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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




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FORM 10-K



|  |                                                                                         
|- | ----------------------------------------------------------------------------------------
|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
	THE 
	 SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2001

OR



|  |                                                                                             
|- | --------------------------------------------------------------------------------------------
|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
	OF THE 
	 SECURITIES EXCHANGE ACT OF 1934

For the transition period
from  to

Commission File Number 000-25781



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NET PERCEPTIONS, INC.

(Exact name of registrant as specific in its
charter)




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|                                                                          |  |                                                 
|------------------------------------------------------------------------- |  | ------------------------------------------------
|Delaware
	(State or Other Jurisdiction
	of Incorporation or Organization) |  | 41-1844584
	(I.R.S. Employer Identification No.)
|                                                                         
|7700 France Avenue South, Edina,
	Minnesota                               |  | 55435                                           
|(Address of Principal Executive
	Offices)                                 |  | (Zip Code)                                      

(952) 842-5000

(Registrants telephone number, including
area code)




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Securities registered pursuant to
Section 12(b) of the Act:

|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of each class |  | Name of each exchange on which registered
|                    |  |                                          
|None                |  | Not applicable                           

Securities registered Pursuant to
Section 12(g) of the Act:

Common Stock, par value $.0001 per
share

(Title of class)


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

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any
amendment to this
Form 10-K.  o

At March 22, 2002, the aggregate market
value of voting and non-voting stock held by non-affiliates of
the Registrant totaled approximately $40,756,819 based on the
last sale price as reported on the Nasdaq National Market. As of
March 22, 2002, there were outstanding 27,207,891 shares of
the Registrants common stock, par value $.0001 per share.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for
the Annual Meeting of Stockholders to be held on May 30,
2002 are incorporated by reference into Part III
(Items 10, 11, 12 and 13) of this Form 10-K.



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TABLE OF CONTENTS



|                                                  |                                                                                               |  |  |  |  |  |  | 
|------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
|PART I                                           
|                                                  | ITEM 1. BUSINESS                                                                             
|                                                  | ITEM 2. PROPERTIES                                                                           
|                                                  | ITEM 3. LEGAL PROCEEDINGS                                                                    
|                                                  | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|PART II                                          
|                                                  | ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                
|                                                  | ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA                                                 
|                                                  | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                                  | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK                           
|                                                  | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                          
|                                                  | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
|PART III                                         
|                                                  | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                  
|                                                  | ITEM 11. EXECUTIVE COMPENSATION                                                              
|                                                  | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|                                                  | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|PART IV                                          
|                                                  | ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                     
|                                                  | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                          
|                                                  | INDEX TO CONSOLIDATED FINANCIAL STATEMENTS                                                   
|REPORT OF INDEPENDENT ACCOUNTANTS                
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS   
|Severance agreement - Thomas M. Donnelly         
|List of Subsidiaries                             
|Consent of PricewaterhouseCoopers LLP            



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NET PERCEPTIONS, INC.

ANNUAL REPORT ON FORM 10-K


FOR THE YEAR ENDED DECEMBER 31, 2001


TABLE OF CONTENTS

|         |  |                                                                                        |  |      |     | 
|-------- |  | -------------------------------------------------------------------------------------- |  | ---- | --- | 
|         |  |                                                                                        |  | Page
|         |  |                                                                                        |  |     
|PART I  
|        
|Item 1.  |  | Business                                                                               |  |      | 4   | 
|Item 2.  |  | Properties                                                                             |  |      | 13  | 
|Item 3.  |  | Legal Proceedings                                                                      |  |      | 13  | 
|Item 4.  |  | Submission of Matters to a Vote of the Security
	Holders                               |  |      | 14  | 
|PART II 
|        
|Item 5.  |  | Market for Registrants Common Equity and
	Related Stockholder Matters                 |  |      | 15  | 
|Item 6.  |  | Selected Consolidated Financial Data                                                   |  |      | 16  | 
|Item 7.  |  | Managements Discussion and Analysis of
	Financial Condition and Results of Operations |  |      | 18  | 
|Item 7A. |  | Quantitative and Qualitative Disclosure about
	Market Risk                             |  |      | 40  | 
|Item 8.  |  | Financial Statements and Supplementary Data                                            |  |      | 41  | 
|Item 9.  |  | Changes in and Disagreements with Accountants on
	Accounting and Financial Disclosure  |  |      | 41  | 
|PART III
|        
|Item 10. |  | Directors and Executive Officers of the Registrant                                     |  |      | 41  | 
|Item 11. |  | Executive Compensation                                                                 |  |      | 41  | 
|Item 12. |  | Security Ownership of Certain Beneficial Owners
	and Management                        |  |      | 41  | 
|Item 13. |  | Certain Relationships and Related Transactions                                         |  |      | 41  | 
|PART IV 
|        
|Item 14. |  | Exhibits, Financial Statement Schedules and
	Reports on Form 8-K                       |  |      | 42  | 
|         |  | Signatures                                                                             |  |      |     | 
|         |  | Index to Consolidated Financial Statements                                             |  |      | F-1 | 

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SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS

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

References in this Annual Report on
Form 10-K to Net Perceptions, the
Company, we, our and
us refer to Net Perceptions, Inc. and, if so
indicated or the context so requires, includes our wholly owned
subsidiary Knowledge Discovery One, Inc. (which we refer to in
this report as KD1).

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PART I




ITEM 1.  BUSINESS

Summary

We develop and market software solutions that
enable our customers to interact more intelligently with their
customers. Our solutions integrate and analyze information about
customers, products and promotional activity to generate
specific actions our customers can take to improve their
marketing, selling, merchandising and advertising effectiveness,
leading to increased revenue, improved profit, decreased costs
and enhanced customer satisfaction. We combine our software
products with industry expertise and professional services to
create highly-focused, industry-specific solutions that are
designed to integrate with and add significant value to existing
custom or purchased customer relationship management, or CRM,
systems and processes.

Our solutions extract data from our
customers existing business applications, including
electronic commerce, call center, campaign management,
merchandise management, enterprise resource planning and point
of sale systems. Sophisticated and proprietary analytical and
reporting techniques then generate intelligence about customers
and products that can be inserted into operational processes and
systems to drive actions such as cross-selling and up-selling,
personalized promotions and item placement in advertisements.
Our solutions are particularly well suited to environments with
large numbers of customers, a large product assortment and large
quantities of transaction data.

We believe our solutions are unique in their
ability to drive profitable actions at the mass market, business
entity and individual customer levels and we believe that we
offer greater value to our customers than traditional reporting
and analytical solutions. Our customers currently include 3M,
Brylane, Eckerd, Great Universal Stores, Half.com, Hudsons
Bay Company, JCPenney, J & L Industrial Supply,
Lowes, Meijer and Tesco.

