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UNITED STATESSECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q

(Mark One)x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934For the Quarterly Period Ended September 30, 2003ORo TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934For the Transition Period From  to .


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Commission File Number: 000-25781

NET PERCEPTIONS, INC.
(Exact Name of Registrant as Specified in its Charter)

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


7700 France Avenue South
Edina, Minnesota 55435
(Address of principal executive offices, Zip Code)

(952) 842-5000
(Registrants telephone number, including area code)

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

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

As of October 31, 2003, there were outstanding 28,145,338 shares of the
registrants Common Stock, $0.0001 par value.





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TABLE OF CONTENTS



|                                            |                                                                                               |                                                                                                       |  |  |  |  |  | 
|------------------------------------------- | --------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION              
|                                            | Item 1. Financial Statements                                                                 
|                                            |                                                                                               | Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002                           
|                                            |                                                                                               | Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2003 and 2002
|                                            |                                                                                               | Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002          
|                                            |                                                                                               | Notes to the Consolidated Financial Statements                                                       
|                                            | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                            | Item 3. Quantitative and Qualitative Disclosures about Market Risk                           
|                                            | Item 4. Controls and Procedures                                                              
|PART II. OTHER INFORMATION                 
|                                            | Item 1. Legal Proceedings                                                                    
|                                            | Item 2. Changes in Securities and Use of Proceeds                                            
|                                            | Item 3. Defaults Upon Senior Securities                                                      
|                                            | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                                            | Item 5. Other Information                                                                    
|                                            | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                 
|EXHIBIT INDEX                              
|EX-10(a) Compensation Agreement            
|EX-10(b) Surrender of Lease Agreement      
|EX-10(c) Surrender and Acceptance Agreement
|EX-31 Certification Pursuant to Section 302
|EX-32 Certification Pursuant to Section 906



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##### Table of Contents



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

TABLE OF CONTENTS

PagePART I. FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsConsolidated Balance Sheets as of September 30, 2003 and December 31, 2002
    
    3Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 2003 and 2002
    
    4Consolidated Statements of Cash Flows for the Nine Months Ended September
30, 2003
and 2002
    
    5Notes to the Consolidated Financial Statements
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    12Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    23Item 4.
    
    Controls and Procedures
    
    23PART II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    24Item 2.
    
    Changes in Securities and Use of Proceeds
    
    25Item 3.
    
    Defaults Upon Senior Securities
    
    25Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    25Item 5.
    
    Other Information
    
    25Item 6.
    
    Exhibits and Reports on Form 8-K
    
    26SIGNATURES
    
    27EXHIBIT INDEX
    
    28


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##### Table of Contents






PART I. FINANCIAL INFORMATION




Item 1. Financial Statements




NET PERCEPTIONS, INC.

CONSOLIDATED BALANCE SHEETS
(in thousands)

September 30,
    
    
    December 31,2003
    
    
    2002(Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    12,187
    
    
    $
    39,729Short-term investments
    
    
    
    
    
    
    23,230Accounts receivable, net
    
    
    153
    
    
    
    389Prepaid expenses and other current assets
    
    
    792
    
    
    
    627Total current assets
    
    
    13,132
    
    
    
    63,975Property and equipment, net
    
    
    90
    
    
    
    1,096Other assets
    
    
    336
    
    
    
    725Total assets
    
    $
    13,558
    
    
    $
    65,796Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    
    
    
    $
    52Accrued liabilities
    
    
    282
    
    
    
    1,470Deferred revenue
    
    
    626
    
    
    
    750Accrued restructuring costs
    
    
    50
    
    
    
    4,672Total current liabilities
    
    
    958
    
    
    
    6,944Deferred Rent
    
    
    
    
    
    
    510Total liabilities
    
    
    958
    
    
    
    7,454Commitments and contingenciesStockholders equity:Common stock
    
    
    2
    
    
    
    2Additional paid-in capital
    
    
    233,760
    
    
    
    275,053Accumulated other comprehensive income
    
    
    
    
    
    
    122Accumulated deficit
    
    
    (221,162
    )
    
    
    (216,835
    )Total stockholders equity
    
    
    12,600
    
    
    
    58,342Total liabilities and stockholders equity
    
    $

    13,558
    
    
    $
    65,796


See accompanying notes to the consolidated financial statements.

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NET PERCEPTIONS, INC.

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

Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2003
    
    
    2002
    
    
    2003
    
    
    2002Revenues:Product
    
    $
    95
    
    
    $
    613
    
    
    $
    576
    
    
    $
    1,558Service and maintenance
    
    
    343
    
    
    
    999
    
    
    
    1,391
    
    
    
    2,793Total revenues
    
    
    438
    
    
    
    1,612
    
    
    
    1,967
    
    
    
    4,351Cost of revenues:Product
    
    
    
    
    
    
    68
    
    
    
    8
    
    
    
    254Service and maintenance
    
    
    164
    
    
    
    473
    
    
    
    635
    
    
    
    1,782Total cost of revenues
    
    
    164
    
    
    
    541
    
    
    
    643
    
    
    
    2,036Gross Margin
    
    
    274
    
    
    
    1,071
    
    
    
    1,324
    
    
    
    2,315Operating expenses:Sales and marketing
    
    
    157
    
    
    
    753
    
    
    
    1,344
    
    
    
    3,610Research and development
    
    
    427
    
    
    
    1,213
    
    
    
    1,616
    
    
    
    4,797General and administrative
    
    
    568
    
    
    
    514
    
    
    
    1,280
    
    
    
    2,191Restructuring related charges
    
    
    1,051
    
    
    
    
    
    
    
    2,251
    
    
    
    768Amortization of intangibles
    
    
    
    
    
    
    28
    
    
    
    
    
    
    
    83Total operating expenses
    
    
    2,203
    
    
    
    2,508
    
    
    
    6,491
    
    
    
    11,449Loss from operations
    
    
    (1,929
    )
    
    
    (1,437
    )
    
    
    (5,167
    )
    
    
    (9,134
    )Other income (expense):Interest income
    
    
    115
    
    
    
    494
    
    
    
    610
    
    
    
    1,841Interest expense
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    (17
    )Other income (expense)
    
    
    101
    
    
    
    321
    
    
    
    229
    
    
    
    (1,126
    )Total other income, net
    
    
    216
    
    
    
    811
    
    
    
    839
    
    
    
    698Net loss
    
    $
    (1,713
    )
    
    $
    (626
    )
    
    $
    (4,328
    )
    
    $
    (8,436
    )Net loss per share:Basic and diluted
    
    $
    (0.06
    )
    
    $
    (0.02
    )
    
    $
    (0.16
    )
    
    $
    (0.31
    )Shares used in computing basic
and diluted net loss per share
    
    
    27,796
    
    
    
    27,298
    
    
    
    27,735
    
    
    
    27,211


See accompanying notes to the consolidated financial statements.

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NET PERCEPTIONS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)

Nine Months EndedSeptember 30,2003
    
    
    2002Cash flows from operating activities:Net loss
    
    $
    (4,328
    )
    
    $
    (8,436
    )Reconciliation of net loss to net cash used in operating activities:Depreciation and amortization
    
    
    477
    
    
    
    1,754Provision for doubtful accounts
    

    
    (65
    )
    
    
    70Compensation expense related to stock options
    
    
    
    
    
    
    35Restructuring related charges
    
    
    2,251
    
    
    
    768Amortization of premiums on investments
    
    
    183
    
    
    
    163Changes in assets and liabilities:Accounts receivable
    
    
    301
    
    
    
    675Prepaid expenses & other assets
    
    
    224
    
    
    
    1,155Accounts payable
    
    
    (52
    )
    
    
    (50
    )Accrued expenses and other liabilities
    
    
    (8,042
    )
    
    
    (3,829
    )Deferred revenue
    
    
    (124
    )
    
    
    (581
    )Total adjustments
    
    
    (4,847
    )
    
    
    160Net cash used in operating activities
    
    
    (9,175
    )
    
    
    (8,276
    )Cash flows from investing activities:Purchases of short-term investments
    
    
    (16,121
    )
    
    
    (29,535
    )Sales and maturities of short-term investments
    
    
    39,046
    
    
    
    58,018Net cash provided by investing activities
    
    
    22,925
    
    
    
    28,483Cash flows from financing activities:Cash distribution to stockholders
    
    
    (42,198
    )Proceeds from exercise of stock options, net of stock repurchases
    
    
    893
    
    
    
    63Proceeds from issuance of stock under employee stock purchase plan
    
    
    12
    
    
    
    38Principal payments under capital lease obligations and notes payable
    
    
    
    
    
    
    (97
    )Net cash provided by financing activities
    
    
    (41,293
    )
    
    
    4Net increase (decrease) in cash and cash equivalents
    
    
    (27,543
    )
    
    
    20,211Cash and cash equivalents at beginning of period
    
    
    39,729
    
    
    
    14,929Cash and cash equivalents at end of period
    
    $
    12,187
    
    
    $
    35,140


See accompanying notes to the consolidated financial statements.

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NET PERCEPTIONS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)

Note 1. Basis of Presentation

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

Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These financial statements should
be read in conjunction with the Companys financial statements and notes
thereto for the year ended December 31, 2002, which are contained in the
Companys Annual Report on Form 10-K (File No. 000-25781). The results of
operations for the interim periods presented are not necessarily indicative of
results that may be expected for any other interim period or for the full
fiscal year.

