##### Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)



|[X] |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|--- |  | ---------------------------------------------------------------------------------------
|   
|    |  | For the quarterly period ended JUNE 30, 2001                                           

OR



|[   ] |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|----- |  | ----------------------------------------------------------------------------------------
|     
|      |  | For the transition period
from ________________ to ____________________                 

Commission file number 0-2972

NETGENESIS CORP.(Exact name of registrant as specified in its charter)

|                                                                        |  |                                                
|----------------------------------------------------------------------- |  | -----------------------------------------------
|DELAWARE
(State or other jurisdiction of
incorporation or organization) |  | 04-3236862
(I.R.S. Employer Identification
No.)

ONE ALEWIFE CENTER
CAMBRIDGE, MA 02140
(Address of principal executive offices, including zip code)

(617) 665-9200
(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 [  ]

As of Aug 7, 2001,
there were 23,507,668 shares of our common
stock outstanding.



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TABLE OF CONTENTS



|                              |                                                                                               |                                         |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | --------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | Item 1. Financial Statements                                                                 
|                              |                                                                                               | CONDENSED BALANCE SHEETS               
|                              |                                                                                               | STATEMENTS OF OPERATIONS               
|                              |                                                                                               | STATEMENTS OF CASH FLOWS               
|                              |                                                                                               | NOTES TO UNAUDITED 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                           
|PART II. OTHER INFORMATION   
|                              | Item 1. Legal Proceedings                                                                    
|                              | Item 2. Change in Securities and Use of Proceeds                                             
|                              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                   



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##### Table of Contents



NETGENESIS CORP.

INDEX

|                              |                                                                    |                                         |                                                           |    |      |   | 
|----------------------------- | ------------------------------------------------------------------ | --------------------------------------- | --------------------------------------------------------- | -- | ---- | - | 
|                              |                                                                    |                                         |                                                           |    | Page
|                              |                                                                    |                                         |                                                           |    |     
|PART I. FINANCIAL INFORMATION |                                                                    |                                         |                                                           |   
|                             
|                             
|                             
|                             
|                              | ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)                           |                                         |                                                           |    |     
|                             
|                             
|                             
|                             
|                              |                                                                    | CONDENSED BALANCE SHEETS                |                                                           |    |      |  
|                             
|                             
|                             
|                             
|                              |                                                                    |                                         | AT JUNE 30, 2001 AND DECEMBER 31, 2000                    |    |      | 3 | 
|                             
|                             
|                             
|                             
|                              |                                                                    | STATEMENTS OF OPERATIONS                |                                                           |    |      |  
|                             
|                             
|                             
|                             
|                              |                                                                    |                                         | FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000 |    |      | 4 | 
|                             
|                             
|                             
|                             
|                              |                                                                    | STATEMENTS OF CASH FLOWS                |                                                           |    |      |  
|                             
|                             
|                             
|                             
|                              |                                                                    |                                         | FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000           |    |      | 5 | 
|                             
|                             
|                             
|                             
|                              |                                                                    | NOTES TO UNAUDITED FINANCIAL STATEMENTS |                                                           |    | 6    |  
|                             
|                             
|                             
|                             
|                              | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL          |                                         |                                                           |    |     
|                             
|                             
|                             
|                             
|                              |                                                                    |                                         | CONDITION AND RESULTS OF OPERATIONS                       |    |      | 8 | 
|                             
|                             
|                             
|                             
|                              | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |                                         |                                                           | 19 |     
|                             
|                             
|                             
|                             
|PART II. OTHER INFORMATION    |                                                                    |                                         |                                                           |   
|                             
|                             
|                             
|                             
|                              | ITEM 1. LEGAL PROCEEDINGS                                          |                                         |                                                           | 20 |     
|                             
|                             
|                             
|                             
|                              | ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS                  |                                         |                                                           | 20 |     
|                             
|                             
|                             
|                             
|                              | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS        |                                         |                                                           | 20 |     
|                             
|                             
|                             
|                             
|                              | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                           |                                         |                                                           | 21 |     
|                             
|                             
|                             
|                             
|SIGNATURES                    |                                                                    |                                         | 22                                                        |   

2



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##### Table of Contents






PART I. FINANCIAL INFORMATION




Item 1. Financial Statements




NETGENESIS CORP.
CONDENSED BALANCE SHEETS
(In Thousands, Except Per Share Data)

|       |                                                |                                                                                                                                                         |                                            |       |          |        |              |        |         |        | 
|------ | ---------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----- | -------- | ------ | ------------ | ------ | ------- | ------ | 
|       |                                                |                                                                                                                                                         |                                            |       | June 30, |        | December 31,
|       |                                                |                                                                                                                                                         |                                            |       | 2001     |        | 2000        
|       |                                                |                                                                                                                                                         |                                            |       |          |        |             
|ASSETS |                                                |                                                                                                                                                         |                                            |       |          |        |              |       
|      
|      
|      
|      
|       | Current assets:                                |                                                                                                                                                         |                                            |       |          |        |              |        |        
|      
|      
|      
|      
|       |                                                | Cash and cash equivalents                                                                                                                               |                                            | $     | 15,787   |        |              | $      | 15,564  |       
|      
|      
|      
|      
|       |                                                | Restricted cash                                                                                                                                         |                                            |       | 1,945    |        |              |        | 490     |       
|      
|      
|      
|      
|       |                                                | Short-term investments and marketable securities                                                                                                        |                                            |       | 21,865   |        |              |        | 32,870  |       
|      
|      
|      
|      
|       |                                                | Accounts receivable, net                                                                                                                                |                                            |       | 3,015    |        |              |        | 9,100   |       
|      
|      
|      
|      
|       |                                                | Prepaid expenses and other current assets                                                                                                               |                                            |       | 2,266    |        |              |        | 2,283   |       
|       |                                                |                                                                                                                                                         |                                            |       |          |        |              |       
|       |                                                |                                                                                                                                                         | Total current assets                       |       |          | 44,878 |              |        |         | 60,307 | 
|      
|      
|      
|      
|       | Marketable securities                          |                                                                                                                                                         |                                            | 3,343 |          |        |              | 4,312  |        
|      
|      
|      
|      
|       | Fixed assets, net                              |                                                                                                                                                         |                                            | 8,534 |          |        |              | 10,861 |        
|      
|      
|      
|      
|       | Other assets                                   |                                                                                                                                                         |                                            | 3,470 |          |        |              | 3,505  |        
|       |                                                |                                                                                                                                                         |                                            |       |          |        |              |       
|       |                                                |                                                                                                                                                         | Total assets                               |       | $        | 60,225 |              |        | $       | 78,985 | 
|       |                                                |                                                                                                                                                         |                                            |       |          |        |              |       
|       | LIABILITIES AND STOCKHOLDERS EQUITY           |                                                                                                                                                         |                                            |       |          |        |              |        |        
|      
|      
|      
|      
|       | Current liabilities:                           |                                                                                                                                                         |                                            |       |          |        |              |        |        
|      
|      
|      
|      
|       |                                                | Current portion of capital lease obligations                                                                                                            |                                            | $     | 1,580    |        |              | $      | 442     |       
|      
|      
|      
|      
|       |                                                | Current portion of long-term debt                                                                                                                       |                                            |       | 766      |        |              |        | 1,354   |       
|      
|      
|      
|      
|       |                                                | Accounts payable                                                                                                                                        |                                            |       | 1,932    |        |              |        | 664     |       
|      
|      
|      
|      
|       |                                                | Accrued expenses                                                                                                                                        |                                            |       | 5,322    |        |              |        | 3,428   |       
|      
|      
|      
|      
|       |                                                | Deferred revenue                                                                                                                                        |                                            |       | 2,244    |        |              |        | 2,738   |       
|       |                                                |                                                                                                                                                         |                                            |       |          |        |              |       
|       |                                                |                                                                                                                                                         | Total current liabilities                  |       |          | 11,844 |              |        |         | 8,626  | 
|      
|      
|      
|      
|       | Long-term portion of capital lease obligations |                                                                                                                                                         |                                            | 1,388 |          |        |              | 362    |        
|      
|      
|      
|      
|       | Long-term debt                                 |                                                                                                                                                         |                                            |      |          |        |              | 121    |        
|      
|      
|      
|      
|       | Other long-term liabilities                    |                                                                                                                                                         |                                            | 1,054 |          |        |              | 164    |        
|       |                                                |                                                                                                                                                         |                                            |       |          |        |              |       
|       |                                                |                                                                                                                                                         | Total liabilities                          |       | $        | 14,286 |              |        | $       | 9,273  | 
|       |                                                |                                                                                                                                                         |                                            |       |          |        |              |       
|       | Stockholders equity:                          |                                                                                                                                                         |                                            |       |          |        |              |        |        
|      
|      
|      
|      
|       |                                                | Common stock, $.001 par value; 100,000 shares
authorized; 21,869 and 21,690 issued and outstanding
at June 30, 2001 and December 31, 2000,
respectively |                                            | $     | 22       |        |              | $      | 22      |       
|      
|      
|      
|      
|       |                                                | Additional paid-in capital                                                                                                                              |                                            |       | 130,277  |        |              |        | 130,739 |       
|      
|      
|      
|      
|       |                                                | Deferred compensation                                                                                                                                   |                                            |       | (4,807   | )      |              |        | (6,946  | )     
|      
|      
|      
|      
|       |                                                | Note receivable from stockholder                                                                                                                        |                                            |       | (96      | )      |              |        | (96     | )     
|      
|      
|      
|      
|       |                                                | Accumulated deficit                                                                                                                                     |                                            |       | (79,635  | )      |              |        | (54,129 | )     
|      
|      
|      
|      
|       |                                                | Accumulated other comprehensive income                                                                                                                  |                                            |       | 178      |        |              |        | 122     |       
|       |                                                |                                                                                                                                                         |                                            |       |          |        |              |       
|       |                                                |                                                                                                                                                         | Total stockholders equity                 |       |          | 45,939 |              |        |         | 69,712 | 
|       |                                                |                                                                                                                                                         |                                            |       |          |        |              |       
|       |                                                |                                                                                                                                                         | Total liabilities and stockholders equity |       | $        | 60,225 |              |        | $       | 78,985 | 
|       |                                                |                                                                                                                                                         |                                            |       |          |        |              |       

The accompanying notes are an integral part of these financial statements.