Corporate History and Recent Events

Net Perceptions was incorporated in Delaware in
1996 and our initial product was shipped in January 1997.
Our principal executive offices are located at 7700 France
Avenue South, Edina, Minnesota 55435. Our website address is
www.netperceptions.com. The information on our website is not
incorporated by reference into this Annual Report on
Form 10-K and should not be considered a part of this
report.

In February 2000, we completed our
acquisition of KD1, a supplier of advanced data analysis
solutions for retailers. In this transaction, we acquired all of
the outstanding shares of KD1 in exchange for 1,969,630 shares
of our common stock, and KD1 became our wholly owned subsidiary.
In addition, stock options of KD1 were converted into options to
purchase approximately 265,514 shares of our common stock.

In March 2000, we completed an underwritten
public offering of 2,000,000 shares of our common stock,
resulting in net proceeds to us of approximately $84.6 million.
We have used the net proceeds of the offering for general
corporate purposes, including working capital. As part of this
public offering, certain of our stockholders sold 625,471 shares
of common stock. We did not receive any of the proceeds from the
sale of shares by the selling stockholders.

In March 2001, we instituted a restructuring
plan to better align our cost structure with our business
outlook and general economic conditions. Under the restructuring
plan, we reduced our workforce by approximately 46%, or 124
positions, throughout the organization and recorded a charge of
$13.9 million to reorganize the company and exit certain
facilities in various United States and international locations.
During the third quarter of 2001, we reduced our workforce by 45
employees and recorded an additional $1.8 million restructuring
charge. As of December 31, 2001, we had 98 employees.

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Industry Background

Market research has shown that acquiring new
customers is considerably more expensive than managing and
enhancing existing customer relationships. Accordingly,
companies are always looking for ways to increase the longevity
and profitability of their customer relationships. Companies may
enhance existing customer relationships by learning from all of
their customer interactions across all channels of customer
communication. Companies can use this knowledge to personalize
products, services and related interactions based on each
customers characteristics or the characteristics of
customer segments. Understanding individual customer preferences
and behavior can facilitate more effective marketing of
complementary products, known as cross-selling, and
higher-end products, known as up-selling, as well as
improve advertising and merchandising effectiveness.

The channels of communication between a company,
its partners and its customers include traditional channels,
such as direct mail, telephone, interactive voice response, or
IVR, retail stores and direct sales forces, as well as modern
channels, such as Web sites and email. The software systems that
manage these communication channels and applications capture
tremendous amounts of customer data, such as customer
demographic information and historical purchasing information.
Analysis of this data can help companies to better understand
customer purchasing patterns, thereby enabling them to market
more effectively to individual customers and customer segments.
However, the technologies historically available to analyze this
tremendous volume of information were highly complex and
required very specialized skills to deploy. As a result,
companies have experienced difficulty in managing large amounts
of customer data obtained from multiple sources and in using the
data effectively.

To aggregate this customer data and use it to
improve customer relationships, companies need to implement an
integrated CRM infrastructure for automating sales, service and
marketing interactions and to facilitate merchandising and
advertising decisions. A CRM solution must enable companies to
leverage the information received from all customer interactions
to serve each individual customer in a consistent and improved
manner regardless of the communications channel the customer
chooses to utilize.

Solution

Our solutions help businesses to more
intelligently interact with their customers by providing
actionable insight about the relationships among products,
promotions and customer interaction. Our solutions focus on
increasing revenue, improving profit, decreasing costs and
enhancing customer satisfaction.

Our software enables companies to establish,
maintain and continually improve customer interactions across
both traditional and modern customer communication channels. Our
software is particularly well suited to environments with large
numbers of customers, a large product assortment and large
quantities of transaction data, such as the retail consumer
goods, retail catalog and wholesale manufacturing and
distribution markets. We believe that the following
characteristics of our software set it apart from that of our
competitors:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Integration of analytical and operational CRM
	solutions.Our software integrates
	analytical technologies, which are used to gain insight into
	customer data, with operational technologies, which make
	customer interactions more efficient. The integration of these
	traditionally disparate technologies results in automation that
	allows companies to increase the value of every interaction with
	a customer as the interaction is taking place. For example,
	through the integration of our analytical technologies, a
	service agent using our operational software to support a
	customer over the telephone will receive real time
	cross-sell and up-sell recommendations for that customer.
|
| |  | Designed to span all channels of customer
	interaction.Our software is designed
	to improve customer relationships across all channels of
	customer interaction. For example, companies can use our
	software to enhance customer interactions using the web,
	telephone and print media.                                                                                                                                                                                                                                                                                                                                                                                                                    

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Web-based design to promote ease of use and
	wide-scale deployment.Our software
	offers easy to use interfaces that are similar to those used on
	most Web sites. Our customers access the interface through a
	corporate network or the Internet using a Web browser. Our
	software is installed in a central location, either on our
	customers own computer servers or on servers located at
	our data center. This Web-based design does not require our
	software to be installed on each users computer, which
	reduces the costs of deploying and maintaining software.
|
| |  | Packaged software suite for faster and less
	expensive implementation.Our software
	is designed to facilitate the integration of the many
	technologies required to collect and analyze customer data,
	create and deploy campaigns and enhance customer interactions.
	As a result, our solutions can generally be implemented in four
	to ten weeks.                                                                                                                                                                                                                          

Our software is designed to provide measurable
economic benefits to our customers. Specifically, we deliver
return on investment to our customers through the analytical
impact of our software, which is usually delivered in real time
into the workflow of our customers, or through management
facilitation, which is usually delivered as an online or printed
report. The principle analytical impact benefits and management
facilitation benefits of our software are summarized below:

|                                                                                                                                                                                                                                                                              |  |                                                                                                                                                                                                                                          
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Analytical Impact                                                                                                                                                                                                                                                             |  | Management Facilitation                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                              |  |                                                                                                                                                                                                                                          
| Up sell and cross sell
	 Replacement product recommendation
	 Coordinate recommendation
	 Optimize catalog mailings
	 Optimize outbound campaigns
	 Increase customer purchase categories
	 Recommend products for reorder
	 Facilitate customer acquisition efforts |  |  Sales and sales effectiveness
	reporting
	 Brand analysis
	 Promotional campaign management and scheduling
	 Business rule management
	 Trend analysis and reporting
	 Overstock management and reporting
	 Tactical intelligence

Products

We offer four principal products:
Personalization Manager, Distribution Analyst, Advertising
Advisorand Retail Analyst.