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

Accumulated other comprehensive income (loss) consists entirely of
unrealized gain (loss) on available-for-sale investments. Changes in unrealized
gain (loss) on available-for-sale investments were $(90) and $(209) for the
third quarter of 2003 and 2002 and $(122) and $(523) for the nine months ended
September 30, 2003 and 2002, respectively. Comprehensive loss was $1,803 and
$835 for the three months ended September 30, 2003 and 2002, respectively, and
$4,450 and $8,959 for the nine months ended September 30, 2003 and 2002.

Note 2. Plan of Liquidation

The condensed consolidated financial statements were prepared on the going
concern basis of accounting, which contemplates realization of assets and
satisfaction of liabilities in the normal course of business. On October 21,
2003, the Company announced that its Board of Directors had unanimously
approved a Plan of Complete Liquidation and Dissolution (referred to in this
Form 10-Q as the  Plan of Liquidation) which will be submitted to the
Companys stockholders for approval and adoption at a special meeting of
stockholders to be held as soon as reasonably practicable. If the Companys
stockholders approve the Plan of Liquidation, the Company will adopt the
liquidation basis of accounting effective upon such approval. Inherent in the
liquidation basis of accounting are significant management estimates and
judgments. Under the liquidation basis of accounting, assets are stated at
their estimated net realizable values and liabilities, including costs of
liquidation, are stated at their anticipated settlement amounts, all of which
approximate their estimated fair values. The estimated net realizable values of
assets and settlement amounts of liabilities will represent managements best
estimate of the recoverable values of the assets and settlement amounts of
liabilities.

A preliminary proxy statement related to the Plan of Liquidation was filed
on Schedule 14A with the Securities and Exchange Commission on November 4,
2003. The key features of the Plan of Liquidation are (i) filing a Certificate
of Dissolution with the Secretary of State of Delaware and thereafter remaining
in existence as a non-operating entity for three years; (ii) winding up our
affairs, including selling remaining non-cash assets of the Company, and taking
such action as may be necessary to preserve the value of our assets and
distributing our assets

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in accordance with the Plan; (iii) paying our creditors; (iv) terminating
any of our remaining commercial agreements, relationships or outstanding
obligations; (v) resolving our outstanding litigation; (vi) establishing a
contingency reserve for payment of the Companys expenses and liabilities; and
(vii) preparing to make distributions to our stockholders.

Note 3. Cash Distribution

On August 6, 2003, the Company announced that its Board of Directors had
unanimously approved a cash distribution to its common stockholders in the
amount of $1.50 per share, payable on September 2, 2003, to common stockholders
of record as of August 18, 2003. On September 2, 2003, the Company distributed
$42,200 to its common stockholders which was reflected as a reduction to
additional paid in capital. As the Company does not have, and does not
anticipate having, current or accumulated earnings and profits, the Company
expects that the cash distribution will not be taxable as a dividend for
federal income tax purposes and will constitute a tax-free return of capital to
the extent of a stockholders basis in his or her Company stock (on a per share
basis), with any excess generally being treated as capital gain.

On August 5, 2003, the Companys Board of Directors, in connection with
the proposed cash distribution payable on September 2, 2003, approved an
adjustment to the exercise price of all of its outstanding options to take
effect on the close of business on September 3, 2003. The
adjustment did not reduce the exercise price of any options to less than $0.01 per share
or increase the number of shares subject to such options to a number exceeding
the number of shares of common stock that are registered and available for
issuance.

The following table summarizes certain information about fixed-price stock
options outstanding at November 10, 2003:

Outstanding
    
    
    VestedExercise Price
    
    Shares
    
    
    Shares$0.22
    
    
    4,717
    
    
    
    2,652$0.23
    
    
    769,900
    
    
    
    179,327$0.24
    
    
    26,835
    
    
    
    2,623$0.25
    
    
    32,903
    
    
    
    32,903$0.30
    
    
    707,691
    
    
    
    58,974$0.31
    
    
    5,307
    
    
    
    5,307$0.35
    
    
    98,709
    
    
    
    98,709$0.37
    
    
    99,691
    
    
    
    99,691$2.87 and above
    
    
    292,223
    
    
    
    256,531Total
    
    
    2,037,976
    
    
    
    736,717


Note 4. Stock-based compensation

In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based
compensationTransition and Disclosure, an amendment to FASB Statement No.
123. The Company is choosing to continue with its current practice of
applying the recognition and measurement principles of APB No. 25, Accounting
for Stock Issued to Employees. The Company has adopted the disclosure
requirements of SFAS No. 148 in its discussion of stock based employee
compensation but the alternative transition options made available by the
standard are not being implemented.

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

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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2003
    
    
    2002
    
    
    2003
    
    
    2002Net loss, as reported
    
    $
    (1,713
    )
    
    $
    (626
    )
    
    $
    (4,328
    )
    
    $
    (8,436
    )Add: Stock-based employee
compensation expense included in
reported net loss
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    35Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards
    
    
    (304
    )
    
    
    (590
    )
    
    
    (1,157
    )
    
    
    (1,770
    )Pro forma net loss
    
    $
    (2,017
    )
    
    $
    (1,207
    )
    
    $
    (5,485
    )
    
    $
    (10,171
    )Basic and diluted net loss per share:As reported
    
    $
    (0.06
    )
    
    $
    (0.02
    )
    
    $
    (0.16
    )
    
    $
    (0.31
    )Pro forma
    
    $
    (0.07
    )
    
    $
    (0.04
    )
    
    $
    (0.20
    )
    
    $
    (0.37
    )


Note 5. Net Loss Per Share

Net loss per share is computed under SFAS No. 128, Earnings Per Share.
Basic net loss per share is computed using the weighted-average number of
shares of common stock outstanding, excluding shares of common stock subject to
repurchase. Such shares of common stock subject to repurchase aggregated 0 and
1 share at September 30, 2003 and 2002, respectively. Diluted net loss per
share does not differ from basic net loss per share since potential issuances
of shares of common stock upon the exercise of stock options and potential
reductions in outstanding shares of common stock subject to repurchase are
anti-dilutive for all periods presented. Diluted net loss per share for the
three and nine months ended September 30, 2003 and 2002 excluded 4,014 and
2,845, respectively, of potential shares of common stock from the exercise of
stock options as they were anti-dilutive.

Note 6. Restructuring Related Charges

The Company recorded restructuring related charges of $1,200 in the first
quarter of 2003 related primarily to the closure of operations in three
satellite offices, and employee termination costs due to a reduction of
workforce by 22 positions. The Company recorded additional restructuring
related charges of $1,051 in the third quarter of 2003 related primarily to the
termination of three real estate lease agreements, and employee termination
costs due to a reduction of workforce by 12 positions. The charges were
recorded in accordance with SFAS No. 146, Accounting for Exit or Disposal
Activities. During 2002 and 2001, the Company instituted certain restructuring
plans to better align its cost structure with its business outlook and general
economic conditions. Under these restructuring plans, the Company recorded
restructuring related charges totaling $768 and $15,551 during 2002 and 2001,
respectively.

In conjunction with the restructuring related charges recorded, the
Company made certain estimates regarding future sublease income that have a
significant impact on its anticipated cash obligations and related
restructuring reserves. Although the Company believes that the lease commitment
estimates are appropriate in the current circumstances, future changes in real
estate markets could impact the ultimate amount of cash paid to resolve these
obligations. On September 12, 2003, we announced that we entered into lease
termination agreements for our office facilities located in Edina, Minnesota,
Roseland, New Jersey and Austin, Texas. The aggregate amount of the three
settlements was approximately $5.4 million and was paid during the month of
September 2003. As a result of these settlements, the Company believes that
total future obligations under operating leases was approximately $250 at
September 30, 2003. The Company believes that total future obligations under
operating leases, net of anticipated sublease income, were
approximately $41 at September 30, 2003.

The Company is actively seeking to sublease or terminate the leases
relating to its remaining facilities in San Francisco, California and Eden
Prairie, Minnesota. As of September 30, 2003, management estimated total
future sublease income of $209, all of which is covered by existing sublease
arrangements.

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

EmployeeLease
    
    
    Severance
    
    
    
    
    
    Fixed AssetCommitments
    
    
    and
    
    
    
    
    
    Disposalsand Related
    
    
    Termination
    
    
    
    
    
    and OtherItems
    
    
    Costs
    
    
    Subtotal
    
    
    Costs
    
    
    TotalRestructuring Related Charges Net of Reversal
    
    $
    10,649
    
    
    $
    1,634
    
    
    $
    12,283
    
    
    $
    3,268
    
    
    $
    15,551Restructuring Payments
    
    
    (2,233
    )
    
    
    (1,523
    )
    
    
    (3,756
    )
    
    
    (195
    )
    
    
    (3,951
    )Sublease Income and proceeds from the Sale of Fixed
Assets
    
    
    280
    
    
    
    
    
    
    
    280
    
    
    
    261
    
    
    
    541Non-Cash Asset Disposals and Deferred Rent
Write-Off
    
    
    (1,800
    )
    
    
    
    
    
    
    (1,800
    )
    
    
    (2,908
    )
    
    
    (4,708
    )Accrued Restructuring as of December 31, 2001
    
    $
    6,896
    
    
    $
    111
    
    
    $
    7,007
    
    
    $
    426
    
    
    $
    7,433Restructuring Related Charges
    
    
    
    
    
    
    506
    
    
    
    506
    
    
    
    262
    
    
    
    768Restructuring Payments
    
    
    (4,024
    )
    
    
    (547
    )
    