3



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##### Table of Contents






NETGENESIS CORP.
STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)

|                                                                                                                                                                                                                                 |                                                                                                                                                                                                                              |                          |         |                    |        |                  |        |          |        |          |         |       |        |   |         |       |        | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------ | ------- | ------------------ | ------ | ---------------- | ------ | -------- | ------ | -------- | ------- | ----- | ------ | - | ------- | ----- | ------ | 
|                                                                                                                                                                                                                                 |                                                                                                                                                                                                                              |                          |         | Three Months Ended |        | Six Months Ended
|                                                                                                                                                                                                                                 |                                                                                                                                                                                                                              |                          |         |                    |        |                 
|                                                                                                                                                                                                                                 |                                                                                                                                                                                                                              |                          |         | June 30,           |        | June 30,         |        | June 30, |        | June 30,
|                                                                                                                                                                                                                                 |                                                                                                                                                                                                                              |                          |         | 2001               |        | 2000             |        | 2001     |        | 2000    
|                                                                                                                                                                                                                                 |                                                                                                                                                                                                                              |                          |         |                    |        |                  |        |          |        |         
|Revenue:                                                                                                                                                                                                                         |                                                                                                                                                                                                                              |                          |         |                    |        |                  |        |          |        |          |         |       |        |   |         |      
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                 | Product revenue                                                                                                                                                                                                              |                          | $       | 1,896              |        |                  | $      | 3,245    |        |          | $       | 2,733 |        |   | $       | 5,327 |       
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                 | Service revenue                                                                                                                                                                                                              |                          |         | 2,412              |        |                  |        | 2,542    |        |          |         | 5,257 |        |   |         | 4,224 |       
|                                                                                                                                                                                                                                 |                                                                                                                                                                                                                              |                          |         |                    |        |                  |        |          |        |          |         |       |        |   |         |      
|                                                                                                                                                                                                                                 |                                                                                                                                                                                                                              | Total revenue            |         |                    | 4,308  |                  |        |          | 5,787  |          |         |       | 7,990  |   |         |       | 9,551  | 
|                                                                                                                                                                                                                                 |                                                                                                                                                                                                                              |                          |         |                    |        |                  |        |          |        |          |         |       |        |   |         |      
|Cost of revenue:                                                                                                                                                                                                                 |                                                                                                                                                                                                                              |                          |         |                    |        |                  |        |          |        |          |         |       |        |   |         |      
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                 | Cost of product revenue                                                                                                                                                                                                      |                          |         | 217                |        |                  |        | 191      |        |          |         | 336   |        |   |         | 319   |       
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                 | Cost of service revenue (excludes stock-based compensation of $110 and $83 for the
three months ended June 30, 2001 and 2000, respectively, and $224 and $178 for the
six months ended June 30, 2001 and 2000, respectively) |                          |         | 2,793              |        |                  |        | 2,487    |        |          |         | 6,085 |        |   |         | 4,289 |       
|                                                                                                                                                                                                                                 |                                                                                                                                                                                                                              |                          |         |                    |        |                  |        |          |        |          |         |       |        |   |         |      
|                                                                                                                                                                                                                                 |                                                                                                                                                                                                                              | Total cost of revenue    |         |                    | 3,010  |                  |        |          | 2,678  |          |         |       | 6,421  |   |         |       | 4,608  | 
|                                                                                                                                                                                                                                 |                                                                                                                                                                                                                              |                          |         |                    |        |                  |        |          |        |          |         |       |        |   |         |      
|Gross profit                                                                                                                                                                                                                     |                                                                                                                                                                                                                              |                          | 1,298   |                    |        |                  | 3,109  |          |        |          | 1,569   |       |        |   | 4,943   |      
|                                                                                                                                                                                                                                 |                                                                                                                                                                                                                              |                          |         |                    |        |                  |        |          |        |          |         |       |        |   |         |      
|Operating expenses:                                                                                                                                                                                                              |                                                                                                                                                                                                                              |                          |         |                    |        |                  |        |          |        |          |         |       |        |   |         |      
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                
|Sales and marketing (excludes stock-based compensation of $350 and $452 for the
three months ended June 30, 2001 and 2000, respectively, and $704 and $941 for the
six months ended June 30, 2001 and 2000, respectively)        |                                                                                                                                                                                                                              |                          | 6,191   |                    |        |                  | 5,187  |          |        |          | 13,625  |       |        |   | 9,267   |      
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                
|Research and development (excludes stock-based compensation of $97 and $127 for the
three months ended June 30, 2001 and 2000, respectively, and $216 and $210 for the
six months ended June 30, 2001 and 2000, respectively)    |                                                                                                                                                                                                                              |                          | 2,551   |                    |        |                  | 2,530  |          |        |          | 5,321   |       |        |   | 5,007   |      
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                
|General and administrative (excludes stock-based compensation of $144 and $168 for
the three months ended June 30, 2001 and 2000, respectively, and $289 and $270 for
the six months ended June 30, 2001 and 2000, respectively) |                                                                                                                                                                                                                              |                          | 2,276   |                    |        |                  | 1,544  |          |        |          | 4,863   |       |        |   | 3,226   |      
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                
|Stock-based compensation                                                                                                                                                                                                         |                                                                                                                                                                                                                              |                          | 701     |                    |        |                  | 830    |          |        |          | 1,433   |       |        |   | 1,599   |      
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                
|Amortization
of intangibles                                                                                                                                                                                                      |                                                                                                                                                                                                                              |                          | 83      |                    |        |                  |       |          |        |          | 166     |       |        |   |        |      
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                
|Restructuring
charges                                                                                                                                                                                                            |                                                                                                                                                                                                                              |                          | 2,472   |                    |        |                  |       |          |        |          | 2,472   |       |        |   |        |      
|                                                                                                                                                                                                                                 |                                                                                                                                                                                                                              |                          |         |                    |        |                  |        |          |        |          |         |       |        |   |         |      
|                                                                                                                                                                                                                                 |                                                                                                                                                                                                                              | Total operating expenses |         |                    | 14,274 |                  |        |          | 10,091 |          |         |       | 27,880 |   |         |       | 19,099 | 
|                                                                                                                                                                                                                                 |                                                                                                                                                                                                                              |                          |         |                    |        |                  |        |          |        |          |         |       |        |   |         |      
|Loss from operations                                                                                                                                                                                                             |                                                                                                                                                                                                                              |                          | (12,976 | )                  |        |                  | (6,982 | )        |        |          | (26,311 | )     |        |   | (14,156 | )    
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                
|Other income:                                                                                                                                                                                                                    |                                                                                                                                                                                                                              |                          |         |                    |        |                  |        |          |        |          |         |       |        |   |         |      
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                 | Interest and other income, net                                                                                                                                                                                               |                          |         | 355                |        |                  |        | 1,131    |        |          |         | 805   |        |   |         | 1,494 |       
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                 | Gain on sale of short-term investments and marketable securities                                                                                                                                                             |                          |         |                   |        |                  |        |         |        |          |         |      |        |   |         | 1,148 |       
|                                                                                                                                                                                                                                 |                                                                                                                                                                                                                              |                          |         |                    |        |                  |        |          |        |          |         |       |        |   |         |      
|Net loss                                                                                                                                                                                                                         |                                                                                                                                                                                                                              | $                        | (12,621 | )                  |        |                  | (5,851 | )        |        | $        | (25,506 | )     |        |   | (11,514 | )    
|                                                                                                                                                                                                                                 |                                                                                                                                                                                                                              |                          |         |                    |        |                  |        |          |        |          |         |       |        |   |         |      
|Dividends and accretion of redeemable preferred stock                                                                                                                                                                            |                                                                                                                                                                                                                              |                          |        |                    |        |                  |       |          |        |          |        |       |        |   | (442    | )    
|                                                                                                                                                                                                                                 |                                                                                                                                                                                                                              |                          |         |                    |        |                  |        |          |        |          |         |       |        |   |         |      
|Net loss available to common stockholders                                                                                                                                                                                        |                                                                                                                                                                                                                              | $                        | (12,621 | )                  |        | $                | (5,851 | )        |        | $        | (25,506 | )     |        | $ | (11,956 | )    
|                                                                                                                                                                                                                                 |                                                                                                                                                                                                                              |                          |         |                    |        |                  |        |          |        |          |         |       |        |   |         |      
|Basic and diluted net loss available to common stockholders per share                                                                                                                                                            |                                                                                                                                                                                                                              | $                        | (0.60   | )                  |        | $                | (0.29  | )        |        | $        | (1.21   | )     |        | $ | (0.84   | )    
|                                                                                                                                                                                                                                 |                                                                                                                                                                                                                              |                          |         |                    |        |                  |        |          |        |          |         |       |        |   |         |      
|Shares used in computing basic and diluted net loss
available to common stockholders per share                                                                                                                                   |                                                                                                                                                                                                                              |                          | 21,188  |                    |        |                  | 20,133 |          |        |          | 21,060  |       |        |   | 14,249  |      
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                
|Pro forma basic and diluted net loss per common share                                                                                                                                                                            |                                                                                                                                                                                                                              |                          |         |                    |        |                  |        |          |        |          |         |       |        | $ | (0.63   | )    
|                                                                                                                                                                                                                                 |                                                                                                                                                                                                                              |                          |         |                    |        |                  |        |          |        |          |         |       |        |   |         |      
|Shares used in computing pro forma basic and diluted net loss per common share                                                                                                                                                   |                                                                                                                                                                                                                              |                          |         |                    |        |                  |        |          |        |          |         |       |        |   | 18,421  |      

The accompanying notes are an integral part of these financial statements.

4



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##### Table of Contents






NETGENESIS CORP.
STATEMENTS OF CASH FLOWS
(In thousands)