Personalization Manager

Personalization Managerallows companies using a Web browser
to create and manage highly personalized campaigns in in-bound,
interactive selling situations, such as Web sites and in-bound
customer contact centers, as well as out-bound selling
solutions, such as email and out-bound customer contact centers.
Personalization Managerdelivers these campaigns in real
time. Companies can use Personalization Managerto
increase the likelihood that the products they market to
customers will be products the customer will value.
Personalization Managerutilizes advanced one-to-one
recommendation technology combined with business rules to
produce product offers targeted directly to individual
customers. It provides marketers with the ability to create
unique marketing strategies for different groups of customers,
interact with those customers on an individualized basis, and
closely track the impact that different strategies are having on
sales and profit by customer segment, product group and
promotional effort. Personalization Managermakes it
possible for marketers to rapidly modify their marketing
strategy and deploy new marketing campaigns.

Personalization Manageris an installed software solution that
is the culmination of our history of product recommendation
systems for assisted marketing. When sold in the manufacturing
and distribution markets, Personalization Manageris
marketed under the name Insight Manager. Predecessor
products include Net Perceptions for E-Commerce, Net
Perceptions for Call Centers, Net Perceptions for Marketing
Campaignsand the Net Perceptions Recommendation
Engine.

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Personalization Manager(or its predecessor products)
accounted for approximately 56%, 80% and 100% of our total
revenues in 2001, 2000 and 1999, respectively.

Distribution Analyst

Distribution Analystallows sales personnel using a Web
browser to access data-driven business intelligence that can be
used to increase sales, profits and penetration into existing
customer accounts. It uses information about a companys
customers, products and transactions to provide tacticalsales assistance about individual customers and products and
strategicsales intelligence about all customers and
products. Distribution Analystuses a variety of advanced
point-of-sale data-mining technologies to produce intelligence
about past customer behavior and recommend future sales
opportunities. It provides sales personnel with a blueprint for
building sales for each customer, including information such as
who to target, what to offer, when to make the offer and what
brands to feature. It provides sales personnel with:



| |   |                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Spending Cluster Analysisthat segments customers based upon
	spending patterns, identifying high and low-value customers and
	how to uniquely serve each group.                                                   
|
| |  | Customer-At-Risk Analysisthat shows the last time high-value
	customers made a purchase and what products should be offered to
	these customers to retain them.                                                   
|
| |  | Brand Power Analysisthat identifies which brands provide
	the most value to the company.                                                                                                                          
|
| |  | Product Affinity Analysisthat identifies which products are
	linked with others, and in each relationship, which product
	drives the sale  providing a blueprint
	for improving cross-sell and up-sell results.

Distribution Analystis currently offered as a hosted
software service that leverages our history of producing product
recommendation systems combined with our experience in
large-scale, point-of-sale analytics. Predecessor products
include the Net Perceptions Recommendation Engine, KD1
GreenLight Go! and KD1 Retail Discovery Suite.

Advertising Advisor

Advertising Advisorallows retailers to optimize their use
of newspaper circular advertising. It helps retailers select the
best mix of products for a circular in order to generate more
traffic, transactions, revenue and profit for all store
locations. Advertising Advisoruses advanced line-item,
point-of-sale data mining technology and sophisticated
optimization techniques that enable retailers to spend less time
on circular preparation while substantially increasing the yield
on their circular advertising investment. This technology uses
information about all transactions across a companys
operation to assess the overall impact of newspaper circular
advertising on total product sales, market basket size, margin
mix and store traffic.

Advertising Advisoris an installed software solution that
leverages our experience in large-scale, point-of-sale
analytics. Predecessor products include KD1 GreenLight Adand KD1 Knowledge Refinery.

Advertising Advisor(or its predecessor products) was
acquired in February 2000 as part of our acquisition of KD1 and
accounted for approximately 42% and 13% of our total revenues in
2001 and 2000, respectively.

Retail Analyst

Retail Analystprovides retailers with important
information about product and customer performance. With
Retail Analystretailers gain intelligence in four key
analysis areas  assortment, customer, vendor
effectiveness and web channel. Retailers can view data across
all applicable channels (store, web, and call center) and also
receive information about a specific store or category, as well
as comparable store service areas for the web and call center
channels.

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Retail Analystprovides retailers with information on
item rate of sales, sales of items in combination, item sales by
customer set, item profitability and the role items play in
driving different types of purchase behavior. It provides
marketers with information about customer lifetime value and an
analysis of recency/ frequency/ monetary information about
customer purchasing and visit behavior  information
that illustrates which portion of its customer base drove a
retailers revenue or profit for an event or period of
time. In addition, Retail Analystanalyzes clusters
around purchase activity and items purchased, and provides
retailers with demographic or other customer attribute profiles.

Retail Analystis an
installed software solution that leverages our experience in
large-scale, point-of-sale analytics. Predecessor products
include KD1 GreenLight Go!and KD1 Retail Discovery
Suite.

Other Products

In addition to the four principal products
described above, we also offer to a limited number of customers
Net Perceptions for Knowledge Management, a product that
applies our recommendation technologies to corporate intra and
extranets. This product integrates with our customers
existing information management systems to track everyday user
interactions with information on these systems. Using this
interaction information and user feedback, Net Perceptions
for Knowledge Management automatically locates documents
containing relevant information and other people with knowledge
and interest in the areas relevant to the users interests,
tasks and objectives.

Professional Services

We believe professional services are an important
component of our product offerings. We deploy services teams
with expertise in the retail consumer goods, retail catalog and
wholesale manufacturing and distribution markets to ensure that
our customers business requirements are met. Our
professional services include:



| |   |                                
| | - | -------------------------------
| |  | Project planning and management
|
| |  | Implementation and testing     
|
| |  | Data analysis                  
|
| |  | Data warehousing               
|
| |  | User and partner training      
|
| |  | Consulting                     
|
| |  | Product hosting                
|
| |  | Ongoing customer support       

We believe that providing a high level of
customer service and technical support is critical to customer
satisfaction and our success. As of March 22, 2002, we had
18 employees dedicated to providing professional services
and support and an additional 18 employees who perform a
mixture of professional service and product development. We
generally charge customers for our professional services on a
time and materials basis. Professional services are offered
through our offices in the United States and the United Kingdom.
Customers benefit from our consultants and engineers
expertise in applied retail data analysis, data warehousing,
software implementation and integration. We believe our
professional services personnel can assist businesses in
developing innovative ways to implement our solutions, leading
to increased product adoption. We intend to extend our
professional services capabilities through partnerships with
select systems integrators.