    
    (4,571
    )
    
    
    (66
    )
    
    
    (4,637
    )Sublease Income and Proceeds from the Sale of Fixed
Assets
    
    
    1,299
    
    
    
    
    
    
    
    1,299
    
    
    
    68
    
    
    
    1,367Non Cash Asset Disposals
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (642
    )
    
    
    (642
    )Reclassification of Accrued Lease Exit Costs
    
    
    383
    
    
    
    
    
    
    
    383
    
    
    
    
    
    
    
    383Accrued Restructuring as of December 31, 2002
    
    $
    4,554
    
    
    $
    70
    
    
    $
    4,624
    
    
    $
    48
    
    
    $
    4,672Restructuring Related Charges
    
    
    1,249
    
    
    
    589
    
    
    
    1,838
    
    
    
    413
    
    
    
    2,251Restructuring Payments
    
    
    (8,083
    )
    
    
    (650
    )
    
    
    (8,733
    )
    
    
    (53
    )
    
    
    (8,786
    )Sublease Income and Proceeds from the Sale of Fixed
Assets
    
    
    1,832
    
    
    
    
    
    
    
    1,832
    
    
    
    165
    
    
    
    1,997Non Cash Asset Disposals and Deferred Rent
Write-Off
    
    
    489
    
    
    
    
    
    
    
    489
    
    
    
    (573
    )
    
    
    (84
    )Accrued Restructuring as of September 30, 2003
    
    $
    41
    
    
    $
    9
    
    
    $
    50
    
    
    $
    
    
    
    $
    50


Note 7. Commitments and Contingencies

Public Offering Litigation

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

The amended complaint generally alleges that the defendants violated
federal securities laws by not disclosing certain actions taken by the
underwriter defendants in connection with our initial public offering and our
follow-on public offering. The amended complaint alleges specifically that the
underwriter defendants, with our direct participation and agreement and without
disclosure thereof, conspired to and did raise and increase their underwriters
compensation and the market prices of our common stock following our initial
public offering and in our follow-on public offering by requiring their
customers, in exchange for receiving allocations of shares of our common stock
sold in our initial public offering, to pay excessive commissions on
transactions in other securities, to purchase additional shares of our common
stock in the initial public offering aftermarket at pre-determined prices above
the initial public offering price, and to purchase shares of our common stock
in our follow-on public offering. The amended complaint seeks unspecified
monetary damages and certification of a plaintiff class consisting of all
persons who acquired our common stock between April 22, 1999, through December
6, 2000. The plaintiffs have since agreed to dismiss the claims against Mr.
Snyder and Mr. Donnelly without prejudice, in return

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for their agreement to toll any statute of limitations applicable to those
claims; and those claims have been dismissed without prejudice. On July 15,
2002, all of the issuer defendants filed a joint motion to dismiss the
plaintiffs claims in all of the related cases. On February 19, 2003, the Court
ruled against the Company on this motion.

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

We believe that the allegations against the Company are without merit.
However, as this litigation is in an initial stage, we are unable to predict
its outcome or its ultimate effect, if any, on our financial condition. The
existence of these claims could delay the making of any distributions to our
stockholders or reduce the amount available for distribution in connection with
the proposed plan of liquidation.

Liquidation Litigation

On October 29, 2003, a class action lawsuit was filed against the Company,
its current directors and unnamed defendants in the District Court, Fourth
Judicial District, of the State Of Minnesota, County of Hennepin captioned Don
Blakstad, on Behalf of Himself and All others Similarly Situated, vs. Net
Perceptions, Inc., John F. Kennedy, Ann L. Winblad, John T. Riedl and Does
1-25, inclusive,File No. 03-17820. The complaint alleges, among other things,
that defendants breached their fiduciary duties of loyalty, due care,
independence, good faith and fair dealing and seeks to enjoin the proposed
liquidation of the Company and to recover reasonable attorneys and experts
fees. Defendants believe that the claims in the lawsuit are without merit and
intend to vigorously defend them. To the extent, if any, that costs and
expenses paid by the Company in connection with, or as a result of, this
lawsuit are not reimbursed under the Companys directors and officers liability
insurance policy (which has a deductible of $250), such costs and expenses will
reduce the ultimate amount paid to stockholders in connection with the
liquidation.

Contingencies

As permitted under Delaware law, the Company has agreements whereby it
indemnifies its officers and directors for certain events or occurrences while
the officer or director is, or was serving, at its request in such capacity.
The term of the indemnification period is for the officers or directors
lifetime. The maximum potential amount of future payments the Company could be
required to make under these indemnification agreements is unlimited; however,
the Company has insurance that limits its exposure and enables the Company to
recover a portion of any future amounts paid. As a result of the insurance
coverage, the Company believes the estimated fair value of these
indemnification agreements is minimal. All of these indemnification agreements
were grandfathered under the provisions of FIN No. 45 as they were in effect
prior to December 31, 2002. Accordingly, the Company believes the liability for
these agreements as of September 30, 2003 is not material.

In the past, the Company entered into standard indemnification agreements
from time to time in the ordinary course of its business. Pursuant to these
agreements, the Company indemnifies, holds harmless, and agrees to reimburse
the indemnified party for losses suffered or incurred by the indemnified party,
generally the business partners or customers, in connection with any U.S.
patent, or any copyright or other intellectual property infringement claim by
any third party with respect to the products. The term of these
indemnification agreements is generally perpetual any time after execution of
the agreement. The maximum potential amount of future payments the Company
could be required to make under these indemnification agreements is unlimited.
The Company has never incurred costs to defend lawsuits or settle claims
related to these indemnification agreements. As a result, the Company believes
the estimated fair value of these agreements is minimal. Accordingly, the
Company believes the liability for these agreements as of September 30, 2003 is
not material.

Note 8. Income Taxes

For federal income tax purposes, the Company has available federal net
operating loss carry-forwards of approximately $107,400 and research and
development credit carry-forwards of $146 at December 31, 2002. The net
operating loss and research and development credit carry-forwards expire in
2011 through 2022 if not previously utilized. The utilization of these
carry-forwards may be subject to limitations based on future changes in
ownership of the Company pursuant to Internal Revenue Code Section 382. Future
tax benefits have not been recognized in the financial statements, as their
utilization is considered uncertain based on the weight of available
information. A sale of the Company at this time would result in a substantial
limitation to these net operating loss

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carry-forwards under Internal Revenue Code Section 382.

Note 9. Recently Issued Accounting Pronouncements

In June 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 146, Accounting for Exit or Disposal Activities. The new statement
addresses the accounting for costs associated with exit or disposal activities.
The provisions of the statement were effective for disposal activities
initiated after December 31, 2002. The Company adopted SFAS No. 146 in the
first quarter of 2003.

In January 2003, the FASB issued FIN 46, Consolidation of Variable
Interest Entities, an Interpretation of ARB 51. The primary objectives of FIN
46 are to provide guidance on the identification of entities for which control
is achieved through means other than through voting rights (variable interest
entities or VIEs) and how to determine when and which business enterprise
should consolidate the VIE (the primary beneficiary). This new model for
consolidation applies to an entity in which either (1) the equity investors (if
any) do not have a controlling financial interest or (2) the equity investment
at risk is insufficient to finance that entitys activities without receiving
additional subordinated financial support from other parties. In addition, FIN
46 requires that both the primary beneficiary and all other enterprises with a
significant variable interest in a VIE make additional disclosures. FIN 46 is
effective for VIEs created after February 1, 2003 and is effective for all
other VIEs in the first reporting period ending after December 31, 2003. The
adoption of FIN 46 is not expected to have a significant effect on the
Companys financial position or results of operations.

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

Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q (including exhibits and information
incorporated by reference herein) contains both historical and forward-looking
statements that involve risks, uncertainties and assumptions. The statements
contained in this report that are not purely historical are forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, including statements regarding our expectations, beliefs,
intentions or strategies for the future. All forward-looking statements
included in this Quarterly Report on Form 10-Q (including exhibits and
information incorporated by reference herein) are based on information
available to us on the date hereof, and we assume no obligation to update any
such forward-looking statements. Our actual results and actual events could
differ materially from those described in our forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in Item 2  Managements Discussion and Analysis of
Financial Condition and Results of Operations under the heading Risks That May
Affect Future Results and those described in our previous filings with the
Securities and Exchange Commission. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
that they were made. We undertake no obligation to publicly release any
revisions to these forward-looking statements to reflect events or
circumstances after the date of this Quarterly Report on Form 10-Q or to
reflect the occurrence of unanticipated events.

References in this Quarterly Report on Form 10-Q to Net Perceptions, the
Company, we, our and us refer to Net Perceptions, Inc. and, if so
indicated or the context so requires, includes our wholly owned subsidiary
Knowledge Discovery One, Inc. (which we refer to in this report as KD1). On
September 9, 2003, KD1 was merged with and into the Company.

OVERVIEW

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

We were incorporated in Delaware in July 1996, and our initial product was
shipped in January 1997. From inception through late 2000, we expanded our
organization by hiring personnel in key areas, particularly marketing, sales
and research and development. Our total number of employees was 315 on December
31, 2000. During 2001, 2002 and 2003, we instituted certain restructuring plans
to align our cost structure with our business outlook and general economic
conditions. In connection with our restructuring activities, our total number
of employees was reduced to 98 as of December 31, 2001, 52 as of December 31,
2002, and 9 as of September 30, 2003.

