In addition, we have recently hired a significant number of employees
and plan to further increase our total headcount. Our headcount has increased
from 14 at December 31, 1996 to 34 at December 31, 1997 to 70 at December 31,
1998 to 130 at June 30, 1999. We also plan to expand the geographic scope of our
customer base and operations. This expansion has resulted and will continue to
result in substantial demands on our management resources. Our ability to
compete effectively and to manage future expansion of our operations, if any,
will require us to continue to improve our financial and management controls,
reporting systems and procedures on a timely basis, and expand, train and manage
our employee work force. Our failure to do so could seriously harm our business,
financial condition and results of operations.

OUR BUSINESS COULD BE AFFECTED BY YEAR 2000 ISSUES. (See "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Year
2000 Readiness.")

OUR CURRENT REVENUE RECOGNITION PRACTICES MAY NEED TO CHANGE, WHICH COULD
SERIOUSLY HARM OUR BUSINESS.

       The American Institute of Certified Public Accountants issued Statement
of Position ("SOP") 97-2, "Software Revenue Recognition," in October 1997 and
amended it by Statements of Position 98-4 and 98-9. However, full
implementation guidelines for these standards have not yet been issued and
there may be additional new pronouncements issued in the future. Our current
revenue accounting practices may need to change and such changes could
seriously harm our future revenues and earnings.

INCREASING GOVERNMENT REGULATION COULD LIMIT THE MARKET FOR OUR PRODUCTS AND
SERVICES, WHICH COULD SERIOUSLY HARM OUR BUSINESS.

       As Internet commerce evolves, we expect that federal, state or foreign
agencies will adopt regulations covering issues such as user privacy, pricing,
content and quality of products and services. If enacted, such laws, rules or
regulations could limit the market for our products and services, which could
seriously harm our business, financial condition and results of operations.
Although many of these regulations may not apply to our business directly, we
expect that laws regulating the solicitation, collection or processing of
personal/customer information could indirectly affect our business. The
Telecommunications Act of 1996 prohibits some types of information and content
from being transmitted over the Internet. The prohibition's scope and the
liability associated with a Telecommunications Act violation are currently
unsettled. In addition, although substantial portions of the Communications
Decency Act were held to be unconstitutional, we cannot be certain that similar
legislation will not be enacted and upheld in the future. It is possible that
such legislation could expose companies involved in Internet commerce to
liability, which could limit the growth of Internet commerce generally.
Legislation like the Telecommunications Act and the Communications Decency Act
could dampen the growth in web usage and decrease its acceptance as a
communications and commercial medium.


                                       23
<PAGE>

WE MAY NEED TO RAISE ADDITIONAL CAPITAL THAT MAY NOT BE AVAILABLE.

       We expect that the net proceeds from the initial public offering will be
sufficient to meet our working capital and capital expenditure needs for at
least the next 12 months. After that, we may need to raise additional funds and
we cannot be certain that we will be able to obtain additional financing on
favorable terms, if at all. If we cannot raise funds, if needed, on acceptable
terms, we may not be able to develop or enhance our products, take advantage of
future opportunities or respond to competitive pressures or unanticipated
requirements, which could seriously harm our business, financial condition and
results of operations.

WE ARE SUBJECT TO POTENTIAL PRODUCT LIABILITY CLAIMS.

       Because our customers use our products for mission-critical applications
such as electronic commerce, errors or defects in or other performance problems
with our products could result in financial or other damages to our customers.
Our customers could seek damages for losses from us. Although our license
agreements typically contain provisions designed to limit our exposure to
product liability claims, existing or future laws or unfavorable judicial
decisions could negate such limitation of liability provisions. We have not
experienced any product liability claims to date. However, a product liability
claim brought against us, even if not successful, would likely be time-consuming
and costly. A product liability claim could seriously harm our business,
financial condition and results of operations.

WE ARE AT RISK OF SECURITIES CLASS ACTION LITIGATION DUE TO OUR EXPECTED STOCK
PRICE VOLATILITY.

       In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and divert management's attention
and resources, which could seriously harm our business, financial condition and
results of operations.


                                       24
<PAGE>

PART II.  OTHER INFORMATION

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

(c)  Changes in Securities.

During the quarter ended March 31, 1999, we granted options to purchase 530,936
shares of common stock to employees, consultants and other service providers of
the Company under our 1996 Stock Plan.

During the quarter ended March 31, 1999, employees, consultants and other
service providers of the Company exercised options to purchase 77,816 shares of
common stock.

During the quarter ended June 30, 1999 and prior to the closing of our initial
public offering, we granted options to purchase 435,000 shares of common stock
to employees, consultants and other service providers of the Company under our
1999 Equity Incentive Plan and our 1996 Stock Plan.