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Strategy

We intend to be a leading provider of solutions
that enable businesses to more intelligently and profitably
interact with their customers. Key elements of our strategy to
achieve this objective include the following:

Maintain and expand our products and technologies

We intend to continue our investment in the
development of our products and underlying technologies. We
intend to build new products to expand the range of problems
that we solve. In particular, we intend to expand our current
software offerings for marketing, merchandising and sales and to
develop new software that solves additional problems in
distribution management and field sales. We believe that
maintaining and enhancing our products is important to our
ability to expand our market share, retain existing customers
and acquire new customers. We intend to maintain an open
architecture so that our products will continue to integrate
with major platforms and technologies as they evolve.

Broaden distribution channels

We intend to expand our indirect distribution
channels by recruiting resellers and systems integrators. Over
time, we expect that our indirect sales will increase as a
percentage of our total sales. We believe that designing our
products to interface with the products of leading vendors of
website, call center, marketing campaign management, customer
relationship management and enterprise resource management
software and network and telephony hardware infrastructures will
make our products more attractive to resellers and systems
integrators.

Expand service offerings

We provide our customers with a comprehensive set
of services, including training and consulting services,
software updates, documentation updates, telephone support and
Web-based support. We intend to continue to increase the value
of our solutions to customers by offering additional and
improved professional services. We believe the relationships we
develop with our customers by providing services are critical to
understanding customer needs and designing our solutions to
satisfy these needs.

Develop industry-specific products

In the future, we plan to offer versions of our
products designed specifically for industries such as high
technology and industrial manufacturing and distribution. We
intend to use the industry expertise of our professional
services organization and the consultants, system integrators
and other companies with which we have relationships to help us
extend our products to solve business problems specific to these
industries.

Emphasize Customer Satisfaction

We believe that by delivering customer
satisfaction we have established a strong customer base. This
provides many benefits, including potentially shortened sales
cycles, incremental sales opportunities to our installed-base of
customers and new and improved products resulting from customer
feedback. We intend to remain focused on providing the highest
level of satisfaction to our customers and to continue designing
our solutions to address their enterprise needs. In addition, we
intend to continue to enhance the capabilities of our
professional services personnel, maintain customer relationships
beyond the implementation phase and provide a superior customer
experience.

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Strategic Alliances

We are pursuing four types of strategic
alliances: implementation, partnering, international and
technology. These alliances are intended to increase our
geographic sales coverage worldwide and address new markets. As
of December 31, 2001, most of these alliances were in an
early development phase.

Implementation.Our
implementation efforts have focused on developing relationships
with systems integrators. These alliances allow us to provide
our customers with access to additional resources to design,
implement and customize our solutions.

Partnering.We have
entered into partnering agreements with Hewlett Packard, IBM,
NCR, Sun and Oracle. These agreements are generally integration
agreements, teaming agreements or reseller agreements and often
provide for training investments, co-marketing and sales
assistance.

International.In
Europe, we have entered into agreements with Integra, Intrasoft
and AGS. These agreements include the development of joint
marketing plans, technology integration efforts and various
promotional activities. We have granted AGS certain exclusive
rights to distribute our products in a number of eastern
European countries, provided AGS attains certain predetermined
distribution goals.

Technology.We have
entered into agreements with Torrent Systems (recently acquired
by Ascential), Microstrategy, Rougewave and Iona to provide us
with certain technology that we incorporate into some of our
products and then distribute on an original equipment
manufacturer basis.

Our marketing and distribution agreements are
non-exclusive in most cases. Some of the parties to these
agreements provide similar products and services to other
companies.

Sales and Marketing

We market our software and professional services
primarily through our direct sales organization and, to a lesser
extent, through indirect distribution channels, including
resellers, systems integrators and original equipment
manufacturers. In the later half of 2002, we intend to place a
greater emphasis on our indirect distribution channels. We have
sales offices in Minneapolis, Minnesota; San Francisco,
California; Austin, Texas and Windsor, United Kingdom.

As of December 31, 2001, our direct sales
force was comprised of 23 employees, including sales
representatives, sales managers, pre-sales engineers and sales
support personnel. Of the 23 employees, 9 were
quota-carrying sales representatives. Initial sales activities
typically include a demonstration of our product capabilities
followed by one or more detailed technical reviews. Often times,
sales activities will result in a paid customer pilot to measure
and quantify the value our solutions provide.

As of December 31, 2001, our marketing
organization consisted of 3 employees primarily engaged in
marketing research, producing marketing materials, managing
press coverage and other public relations, identifying potential
customers, attending and exhibiting at trade shows, seminars and
conferences, creating presentations and sales tools,
establishing and maintaining close relationships with industry
analysts and maintaining our website. In addition, we rely on
various outside consultants to supplement our marketing
organization for various public relations and market research
requirements.

Research and Development

Our research and development organization is
responsible for product strategy, product architecture, core
technology, quality assurance and product documentation. In
addition, this organization supports some pre-sale and customer
support activities. Our research and development organization is
divided into teams consisting of product managers, development
engineers, quality assurance engineers and technical writers.
The organization operates primarily out of our Edina, Minnesota
and Austin, Texas locations.

As of December 31, 2001, our research and
development staff consisted of 31 employees. Our total
expenses for research and development were $10.6 million in
2001, $19.4 million in 2000 and $8.6 million

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in 1999. We believe 2002 research and development
spending will be less than our spending in 2001. To date, our
development efforts have not resulted in any capitalized
software development costs. We believe our future performance
will depend in large part on our ability to maintain and enhance
our current product line, integrate acquired products and
technology, develop new products that achieve market acceptance,
maintain technological competitiveness, and meet an expanding
range of customer requirements.


Competition

The market for our products is intensely
competitive, evolving and subject to rapid technological change.
We expect the intensity of competition to increase in the
future. Competitors vary in size and in the scope and breadth of
the products and services they offer. Principal competitive
factors include: quality, breadth and depth of application
offerings, product scalability, core technology and
architecture, ease of deployment and maintenance, customer
service and support and price. Although we believe our products
currently compete favorably with respect to such factors, our
market is relatively new and is rapidly evolving. We may not be
able to maintain our competitive position against current and
potential competitors, especially those with significantly
greater financial, marketing, sales, service, support, technical
and other resources.

We have three primary sources of competition for
our product offerings:



| |   |                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | CRM vendors, such as E.piphany, Kana, Siebel and
	Xchange;                                                                                                       
|
| |  | retail enterprise resource planning companies,
	such as Retek, JDA and Blue Martini; and                                                                         
|
| |  | in-house development efforts by potential
	customers using traditional statistical analysis and decision
	support tools marketed by vendors such as SPSS and SAS.

In addition, we face competition from vendors of
other enterprise applications as they expand the functionality
of their product offerings. These vendors include ATG, i2, IBM,
Microsoft, NCR, Oracle, PeopleSoft and SAP.