|                                                                            |                                                                                 |                                   |                                                     |         |                  |         |          |         |        |         |  
|--------------------------------------------------------------------------- | ------------------------------------------------------------------------------- | --------------------------------- | --------------------------------------------------- | ------- | ---------------- | ------- | -------- | ------- | ------ | ------- | -
|                                                                            |                                                                                 |                                   |                                                     |         | Six Months Ended
|                                                                            |                                                                                 |                                   |                                                     |         |                 
|                                                                            |                                                                                 |                                   |                                                     |         | June 30,         |         | June 30,
|                                                                            |                                                                                 |                                   |                                                     |         | 2001             |         | 2000    
|                                                                            |                                                                                 |                                   |                                                     |         |                  |         |         
|CASH FLOW FROM OPERATING ACTIVITIES:                                        |                                                                                 |                                   |                                                     |         |                  |         |          |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Net loss                                                                    |                                                                                 | $                                 | (25,506                                             | )       |                  | $       | (11,514  | )      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Adjustments to reconcile net loss to net cash used in
operating activities: |                                                                                 |                                   |                                                     |         |                  |         |          |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Non-cash portion of restructuring charges                                       |                                   |                                                     | 447     |                  |         |          |        |       
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Depreciation and amortization                                                   |                                   |                                                     | 2,397   |                  |         |          | 1,107   |       
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Gain on sale of short-term investments and marketable securities                |                                   |                                                     |        |                  |         |          | (1,220  | )     
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Amortization of gain
on sale and leaseback of fixed assets                      |                                   |                                                     | (49     | )                |         |          |        |       
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Loss on disposal of fixed assets                                                |                                   |                                                     | 9       |                  |         |          |        |       
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Non-cash interest expense                                                       |                                   |                                                     | 41      |                  |         |          | 41      |       
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Stock-based compensation expense                                                |                                   |                                                     | 1,433   |                  |         |          | 1,599   |       
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Increase (decrease) resulting from changes in operating assets and liabilities: |                                   |                                                     |         |                  |         |          |         |       
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                                                 | Accounts receivable               |                                                     |         | 6,085            |         |          |         | (2,321 | )      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                                                 | Prepaid expenses and other assets |                                                     |         | 17               |         |          |         | (1,272 | )      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                                                 | Other assets                      |                                                     |         | 35               |         |          |         | 17     |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                                                 | Deferred revenue                  |                                                     |         | (494             | )       |          |         | 293    |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                                                 | Accounts payable                  |                                                     |         | 1,268            |         |          |         | 499    |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                                                 | Accrued expenses                  |                                                     |         | 1,894            |         |          |         | 68     |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                                                 | Other liabilities                 |                                                     |         | 890              |         |          |         | 13     |        
|                                                                            |                                                                                 |                                   |                                                     |         |                  |         |          |        
|                                                                            |                                                                                 |                                   | Net cash used in operating activities               |         |                  | (11,533 | )        |         |        | (12,690 | )
|                                                                            |                                                                                 |                                   |                                                     |         |                  |         |          |        
|CASH FLOW FROM INVESTING ACTIVITIES:                                        |                                                                                 |                                   |                                                     |         |                  |         |          |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Purchases of fixed assets                                                       |                                   |                                                     | (681    | )                |         |          | (4,748  | )     
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Purchases of short-term investments and marketable securities                   |                                   |                                                     | (13,713 | )                |         |          | (63,644 | )     
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Proceeds from sales of short-term investments and marketable securities         |                                   |                                                     | 25,950  |                  |         |          | 3,009   |       
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Increase in other
assets                                                        |                                   |                                                     |        |                  |         |          | (1,681  | )     
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | (Decrease) increase in restricted cash                                          |                                   |                                                     | (1,455  | )                |         |          | 46      |       
|                                                                            |                                                                                 |                                   |                                                     |         |                  |         |          |        
|                                                                            |                                                                                 |                                   | Net cash provided by (used in) investing activities |         |                  | 10,101  |          |         |        | (67,018 | )
|                                                                            |                                                                                 |                                   |                                                     |         |                  |         |          |        
|CASH FLOW FROM FINANCING ACTIVITIES:                                        |                                                                                 |                                   |                                                     |         |                  |         |          |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Proceeds from sale and leaseback of fixed assets                                |                                   |                                                     | 2,797   |                  |         |          | 547     |       
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Principal payments of capital lease obligations                                 |                                   |                                                     | (633    | )                |         |          | (67     | )     
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Repayment of debt                                                               |                                   |                                                     | (750    | )                |         |          | (597    | )     
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Proceeds from the issuance of common stock                                      |                                   |                                                     |        |                  |         |          | 80,653  |       
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Proceeds from employee stock purchase
plan                                      |                                   |                                                     | 140     |                  |         |          |        |       
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Proceeds from exercise of stock options                                         |                                   |                                                     | 101     |                  |         |          | 58      |       
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Repurchase of restricted common stock                                           |                                   |                                                     |        |                  |         |          | (11     | )     
|                                                                            |                                                                                 |                                   |                                                     |         |                  |         |          |        
|                                                                            |                                                                                 |                                   | Net cash provided by financing activities           |         |                  | 1,655   |          |         |        | 80,583  |  
|                                                                            |                                                                                 |                                   |                                                     |         |                  |         |          |        
|Net increase in cash and cash equivalents                                   |                                                                                 |                                   | 223                                                 |         |                  |         | 875      |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Cash and cash equivalents, beginning of period                              |                                                                                 |                                   | 15,564                                              |         |                  |         | 9,643    |        
|                                                                            |                                                                                 |                                   |                                                     |         |                  |         |          |        
|Cash and cash equivalents, end of period                                    |                                                                                 | $                                 | 15,787                                              |         |                  | $       | 10,518   |        
|                                                                            |                                                                                 |                                   |                                                     |         |                  |         |          |        
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                           |                                                                                 |                                   |                                                     |         |                  |         |          |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Dividends and accretion of preferred stock                                      |                                   | $                                                   |        |                  |         | $        | 442     |       
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:     |                                                                                 |                                   |                                                     |         |                  |         |          |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Additions to capital lease obligations for sale and leaseback of fixed assets   |                                   |                                                     | 2,797   |                  |         |          | 547     |       
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Conversion of redeemable convertible preferred stock to common stock            |                                   |                                                     |        |                  |         |          | 36,575  |       
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Conversion of convertible preferred stock to common stock                       |                                   |                                                     |        |                  |         |          | 1,717   |       

The accompanying notes are an integral part of these financial statements.

5



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##### Table of Contents






NOTES TO UNAUDITED FINANCIAL STATEMENTS

Note 1  Basis of Presentation

The accompanying unaudited condensed financial statements reflect all
adjustments (consisting only of normal recurring adjustments) which, in the
opinion of management, are necessary for a fair presentation of the financial
results for the periods shown.

The accompanying unaudited financial statements have been prepared in
accordance with the instructions for Form 10-Q and therefore do not include all
information and footnotes necessary for a complete presentation of the results
of operations, financial position, and cash flows of the Company, in conformity
with generally accepted accounting principles. These unaudited financial
statements should be read in conjunction with the financial statements and
notes thereto included in the Companys Annual Report on Form 10-K filed with
the Securities and Exchange Commission.

The results of operations for the current interim period are not
necessarily indicative of results to be expected for the entire current year or
other future interim periods.

Note 2  Net Loss Available to
Common Stockholders Per Common Share and Pro Forma Net Loss Per Common Share

Basic and diluted net loss available to common stockholders per share is
computed using the weighted average number of common shares outstanding.

Pro forma net loss per share has been computed as described above except
that it gives effect to the conversion of preferred stock outstanding as if the
conversion took place at the beginning of the period presented:

|                                                                        |                                                                                                |                                                               |         |                    |        |                  |        |          |        |          |         |         |        |   |         |         |        |  
|----------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------- | ------------------------------------------------------------- | ------- | ------------------ | ------ | ---------------- | ------ | -------- | ------ | -------- | ------- | ------- | ------ | - | ------- | ------- | ------ | -
|                                                                        |                                                                                                |                                                               |         | Three Months Ended |        | Six Months Ended
|                                                                        |                                                                                                |                                                               |         |                    |        |                 
|                                                                        |                                                                                                |                                                               |         | June 30,           |        | June 30,         |        | June 30, |        | June 30,
|                                                                        |                                                                                                |                                                               |         | 2001               |        | 2000             |        | 2001     |        | 2000    
|                                                                        |                                                                                                |                                                               |         |                    |        |                  |        |          |        |         
|Net loss                                                                |                                                                                                | $                                                             | (12,621 | )                  |        | $                | (5,851 | )        |        | $        | (25,506 | )       |        | $ | (11,514 | )      
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        | Dividends and accretion of redeemable preferred stock                                          |                                                               |         |                   |        |                  |        |         |        |          |         |        |        |   |         | (442    | )     
|                                                                        |                                                                                                |                                                               |         |                    |        |                  |        |          |        |          |         |         |        |   |         |        
|                                                                        | Net loss available to common stockholders                                                      |                                                               | $       | (12,621            | )      |                  | $      | (5,851   | )      |          | $       | (25,506 | )      |   | $       | (11,956 | )     
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        |                                                                                                | Weighted average shares                                       |         |                    | 21,859 |                  |        |          | 21,068 |          |         |         | 21,789 |   |         |         | 15,270 |  
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        |                                                                                                | Weighted average unvested common shares subject to repurchase |         |                    | (671   | )                |        |          | (935   | )        |         |         | (729   | ) |         |         | (1,021 | )
|                                                                        |                                                                                                |                                                               |         |                    |        |                  |        |          |        |          |         |         |        |   |         |        
|                                                                        | Shares used in computing basic and diluted net loss available to
common stockholders per share |                                                               |         | 21,188             |        |                  |        | 20,133   |        |          |         | 21,060  |        |   |         | 14,249  |       
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        | Net loss available to common stockholders per share:                                           |                                                               |         |                    |        |                  |        |          |        |          |         |         |        |   |         |         |       
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        |                                                                                                | Basic and diluted                                             |         | $                  | (0.60  | )                |        | $        | (0.29  | )        |         | $       | (1.21  | ) |         | $       | (0.84  | )
|                                                                        |                                                                                                |                                                               |         |                    |        |                  |        |          |        |          |         |         |        |   |         |        
|Conversion of convertible preferred stock                               |                                                                                                |                                                               |         |                    |        |                  |        |          |        |          |         |         |        |   | 4,172   |        
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Pro forma shares used in computing basic and diluted net loss per share |                                                                                                |                                                               |         |                    |        |                  |        |          |        |          |         |         |        |   | 18,421  |        
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Pro forma net loss per share:                                           |                                                                                                |                                                               |         |                    |        |                  |        |          |        |          |         |         |        |   |         |        
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        |                                                                                                | Basic and diluted                                             |         |                    |        |                  |        |          |        |          |         |         |        |   |         | $       | (0.63  | )
|                                                                        |                                                                                                |                                                               |         |                    |        |                  |        |          |        |          |         |         |        |   |         |        

Options to purchase
3,961,519 and 2,415,572 shares
of common stock were outstanding for the quarter ended June 30,
2001 and 2000, respectively, but were excluded from the calculation
of dilutive net loss per share as the effect of their inclusion would
have been anti-dilutive due to the net loss incurred in both periods
presented. For the quarter ended June 30, 2001 and 2000,
respectively, options for 228,409 and 2,375,572 shares, respectively,
of common stock had an exercise price that was below the average
market value per share of the Companys common stock during such
respective periods.

Note 3  Equity Transactions

Amortization of deferred stock-based compensation recognized for the three
months ended June 30, 2001 and 2000 was $414,000 and $500,000, respectively.
Amortization of deferred stock-based compensation recognized for the six months
ended June 30, 2001 and 2000 was $859,000 and $918,000, respectively. During
the quarter ended and six months ended June 30, 2001, the Company recorded
amortization of stock-based compensation of $287,000 and $574,000,
respectively, related to the acquisition of a German distributor of software in
October 2000. In addition, during the three months ended June 30, 2000, the
Company recorded stock-based compensation expense of $330,000 related to
separation agreements entered into with former employees. During the six months
ended June 30, 2000, the Company recorded stock-based compensation expense of
$681,000 related to separation agreements entered into with former employees.
For the three months ended June 30, 2001, the Company recorded a decrease in
deferred stock-based compensation of $389,000 related to the forfeiture of
stock options. For the six months ended June 30, 2001, the Company recorded a
decrease in deferred stock-based compensation of $599,000 related to the
forfeiture of stock options.