We have sustained losses on a quarterly and annual basis since inception.
As of September 30, 2003, we had an accumulated deficit of $221 million. Our
net loss was $1.7 million in the third quarter of 2003, compared to a net loss
of $626 thousand in the third quarter of the prior year. For the nine months
ended September 30, 2003, our net loss was $4.3 million (including $2.25
million of restructuring related charges), compared to a net loss of $8.4
million in the same period of the prior year (including $768,000 in
restructuring related charges and $228,000 of amortization of intangible assets
and non-cash stock compensation expense). These losses resulted from
significant costs incurred in the development and marketing of our products and
services as well as a decline in our revenues since the third quarter of 2000.

In February 2003, we engaged U.S. Bancorp Piper Jaffray, Inc. to act as
our advisor in connection with the potential sale of the Company. However, to
date, we have been unable to identify and consummate such a transaction on
acceptable terms. On August 6, 2003, we announced a cash distribution to our
stockholders of $1.50 per share, payable on September 2, 2003 to stockholders
of record as of August 18, 2003, and reduced our workforce by 12 positions to
10 full-time employees. On September 2, 2003, we distributed $42.2 million to
the common stockholders which was reflected as a reduction to additional paid
in capital. In addition, our Board of Directors, in connection with the cash
distribution payable on September 2, 2003, approved an adjustment to the
exercise price of all of our outstanding options to take effect on the close of
business on September 3, 2003. The adjustment did not reduce the
exercise price of any options to less than $0.01 per share or increase the
number of shares subject to such

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options to a number exceeding the number of shares of common stock that
are registered and available for issuance. There was no accounting consequence
due to the changes made to the exercise price or the number of shares other
than future potential dilution to stockholders. As of September 30, 2003, we
had 6 full-time employees in engineering and 3 in general and administrative.

On October 21, 2003, we announced that our Board of Directors had
unanimously approved the Plan of Liquidation which will be submitted to the
Companys stockholders for approval and adoption at a special meeting of
stockholders to be held as soon as reasonably practicable. A preliminary proxy
statement relating to the Plan of Liquidation was filed on Schedule 14A with
the Securities and Exchange Commission on November 4, 2003. The key features
of the Plan of Liquidation are (i) filing a Certificate of Dissolution with the
Secretary of State of Delaware and thereafter remaining in existence as a
non-operating entity for three years; (ii) winding up our affairs, including
selling remaining non-cash assets of the Company, and taking such action as may
be necessary to preserve the value of our assets and distributing our assets in
accordance with the Plan; (iii) paying our creditors; (iv) terminating any of
our remaining commercial agreements, relationships or outstanding obligations;
(v) resolving our outstanding litigation; (vi) establishing a contingency
reserve for payment of the Companys expenses and liabilities; and (vii)
preparing to make distributions to our stockholders. Although our Board of
Directors has adopted the plan of liquidation and has recommended its approval
and adoption by stockholders, the Board will continue to consider and evaluate,
consistent with its efforts to maximize stockholder value, viable alternative
transaction proposals which it may receive and which it determines are
reasonably likely to achieve higher returns to stockholders than liquidation
and dissolution in accordance with the plan of liquidation, including proposals
for the acquisition of the entire Company or all or substantially all
of its
assets.

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

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

LIQUIDATION BASIS OF ACCOUNTING

The condensed consolidated financial statements were prepared on the going
concern basis of accounting, which contemplates realization of assets and
satisfaction of liabilities in the normal course of business. If our
shareholders adopt the Plan of Liquidation, we will adopt the liquidation basis
of accounting effective upon such approval. Inherent in the liquidation basis
of accounting are significant management estimates and judgments. Under the
liquidation basis of accounting, assets are stated at their estimated net
realizable values, and liabilities, including costs of liquidation, are stated
at their anticipated settlement amounts, all of which approximate their
estimated fair values. The estimated net realizable values of assets and
settlement amounts of liabilities will represent our best estimate of the
recoverable values of the assets and settlement amounts of liabilities.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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We believe the following critical accounting policies affect significant
judgments and estimates used in the preparation of our consolidated financial
statements. Events occurring subsequent to the preparation of the consolidated
financial statements, such as those described in the section of this report
entitled Managements Discussion and Analysis of Financial Condition and
Results of Operations  Overview, may cause us to re-evaluate these policies.

Revenue Recognition.Our revenues are recognized in accordance with the
American Institute of Certified Public Accountants Statement of Position
(SOP) 97-2, Software Revenue Recognition, as amended by SOP 98-4 and SOP
98-9, as well as Technical Practice Aids issued from time to time by the
American Institute of Certified Public Accountants and in accordance with the
Securities and Exchange Commission Staff Accounting Bulletin (SAB) No. 101,
Revenue Recognition in Financial Statements. We derive revenues from software
licenses, software maintenance and professional services. Maintenance includes
telephone and Web-based technical support, bug fixes and rights to unspecified
upgrades on a when-and-if available basis. Professional services include
project planning and management, implementation and testing, data analysis,
user and partner training, consulting, product hosting and ongoing customer
support.

For software arrangements that include multiple software products,
maintenance or services, we allocate the total arrangement fee using the
residual method. Under the residual method, the fair value of the undelivered
maintenance and services elements, as determined by vendor-specific objective
evidence, is deferred and the remaining (residual) arrangement fee is
recognized as software product revenue. For software arrangements in which we
do not have vendor-specific objective evidence of undelivered elements, revenue
is deferred until the earlier of when vendor-specific objective evidence is
determined for the undelivered elements or when all elements for which we do
not have vendor-specific objective evidence have been delivered.

Revenues from license fees are recognized when a non-cancelable agreement
has been executed, the product has been shipped or electronically delivered,
there are no uncertainties surrounding product acceptance, the fee is fixed or
determinable and collection of the related receivable is considered probable.
If the fee due from the customer is not fixed or determinable, revenues are
recognized as payments become due from the customer. If we do not consider
collection to be probable, then revenues are recognized when the fee is
collected.

License revenues related to license terms of less than twenty-four months
are recognized ratably over the term of the license period. When we offer
products and services on a hosted basis, up front set-up fees are deferred and
recognized ratably over the estimated service period.

We recognize revenues allocable to maintenance ratably over the term of
the agreement. We evaluate arrangements that include professional and/or data
processing services to determine whether those services are essential to the
functionality of other elements of the arrangement. If services are considered
essential, revenues from the arrangement are recognized using contract
accounting, generally on a percentage-of-completion basis. When we do not
consider the professional services to be essential, we recognize the revenues
allocable to the services as they are performed.

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

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

Sublease income.In conjunction with the restructuring related charges
recorded in 2003, 2002 and 2001, we made certain estimates regarding future
sublease income that had a significant impact on our anticipated cash
obligations. Although we believe that our lease commitment estimates were
appropriate when made, changes in real estate markets and other factors could
impact the ultimate amount of cash paid to resolve these obligations. As of
September 30, 2003, we estimated total future sublease income of $209,000 all
of which is covered by existing sublease arrangements.

Allowance for doubtful accounts.We maintain allowances for doubtful
accounts for estimated losses resulting

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

Litigation.We have not recorded an estimated liability related to the
class action lawsuits in which we are named. For a discussion of this matter,
see the section of this report entitled Legal Proceedings. Due to the
uncertainties related to both the likelihood and the amount of any potential
loss, no estimate was made of the liability that could result from an
unfavorable outcome. As additional information becomes available, we will
assess the potential liability and make or revise our estimate(s) accordingly,
which could materially impact our results of operations and financial position.

RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003
AND SEPTEMBER 30, 2002

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

Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2003
    
    
    2002
    
    
    2003
    
    
    2002Revenues:Product
    
    
    22
    %
    
    
    38
    %
    
    
    29
    %
    
    
    36
    %Service and maintenance
    
    
    78
    
    
    
    62
    
    
    
    71
    
    
    
    64Total revenues
    
    
    100
    
    
    
    100
    
    
    
    100
    
    
    
    100Cost of revenues:Product
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    6Service and maintenance
    
    
    37
    
    
    
    30
    
    
    
    33
    
    
    
    41Total cost of revenues
    
    
    37
    
    
    
    34
    
    
    
    33
    
    
    
    47Gross Margin
    
    
    63
    
    
    
    66
    
    
    
    67
    
    
    
    53Operating expenses:Sales and marketing
    
    
    36
    
    
    
    47
    
    
    
    68
    
    
    
    83Research and development
    
    
    97
    
    
    
    75
    
    
    
    82
    
    
    
    110General and administrative
    
    
    130
    
    
    
    31
    
    
    
    65
    
    
    
    50Restructuring related charges
    
    
    240
    
    
    
    
    
    
    
    114
    
    
    
    18Amortization of intangibles
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    2Total operating expenses
    
    
    503
    
    
    
    155
    
    
    
    329
    
    
    
    263Loss from operations
    
    
    (440
    )
    
    
    (89
    )
    
    
    (263
    )
    
    
    (210
    )Other income, net:
    
    
    49
    
    
    
    50
    
    
    
    43
    
    
    
    16Net loss
    
    
    (391)
    %
    
    
    (39)
    %
    
    
    (220)
    %
    
    
    (194)
    %


REVENUES

Total revenues. Total revenues decreased 73% to $438,000 in the quarter
ended September 30, 2003, from $1.6 million in the third quarter of 2002.
Revenues decreased 55% to $2.0 million for the nine months ended September 30,
2003, from $4.4 million for the same period in 2002. Revenues from sales in the
United States were $352,000 or 80% of total revenues in the third quarter of
2003 compared to $1.4 million or 87% of total revenues in the third quarter of
2002. Revenues from sales in the United States were $1.7 million or 89% of
total revenues for the nine months ended September 30, 2003 compared to $3.9
million or 89% of total revenues for the nine months ended September 30, 2002.