Of these competitors, E.piphany, ATG and the
in-house development efforts referred to above directly compete
against Personalization Manager, and Retek and in-house
development efforts compete against Advertising Advisor.

Many of our competitors have longer operating
histories, significantly greater financial, technical, marketing
and other resources, significantly greater name recognition and
a larger installed base of customers than we have. In addition,
many of our competitors have well-established relationships with
current and potential customers of ours, have extensive
knowledge of our industry and are capable of offering a
single-vendor solution. As a result, our competitors may be able
to respond more quickly to new or emerging technologies and
changes in customer requirements, or to devote greater resources
to the development, promotion and sale of their products, than
we can. In addition, current and potential competitors have
established or may establish cooperative relationships among
themselves or with third parties to increase the ability of
their products to address customer needs. Accordingly, it is
possible that new competitors or alliances among competitors may
emerge and rapidly acquire significant market share. We also
expect that competition will increase as a result of software
industry consolidations. Increased competition is likely to
result in price reductions, reduced gross margins and loss of
market share. We may not be able to compete successfully against
current and future competitors.

Intellectual Property and Other Proprietary Rights

Our ability to succeed depends in large part on
protecting our intellectual property. We rely on a combination
of trademark, copyright, patent and trade secret laws to protect
our rights in our technology. We license our software and
require our customers to enter into license agreements, which
impose restrictions on our customers ability to utilize
the software. In addition, we seek to avoid disclosure of our
trade secrets, including but not limited to requiring those
persons with access to our proprietary

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information to execute confidentiality agreements
with us and restricting access to the source code for our
software.


As of March 22, 2002, we had 17 pending
United States patent applications and three issued United States
patents. We also have license rights to three issued United
States patents from the University of Minnesota and one allowed
United States patent application. It is possible that no patents
will be issued from the currently pending patent applications.
It is also possible that our current patents or potential future
patents may be found invalid or unenforceable, or otherwise be
successfully challenged. It is also possible that any patent
issued to us may not provide us with any competitive advantages.
Moreover, we may not develop future proprietary products or
technologies that are patentable, and the patents of others may
seriously limit our ability to conduct our business. In this
regard, we have not performed any comprehensive analysis of the
patents of others that may limit our ability to conduct our
business.

Our efforts to protect our proprietary rights may
not succeed. Copyright and trade secret laws afford only limited
protection for our proprietary rights in our software, our
product documentation and other written materials. Unauthorized
parties may be able to copy aspects of our products or to obtain
and use information that we regard as proprietary. Policing
unauthorized use of our products is difficult, and while we are
unable to determine the extent to which piracy of our software
products exists, software piracy can be expected to be a
persistent problem. In addition, the laws of some foreign
countries do not protect our proprietary rights as extensively
as the laws of the United States. Our means of protecting our
proprietary rights may not be adequate and our competitors may
independently develop similar technology, duplicate our
products, design around patents issued to us or otherwise
circumvent our intellectual property rights. We may not be able
to detect infringement and, as a result, our competitive
position in the market may suffer.

There has been a substantial amount of litigation
in the software industry regarding intellectual property rights.
We have, from time to time, received claims that we are
infringing third parties intellectual property rights. It
is possible that in the future third parties may claim that our
current or potential future products infringe their intellectual
property rights. We expect that software companies such as Net
Perceptions will increasingly be subject to infringement claims
as the number of products and competitors in our industry
segment grows and the functionality of products in different
industry segments overlaps. Any such claims, with or without
merit, could be time-consuming, result in costly litigation,
cause product shipment delays, or require us to enter into
royalty or licensing agreements in order to secure continued
access to required technology. Royalty or licensing agreements,
if required, may not be available on terms acceptable to us, or
at all. Claims of intellectual property infringement also may
require us to pay significant damages or subject us to an
injunction against the sale or use of our products. Any
successful claim of intellectual property infringement against
us could have an immediate and significant impact on our ability
to carry on our business and market our products.

Certain Legal and Regulatory Matters

Our products and services are often used in
conjunction with user preference and profile information
collected by our customers. Privacy concerns may cause users to
resist providing the personal data necessary to support this
profiling capacity. Our customers generally have implemented
security measures to protect their customers data from
unauthorized disclosure or interception by third parties.
However, the security measures may not be effective against all
potential security threats. If a breach of customer data
security were to be publicized, our products may be perceived as
less desirable, and our future sales may be negatively impacted.
More importantly, even the perception of privacy and security
concerns, whether or not valid, may indirectly inhibit our
customers collection of user preference and customer
profile data. In addition, legislative or regulatory
requirements may heighten such concerns if users must be
notified that the data captured after these interactions may be
used by marketing entities for direct product promotion and
advertising. During the last few years, many pieces of
legislation have been proposed at the federal and state level
that address some aspect of the Internet, including a number of
bills that specifically address Internet privacy matters. Such
proposed legislation indicates that some

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federal and state legislators believe that
certain aspects of the Internet and e-commerce, including data
privacy, are appropriate matters for regulation and review.
Various other countries and political entities, such as the
European Union, have adopted legislation or regulatory
requirements addressing issues, such as data privacy, that may
directly impact some of our customers. If user privacy concerns
are not adequately addressed or if restrictive legislation is
adopted in the United States, our business could be seriously
harmed and we could experience increased operating losses.


Employees

As of December 31, 2001 we had a total of
98 employees, including 26 in sales and marketing, 31 in
research and development, 23 in customer support and 18 in
administration. 93 of these employees were located in North
America and five employees were located in Europe. None of
our employees is represented by a collective bargaining
agreement, nor have we experienced any work stoppage. We
consider our relations with our employees to be good.




ITEM 2.     PROPERTIES

Information about our principal executive offices
and our other facilities is included in the following table. We
lease all of our existing facilities.

|                          |                                      |         |        |                 |  |                    |                |               |  |                                                |                                                                                         
|------------------------- | ------------------------------------ | ------- | ------ | --------------- |  | ------------------ | -------------- | ------------- |  | ---------------------------------------------- | ----------------------------------------------------------------------------------------
|                          |                                      | Square  |        | Lease           |  |                   
|Location                  |                                      | Footage |        | Expiration Date |  | Description of Use
|                          |                                      |         |        |                 |  |                   
|Minneapolis, Minnesota    |                                      |         |        |                 |  |                    |                |               |  |                                               
|                          | Principal executive offices          |         |        | 125,800         |  |                    |                | July 2010     |  |                                                | Executive, research and development and sales
	offices and portion sublet to third party
|                          | Previous principal executive offices |         |        | 26,249          |  |                    |                | December 2003 |  |                                                | N/A  sublet to third party                                                             
|Austin, Texas             |                                      |         | 13,965 |                 |  |                    | January 2004   |               |  | Research and development office               
|Roseland, New Jersey      |                                      |         | 8,687  |                 |  |                    | November 2005  |               |  | N/A  seeking to sublease to third party      
|San Francisco, California |                                      |         | 5,350  |                 |  |                    | August 2004    |               |  | Sales office and portion sublet to third party
|Berkshire, United Kingdom |                                      |         | 3,500  |                 |  |                    | March 2010     |               |  | N/A  sublet to third party                   
|Richardson, Texas         |                                      |         | 1,632  |                 |  |                    | February 2003  |               |  | Data center                                   
|Windsor, United Kingdom   |                                      |         | 1,020  |                 |  |                    | September 2003 |               |  | Sales office                                  