6



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##### Table of Contents



Note 4  Significant Customer and Geographic Information

Revenue by geographic region is as follows (in thousands):

|              |       |   |                    |       |                  |   |          |       |          |   |       |       |  |   |       |       | 
|------------- | ----- | - | ------------------ | ----- | ---------------- | - | -------- | ----- | -------- | - | ----- | ----- |  | - | ----- | ----- | 
|              |       |   | Three Months Ended |       | Six Months Ended
|              |       |   |                    |       |                 
|              |       |   | June 30,           |       | June 30,         |   | June 30, |       | June 30,
|              |       |   | 2001               |       | 2000             |   | 2001     |       | 2000    
|              |       |   |                    |       |                  |   |          |       |         
|United States |       | $ | 2,951              |       |                  | $ | 5,117    |       |          | $ | 5,421 |       |  | $ | 8,363 |      
|             
|             
|             
|             
|Europe        |       |   | 1,134              |       |                  |   | 552      |       |          |   | 2,259 |       |  |   | 924   |      
|             
|             
|             
|             
|Australia     |       |   | 22                 |       |                  |   | 10       |       |          |   | 109   |       |  |   | 63    |      
|             
|             
|             
|             
|Other         |       |   | 201                |       |                  |   | 108      |       |          |   | 201   |       |  |   | 201   |      
|              |       |   |                    |       |                  |   |          |       |          |   |       |       |  |   |       |      
|              | Total |   | $                  | 4,308 |                  |   | $        | 5,787 |          |   | $     | 7,990 |  |   | $     | 9,551 | 
|              |       |   |                    |       |                  |   |          |       |          |   |       |       |  |   |       |      

One customer accounted for more than 10% of revenue for the quarter ended
June 30, 2001. Each of two customers accounted for more than 10% of revenue for
the quarter ended June 30, 2000. No customer accounted for more than 10% of
revenue for the six months ended June 30, 2001 or June 30, 2000, respectively.

Note 5  Comprehensive Loss

The components of comprehensive loss, net of income taxes, are as follows
(in thousands):

|                                                                           |  |                    |         |                  |  |          |        |          |  |   |         |   |  |   |         |  
|-------------------------------------------------------------------------- |  | ------------------ | ------- | ---------------- |  | -------- | ------ | -------- |  | - | ------- | - |  | - | ------- | -
|                                                                           |  | Three Months Ended |         | Six Months Ended
|                                                                           |  |                    |         |                 
|                                                                           |  | June 30,           |         | June 30,         |  | June 30, |        | June 30,
|                                                                           |  | 2001               |         | 2000             |  | 2001     |        | 2000    
|                                                                           |  |                    |         |                  |  |          |        |         
|Net loss                                                                   |  | $                  | (12,621 | )                |  | $        | (5,851 | )        |  | $ | (25,506 | ) |  | $ | (11,514 | )
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|Unrealized
gain (loss) on short-term investments and marketable securities |  |                    | (21     | )                |  |          | (72    | )        |  |   | 56      |   |  |   | (105    | )
|                                                                           |  |                    |         |                  |  |          |        |          |  |   |         |   |  |   |         |  
|Comprehensive loss                                                         |  | $                  | (12,642 | )                |  | $        | (5,923 | )        |  | $ | (25,450 | ) |  | $ | (11,619 | )
|                                                                           |  |                    |         |                  |  |          |        |          |  |   |         |   |  |   |         |  

Note 6  Restructuring Charges

During the quarter
ended June 30, 2001, the Company recorded a
restructuring charge of $2.5 million related to a workforce reduction and
facility consolidation.

The following table summarizes the restructuring charges (in thousands):

|                              |                                    |  |                    |       | 
|----------------------------- | ---------------------------------- |  | ------------------ | ----- | 
|                              |                                    |  | Three
Months Ended
|                              |                                    |  | June 30, 2001     
|                              |                                    |  |                   
|Charges to operations:        |                                    |  |                    |      
|                             
|                             
|                             
|                             
|                              | Employee severance and termination |  | $                  | 437   | 
|                             
|                             
|                             
|                             
|                              | Asset write-offs                   |  |                    | 447   | 
|                             
|                             
|                             
|                             
|                              | Facility consolidation             |  |                    | 1,588 | 
|                              |                                    |  |                    |      
|Total charges to operations   |                                    |  | 2,472              |      
|                             
|                             
|                             
|                             
|Costs incurred:               |                                    |  |                    |      
|                             
|                             
|                             
|                             
|                              | Employee severance and termination |  |                    | 283   | 
|                             
|                             
|                             
|                             
|                              | Asset write-offs                   |  |                    | 447   | 
|                             
|                             
|                             
|                             
|                              | Facility consolidation             |  |                    | 351   | 
|                              |                                    |  |                    |      
|Total costs incurred:         |                                    |  | 1,081              |      
|                             
|                             
|                             
|                             
|Ending balance                |                                    |  | 1,391              |      
|                             
|                             
|                             
|                             
|Cash expenditures:            |                                    |  |                    |      
|                             
|                             
|                             
|                             
|                              | Employee severance and termination |  |                    | 283   | 
|                             
|                             
|                             
|                             
|                              | Facility consolidation             |  |                    | 351   | 
|                              |                                    |  |                    |      
|Total cash expenditures       |                                    |  | 634                |      
|                             
|                             
|                             
|                             
|Number of employee severances |                                    |  | 34                 |      

As of June 30, 2001, total liabilities include the remaining $1.4 million of
expected nonrecurring charges split between accrued expenses and other
long-term liabilities of $903,000 and $488,000, respectively.

7



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##### Table of Contents



Note 7  Recent Accounting Pronouncements

In July 2001, the FASB issued SFAS No. 141, Business Combinations and
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires
that all business combinations be accounted for under the purchase method only
and that certain acquired intangible assets in a business combination be
recognized as assets apart from goodwill. SFAS No. 142 requires that ratable
amortization of goodwill be replaced with periodic tests of the goodwills
impairment and that intangible assets other than goodwill be amortized over
their useful lives. SFAS No. 141 is effective for all business combinations
initiated after June 30, 2001 and for all business combinations accounted for
by the purchase method for which the date of acquisition is after June 30,
2001. The provisions of SFAS No. 142 will be effective for fiscal years
beginning after December 15, 2001, and will thus be adopted by the Company, as
required, in fiscal year 2002. The Company has not yet assessed impact from
the adoption of SFAS No. 141 and SFAS No. 142 on the Companys financial
statements.

Note 8  Subsequent Event

In July 2001, in response to continuing changes in our business
environment, the Company implemented a cost reduction program that is expected
to result in restructuring charges of up to $2.6 million. Headcount reductions
and facility consolidation are expected to yield anticipated cost savings of
$4.9 million per year. The cost of headcount reductions and facility
consolidation are expected to be $.7 million and $1.9 million, respectively.




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

The following information should be read in conjunction with the condensed
historical financial information and the notes thereto included in this report
and Managements Discussion and Analysis of Financial Condition and Results of
Operations and related financial information contained in the Companys Annual
Report on Form 10-K for the year ended December 31, 2000 (File No. 0-29721).

THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING THE
COMPANYS EXPECTATIONS, BELIEFS, INTENTIONS OR FUTURE STRATEGIES THAT ARE
SIGNIFIED BY THE WORDS EXPECTS, ANTICIPATES, INTENDS, BELIEVES, OR
SIMILAR LANGUAGE. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE
BASED ON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE
COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS.
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS
TO DIFFER FROM THESE FORWARD-LOOKING STATEMENTS INCLUDE THOSE SET FORTH BELOW
UNDER THE CAPTION RISK FACTORS, AND UNDER THE CAPTION RISK FACTORS IN OUR
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000. THE COMPANY
CAUTIONS INVESTORS THAT ITS BUSINESS AND FINANCIAL PERFORMANCE ARE SUBJECT TO
SUBSTANTIAL RISKS AND UNCERTAINTIES.

OVERVIEW

We offer e-customer intelligence software that enables companies to
understand and improve their online businesses. We license our software
products to customers for a fee and also provide related maintenance and
support services. In addition, we provide professional consulting services,
including analytic consulting, product implementation, application integration,
customization of e-customer analysis reporting, and training.

We license our software products to customers primarily on a perpetual,
non-exclusive and non-transferable basis. Our pricing model is based on the
number of CPUs within the customers managed servers in the customers
environment, the platform supported and the number of end users of software,
allowing for additional revenue as a customers requirements grow. Support and
maintenance contracts, which are typically purchased with initial product
licenses and are renewable annually thereafter, entitle customers to
telephone, e-mail and web-based support and to routine product upgrades, when
and if available. The price for support and maintenance services is based on a
percentage of the current list price of software. Consulting fees for
implementation services and training are charged primarily on a
time-and-materials basis.

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Service revenue consists of fees from professional services and from
software maintenance and support. Professional services include analytic
consulting, product implementation, application integration, report
customization, training and support. Professional services fees are typically
recognized as the services are performed.

Customers typically purchase maintenance and support agreements annually.
Revenue from maintenance and support agreements is recognized ratably over the
term of the agreement, typically one year. Cash receipts from clients and
billed amounts due from clients in excess of revenue recognized are recorded as
deferred revenue. The timing and amount of cash receipts from clients can vary
significantly depending on specific contract terms and can therefore have a
significant impact on the amount of deferred revenue in any given period.

Since inception, we have incurred substantial costs to develop our
technology and products, to recruit and train personnel for engineering, sales
and marketing and professional services departments, and to establish an
administrative organization. As a result, we have incurred net losses in each
fiscal quarter since December 31, 1994 and, as of June 30, 2001, had an
accumulated deficit of $79.6 million. We anticipate that our operating expenses
will stabilize or decrease over the next several quarters, but will increase in
the long-term as we increase sales and marketing operations, develop new
distribution channels, fund greater levels of research and development, broaden
professional consulting services and support, and improve operational and
financial systems. We expect that these operating expenses, as well as
anticipated capital expenditures, will constitute a material use of our cash
resources. We expect to incur additional losses and continued negative cash
flow from operations, and may not achieve or sustain profitability or positive
cash flow from operations.

We have recorded deferred stock-based compensation related to grants of
stock options. This amount represents the difference between the exercise price
of these stock option grants and the amount subsequently determined to be the
fair market value of the underlying common stock for financial reporting
purposes at the time of grant. Of this amount, approximately $414,000 was
amortized in the quarter ended June 30, 2001 and $859,000 was amortized in the
six months ended June 30, 2001. In addition, we recorded amortization of
stock-based compensation of $287,000 related to stock issued in connection with
the acquisition of a German distributor of software in October 2000 during the
quarter ended June 30, 2001 and $574,000 during the six months ended June 30,
2001. A total of $4.8 million of stock-based compensation will be amortized
ratably over the remaining vesting periods of the stock and options, generally
four years or less, which will affect reported results of operations through
2003.

Results of Operations

Total Revenue.Total revenue decreased by $1.5 million, or 26%, to $4.3
million for the quarter ended June 30, 2001 from $5.8 million for the quarter
ended June 30, 2000. Total revenue decreased by $1.6 million, or 16%, to $8.0
million for the six months ended June 30, 2001 from $9.6 million for the six
months ended June 30, 2000. One customer accounted for more than 10% of
revenue for the quarter ended June 30, 2001. Two different customers accounted
for more than 10% of revenue for the quarter ended June 30, 2000. No customer
accounted for more than 10% of revenue for the six months ended June 30, 2001
or June 30, 2000, respectively.