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Revenues from international sales in the third quarter of 2003 were
$86,000 or 20% of total revenues compared to $207,000 or 13% of total revenues
in the third quarter of the prior year. Revenues from international sales were
$218,000 and $473,000, or 11% and 11% of total revenues, for the nine months
ended September 30, 2003 and 2002, respectively. As a result of the downsizing
of our business and operations described elsewhere in Managements Discussion
and Analysis of Financial Condition and Results of Operations and the Notes to
the Consolidated Financial Statements, we no longer maintain a direct sales
force. International sales are generally denominated in United States dollars.

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

Product revenues.Product revenues decreased 85% to $95,000 in the third
quarter of 2003 compared to $613,000 for the same period in the prior year.
Product revenues decreased 63% to $576,000 for the nine months ended September
30, 2003 from $1.6 million in the same period in 2002. Product revenues
comprised 22% of total revenues for the third quarter of 2003 compared to 38%
for the same period in 2002. Product revenues comprised 29% of total revenues
for the nine months ended September 30, 2003 compared to 36% for the same
period in 2002. The decrease in product revenues in absolute dollars is
attributable in part to increased deferral of purchase decisions by our current
and potential customers due to economic conditions, concerns about our ability
to support products in the future, elections to utilize alternatives to our
products and reduced selling activities. We expect product revenues to
continue to decline.

Service and maintenance revenues.Service and maintenance revenues
consist primarily of professional and maintenance services. Our professional
service revenues include business consulting, implementation support, data
warehousing and processing and educational services and are generally offered
on a time and materials basis. Maintenance revenues are generally derived from
annual service agreements and are recognized ratably over the term of the
agreement. Service and maintenance revenues decreased 66% to $343,000 in the
third quarter of 2003 from $999,000 in the third quarter of 2002. Service and
maintenance revenues comprised 78% and 62% of total revenues in the third
quarter of 2003 and 2002, respectively.Total service and maintenance revenues
decreased 50% to $1.4 million for the nine months ended September 30, 2003 from
$2.8 million for the same period in 2002. Service and maintenance revenues
comprised 71% and 64% of total revenues for the nine months ended September 30,
2003 and 2002, respectively. The decrease in service and maintenance revenues
in absolute dollars reflected the lower levels of consulting and maintenance
services due to the combined effect of fewer new customer acquisitions and a
decline in our customer base, as well as concerns about our ability to support
our products in the future. We expect service and maintenance revenues to
continue to decline.

COST OF REVENUES

Cost of product revenues. Cost of product revenues consists primarily of
the cost of royalties paid to third-party vendors and amortization of acquired
technology costs. Cost of product revenues decreased to $0 in the third quarter
of 2003 from $68,000 in the third quarter of 2002, representing 0% and 11% of
the related product revenues, respectively. Cost of product revenues decreased
97% to $8,000 for the nine months ended September 30, 2003 from $254,000 for
the nine months ended September 30, 2002, representing 1% and 16% of the
related product revenues, respectively. The decrease in cost of product
revenues in absolute dollars is due to no royalties payable to third parties
and no amortization expense related to intangible assets in the first nine
months of 2003. Since all internal development costs incurred in the research
and development of new software products and enhancements to existing software
products have been expensed as incurred, cost of product revenues includes no
amortization of capitalized software development costs. We do not expect any
future costs of product revenues to be significant.

Cost of service and maintenance revenues. Cost of service and maintenance
revenues consists primarily of personnel-related and infrastructure costs
incurred in providing telephone and Web-based support of our software products,
as well as professional, consulting and educational related services to
customers. Cost of service and maintenance revenues decreased 65% to $164,000
in the third quarter of 2003, from $473,000 in the third quarter of the prior
year, representing 48% and 47% of the related service and maintenance revenues,
respectively. Cost of service and maintenance revenues decreased 64% to
$635,000 for the nine months ended September 30, 2003 from $1.8 million for the
same period in the prior year, representing 46% and 64% of the related service
and maintenance revenues, respectively. The decrease in cost of services and
maintenance revenues in absolute dollars and as a percentage of revenues is
primarily due to continued headcount reductions in our technical organization
as a result of our restructuring efforts and significantly decreased use of
third-party consultants to staff consulting engagements. Due to the further
headcount reductions undertaken on August 6, 2003, and because we have ceased
to actively market our

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products, we expect that our cost of service and maintenance revenues will
decrease for the remainder of 2003.

OPERATING EXPENSES

In the first quarter of 2003, we reduced our operating expenses through
the closure of three remote offices and a reduction in workforce affecting 22
employees. On August 6, 2003, we reduced our workforce by an additional 12
employees. At September 30, 2003 we had 9 full-time employees, which was
determined to be the minimum number necessary to serve customers, preserve the
value of our intellectual property and administer our limited ongoing business
affairs. As described in the section of this report entitled Managements
Discussion and Analysis of Financial Condition and Results of Operations 
Overview, we are no longer actively marketing our products and do not expect
to incur significant operating expenses in for the balance of 2003 relating to
sales and marketing. On October 21, 2003, we announced that our Board of
Directors had unanimously approved a Plan of Liquidation which will be
submitted to our stockholders for approval and adoption. Up to and after the
approval and adoption of Plan of Liquidation by our stockholders, we anticipate
continuing to vigorously manage expense levels.

Sales and marketing. Sales and marketing expenses consist primarily of
salaries, other employee-related costs, commissions and other incentive
compensation, travel and entertainment and expenditures for marketing programs
such as collateral materials, trade shows, public relations and creative
services. Sales and marketing expenses decreased 79% to $157,000 in the third
quarter of 2003, compared to $753,000 recorded in the quarter of 2002. Sales
and marketing expenses were 36% and 47% of total revenues in the third quarter
of 2003 and 2002, respectively. Sales and marketing expenses were $1.3 million
and $3.6 million, or 68% and 83% of total revenues, for the nine months ended
September 30, 2003 and 2002, respectively. The decrease in sales and marketing
expenses in absolute dollars is primarily due to headcount reductions as a
result of our restructuring efforts and our decision to no longer actively
market our products. We expect sales and marketing expenses will continue to
decline in the fourth quarter of 2003.

Research and development. Research and development expenses consist
primarily of salaries, other employee-related costs and consulting fees related
to the development of our products. Research and development expenses decreased
65% to $427,000 in the third quarter of 2003, compared to $1.2 million in the
third quarter of 2002. Research and development expenses were 97% and 75% of
total revenues in the third quarter of 2003 and 2002, respectively. Research
and development expenses were $1.6 million and $4.8 million, or 82% and 110% of
total revenues, for the nine months ended September 30, 2003 and 2002,
respectively. The decrease in research and development expenses in absolute
dollars is primarily due to continued headcount reductions as a result of our
restructuring efforts. We expect research and development expenses to continue
to continue to decline in the fourth quarter of 2003.

General and administrative. General and administrative expenses consist
primarily of salaries, other employee-related costs, provision for doubtful
accounts and professional service fees. General and administrative expenses
were $568,000 in the third quarter of 2003, an increase of 11% from the
$514,000 recorded in the third quarter of 2002. General and administrative
expenses were 130% and 31% of total revenue in the third quarter of 2003 and
2002, respectively. General and administrative expenses were $1.3 million and
$2.2 million, or 65% and 50% of total revenues, for the nine months ended
September 30, 2003 and 2002, respectively. The increase in general and
administrative expenses in absolute dollars during the third quarter of 2003 is
primarily due to higher costs associated with outside professional services
relating to the special cash distribution, potential strategic relationships
and possible liquidation and dissolution of the Company. The decrease in
general and administrative expenses in absolute dollars during the nine months
ended September 30, 2003 is primarily due to headcount reductions as part of
our restructuring efforts. Although we expect personal-related general and
administrative expenses to decline due to the August 6, 2003 headcount
reductions, any such decrease may be offset by professional fees associated
with the settlement or other resolution of our existing obligations and
liabilities, our continued exploration of asset dispositions, other activities
relating to the Plan of Liquidation and our possible continued consideration
and evaluation of any alternatives to the Plan of Liquidation that may be
proposed.

Restructuring related charges.We recorded restructuring related charges
of $1.2 million in the first quarter of 2003 related primarily to the closure
of operations in three satellite offices, and employee termination costs due to
a reduction of workforce by 22 positions. We recorded additional restructuring
related charges of $1.1 million in the third quarter of 2003 related primarily
to the termination of three real estate lease agreements, and employee
termination costs due to a reduction of workforce by 12 positions. The charges
were recorded in accordance with SFAS No. 146, Accounting for Exit or Disposal
Activities. During 2002 and 2001, we instituted certain restructuring plans to
better align our cost structure with our business outlook and general economic
conditions. Under the restructuring plans, we recorded restructuring related
charges totaling $768,000 and $15.6 million during 2002 and 2001, respectively.
We expect to record additional restructuring charges in the fourth quarter of
2003 relating to employee termination costs and other costs associated with the
implementation of the Plan of Complete

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Liquidation and Dissolution.