As of March 22, 2002 and in connection with
the restructuring described in Managements Discussion and
Analysis of Financial Condition and Results of Operations and
the Notes to the Consolidated Financial Statements, we have
signed agreements to sublease approximately 114,000 square
feet of our existing facilities through the remaining terms of
the respective leases. We are actively seeking to sublease the
remaining excess space at our other facilities. Specifically, we
are currently seeking to sublease an additional portion of our
Minneapolis, Minnesota facility, our entire Roseland, New Jersey
facility and a portion of our Austin, Texas facility.






|        |                  
|------- | -----------------
|ITEM 3. | LEGAL PROCEEDINGS

On or about November 2, 2001, Timothy J. Fox
filed a purported class action lawsuit against us, FleetBoston
Robertson Stephens, Inc., the lead underwriter of our April 1999
initial public offering, several other underwriters who
participated in our initial public offering, Steven J. Snyder,
our then president and chief executive officer, and Thomas M.
Donnelly, our chief operating officer and chief financial
officer. The lawsuit, Fox v. Net Perceptions, Inc., et al.,
Civil Action No. 01-CV-9675, was filed on November 2,
2001 in the United States District Court for the Southern
District of New York and has been assigned to the judge who is
also the pretrial coordinating judge for substantially similar
lawsuits involving more than 300 other issuers. The suit
generally alleges that the defendants violated federal
securities laws by not disclosing certain actions taken by the
underwriter defendants in connection with

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our initial public offering. The suit alleges
specifically that the underwriter defendants, with our direct
participation and agreement and without disclosure thereof,
conspired to and did raise and increase their underwriters
compensation and the market prices of our common stock following
our initial public offering by requiring their customers, in
exchange for receiving allocations of shares of our common stock
sold in our initial public offering, to pay excessive
commissions on transactions in other securities and to purchase
additional shares of our common stock in the initial public
offering aftermarket at pre-determined prices above the initial
public offering price. The suit seeks unspecified monetary
damages and certification of a plaintiff class consisting of all
persons who acquired our common stock between April 22,
1999 through December 6, 2000.


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






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

None.

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PART II






|        |                                                                       
|------- | ----------------------------------------------------------------------
|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED
	STOCKHOLDER MATTERS

(a) Our common stock has been quoted on the
Nasdaq National Market under the symbol NETP since
April 23, 1999. The following table sets forth, for the
periods indicated, the high and low sale prices per share of our
common stock as reported on the Nasdaq National Market.

|               |  |                |       |     |  |   |       | 
|-------------- |  | -------------- | ----- | --- |  | - | ----- | 
|               |  |               
|               |  | Price Range of
|               |  | Common Stock  
|               |  |               
|               |  | High           |       | Low
|               |  |                |       |    
|2000           |  |                |       |     |  |   |       | 
|First Quarter  |  | $              | 66.50 |     |  | $ | 31.50 | 
|Second Quarter |  |                | 36.50 |     |  |   | 10.00 | 
|Third Quarter  |  |                | 19.50 |     |  |   | 4.66  | 
|Fourth Quarter |  |                | 5.69  |     |  |   | 1.44  | 
|2001           |  |                |       |     |  |   |       | 
|First Quarter  |  |                | 3.75  |     |  |   | .88   | 
|Second Quarter |  |                | 2.25  |     |  |   | .88   | 
|Third Quarter  |  |                | 1.90  |     |  |   | .85   | 
|Fourth Quarter |  |                | 1.97  |     |  |   | 1.03  | 

On March 22, 2002, the last reported sale
price of our common stock on the Nasdaq National Market was
$1.69 per share. As of March 22, 2002, there were
229 stockholders of record registered with our transfer
agent, Wells Fargo Bank Minnesota, N.A.

We have not declared or paid any cash dividends
on our capital stock since our inception and do not intend to
pay any cash dividends in the foreseeable future. We currently
intend to retain future earnings, if any, to fund the
development and growth of our business. Our board of directors
will determine future dividends, if any, based upon our
financial condition, results of operations, capital
requirements, general business condition and other factors that
the board deems relevant. Therefore, you will not receive any
funds without selling your shares.

(b) On April 28, 1999, Net Perceptions
completed the initial public offering of its common stock. The
shares of common stock sold in the offering were registered
under the Securities Act of 1933, on a Registration Statement on
Form S-1 (No. 333-71919). The Securities and Exchange
Commission declared the Registration Statement effective on
April 22, 1999. To date, proceeds from the initial public
offering have been used for working capital and general
corporate purposes.

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|        |                                     
|------- | ------------------------------------
|ITEM 6. | SELECTED CONSOLIDATED FINANCIAL DATA

In the tables below we provide you with selected
historical financial data of Net Perceptions, which should be
read in conjunction with the financial statements and the notes
to the financial statements and Managements
Discussion and Analysis of Financial Condition and Results of
Operations, which are included elsewhere in this report.
The statement of operations data for each of the three years in
the period ended December 31, 2001, and the balance sheet
data at December 31, 2001 and 2000, are derived from, and
are qualified by reference to, the audited financial statements
included elsewhere in this report. The statement of operations
data for the year ended December 31, 1998 and the year
ended December 31, 1997 and the balance sheet data at
December 31, 1999, 1998 and 1997 are derived from audited
financial statements not included in this report.