Product Revenue.Product revenue decreased by $1.3 million, or 42%, to
$1.9 million for the quarter ended June 30, 2001 from $3.2 million for the
quarter ended June 30, 2000. Product revenue decreased by $2.6 million, or
49%, to $2.7 million for the six months ended June 30, 2001 from $5.3 million
for the six months ended June 30, 2000. The decline was largely caused by a
downturn in spending on information technology focused on the internet in the
United States and Europe, which adversely affected product license sales.
Product revenue as a percentage of total revenue decreased to 44% for the
quarter ended June 30, 2001 from 56% for the quarter ended June 30, 2000.
Product revenue as a percentage of total revenue decreased to 34% for the six
months ended June 30, 2001 from 56% for the six months ended June 30, 2000. Although product revenue for the periods ended June
30, 2001 was lower than historical periods, we believe that product revenue
will represent a majority of our revenues in future periods once spending on information
technology focused on the
internet returns to more historical levels in the United States and Europe.

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Service Revenue.Service revenue decreased by $130,000, or 5%, to $2.4
million for the quarter ended June 30, 2001 from $2.5 million for the quarter
ended June 30, 2000. Service revenue increased by $1.1 million, or 24%, to
$5.3 million for the six months ended June 30, 2001 from $4.2 million for the
six months ended June 30, 2000. Approximately $542,000 of the decrease in the
dollar amount of service revenue for the quarter ended June 30, 2001 was
attributable to decreased implementation and consulting services chiefly in
connection with a reduced number of product license sales compared to the same
period a year ago. An increase of $412,000 from the sales of maintenance
contracts associated with higher dollar value sales of software licenses in prior periods offset
much of the decrease in consulting revenue for the quarter. Approximately $1.2
million of the increase in service revenue for the six
months ended June 30, 2001 was attributable to an increase in sales of
maintenance contracts associated with higher dollar value sales of software
licenses in prior periods. This was offset by a decrease of $145,000 in
implementation and consulting services chiefly in connection with a lower
number of product license sales.

Cost of Product Revenue.Cost of product revenue consists primarily of
royalties associated with third-party software embedded in our software
products and software product costs, such as user manuals, packaging and media
costs. Cost of product revenue increased by $26,000, or 14%, to $217,000 for
the quarter ended June 30, 2001 from $191,000 for the quarter ended June 30,
2000. Cost of product revenue increased by $17,000, or 5%, to $336,000 for the
six months ended June 30, 2001 from $319,000 for the six months ended June 30,
2000. The increase was attributable to increased printing and reproduction
costs. Cost of product revenue as a percentage of product revenue increased to
11% for the quarter ended June 30, 2001 from 6% for the quarter ended June 30,
2000. Cost of product revenue as a percentage of product revenue increased to
12% for the six months ended June 30, 2001 from 6% for the six months ended
June 30, 2000. The increase is due to fixed printing and reproduction costs
incurred on comparatively lower software license sales. We expect printing and
reproduction costs to increase at a slower rate in proportion to software
license sales in future quarters.

Cost of Service Revenue.Cost of service revenue consists primarily of
salaries, benefits and associated overhead costs of our professional services
organization. Cost of service revenue, excluding stock-based compensation,
increased by $306,000, or 12%, to $2.8 million for the quarter ended June 30,
2001 from $2.5 million for the quarter ended June 30, 2000. Cost of service
revenue, excluding stock-based compensation, increased by $1.8 million or 42%,
to $6.1 million for the six months ended June 30, 2001 from $4.3 million for
the six months ended June 30, 2000. Approximately $184,000 and $433,000 of the
increases for the quarter ended and six months ended June 30, 2001,
respectively, can be attributed to an increase in allocated facilities costs.
The balance of the increase is attributable to increased personnel costs
including salaries, variable compensation, and employee benefits. Cost of
service revenue, excluding stock-based compensation, as a percentage of service
revenue increased to 116% for the quarter ended June 30, 2001 from 98% for the
quarter ended June 30, 2000. Cost of service revenue, excluding stock-based
compensation, as a percentage of service revenue increased to 116% for the six
months ended June 30, 2001 from 102% for the six months ended
June 30, 2000. This increase is due mainly to an increase in
allocated facilities costs, as well as increased personnel costs.

Sales and Marketing Expenses.Sales and marketing expenses consist
primarily of personnel costs, including related overhead costs and commissions,
as well as travel and entertainment expenses, trade show and other promotional
expenses, advertising, and other marketing costs. Sales and marketing expenses,
excluding stock-based compensation, increased by $1.0 million, or 19%, to $6.2
million for the quarter ended June 30, 2001 from $5.2 million for the quarter
ended June 30, 2000. Sales and marketing expenses, excluding stock-based
compensation, increased by $4.3 million, or 47%, to $13.6 million for the six
months ended June 30, 2001 from $9.3 million for the six months ended June 30,
2000. Approximately $885,000 and $3.1 million of the increases for the quarter
ended and the six months ended June 30, 2001, respectively, are attributable to
increased personnel-related costs associated with increased headcount in our
sales and marketing organizations and related increases in incentive
compensation paid to sales personnel. The balance of the increase for the
quarter ended June 30, 2001 is attributable to an increase in allocated
facilities costs. The balance of the increase for the six months ended June
30, 2001 is approximately $658,000 for the increase in allocated facilities
costs and $496,000 for increased marketing-related expenses. Sales and
marketing expenses, excluding stock-based compensation, as a percentage of
total revenue increased to 144% for the quarter ended June 30, 2001 from 90%
for the quarter ended June 30, 2000. Sales and marketing expenses, excluding
stock-based compensation, as a percentage of total revenue increased to 171%
for the six months ended June 30, 2001 from 97% for the six months ended June
30, 2000. The increase was due to the hiring of additional personnel, increased
facilities costs and greater marketing expenses associated with lead generation
efforts, as well as lower than expected product revenue. We expect that sales
and marketing expenses will stabilize or decrease in the near term, and in the
long-term, increase in dollar amount due to increased commissions associated
with higher revenues, continued investment in international distribution
capability, and support for new product launches, brand awareness programs,
international expansion and lead generation efforts.

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Research and Development Expenses.Research and development expenses
consist primarily of salaries, benefits and related overhead costs attributable
to our research and development organization, as well as the cost of
consultants. Research and development expenses, excluding stock-based
compensation, increased by $21,000, or 1%, to $2.6 million for the quarter
ended June 30, 2001 from $2.5 million for the quarter ended June 30, 2000.
Research and development expenses, excluding stock-based compensation,
increased by $314,000, or 6%, to $5.3 million for the six months ended June 30,
2001 from $5.0 million for the six months ended June 30, 2000. The increases
in research and development expenses in absolute dollar amounts were primarily
attributable to an increase in allocated facilities costs of $267,000 and
$586,000 for the quarter ended and six months ended June 30, 2001,
respectively. This was offset by a reduction in the cost of external
consultants of $283,000 and $330,000 for the quarter ended and six months ended
June 30, 2001, respectively. The balance of the increase is attributable to
increased personnel costs including salaries and employee benefits. Research
and development expenses, excluding stock-based compensation, as a percentage
of total revenue increased to 59% for the quarter ended June 30, 2001 from 44%
for the quarter ended June 30, 2000. Research and development expenses,
excluding stock-based compensation, as a percentage of total revenue increased
to 67% for the six months ended June 30, 2001 from 52% for the six months ended
June 30, 2000. The increase as a percentage of revenue is primarily due to
increased facilities costs, as well as lower than expected product revenue. We
believe that research and development expenses will stabilize or decrease in
the near term, and in the long-term increase in dollar amount as we hire
additional research and development personnel.

General and Administrative Expenses.General and administrative expenses
consist primarily of salaries, benefits and overhead costs associated with our
executive, finance, human resource, legal, accounting and internal information
system functions. General and
administrative expenses, excluding stock-based compensation, increased by $732,000, or 47%, to
$2.3 million for the quarter ended June 30, 2001 from $1.5
million for the quarter ended June 30, 2000. General and administrative
expenses, excluding stock-based compensation, increased by $1.6 million, or
51%, to $4.9 million for the six months ended June 30, 2001 from $3.2 million
for the six months ended June 30, 2000. Contributing to the increase was $198,000 and $451,000 for the quarter and six
months ended June 30, 2001, respectively, due to an increase in
the provision for bad debt. The balance of the increase was attributable to
increased professional services costs, as well as an increase in allocated
facilities costs. General and administrative expenses, excluding stock-based
compensation, as a percentage of total revenue increased to 53% for the
quarter ended June 30, 2001 from 27% for the quarter ended June 30, 2000.
General and administrative expenses, excluding stock-based compensation, as a
percentage of total revenue increased to 61% for the six months ended June 30,
2001 from 34% for the six months ended June 30, 2000. The increase is
primarily due to the provisions for bad debt and professional services costs, as well
as lower than expected product revenue. We expect that general and
administrative expenses will stabilize or decrease in the near-term, and in the
long-term increase in dollar amount as we expand our operations and
infrastructure to support future growth.

Stock-based Compensation.We incurred stock-based compensation expense of
$701,000 and $830,000 for the quarters ended June 30, 2001 and 2000,
respectively. We incurred stock-based compensation expense of $1.4 million and
$1.6 million for the six months ended June 30, 2001 and 2000, respectively.
Amortization of deferred stock-based compensation recognized for the three
months ended June 30, 2001 and 2000 was $414,000 and $500,000, respectively.
Amortization of deferred stock-based compensation recognized for the six months
ended June 30, 2001 and 2000 was $859,000 and $918,000, respectively.
Amortization of the deferred expense is attributable to the issuance of stock
options with exercise prices less than the amount subsequently determined to be
the fair market value of the underlying stock for financial reporting purposes
on the date of grant. These options generally vest over four years or less. In
addition, during the three months ended June 30, 2000, we recorded
stock-based compensation expense of $330,000 related to separation agreements
entered into with former employees. During the six months ended June 30, 2000,
we recorded stock-based compensation expense of $681,000 related to
separation agreements entered into with former employees. During the quarter
ended June 30, 2001, $287,000 of stock-based compensation expense was
attributable to stock granted in connection with the acquisition of a German
distributor of software in October 2000. During the six months ended June 30,
2001, $574,000 of stock-based compensation expense was attributable to stock
granted in connection with the same acquisition. The remaining deferred
compensation expense of approximately $4.8 million will be amortized ratably
over the remaining vesting periods of the stock and options, and will affect
periods ending after June 30, 2001.

Amortization of Intangibles. We incurred amortization of intangible assets of $83,000 and $166,000 for the quarter ended and six months ended June 30, 2001, respectively.
Amortization of intangibles is related to our acquisition of a German distributor of software in October 2000.

Restructuring Charges. We incurred a
restructuring charge of $2.5 million for the quarter ended June 30,
2001 related to a reduction in workforce and consolidation of excess
facilities. Of the $2.5 million charge, $437,000 consisted of
severance pay, taxes, benefits, and other terminating costs for 34
people. The remaining $2.1 million was allocated to the consolidation of excess leased facilities and a
write-down of the remaining leasehold improvements for those
facilities.