Amortization of intangibles.Amortization expense related to intangibles
acquired in the February 2000 acquisition of KD1 was $0 during the third
quarter of 2003 compared to $65,000 (including $37,000 of amortization of
goodwill and other intangibles included in the cost of product revenues) during
the third quarter of 2002. This represented 0% and 4% of 2003 and 2002 third
quarter total revenues, respectively. Amortization expense was $0 for the first
nine months of 2003 compared to $193,000 (including $110,000 of amortization
and goodwill and other intangibles included in cost of product revenues) for
the nine months ended September 30, 2002. This represented 0% and 4% of total
revenues for the nine months ended September 30, 2003 and 2002, respectively.
Total amortization is expected to be $0 for the remainder of 2003 due to the
$6.5 million impairment charge recorded in the fourth quarter of 2002 to reduce
goodwill and other intangible assets to zero value.

Stock compensation expense.Compensation charges related to stock options
were $0 in the third quarter of 2003 and $9,000 in the third quarter of 2002,
comprising 0% and 1% of total revenues in each of the respective periods. Stock
compensation was $0 and $35,000 or 0% and 1% of total revenues, for the nine
months ended September 30, 2003 and 2002, respectively. Stock compensation
expense represents the amortization of deferred compensation related to stock
options granted in 1999 and 1998. Such compensation is amortized over the
four-year repurchase period of the common stock underlying the related options.
Stock compensation expense was recorded in the functional operating expense
categories as follows (in thousands):

Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2003
    
    
    2002
    
    
    2003
    
    
    2002Sales and marketing
    
    $
    
    
    
    $
    7
    
    
    $
    
    
    
    $
    23Research and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3General and administrative
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    9$
    
    
    
    $
    9
    
    
    $
    
    
    
    $
    35


Other income, net. Other income, net, consists of interest income,
interest expense, foreign currency transaction losses or gains and other
expense. Net other income was $216,000 in the third quarter of 2003 compared to
net other income of $811,000 in the same period in 2002. Net other income for
the nine months ended September 30, 2003, was $839,000 compared to net other
income of $698,000 for the nine months ended September 30, 2003 and 2002,
respectively. The decrease in net other income for the three months ended
September 30, 2003 compared to the same period in 2002 was primarily due to
lower cash and investment balances as a result of the special cash distribution
to shareholders on September 2, 2003 and lower interest rates. The increase in
net other income for the nine months ended September 30, 2003 compared to the
same period in 2002 was primarily due to a $1.6 million loss on investment in
2002 resulting from our sale of $2.1 million in WorldCom bonds upon
announcement of accounting issues by WorldCom.

PROVISION FOR INCOME TAXES

We have incurred significant operating losses for all periods from
inception through September 30, 2003. As of December 31, 2002, we had net
operating loss carry-forwards of approximately $107.4 million available to
reduce future taxable income expiring at various dates beginning in 2011. In
addition, as of December 31, 2002, we had $146,000 of tax credit carry-forwards
expiring at various dates beginning in 2011. Under the provisions of the
Internal Revenue Code of 1986, as amended, if certain substantial changes in
our ownership were to occur, we could be limited in the future in the amount of
net operating loss and tax credit carry-forwards that could be utilized
annually to offset future taxable income. Future tax benefits have not been
recognized in the financial statements, as their utilization is considered
uncertain based on the weight of available information. A sale of the Company
at this time would result in a substantial limitation to these net operating
loss carry-forwards under Internal Revenue Code Section 382.

We have recorded a valuation allowance for the full amount of our net
deferred tax assets, as the realization of the future tax benefit is presently
not likely.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have financed our operations primarily through the
sale of equity securities. At September

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30, 2003, we had $12.2 million of cash, cash equivalents and short-term
investments, compared to $64.6 million at September 30, 2002. This significant
reduction was primarily due to the special cash distribution paid to
shareholders on September 2, 2003 to record holders of our common stock on
August 18, 2003 in the amount of approximately $42.2 million.

Cash used in operations was $9.2 million for the nine months ended
September 30, 2003, compared to $8.3 million for the same period in 2002. Cash
used in operations in 2002 resulted primarily from net losses, as adjusted for
non-cash expenses. Cash used in operations in 2003 resulted from net losses, as
adjusted for non-cash expenses and payments related to the termination of
certain real estate obligations accrued on the Companys financial statements
in prior years. The increase in cash used in operations in the first nine
months of 2003 as compared to the same period in 2002 is principally related to
these lease terminations, partially offset by reduced operating expenses and
cost of revenues that have resulted from the restructuring plans described
below, as adjusted for non-cash expenses. In April 2003, our directors and
officers liability insurance policy came up for renewal and we obtained a
policy at a cost of approximately $1 million. We do not expect to receive any
significant future cash from operations and, as we settle, or otherwise
resolve, our existing obligations and liabilities, and continue to explore
asset dispositions and third party proposals which may be presented to us, we
will continue to incur legal fees, salary expenses and other ongoing costs that
will constitute a material use of cash and decrease the amount of cash
available for distribution to stockholders.

A total of $23.0 million in net cash was provided by investing activities
for the nine months ended September 30, 2003, compared to $28.4 million of cash
provided in the same period for 2002. Our investing activities consisted
primarily of net purchases of short-term investments and marketable securities.
Our investment portfolio as of September 30, 2003 was all invested in money
market accounts.

Net cash provided from financing activities was $41.3 million for the nine
months ended September 30, 2003 and net cash provided from financing activities
was $4,000 for the same period in 2002. Net cash from financing in both
periods was primarily attributable to proceeds from sales of our common stock
pursuant to the exercise of options. As described above, on August 6, 2003, we
announced a return of capital cash distribution to our stockholders of $1.50
per share, payable on September 2, 2003 to stockholders of record as of August
18, 2003. The total amount of this cash distribution was approximately $42.2
million.

During 2002 and 2001, we instituted certain restructuring plans to better
align our cost structure with our business outlook and general economic
conditions. Under the restructuring plans, we recorded restructuring related
charges totaling $768,000 and $15.6 million for the years ended December 31,
2002 and 2001, respectively. In the first quarter of 2003, an additional $1.2
million restructuring charge was recorded related primarily to the closure of
operations in three satellite offices, and employee termination costs due to a
reduction of workforce by 22 positions. Of the $1.2 million restructuring
charge recorded during the first quarter of 2003, approximately $604,000 was
related to lease commitments. We recorded additional restructuring related
charges of $1.1 million in the third quarter of 2003 related primarily to the
termination of three real estate lease agreements, and employee termination
costs due to a reduction of workforce by 12 positions. Of the $1.1 million
restructuring charge recorded during the third quarter of 2003, approximately
$645,000 was related to lease commitments.

Management
estimates that $41,000 of the remaining restructuring reserve
as of September 30, 2003 will be a use of cash in future periods
through September 2004, for remaining rent commitments and other carrying
costs, less estimated sublease income, related to facilities we have vacated.
See the table below summarizing our contractual obligations as of September 30,
2003, and the related discussion regarding our operating lease obligations and
related sublease agreements.

Capital expenditures were $0 for the nine months ended September 30, 2003,
and for the nine months ended September 30, 2002. Capital expenditures were
higher in years prior to 2002 and reflected our rapidly growing employee base
and expanded operations. As of September 30, 2003, we had no material
long-term commitments for capital expenditures and we do not anticipate
entering into any further material commitments for capital expenditures. Since
1999, we have purchased property and equipment with cash. From inception
through 1998, we generally funded the purchase of property and equipment with
capital leases.

Our remaining commitments consist primarily of obligations under our
operating leases. The following summarizes our contractual lease obligations
at September 30, 2003 (in thousands). See the discussion below regarding our
operating lease obligations and related sublease agreements.

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2003
    
    
    2004
    
    
    TotalOperating leases
    
    $
    161
    
    
    $
    89
    
    
    $
    250Executed sublease agreements
    
    
    (150
    )
    
    
    (59
    )
    
    
    (209
    )Net contractual cash obligation
    
    $
    11
    
    
    $
    30
    
    
    $
    41


Operating lease obligations relate to our existing facilities. We are
currently seeking to sublease and negotiate an early termination of our
remaining obligations under these leases, and will incur additional legal fees
and other costs in connection therewith. We are actively seeking to sublease
the remainder of our San Francisco, California office space and are also
attempting to negotiate the termination of this lease. Our lease for our
former corporate headquarters in Eden Prairie, Minnesota is currently sublet
through the end of the lease term which is December 31, 2003. We currently
occupy approximately 2,500 square feet of office space pursuant to a
month-to-month lease in Edina, Minnesota. As of September 30, 2003, we
estimated total future sublease income of $209,000 all of which is covered by
existing sublease arrangements.

We believe that existing cash and investments will be sufficient to meet
our expected working capital needs until our assets are sold as part of the
Plan of Liquidation and to meet our existing and future obligations and
liabilities. However, uncertainties exist as to the amounts we will receive in
connection with the sale of assets and the precise value of our existing
obligations and liabilities, which may exceed our available cash and cash
equivalents. Furthermore, we may be unable to settle or otherwise resolve our
remaining obligations and liabilities, and we may incur or be subject to
additional obligations and liabilities, which could collectively exceed our
available cash and cash equivalents.

RISKS THAT MAY AFFECT FUTURE RESULTS

The risks and uncertainties described below are not the only ones we face.
Additional risks and uncertainties not presently known to us or which are
currently deemed immaterial may also impair our financial condition,
the
results of operations and our cash position. If any of these risks actually
occur, our financial condition and results of operations and cash
position could be materially adversely affected.