FIVE YEAR CONSOLIDATED FINANCIAL
DATA(1)

|                                                               |                                                 |                                          |          |        |         |      |         |        |        |      |         |        |        |   |        |       |       |   |        |       |       | 
|-------------------------------------------------------------- | ----------------------------------------------- | ---------------------------------------- | -------- | ------ | ------- | ---- | ------- | ------ | ------ | ---- | ------- | ------ | ------ | - | ------ | ----- | ----- | - | ------ | ----- | ----- | 
|                                                               |                                                 |                                         
|                                                               |                                                 | Year Ended December 31,                 
|                                                               |                                                 |                                         
|                                                               |                                                 | 2001                                     |          | 2000   |         | 1999 |         | 1998   |        | 1997
|                                                               |                                                 |                                          |          |        |         |      |         |        |        |     
|                                                               |                                                 |                                         
|                                                               |                                                 | (in thousands, except per share amounts)
|Statement of Operations Data                                   |                                                 |                                          |          |        |         |      |         |        |        |      |         |        |        |   |        |       |       |   |        |      
|Revenues:                                                      |                                                 |                                          |          |        |         |      |         |        |        |      |         |        |        |   |        |       |       |   |        |      
|                                                               | Product                                         |                                          | $        | 2,979  |         |      | $       | 25,087 |        |      | $       | 11,408 |        |   | $      | 3,955 |       |   | $      | 284   |      
|                                                               | Service and maintenance                         |                                          |          | 7,184  |         |      |         | 11,501 |        |      |         | 3,721  |        |   |        | 522   |       |   |        | 33    |      
|                                                               |                                                 |                                          |          |        |         |      |         |        |        |      |         |        |        |   |        |       |       |   |        |      
|                                                               |                                                 | Total revenues                           |          |        | 10,163  |      |         |        | 36,588 |      |         |        | 15,129 |   |        |       | 4,477 |   |        |       | 317   | 
|                                                               |                                                 |                                          |          |        |         |      |         |        |        |      |         |        |        |   |        |       |       |   |        |      
|Cost of revenues:                                              |                                                 |                                          |          |        |         |      |         |        |        |      |         |        |        |   |        |       |       |   |        |      
|                                                               | Product                                         |                                          |          | 943    |         |      |         | 1,807  |        |      |         | 286    |        |   |        | 52    |       |   |        | 14    |      
|                                                               | Service and maintenance                         |                                          |          | 4,792  |         |      |         | 10,691 |        |      |         | 2,735  |        |   |        | 373   |       |   |        | 30    |      
|                                                               |                                                 |                                          |          |        |         |      |         |        |        |      |         |        |        |   |        |       |       |   |        |      
|                                                               |                                                 | Total cost of revenues                   |          |        | 5,735   |      |         |        | 12,498 |      |         |        | 3,021  |   |        |       | 425   |   |        |       | 44    | 
|                                                               |                                                 |                                          |          |        |         |      |         |        |        |      |         |        |        |   |        |       |       |   |        |      
|Gross margin                                                   |                                                 |                                          | 4,428    |        |         |      | 24,090  |        |        |      | 12,108  |        |        |   | 4,052  |       |       |   | 273    |      
|                                                               |                                                 |                                          |          |        |         |      |         |        |        |      |         |        |        |   |        |       |       |   |        |      
|Operating expenses:                                            |                                                 |                                          |          |        |         |      |         |        |        |      |         |        |        |   |        |       |       |   |        |      
|                                                               | Sales and marketing                             |                                          |          | 15,215 |         |      |         | 25,589 |        |      |         | 12,883 |        |   |        | 5,238 |       |   |        | 3,063 |      
|                                                               | Research and development                        |                                          |          | 10,572 |         |      |         | 19,354 |        |      |         | 8,625  |        |   |        | 2,372 |       |   |        | 1,372 |      
|                                                               | General and administrative                      |                                          |          | 6,198  |         |      |         | 11,146 |        |      |         | 4,005  |        |   |        | 1,474 |       |   |        | 585   |      
|                                                               | Lease abandonment expense                       |                                          |          | 225    |         |      |         | 1,250  |        |      |         |       |        |   |        |      |       |   |        |      |      
|                                                               | Restructuring related charges(2)                |                                          |          | 15,551 |         |      |         |       |        |      |         |       |        |   |        |      |       |   |        |      |      
|                                                               | Amortization of goodwill and other intangibles  |                                          |          | 9,650  |         |      |         | 25,394 |        |      |         |       |        |   |        |      |       |   |        |      |      
|                                                               | Impairment of goodwill and other intangibles(3) |                                          |          | 75,298 |         |      |         |       |        |      |         |       |        |   |        |      |       |   |        |      |      
|                                                               |                                                 |                                          |          |        |         |      |         |        |        |      |         |        |        |   |        |       |       |   |        |      
|                                                               |                                                 | Total operating expenses                 |          |        | 132,709 |      |         |        | 82,733 |      |         |        | 25,513 |   |        |       | 9,084 |   |        |       | 5,020 | 
|                                                               |                                                 |                                          |          |        |         |      |         |        |        |      |         |        |        |   |        |       |       |   |        |      
|Loss from operations                                           |                                                 |                                          | (128,281 | )      |         |      | (58,643 | )      |        |      | (13,405 | )      |        |   | (5,032 | )     |       |   | (4,747 | )    
|Other income, net                                              |                                                 |                                          | 4,483    |        |         |      | 5,096   |        |        |      | 1,366   |        |        |   | 64     |       |       |   | 25     |      
|                                                               |                                                 |                                          |          |        |         |      |         |        |        |      |         |        |        |   |        |       |       |   |        |      
|Net loss                                                       |                                                 | $                                        | (123,798 | )      |         | $    | (53,547 | )      |        | $    | (12,039 | )      |        | $ | (4,968 | )     |       | $ | (4,722 | )    
|                                                               |                                                 |                                          |          |        |         |      |         |        |        |      |         |        |        |   |        |       |       |   |        |      
|Basic and diluted net loss per share                           |                                                 | $                                        | (4.59    | )      |         | $    | (2.12   | )      |        | $    | (0.78   | )      |        | $ | (1.40  | )     |       | $ | (3.01  | )    
|                                                               |                                                 |                                          |          |        |         |      |         |        |        |      |         |        |        |   |        |       |       |   |        |      
|Shares used in computing basic and diluted net
	loss per share |                                                 |                                          | 26,951   |        |         |      | 25,209  |        |        |      | 15,402  |        |        |   | 3,546  |       |       |   | 1,569  |      
|                                                               |                                                 |                                          |          |        |         |      |         |        |        |      |         |        |        |   |        |       |       |   |        |      
|Balance Sheet Data                                             |                                                 |                                          |          |        |         |      |         |        |        |      |         |        |        |   |        |       |       |   |        |      
|Cash, cash equivalents and short-term investments              |                                                 | $                                        | 73,605   |        |         | $    | 68,880  |        |        | $    | 36,854  |        |        | $ | 972    |       |       | $ | 4,846  |      
|Working capital                                                |                                                 |                                          | 64,321   |        |         |      | 66,364  |        |        |      | 37,372  |        |        |   | 468    |       |       |   | 4,442  |      
|Total assets                                                   |                                                 |                                          | 88,878   |        |         |      | 211,834 |        |        |      | 58,748  |        |        |   | 5,637  |       |       |   | 5,575  |      
|Long-term liabilities, net of current portion                  |                                                 |                                          | 577      |        |         |      | 1,951   |        |        |      | 707     |        |        |   | 538    |       |       |   | 345    |      
|Redeemable preferred stock                                     |                                                 |                                          |         |        |         |      |        |        |        |      |        |        |        |   | 650    |       |       |   | 650    |      
|Total stockholders equity                                     |                                                 |                                          | 75,407   |        |         |      | 198,518 |        |        |      | 48,388  |        |        |   | 421    |       |       |   | 3,879  |      