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Other Income.Other income consists of interest income, interest expense,
other income and expenses, foreign exchange gains and losses, and realized gain
or loss on the sale of marketable securities or the disposal of property, plant
or equipment. Other income decreased by $776,000 to $355,000 for the quarter
ended June 30, 2001 from $1.1 million in the quarter ended June 30, 2000.
Other income decreased by $1.8 million to $805,000 for the six months ended
June 30, 2001 from $2.6 million in the six months ended June 30, 2000. The
decrease is primarily due to lower interest income earned on smaller average
outstanding cash and investment balances during the quarter and six months
ended June 30, 2001. Additionally, approximately
$1.1 million of the period-to-period decrease for the six months ended June 30, 2001 is attributable to
realized gains on marketable securities sold in the quarter ended March 31,
2000.

Recent Accounting Pronouncements

In July 2001, the FASB issued SFAS No. 141, Business Combinations and
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires
that all business combinations be accounted for under the purchase method only
and that certain acquired intangible assets in a business combination be
recognized as assets apart from goodwill. SFAS No. 142 requires that ratable
amortization of goodwill be replaced with periodic tests of the goodwills
impairment and that intangible assets other than goodwill be amortized over
their useful lives. SFAS No. 141 is effective for all business combinations
initiated after June 30, 2001 and for all business combinations accounted for
by the purchase method for which the date of acquisition is after June 30,
2001. The provisions of SFAS No. 142 will be effective for fiscal years
beginning after December 15, 2001, and will thus be adopted by the Company, as
required, in fiscal year 2002. The Company has not yet assessed impact from
the adoption of SFAS No. 141 and SFAS No. 142 on the Companys financial
statements.

Liquidity and Capital Resources

Since our inception, we have financed our operations primarily through
private sales of preferred stock, which generated net proceeds of $35.0
million, and with the net proceeds of $80.3 million from our initial public
offering in February 2000. To a lesser extent, we have financed our operations
through debt and lease financing. As of June 30, 2001, we had $44.6 million in
cash and cash equivalents, restricted cash, and short and long-term
investments, a decrease of $10.3 million from $54.9 million as of December 31,
2000. Of the $44.6 million and $54.9 million in cash and cash equivalents,
restricted cash, and short and long-term investments on June 30, 2001 and
December 31, 2000, respectively, $1.7 million is restricted cash that serves as
collateral for our obligations under the lease of our headquarters in
Cambridge, Massachusetts and is classified on the balance sheet as long-term other asset.

We used $11.5 million of cash in operations in the six months ended June
30, 2001 compared to $12.7 million in operations in the six months ended June
30, 2000. For the six months ended June 30, 2001, cash used in operating
activities was primarily due to our net operating loss of $25.5 million. Our
net cash outflow from operating activities was offset by changes in our working
capital balances such as a decrease in accounts receivable of $6.1 million and
increases in accrued expenses of $1.9 million, accounts payable of $1.3 million and
other liabilities of $890,000. Other non-cash charges such as $2.4 million for
depreciation and amortization, $447,000 for the non-cash portion of
restructuring charges, and $1.4 million for stock-based compensation also
offset cash used in operating activities.

Our investing
activities resulted in net cash provided of $10.1 million
for the six months ended June 30, 2001 and net cash used of $67.0 million for
the six months ended June 30, 2000. For the six months ended June 30, 2001,
$12.2 million of cash was provided by the net purchases and sales of short-term
investments and marketable securities, offset by restricted cash needs of $1.5
million and further reduced by $681,000 used to purchase fixed assets. For
the six months ended June 30, 2000, approximately $60.7 million of cash was
used for the net purchases and sales of short-term investments and marketable
securities, approximately $4.7 for capital expenditures, and approximately $1.6
million for restricted cash purposes.

Capital expenditures
were $681,000 for the six months ended June 30, 2001
and $4.7 million for the six months ended June 30, 2000. Our capital
expenditures consist primarily of purchases of property and equipment,
including computer equipment and software and leasehold improvements. We expect
that our capital expenditures will increase in the future as we continue to
enhance and expand our information systems.

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Cash provided by
financing activities was $1.7 million for the six months
ended June 30, 2001 and $80.6 million for the six months ended June 30, 2000.
The principal source of financing for the six months ended June 30, 2000 was
our initial public offering in February 2000. The principle sources of
financing for the six months ended June 30, 2001 were two sale and leaseback
transactions in which we sold certain fixed assets to a third party
for $2.8
million and subsequently leased the property back from the same party. Also
contributing to the net cash provided by financing activities during the six
months ended June 30, 2001 were proceeds received from our employee
stock purchase plan of $140,000 and the exercise of stock options of $101,000.
This was offset by principal payments on capital leases and debt of
$1.2 million.

We are a party to a subordinated debt agreement under which we have
obtained a term loan of $3.0 million and an equipment line of credit of up to
$1.0 million. The term loans and the equipment line are payable in 36 monthly
installments. As of June 30, 2001, we had $766,000 outstanding under the term
loan agreement and $541,000 outstanding under the equipment line. No additional
amounts are available for borrowing under the term loan agreement. In order to
lease additional equipment under the equipment line of credit, we must not be
in default under the equipment line or under any other agreement, and there
must not have been a material change in our credit standing or in our ability
to perform our obligations under the equipment line. We believe we were in
compliance with these conditions as of June 30, 2001.

In March 2001, we entered into two separate sale and leaseback agreements
in which certain of our assets, consisting primarily of computer hardware, were
sold to a third party and subsequently leased back to us. The lease terms are
24 and 36 months, respectively. Both leases have been accounted for as capital
leases on the balance sheet. As of June 30, 2001, the outstanding balances on
these two leases are $1.3 million and $1.1 million, respectively. Related to
these transactions, we recorded a deferred gain of $437,000, which is being
recognized ratably over the term of the lease through other income.

While we anticipate that our operating expenses will stabilize or decrease
in the short-term, over the long-term we expect to experience significant
growth in operating expenses in order to execute our business plan,
particularly research and development and sales and marketing expenses. As a
result, we anticipate that our operating expenses, as well as planned capital
expenditures, will constitute a material use of our cash resources. In
addition, we may utilize cash resources to fund acquisitions of or investments
in complementary products, services, businesses, or technologies. We believe
that our existing cash resources will be sufficient to meet our working capital and capital expenditure
requirements for at least the next 12 months. Thereafter, we may find it
necessary to obtain additional equity or debt financing. Any needed financing
may not be available to us on commercially reasonable terms, if at all.

Risk Factors

The following is a discussion of certain factors that currently affect or
may affect our business, operating results and/or financial condition. Anyone
making an investment decision with respect to our capital stock or other
securities is cautioned to carefully consider these factors, along with the
factors discussed under the heading Risk Factors in our Annual Report on Form
10-K for the year ended December 31, 2000 (File No. 0-29721).

Our limited operating history makes it difficult to predict our future operations

Although we were formed in 1994, our current business operations have a
limited history. We introduced the first version of our NetGenesis product
(then called net.Analysis), and related product and services, in January 1996
and recorded our first revenue from this product and related services in
February 1996. Accordingly, there is limited information about our company with
which to evaluate our business and prospects. Before buying our common stock,
consideration should be given to the risks and difficulties frequently
encountered by early stage companies in new and rapidly evolving markets,
particularly those companies whose businesses depend on the Internet.

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We have a history of losses, expect to incur substantial losses and negative
operating cash flows and may not achieve or maintain profitability in the
future

We have not achieved profitability since our inception in 1994. As a
result of ongoing operating losses, we had an accumulated deficit of $79.6
million at June 30, 2001. We expect to continue to incur losses and negative
cash flow from operations in the near term. While we expect operating expenses
and capital expenditures to stabilize or decrease in the near term, we will
need to generate significant revenue to achieve profitability. Also, in the
long-term, we expect operating expenses and capital expenditures to increase as
we increase sales and marketing operations, develop new distribution channels,
fund greater levels of research and development, broaden professional
consulting services and support, and improve operational and financial systems.
We will therefore need to continue to generate substantial revenue to achieve
and maintain profitability. Recently, our revenues have declined
dramatically. We may be unable to achieve or maintain profitability
or positive cash flows
from operations on a quarterly or annual basis in the future. Our failure to
achieve or maintain profitability or positive cash flows may materially and adversely affect the
market price of our common stock.

If revenues do not meet internal or analyst expectations, we might be required
to implement additional expense reduction programs, which could cause significant strain
on remaining personnel and adversely affect our results of operations

Our personnel and expense levels are planned to support anticipated levels
of sales of our products and services. In April and July 2001, we announced
that we had reduced expenses by means of an employee termination and facilities
consolidation. If revenues do not meet internal or analyst expectations, we
might be required to implement further expense reduction programs, which could
include additional reductions in our headcount. In such circumstances, the
remaining personnel could feel significant strain in performing their roles and
responsibilities, and our ability to sell and support our products and to
develop new and enhanced products could be adversely affected.

We expect our revenue and results of operations to fluctuate. The market price
of our common stock would likely fall if our quarterly results are lower than
the expectations of security analysts or stockholders

We have experienced substantial fluctuations in both our annual and
quarterly revenue and results of operations, and we expect those fluctuations
to continue for the foreseeable future. Recently, our revenues and
results of operations have declined dramatically. We believe the following factors are
those most likely to cause our revenue and results of operations to fluctuate:



| |  |  | uncertain demand for our products and services                                                                             
| | - |  | ---------------------------------------------------------------------------------------------------------------------------
|
| |  |  | changes in the market for e-customer intelligence software                                                                 
|
| |  |  | adverse economic conditions in the United States or Europe                                                                 
|
| |  |  | the timing of sales and delivery of our products and services                                                              
|
| |  |  | the timing of customer implementations of our products                                                                     
|
| |  |  | the mix of revenue derived from our products and services                                                                  
|
| |  |  | timing of introductions of new products and services by us or our competitors                                              
|
| |  |  | changes in underlying terms of our contracts                                                                               
|
| |  |  | seasonal trends in our customers business activity                                                                        
|
| |  |  | timing of hiring of personnel and changes in productivity of our
professional services personnel and direct sales personnel

If our revenue or results of operations fall below the expectations of
securities analysts or investors, the market price of our common stock would
likely fall. We budget our expenses in part according to the revenue we forecast. A
significant percentage of our expenses, particularly salaries and rent, are
relatively fixed. As a result, if our revenue falls below our expectations, we
may be unable to curtail our expenses quickly enough to avoid losses greater
than expected. As a result of these factors, our results of
operations have recently been and in the future may be volatile and
difficult to predict. We do not believe that period-to-period comparisons of
our revenue and operating results are necessarily meaningful. You should not
rely on the results of any one quarter or series of quarters as an indication
of future performance.