During the quarter ended June 30, 1999 and prior to the closing of our initial
public offering employees, consultants and other service providers of the
Company exercised options to purchase 100,924 shares of common stock.

On April 28, 1999, the Company issued 290,911 shares of Common Stock to Trans
Cosmos, Inc. pursuant to the conversion of a promissory note.

The sale of the above securities was deemed to be exempt from registration under
the Securities Act of 1933 ("the Act") in reliance upon Section 4(2) of the Act
or Rule 701 promulgated under Section 3(b) of the Act.

(d) Use of Proceeds.

On April 28, 1999, Net Perceptions completed the initial public offering of its
common stock. The managing underwriters in the offering were BancBoston
Robertson Stephens Inc., Hambrecht & Quist LLC, U.S. Bancorp Piper Jaffray Inc.
and Wit Capital Corporation. The shares of common stock sold in the offering
were registered under the Securities Act of 1933, as amended, on a Registration
Statement on Form S-1 (No. 333-71919). The Securities and Exchange Commission
declared the Registration Statement effective on April 22, 1999.

The offering closed on April 28, 1999 after we had sold all of the 3,650,000
shares of common stock registered under the Registration Statement. The Company
sold an additional 547,500 shares of common stock registered under the
Registration Statement in connection with the exercise of the underwriters'
over-allotment option on May 25, 1999. The initial public offering price was $14
per share for an aggregate initial public offering of $58.8 million.

We paid a total of $4.1 million in underwriting discounts and commissions. In
addition, the following table sets forth the estimated costs and expenses, other
than underwriting discounts and commissions, incurred in connection with the
offering. None of the amounts shown was paid directly or indirectly to any
director, officer, general partner of Net Perceptions or their associates,
persons owning 10 percent or more of any class of equity securities of Net
Perceptions or an affiliate of Net Perceptions.

<TABLE>

                  <S>                                         <C>
                  SEC registration fee                        $      14,000
                  NASD fee                                            4,000
                  Nasdaq National Market initial listing fee         96,000
                  Printing and engraving                            271,000
                  Legal fees and expenses                           366,000
                  Accounting fees and expenses                      224,000
                  Directors and officers liability insurance        350,000
                  Blue sky fees and expenses                          5,000
                  Transfer agent fees                                 6,000
                  Miscellaneous                                     108,000
                                                              -------------

                                    Total                     $   1,444,000
                                                              =============

</TABLE>


                                       25
<PAGE>

After deducting the underwriting discounts and commissions and the offering
expenses, the estimated net proceeds to Net Perceptions from the offering were
approximately $53.2 million, which have been invested in interest bearing,
investment grade securities.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On April 8, 1999, the Company's stockholders approved (i) an amendment and
restatement of the Company's Certificate of Incorporation filed prior to the
initial public offering, which, among other things, effected a two-for-one stock
split of the Company's outstanding Preferred Stock and Common Stock; (ii) an
amendment and restatement of the Company's Certificate of Incorporation filed
following the closing of the initial public offering, which, among other things,
increased the number of authorized shares of Common Stock and eliminated the
right of stockholders to take action by written consent; (iii) an amendment and
restatement of the Company's bylaws, which, among other things, limited the
stockholders' right to call a special meeting of the stockholders and provided
for indemnification of officers and directors of the Company to the full extent
authorized or permitted by under Delaware law; (iv) the adoption of the
Company's 1999 Equity Incentive Plan; (v) the adoption of the Company's Employee
Stock Purchase Plan; (vi) the adoption of the Company's 1999 Non-Employee
Director Option Plan; and (vii) a form of indemnification agreement to be
entered into with each of the officers and directors of the Company. The number
of shares of each class and series outstanding was follows (of which a majority
of the holders of each class and series of stock outstanding voted to approve
the action):

<TABLE>
<CAPTION>

                                                      Outstanding

                  <S>                                 <C>
                  Series A Preferred Stock             1,084,065
                  Series B Preferred Stock             1,932,368
                  Series C Preferred Stock             2,317,917
                  Common Stock                         3,353,206

</TABLE>

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)    Exhibits:

       Exhibit 27.  Financial Data Schedule

(b)    No reports on Form 8-K were filed by Net Perceptions during the quarter
       ended June 30, 1999.


                                       26
<PAGE>

                                   SIGNATURES

Pursuant to the requirements of the Securities 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 16, 1999          By: /s/ Thomas M. Donnelly
                                          ----------------------------------
                                          Thomas M. Donnelly
                                          CHIEF FINANCIAL OFFICER

                                          (Duly authorized officer and prinicpal
                                          financial and accounting officer)


                                       27