WE
CANNOT PREDICT THE AMOUNT OR TIMING OF THE LIQUIDATING DISTRIBUTIONS AND THE
AMOUNT OF LIQUIDATING DISTRIBUTIONS MAY NOT RESULT IN GREATER RETURNS TO
STOCKHOLDERS THAN CONTINUING OUR EXISTENCE AND MAY NOT EQUAL OR EXCEED THE
PRICE OR PRICES AT WHICH OUR COMMON STOCK HAS TRADED OR MAY TRADE IN THE
FUTURE.

We cannot predict, the amount or timing of any liquidating distributions. Any
possible distributions to stockholders may be reduced by additional liabilities
or expenses we may incur and the ultimate amounts of our existing liabilities.
Accordingly, we cannot assure stockholders that the Plan of Liquidation will
result in greater returns to stockholders than our continuing to operate our
business or through a business combination or other transaction with a third
party. Also, the per share amount of liquidating distributions may well be less
than the per share price or prices at which our common stock has recently
traded or may trade in the future.

STOCKHOLDERS COULD BE LIABLE TO THE EXTENT OF LIQUIDATING DISTRIBUTIONS
RECEIVED IF CONTINGENT RESERVES ARE INSUFFICIENT TO SATISFY THE COMPANYS
LIABILITIES.

If we fail to create an adequate contingency reserve for payment of our
expenses and liabilities, or if the Plan of Liquidation is approved and adopted
by stockholders and in connection therewith we transfer our assets to a
liquidating trust and the contingency reserve and the assets held by the
liquidating trust are less than the amount ultimately found payable in respect
of expenses and liabilities, each stockholder could be held liable for the
payment to creditors of such stockholders pro rata portion of the deficiency,
limited, however, to the amounts previously received by the stockholder in
distributions from us or the liquidating trust (possibly including amounts
received pursuant to the special cash distribution declared on August 5, 2003
and paid on September 2, 2003 to stockholders of record as of August 18, 2003).
Accordingly, stockholders could be required to return some or all distributions
made to them. In such an event, stockholders could receive nothing under the
Plan of Liquidation and could be required to return some or all of the special
cash distribution paid on September 2, 2003.

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If a court holds at any time that we have failed to make adequate provision for
our expenses and liabilities or if the amount ultimately required to be paid in
respect of such liabilities exceeds the amount available from the contingency
reserve and the assets of a liquidating trust, our creditors could seek an
injunction against the making of distributions under the plan of liquidation on
the grounds that the amounts to be distributed are needed to provide for the
payment of our expenses and liabilities. Any such action could delay or
substantially diminish the cash distributions to be made to stockholders and/or
holders of beneficial interests of the liquidating trust under the Plan of
Liquidation if it is approved and adopted by stockholders.

SECURITIES CLASS ACTION CLAIMS HAVE BEEN FILED AGAINST US AND CERTAIN OF OUR
CURRENT AND FORMER OFFICERS AND DIRECTORS. THESE CLAIMS COULD DELAY THE MAKING
OF ANY DISTRIBUTIONS TO OUR STOCKHOLDERS OR DEPLETE THE PROCEEDS THAT MIGHT
OTHERWISE BE AVAILABLE TO BE DISTRIBUTED TO OUR STOCKHOLDERS.

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

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

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

We believe that the allegations against the Company are without merit. However,
as this litigation is in an initial stage, we are unable to predict its outcome
or its ultimate effect, if any, on our financial condition. The existence of
these claims could delay the making of any distributions to our stockholders or
reduce the amount available for distribution in connection with the proposed
plan of liquidation.

On October 29, 2003, a class action lawsuit was filed against the Company, its
current directors and unnamed defendants in the District Court, Fourth Judicial
District, of the State Of Minnesota, County of Hennepin captioned Don Blakstad,
on Behalf of Himself and All others Similarly Situated, vs. Net Perceptions,
Inc., John F. Kennedy, Ann L. Winblad, John T. Riedl and Does 1-25, inclusive,
File No. 03-17820. The complaint alleges, among other things, that defendants
breached their fiduciary duties of loyalty, due care, independence, good faith
and fair dealing and seeks to enjoin the proposed liquidation of the Company
and to recover reasonable attorneys and experts fees. Defendants believe that
the claims in the lawsuit are without merit and intend to vigorously defend
them. To the extent, if any, that costs and expenses paid by the Company in
connection with, or as a result of, this lawsuit are not reimbursed under the
Companys directors and officers liability insurance policy (which has a
deductible of $250,000), such costs and expenses will reduce the ultimate
amount paid to stockholders in

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connection with the liquidation.

ANTICIPATED TIMING OF LIQUIDATION MAY NOT BE ACHIEVED.

We intend to proceed toward the orderly sale, license or other disposition of
our intellectual property and other non-cash assets. We expect that if the plan
of liquidation is approved and adopted by our stockholders, we would, as soon
as reasonably practicable, complete such sale, license or other disposition.
Although we anticipate that we will proceed as expeditiously as reasonably
practicable to complete the sale, license or other disposition of our
intellectual property and other non-cash assets, our board of directors may
determine that it is in the best interests of our stockholders that any
remaining non-cash assets, together with the cash contingency reserve which we
will establish, be placed into a liquidating trust, which could delay the
receipt by stockholders of the final proceeds of the liquidation.

STOCKHOLDERS MAY NOT BE ABLE TO RECOGNIZE A LOSS FOR FEDERAL INCOME TAX
PURPOSES UNTIL THEY RECEIVE A FINAL DISTRIBUTION FROM US.

As a result of our liquidation, for United States federal income tax purposes
stockholders will recognize gain or loss equal to the difference between (i)
the sum of the amount of cash distributed to them and the aggregate fair market
value at the time of distribution of any property distributed to them
(including transfers of assets to a liquidating trust), and (ii) their tax
basis for their shares of our capital stock. Any loss may generally be
recognized only when the final distribution has been received from us.

OUR STOCK TRANSFER BOOKS WILL CLOSE ON THE FINAL RECORD DATE, AFTER WHICH IT
WILL NOT BE POSSIBLE FOR STOCKHOLDERS TO PUBLICLY TRADE IN OUR STOCK.

We intend to close our stock transfer books and discontinue recording transfers
of common stock at the close of business on the final record date, which we
expect will be the date on which we file a certificate of dissolution.
Thereafter, certificates representing our common stock will not be assignable
or transferable on our books except by will, intestate succession or operation
of law.

WE EXPECT TO TERMINATE REGISTRATION OF OUR COMMON STOCK UNDER THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED, WHICH WILL REDUCE SUBSTANTIALLY PUBLICLY
AVAILABLE INFORMATION ABOUT THE COMPANY.

Our common stock is currently registered under the Securities Exchange Act of
1934, which requires that we, and our officers and directors with respect to
Section 16 of that Act, comply with certain public reporting and proxy
statement requirements thereunder. Compliance with these requirements is costly
and time-consuming. Termination of such registration may occur following our
certification to the Securities and Exchange Commission that there are fewer
than 300 record holders of our common stock. As of November 13, 2003, there
were 238 record holders of our common stock. We anticipate that, if
the Plan of Liquidation is approved and adopted by stockholders, in order to
curtail expenses, and assuming at that time we continue to have fewer than 300
record holders of our common stock, we will, after filing a certificate of
dissolution, file with the SEC a Form 15 in order to terminate the registration
of our common stock under the Securities Exchange Act of 1934, as amended. Such
termination will be effective ninety days after we file a Form 15. During such
ninety day period, our obligation to file periodic reports on Form 10-Q and
10-K and current reports on Form 8-K will be suspended. However, we anticipate
that we would continue to file with the SEC current reports on Form 8-K to
disclose material events relating to our liquidation and dissolution until the
effectiveness of the termination of the registration of our common stock.

NO FURTHER STOCKHOLDER APPROVAL WILL BE REQUIRED.

Approval and adoption of the plan of liquidation requires the affirmative
vote of the holders of a majority of all shares of our common stock outstanding
and entitled to vote. If our stockholders approve and adopt the plan of
liquidation, we will be authorized to sell, license or otherwise dispose of our
assets without further approval of our stockholders.

THE PROCEEDS FROM A SALE OF OUR ASSETS MAY BE LESS THAN ANTICIPATED.

If the Plan of Liquidation is approved and adopted by stockholders, we
plan to sell our remaining assets pursuant thereto. Such sales will be made on
terms approved by our board of directors or the trustee of a

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

WE MAY BE UNABLE TO SETTLE OR OTHERWISE RESOLVE OUR EXISTING OBLIGATIONS AND
LIABILITIES.

We are currently seeking to settle or otherwise resolve our existing
obligations and liabilities, which include our building and facilities leases
and the ongoing litigation matters described in the section of this report
entitled Legal Proceedings. Settling or otherwise resolving such obligations
and liabilities could result in substantial costs. If we are unable to
successfully negotiate the settlement or termination of these obligations on
acceptable terms, we will have less cash available to pay our ongoing expenses
and, ultimately, for distribution to our stockholders, and any such
distribution may be delayed.

OUR ABILITY TO RESOLVE OUR OBLIGATIONS, DISPOSE OF OUR ASSETS, AND LIQUIDATE
MAY BE IMPAIRED IF WE LOSE CERTAIN OF OUR KEY PERSONNEL.