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We participate in the unproven market for e-customer intelligence software,
which makes the demand for our products uncertain

The market for e-customer intelligence products and services is in an
early stage of development and its growth rate is unpredictable. Accordingly, the
demand for our products is uncertain. Many companies in our target markets are
unaware that e-customer intelligence software such as ours is available or
beneficial and may choose to allocate their resources elsewhere, including to
internally developed analytic capabilities. Moreover, many companies may
continue to rely on traditional offline customer intelligence methods or
internally-developed applications. In order for us to be successful, our
potential customers must recognize the value of and decide to invest in
e-customer intelligence software, and, in particular, adopt our product. The
recent downturn in the United States economy has caused many of our customers
to reduce their spending on information technology products relating to the
internet, adversely affecting current demand for e-customer intelligence
software such as ours. Any failure of this market to continue to develop,
including as a result of continued adverse economic conditions, would seriously
harm our business.

Most of our revenue each quarter is derived from a small number of large
orders. If we fail to complete enough large orders in any quarter, our revenue
could be significantly lower than expected

We derive a significant portion of our revenue in each quarter from a
small number of large orders. For example, during the quarters ended June 30,
2001 and 2000, at least one customer accounted for more than 10% of our total
revenue. Our quarterly operating results would be adversely affected if we were
unable to complete one or more large orders in any quarter.

Our sales cycles are long and unpredictable, making it difficult to forecast
our revenues and budget our expenses

Our sales cycles are long and unpredictable, in part because we generally
need to educate potential customers about the benefits of e-customer
intelligence software. In addition, we believe that, for many of our potential
customers, the purchase of our software and services can represent a
significant portion of their web site budget and a substantial commitment of
personnel resources. As a result, we experience widely varying sales cycles
that typically range from four to eight months or more. Our long and varying
sales cycles make it difficult to predict the quarter in which particular sales
may occur and, therefore, to forecast our revenue and budget our expenses.
Moreover, a significant portion of our sales tend to occur within the last
month of a quarter, making it difficult to predict revenue until late in the
quarter and to adjust expenses accordingly.

Our operating results may be adversely affected by small delays in customer
orders or product installations

Small delays in customer orders can cause significant variability in our
license revenue and operating results for any particular period. We derive a
substantial portion of our revenue from the sale of software products and
related services. Our revenue recognition policy generally permits us to
recognize revenue for product license fees upon shipment and professional
services upon performance. Any end of quarter delays in orders for delivery or
product installation schedules could harm operating results for that quarter.

Diminution or consolidation of our client and prospect base could limit our
future revenue opportunities, causing an adverse affect on our revenue

In recent months, a substantial number of businesses that operate over the
internet have ceased or reduced the scope of their operations. In addition,
consolidation continues to play an important role in the strategic initiatives
of our client and prospect base. To the extent that our current or potential
customers cease their operations or combine their businesses with companies
that already use our technology, or technologies similar to ours, demand for our product and service offerings could be reduced or eliminated,
and our future revenue opportunities could be adversely affected.

We face intense competition, and if we are unable to compete successfully, we
could experience reduced demand for our products and services, price reductions
and reduced gross margins for our products and services, any of which would
seriously harm our business

Even though the market for e-customer intelligence software and other web
site analysis software is immature, it is already intensely competitive,
fragmented, evolving and subject to rapid technological change. We expect
competition to intensify in the future. Increased competition could result in
reduced demand for our products and services, price reductions and reduced
gross margins for our products and services, any of which could seriously harm
our business.

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We may not be able to compete successfully against current and future
competitors. Many of our competitors have longer operating histories and
significantly greater financial, technical, marketing and other resources than
we do. They may also have significantly greater name recognition and a larger
installed base of customers. In addition, many of our competitors have
well-established relationships with our current and potential customers and
have extensive knowledge of our target markets. As a result, our competitors
may be able to respond more quickly to evolving industry standards and changes
in customer requirements, or to devote greater resources to the development,
promotion and sale of their products than we can. In the past, we have lost
potential customers to competitors for various reasons and may continue to do
so.

Our ability to increase revenue depends on our ability to retain our direct sales force and increase its productivity, which may be difficult because of the shortage of qualified sales
personnel and
because it takes time for new hires to become productive.

To date, we have derived the substantial majority of our revenue from the efforts of our direct sales force.
To increase our revenue, we believe we must therefore increase the productivity of our direct sales force.
However, the technical nature of our products and other factors can cause significant delays in the time it takes our newly hired direct sales representatives to become productive.
Because a significant portion of our direct sales force is relatively new, this lag in productivity may make it difficult for us to meet our sales targets.
In addition, the competition for qualified sales personnel may make it difficult for us to retain the direct sales personnel we have hired or may hire in the future, and significant attrition in our direct sales force would also have a negative effect on our ability to meet revenue goals.

If we are unable to expand our indirect sales through internet-oriented systems
integrators, resellers, original equipment manufacturers and application
service providers, we may not maintain or increase our market share or revenue,
which could seriously harm our business

Our strategy includes developing relationships with a variety of
Internet-oriented systems integrators, resellers, original equipment
manufacturers and application service providers, in the United States and
abroad, to augment the efforts of our direct sales force. These third parties
may not succeed in marketing or selling our products and services. We have
little or no control over the activities of these third parties or the
viability of their businesses, and poor performance by any of them could injure
our reputation, create liabilities for us and seriously harm our business.
These third parties may also market and sell competing products and services,
which could adversely affect sales of our products and services. We may be
unable to effectively manage potential conflicts among these third parties. Our
reliance on these third parties may also increase our credit risk because we
effectively bear the risk of non-payment by both the third parties and their
customers. Any failure by these parties to pay for our products and services in
a timely manner could reduce our cash flows and harm our financial condition.

Because there is intense competition for qualified personnel in our industry,
we may not be able to recruit or retain the personnel we need, which could
adversely affect our ability to achieve our business objectives

Our ability to achieve our business objectives could be adversely affected
if we cannot identify, attract, hire, train, retain and motivate our
personnel. Many other employers are able to offer significantly more attractive
compensation and benefits than we do. We may be unable to recruit and retain
the personnel we need. In addition, a significant portion of our employees
compensation is in the form of stock options at exercise prices significantly
above current market value. This may affect our ability to retain these
employees. Our business would be seriously harmed if we are unable to retain
our existing employees or to hire highly qualified replacements.

Future expansion of our international operations will require significant
management attention and financial resources and our efforts to expand
internationally may not succeed

We intend to expand our international operations and international sales
and marketing efforts, particularly in Europe and Asia. We currently have
offices in the United Kingdom, Canada, and Germany, and are pursuing business
through indirect channels in other European countries, Australia and Japan. We
have limited experience in developing localized versions of our software
products and in marketing, selling and distributing our software and services
internationally. To successfully expand international sales, we must expand our
international operations, recruit additional international sales and support
personnel, and expand our international distribution channels. This
international expansion strategy will require significant management attention
and financial resources, and we may not be successful in implementing our
strategy. Our failure to manage these risks adequately could seriously harm our
business.

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We may need to acquire complementary products, services, businesses or
technologies to remain competitive. Acquisitions may be unavailable to us or
may expose us to risks that could negatively affect our operating results

We believe our customers will increasingly demand additional product
capabilities, features and services. Our internal resources may be inadequate
to meet those demands on a timely basis. As a result, we may need to acquire
products, services, businesses, technologies or other capabilities in order to
remain competitive. Our failure to meet customer demands could seriously harm
our business. We may be unable to successfully identify or acquire on
commercially reasonable terms the products, services, businesses, technologies
or capabilities that we need. Many of our competitors have greater financial
resources and more well-established industry relationships than we do, and may
therefore compete more effectively for acquisition opportunities. If we make an
acquisition, we may be exposed to additional risks that could seriously harm
our business, including the following:



| |  |  | acquired products, businesses, services, technologies and
capabilities may not meet customer needs or may not achieve or sustain
widespread market acceptance
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | we may encounter difficulties in assimilating acquired products, services, businesses, technologies and capabilities                                         
|
| |  |  | we may encounter difficulties in integrating acquired personnel and operations                                                                               
|
| |  |  | acquired products, services, businesses, technologies and
capabilities may result in decreased revenue from our existing products
and services               

Acquisitions could disrupt our ongoing business, distract our employees,
increase our expenses and adversely affect our results of operations. We could
issue equity securities to pay for an acquisition, which could dilute the
equity interests of our existing stockholders. In addition, acquisitions may
involve investment-related or other charges and amortization of acquired
technology, and other intangible assets, which may adversely affect
our results of operations.

If any technologies embedded in our products become unavailable to us, product
functionality could suffer, causing an adverse effect on our revenue

Currently, certain
third-party technologies are embedded into our products,
providing additional advanced functionality of our software for our customers,
pursuant to license agreements with such third parties. Most of these license
agreements are non-exclusive, are for limited terms, and may be terminated by
the other party if we default in our obligations. If these license agreements
were terminated or if these technologies were otherwise no longer available to
us, product functionality of our software could suffer as we attempt to replace
the technologies, causing an adverse affect on our quarterly results.

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Our business and prospects would suffer if we are unable to protect our
intellectual property rights

Our success depends in large part on our intellectual property,
particularly our software. If we fail to successfully enforce our intellectual
property rights, other companies might copy our technology or introduce
products or services that compete with ours. This could reduce our revenues and
weaken our competitive position. We rely solely on a combination of copyright,
patent, trademark and trade secrets law, assignment of invention and
confidentiality agreements, confidentiality procedures and licensing
arrangements to establish and protect our intellectual property rights.
Currently, we have two pending patent applications and no issued patents. Our
efforts to protect our intellectual property may be inadequate. Existing
patent, trade secret, copyright and trademark laws offer only limited
protection, and we may be unsuccessful in obtaining that protection, or our
efforts to obtain that protection may be opposed by others. In addition, the
laws of some foreign countries where we market our products and services do not
protect intellectual property rights to the same extent as do the laws of the
United States. We may be required to spend significant resources to monitor
infringement of and enforce our intellectual property rights. Third parties
could copy or otherwise obtain and use our products or technology without our
authorization. They could also independently develop similar technology that
may infringe our intellectual property rights. We may not be able to detect
infringement and may lose our competitive position in the market before we do
so. Competitors may also design around our technology or develop competing
technologies. If this occurs, our business and prospects would be materially
and adversely affected.

Others may bring infringement claims against us which could harm our business,
results of operations and financial condition

Reliance on intellectual property rights is pervasive in our industry, and
we expect that as competition intensifies, companies will continue to pursue
vigorous enforcement of their intellectual property rights through litigation
and other means. As a result, third parties may claim that our products or
services infringe their intellectual property rights. Any such claim could
seriously harm our business, results of operations and financial condition. We
have not performed a comprehensive analysis of patents that may limit our ability to do
business. An increasing number of companies are seeking and obtaining patents
regarding methods of doing business on the Internet, and valid patents that
apply to our methods of doing business may have been issued or maybe issued in
the future without our knowledge. Defending any claim of intellectual property
infringement, regardless of merit, is expensive and time-consuming and may
distract our managements attention away from our business. As a result of any
claim or anticipated claim, we may agree or be forced to:



| |  |  | pay substantial damages                                                                                                                                                                                                        
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | cease selling or using products and services that incorporate the infringed intellectual property                                                                                                                              
|
| |  |  | obtain a license for the infringed intellectual property, which might
not be available on commercially reasonable terms or which could
adversely affect our results of operations and financial condition                      
|
| |  |  | attempt to modify our products and services to avoid infringing
others intellectual property rights, which we might be unable to do at
all or quickly enough to prevent serious harm to our competitive
position in the market
|
| |  |  | refund portions of license fees paid to us if other remedies are
unavailable                                                                                                                                                   

We could be named in lawsuits regarding the enablement of privacy violations,
which could distract personnel from their present roles and responsibilities,
as well as adversely affect our results of operations

Recent lawsuits have been filed against other companies by individuals and
organizations claiming privacy violations with respect to improper use of their
information that was gathered from web site activity. Because our software
analyzes information regarding usage of our customers web sites, customers may
use our software to generate personally identifiable information about users of
their sites. While we do not control how our customers may use this
information, we could be named in lawsuits regarding the enablement of privacy
violations. Any such litigation could result in liability to us, could distract
personnel from their present roles and responsibilities, and adversely affect
our results of operations.

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Anti-takeover provisions in our charter
documents and Delaware law could
prevent or delay a change in control of our company

Provisions of our certificate of incorporation and by-laws may discourage,
delay or prevent a merger, acquisition or change of control that a stockholder
may consider favorable. These provisions could also discourage proxy contests
and make it more difficult for stockholders to elect directors and take other
corporate actions. The existence of these provisions could limit the price that
investors might be willing to pay in the future for shares of our common stock.
These provisions include:



| |  |  | authorizing the issuance of blank check preferred stock  providing
for a classified board of directors with staggered, three-year terms                     
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | providing that directors may only be removed for cause by a two-thirds vote of stockholders                                                                    
|
| |  |  | limiting the persons who may call special meetings of stockholders                                                                                             
|
| |  |  | prohibiting stockholder action by written consent                                                                                                              
|
| |  |  | establishing advance notice requirements for nominations for election
to the board of directors and for proposing matters to be submitted to a
stockholder vote

Delaware law may also discourage, delay or prevent someone from acquiring
or merging with our company or obtaining control of our company.

A large percentage of our outstanding common stock is held by a small number of
investors, which creates low trading volume in our stock, for which even
relatively small trades could cause fluctuations in the price of our stock

As of August 7, 2001, our common shares issued and outstanding totaled
23,507,668. A significant portion of this amount is held by a small number of
investors, which limits the amount of trading volume in the public market.
Because of this limited liquidity, even relatively small volumes of stock
traded over a short period of time could create a large supply of stock with
limited demand, causing an adverse effect on the value of our common stock.

Our common stock may not continue to trade on
the Nasdaq National Market, which could reduce the value of your
investment and make your shares more difficult to sell.

In order for our
common stock to
trade on the Nasdaq National Market, we must continue to meet the
listing standards of that market. Among other things, those standards
require that our common stock maintain a minimum closing bid price of
at least $1.00 per share. Recently, our common stock has traded at
prices below $1.00. If our common stock does not maintain the minimum
closing bid price, Nasdaq is likely to remove it from the Nasdaq
National Market. The removal of our common stock from the Nasdaq
National Market could hinder your ability to sell, or obtain an
accurate quotation for the price of, your shares of our common stock.
Removal could also adversely affect the perception among investors of
us and our prospects, which could lead to further declines in the
market price of our common stock. Removal would also make it more
difficult and expensive for us to raise capital. In addition, removal
might subject us to an SEC rule that could adversely affect the
ability of broker-dealers to sell or make a market in our common stock, thus hindering your ability to sell your shares.




Item 3. Quantitative and qualitative disclosures about market risk

We are exposed to the impact of interest rate changes, foreign
currency fluctuation, and changes in the market values of our investments.

Interest Rate Risk

Our exposure to market rate risk for changes in interest rates relate
primarily to our investment portfolio. As of June 30, 2001, we had cash and
cash equivalents of $15.8 million and short-term investments and marketable
securities of $26.9 million. We have not used derivative financial instruments
in our investment portfolio. We invest our excess cash in cash and cash
equivalents, which consist of financial instruments with purchased maturities
of three months or less, and short and long-term investments, which consist of
debt instruments of the U.S. Government and its agencies, and in high-quality
corporate issuers. We protect and preserve our invested funds by seeking to
limit default, market and reinvestment risk. Our investment policy allows us to
invest in a portfolio with a maximum average maturity of three months and a
maximum maturity on any one security of two years. Investment in both fixed
rate and floating rate interest-earning instruments carries a degree of
interest rate risk. The fair market value of fixed rate securities may be
adversely affected by a rise in interest rates, while floating rate securities
may produce less income than expected if interest rates fall. Based upon our
current balance of cash and cash equivalents and short-term investments and
marketable securities, a decrease in interest rates of 0.5% would cause a
corresponding decrease in our annual interest income by approximately $213,000.
Due in part to these factors, our future investment income may fall short of
expectations due to changes in interest rates or we may suffer losses in
principal if forced to sell securities that have declined in market value due
to changes in interest rates.

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Foreign Currency Risk

The majority of our operations are based in the United States and,
accordingly, the majority of our transactions are denominated in U.S. dollars.
However, we have foreign-based operations where transactions are denominated in
foreign currencies and are subject to market risk with respect to fluctuations
in the relative value of currencies. Currently, we have operations in Canada,
Germany and the United Kingdom and conduct transactions in the local currency
of each location. The impact of fluctuations in the relative value of other
currencies was not material for the three months ended June 30, 2001. We do not
use derivative financial instruments, which are ineligible investments under
our investment policy guidelines.




PART II. OTHER INFORMATION




Item 1. Legal Proceedings

We are not involved in any legal proceedings that are material to
our business or financial condition.




Item 2. Change in Securities and Use of Proceeds

d.     Use of Proceeds from Sale of Registered Securities.

On February 29, 2000 we completed an initial public offering of our common
stock, $0.001 par value. The managing underwriters in the offering were Chase
Securities, Inc., Deutsche Bank Securities, Inc., and U.S. Bancorp Piper
Jaffray, Inc. (the Underwriters). The shares of common stock sold in the
offering were registered under the Securities Act on a Registration Statement
on Form S-1 (the Registration Statement) (File No. 333-93335) that was
declared effective by the Securities and Exchange Commission on February 28,
2000. The offering commenced on February 29, 2000, on which date the 4,887,500
shares of common stock registered under the Registration Statement (including
637,500 shares issued upon exercise of the underwriters over-allotment option)
were sold at a price of $18.00 per share. The aggregate underwriting discounts
and commissions to the Underwriters were $6.2 million and our aggregate net
proceeds were approximately $80.3 million after deducting
offering expenses of $1.5 million. Through June 30, 2001, we have applied the
net proceeds of the offering approximately as follows: $30.8 million for
working capital; $9.8 million for purchases of fixed assets; $1.2 million for
acquisition related costs and, $2.6 million for the repayment of principal on
our indebtedness and capital lease obligations. The balance of the net
proceeds, in the amount of $35.9 million, has been invested in temporary
investments, consisting primarily of high-grade government agency and corporate
bonds, pending their future application.

We currently expect to use the balance of net proceeds primarily for
working capital and general corporate purposes, including funding product
development. The amounts and
timing of these expenditures will vary depending on a number of factors,
including the amount of cash generated by our operations, competitive and
technological developments and the rate of growth, if any, of our business. In
addition, we may use a portion of the net proceeds for acquisitions of products, technologies and
businesses.

None of our offering expenses or the net proceeds of the offering were
paid directly or indirectly to any director, officer, general partner of
NetGenesis or their associates, persons owning 10% or more of any class of
equity securities of NetGenesis, or any affiliate of NetGenesis.




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

At our annual meeting of
stockholders held on June 6, 2001, the following three proposals
were submitted to a vote of the stockholders:

Proposal I  To elect two Class I
Directors.

|                 |  |            |  |                      
|---------------- |  | ---------- |  | ---------------------
|For All Nominees |  | Instructed |  | Withheld All Nominees
|15,464,856       |  | 2,151      |  | 142,564              

|                 |  |            |  |               
|---------------- |  | ---------- |  | --------------
|                 |  | Votes For  |  | Votes Withheld
|Lawrence S. Bohn |  | 15,464,856 |  | 144,715       
|Rory O'Driscoll  |  | 15,467,007 |  | 142,564       

As a result, the stockholders
elected both of Messrs. Bohn and O'Driscoll as members of our
Board of Directors.

Proposal II  To approve our 1999
Stock Incentive Plan, as amended.

|              |  |            |  | 
|------------- |  | ---------- |  | 
|              |  | Votes      |  | 
|Votes For     |  | 11,303,517 |  | 
|Votes Against |  | 480,218    |  | 
|Abstain       |  | 9,905      |  | 
|Non Votes     |  | 3,815,931  |  | 

As a result, the stockholders
approved our 1999 Stock Incentive Plan, as amended.



|                                                                             |  |            |  | 
|---------------------------------------------------------------------------- |  | ---------- |  | 
|Proposal III  To approve our 1999
Employee Stock Purchase Plan, as amended.
|                                                                             |  | Votes      |  | 
|Votes For                                                                    |  | 11,382,061 |  | 
|Votes Against                                                                |  | 326,974    |  | 
|Abstain                                                                      |  | 84,605     |  | 
|Non Votes                                                                    |  | 3,815,931  |  | 

As a result, the stockholders
approved our 1999 Employee Stock Purchase Plan, as amended.

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Item 6. Exhibits and Reports on Form 8-K

a) Exhibits

INDEX TO EXHIBITS

|               |  |                                                                                              
|-------------- |  | ---------------------------------------------------------------------------------------------
|Exhibit Number |  | Exhibit Description                                                                          
|               |  |                                                                                              
|* 3.1          |  | Amended and Restated Certificate of Incorporation of NetGenesis Corp., as currently in effect
|              
|              
|              
|              
|* 3.2          |  | Amended and Restated By-Laws of NetGenesis Corp.                                             
|              
|              
|              
|              
|* 3.3          |  | Specimen certificate for common stock of NetGenesis Corp.                                    
|              
|              
|              
|              
|** 10.1        |  | NetGenesis Corp. 1999 Stock Incentive Plan, as amended                                       
|              
|              
|              
|              
|** 10.2        |  | NetGenesis Corp. 1999 Employee Stock Purchase Plan, as amended                               

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|* |  | Incorporated by reference to our Registration Statement on Form S-1, File No. 333-93335.

|   |  |                                                                                                                                                                                                                   
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|** |  | Incorporated by reference to our Proxy Statement relating to our
Annual Meeting of Stockholders held on June 6, 2001, as filed on
April 26, 2001 pursuant to Section 14(A) of the Securities Exchange Act of 1934.

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SIGNATURES

Pursuant to the
requirements of the Securities Exchange Act of 1934, NetGenesis
Corp. has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Cambridge,
Massachusetts, as of August 13, 2001.



| | NETGENESIS CORP.
| | ----------------



| | BY: /s/ Christopher A.
Hanson
      Christopher A. Hanson
      Chief Financial Officer, Executive Vice President,
      and Treasurer
      (duly authorized officer and
      principal financial officer)
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: August 13, 2001

22