As of September 30, 2003, we had nine full-time employees. We retained
only 3 management and administrative and 6 engineering personnel. The loss of
the services of any of such persons, in particular, the loss of our
President and Chief Financial Officer, Thomas M. Donnelly, could seriously harm
our ability to settle or otherwise resolve our existing obligations and
liabilities, consummate a sale of our remaining assets and successfully pursue
the Plan of Liquidation on favorable terms. Our inability to retain certain
key engineers familiar with our assets may make it difficult to preserve the
value of such assets and dispose of them. Any or all of our remaining
personnel may terminate their employment at any time.




Item 3. Quantitative and Qualitative Disclosures about Market Risk

Through June 30, 2003, the majority of our recognized revenues were
denominated in United States dollars and were primarily from customers in the
United States, and our exposure to foreign currency exchange rate changes has
been immaterial. As described above in the section of this report entitled
Managements Discussion and Analysis of Financial Condition and Results of
Operations  Overview, we are no longer actively marketing our products.
Accordingly, we do not consider significant our exposure to foreign currency
exchange rate changes arising from revenues being denominated in foreign
currencies.

Our historical exposure to market risk was otherwise limited to interest
income sensitivity, which is affected by changes in the general level of United
States interest rates, particularly because the majority of our investments are
in debt securities issued by corporations and the United States government.
However, at September 30, 2003, all of our cash was held in money market
accounts and therefore our future interest income sensitivity is limited.




Item 4. Controls and Procedures

(a) Disclosure Controls and Procedures. The Companys management, with
the participation of the Companys President and Chief Financial Officer, has
evaluated the effectiveness of the Companys disclosure controls and procedures
(as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the
period covered by this report. Based on such evaluation, the Companys
President and Chief Financial Officer has concluded that, as of the end of such
period, the Companys disclosure controls and procedures are effective in
recording, processing, summarizing and reporting, on a timely basis,
information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act.

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

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PART II. OTHER INFORMATION




Item 1. Legal Proceedings

Public Offering Litigation

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

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

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

We believe that the allegations are without merit, and we intend to
vigorously defend against the plaintiffs claims. As this litigation is in an
initial stage, we are unable to predict its outcome or its ultimate effect, if
any, on our financial condition.

Liquidation Litigation

On October 29, 2003, a class action lawsuit was filed against the Company, its
current directors and unnamed defendants in the District Court, Fourth Judicial
District, of the State Of Minnesota, County of Hennepin captioned Don Blakstad,
on Behalf of Himself and All others Similarly Situated, vs. Net Perceptions,
Inc., John F. Kennedy, Ann L. Winblad, John T. Riedl and Does 1-25, inclusive,
File No. 03-17820. The complaint alleges, among other things, that defendants
breached their fiduciary duties of loyalty, due care, independence, good faith
and fair dealing and seeks to enjoin the proposed liquidation of the Company
and to recover reasonable attorneys and experts fees. Defendants believe that
the claims in the lawsuit are without merit and intend to vigorously defend
them. To the extent, if any, that costs and expenses paid by the Company in
connection with, or as a result of, this lawsuit are not reimbursed under the
Companys directors and officers liability insurance policy (which has a
deductible of $250,000), such costs and expenses will reduce the ultimate
amount paid to stockholders in connection with the liquidation.

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##### Table of Contents






Item 2. Changes in Securities and Use of Proceeds

None.




Item 3. Defaults Upon Senior Securities

None.




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

None.




Item 5. Other Information

None.

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##### Table of Contents






Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

ExhibitNumber
    
    Description3.1(a)
    
    Amended and Restated Certificate of Incorporation(1)3.1(b)
    
    Certificate of Amendment to the Amended and Restated Certificate of Incorporation (2)3.2
    
    Amended and Restated Bylaws as amended through August 5, 2003. (3)4.1
    
    Amended and Restated Investor Rights Agreement, dated December 18, 1997, among Net
Perceptions, Inc. and the investors and founders named therein, as amended (1)4.2
    
    Specimen common stock certificate (1)4.3
    
    Specimen common stock certificate (including Rights Agreement Legend) (4)4.4
    
    Rights Agreement between Net Perceptions, Inc. and Wells Fargo Bank Minnesota, as
Rights Agent (5)4.5
    
    Form of Certificate of Designation of Series A Junior Participating Preferred Stock
(attached as Exhibit A to the Rights Agreement filed as Exhibit 4.4 hereto) (5)4.6
    
    Form of Rights Certificate (attached as Exhibit B to the Rights Agreement filed as
Exhibit 4.4 hereto) (5)10(a)
    
    Letter agreement between Net Perceptions, Inc. and Thomas M. Donnelly dated,
September 24, 2003.10(b)
    
    Surrender of Lease Agreement between 7700 France Avenue LLC and Net Perceptions dated
September 9, 200310(c)
    
    Surrender and Acceptance Agreement between Roseland II L.L.C. and Net Perceptions
dated September 12, 200331
    
    Certification of Principal Executive Officer and Principal Financial Officer required
by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32
    
    Certification of the Principal Executive Officer and Principal Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.




|(1) |  | Incorporated by reference to Net Perceptions Registration
Statement on Form S-1 (Registration No. 333-71919).
|--- |  | --------------------------------------------------------------------------------------------------------------



|(2) |  | Incorporated by reference to Net Perceptions Annual Report on Form
10-K for the year ended December 31, 2002 (File No. 000-25781).
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------



|(3) |  | Incorporated by reference to Net Perceptions Quarterly Report on
Form 10-Q for the quarter ended June 30, 2003 (File No. 000-25781).
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------



|(4) |  | Incorporated by reference to Net Perceptions Quarterly Report on
Form 10-Q for the quarter ended June 30, 2001 (File No. 000-25781).
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------



|(5) |  | Incorporated by reference to Net Perceptions Registration
Statement on Form 8-A filed June 6, 2001 (File No. 000-25781).
|--- |  | -------------------------------------------------------------------------------------------------------------------------

(b) Reports on Form 8-K

On
July 24, 2003, the Company submitted a Report on Form 8-K
reporting under Item 12 that it had issued a press release
announcing earnings for the second quarter of 2003. Such report is
not deemed filed for purposes of Section 18 of the
Securities Act of 1934 and is not incorporated in any filing under
the Securities Act of 1933.

On August 6, 2003, the Company filed a report on Form 8-K reporting under
Item 5 that the Company had issued a press release announcing that its Board of
Directors authorized a cash distribution of $1.50 per share on September 2,
2003, payable to shareholders of record as of August 18, 2003.

On September 12, 2003, the Company filed a report on Form 8-K reporting
under Item 5 that the Company had issued a press release announcing, among
other things, that it has entered into lease termination agreements for its
office facilities located in Edina, Minnesota, Roseland, New Jersey and Austin,
Texas.

[add additional 8-ks which were furnished]

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##### Table of Contents






SIGNATURES

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

NET PERCEPTIONS, INC.Date: November 14, 2003
    
    By:
    
    /s/ Thomas M. DonnellyThomas M. DonnellyPresident and Chief Financial Officer(Duly authorized officer
and principal financial
officer)


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##### Table of Contents






NET PERCEPTIONS, INC.
FORM 10-Q
For the Quarter Ended September 30, 2003EXHIBIT INDEX

ExhibitNumber
    
    Description3.1(a)
    
    Amended and Restated Certificate of Incorporation(1)3.1(b)
    
    Certificate of Amendment to the Amended and Restated Certificate of Incorporation (2)3.2
    
    Amended and Restated Bylaws as amended through August 5, 2003. (3)4.1
    
    Amended and Restated Investor Rights Agreement, dated December 18, 1997, among Net
Perceptions, Inc. and the investors and founders named therein, as amended (1)4.2
    
    Specimen common stock certificate (1)4.3
    
    Specimen common stock certificate (including Rights Agreement Legend) (4)4.4
    
    Rights Agreement between Net Perceptions, Inc. and Wells Fargo Bank Minnesota, as
Rights Agent (5)4.5
    
    Form of Certificate of Designation of Series A Junior Participating Preferred Stock
(attached as Exhibit A to the Rights Agreement filed as Exhibit 4.4 hereto) (5)4.6
    
    Form of Rights Certificate (attached as Exhibit B to the Rights Agreement filed as
Exhibit 4.4 hereto) (5)10(a)
    
    Letter agreement between Net Perceptions, Inc. and Thomas M. Donnelly dated,
September 24, 2003.10(b)
    
    Surrender of Lease Agreement between 7700 France Avenue LLC and Net Perceptions dated
September 9, 200310(c)
    
    Surrender and Acceptance Agreement between Roseland II L.L.C. and Net Perceptions
dated September 12, 200331
    
    Certification of Principal Executive Officer and Principal Financial Officer required
by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32
    
    Certification of the Principal Executive Officer and Principal Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.




|(1) |  | Incorporated by reference to Net Perceptions Registration
Statement on Form S-1 (Registration No. 333-71919).
|--- |  | --------------------------------------------------------------------------------------------------------------



|(2) |  | Incorporated by reference to Net Perceptions Annual Report on Form
10-K for the year ended December 31, 2002 (File No. 000-25781).
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------



|(3) |  | Incorporated by reference to Net Perceptions Quarterly Report on
Form 10-Q for the quarter ended June 30, 2003 (File No. 000-25781).
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------



|(4) |  | Incorporated by reference to Net Perceptions Quarterly Report on
Form 10-Q for the quarter ended June 30, 2001 (File No. 000-25781).
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------



|(5) |  | Incorporated by reference to Net Perceptions Registration
Statement on Form 8-A filed June 6, 2001 (File No. 000-25781).
|--- |  | -------------------------------------------------------------------------------------------------------------------------

28