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|    |                                                                                                                                                                                                                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The selected consolidated financial data for the
	years ended December 31, 2001 and December 31, 2000
	include the effects of the acquisition of KD1 in February 2000,
	which was accounted for under the purchase method of accounting.
	See Note 4 to the Consolidated Financial Statements.                                                                             
|   
|(2) | In 2001, we incurred a restructuring related
	charge of $15.6 million, consisting of charges relating to
	facility consolidation and employee terminations, losses and
	estimated losses on the disposal of assets and other
	restructuring related charges. See Note 5 to the
	Consolidated Financial Statements.                                                         
|   
|(3) | At March 31, 2001, we performed an
	impairment assessment of the goodwill and other intangible
	assets recorded in connection with the acquisition of KD1. As a
	result of our review, we recorded a $75.3 million
	impairment charge to reduce goodwill and other intangible assets
	to their estimated fair values. See Note 4 to the
	Consolidated Financial Statements.

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|        |                                                                                        
|------- | ---------------------------------------------------------------------------------------
|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF
	FINANCIAL  CONDITION AND RESULTS OF OPERATIONS

Overview

The following discussion and analysis should be
read in conjunction with Selected Consolidated Financial
Data and the consolidated financial statements and notes
thereto appearing elsewhere in this report.

We develop and market software solutions that
enable our customers to interact more intelligently with their
customers. Our solutions integrate and analyze information about
customers, products and promotional activity to generate
specific actions our customers can take to improve their
marketing, selling, merchandising and advertising effectiveness,
leading to increased revenue, improved profit, decreased costs
and enhanced customer satisfaction. We combine our software
products with industry expertise and professional services to
create highly-focused, industry-specific solutions that are
designed to integrate with and add significant value to existing
custom or purchased CRM systems and processes.

We sell our solutions worldwide primarily through
a direct sales force. We license our products under various
pricing plans, such as per user, per CPU, per site and per
enterprise. We generally grant licenses on a perpetual basis.
License fees for our products range from $50,000 to in excess of
$1.0 million. We provide product maintenance pursuant to
service agreements, the pricing of which is typically based on a
percentage of the related product license fee and is generally
paid in advance. Professional service fees for business
consulting, implementation support, data warehousing and
processing and educational services are generally priced on a
time and materials basis. In addition, we offer some of our
products on a hosted basis. Charges for hosted product related
services vary across service offerings, but generally include an
initial set-up fee and a recurring monthly charge based on usage.

From inception through late 2000, we expanded our
organization by hiring personnel in key areas, particularly
marketing, sales and research and development. Our total number
of employees was 34, 70, 213 and 315 on December 31, 1997,
1998, 1999 and 2000, respectively. In March 2001, we
instituted a restructuring plan to better align our cost
structure with our business outlook and general economic
conditions. Under the restructuring plan, we reduced our
workforce by approximately 46%, or 124 positions throughout the
organization, and recorded a charge of $13.9 million to
reorganize the company and exit certain facilities in various
United States and international locations. During the third
quarter of 2001, we reduced our workforce by 45 employees and
recorded an additional $1.8 million restructuring charge. As of
December 31, 2001, we had 98 employees. We anticipate
recording an additional $400,000 restructuring charge in the
first quarter of 2002.

We have sustained losses on a quarterly and
annual basis since inception. As of December 31, 2001, we
had an accumulated deficit of $200.1 million. Our net loss was
$123.8 million for the year ended December 31, 2001
(including $15.6 million in restructuring related charges, $10.3
million of amortization of goodwill and other intangibles and
non-cash stock compensation expense and a $75.3 million charge
for the impairment of goodwill and other intangibles). This is
compared to net losses of $53.5 million and
$12.0 million for the years ended December 31, 2000
and 1999, respectively (including amortization of intangibles
and non-cash stock compensation expense of $27.6 million in 2000
and including non-cash stock compensation expense of $1.5
million in 1999). These losses resulted from significant costs
incurred in the development and sale of our products and
services as well as a decline in our revenues beginning in the
third quarter of 2000. We anticipate that our operating expenses
will continue to constitute a material use of our cash
resources. We also expect to incur additional losses and
continued negative cash flow from operations for the foreseeable
future. We do not expect to achieve profitability in 2002.

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

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successful in addressing these risks and
difficulties. Prior to the third quarter of 2000, we experienced
significant sequential percentage quarterly growth in revenues.
We do not believe that prior revenue growth rates are indicative
of future growth rates.


The KD1 Acquisition

In February 2000, we acquired KD1, a
developer and marketer of advanced data analysis solutions for
retailers. In this transaction, we acquired all of the
outstanding shares of KD1 in exchange for 1,969,630 shares of
our common stock, and KD1 became our wholly owned subsidiary. In
addition, stock options of KD1 were converted into options to
purchase approximately 265,514 shares of our common stock.

For a discussion of the impairment of goodwill
and other intangible assets relating to the KD1 acquisition, see
Note 4 to the Consolidated Financial Statements and
Valuation of long-lived and intangible assets and
goodwill below.

Critical Accounting Policies and Estimates

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

We believe the following critical accounting
policies affect significant judgments and estimates used in the
preparation of our consolidated financial statements:

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

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

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

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payments become due from the customer. If we do
not consider collection to be probable, then revenues are
recognized when the fee is collected.


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

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

Sublease income.In
conjunction with the restructuring related charges recorded in
2001, we made certain estimates regarding future sublease income
that have a significant impact on our anticipated cash
obligations. Although we believe that our lease commitment
estimates are appropriate in the current circumstances, future
changes in real estate markets could impact the ultimate amount
of cash paid to resolve these obligations.

Allowance for doubtful accounts.We maintain allowances for doubtful
accounts for estimated losses resulting from the inability of
our customers to make required payments. If the financial
condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional
allowances may be required.

Litigation.We have
not recorded an estimated liability related to the class action
lawsuit in which we are named. For a discussion of this matter,
see Legal Proceedings above and Note 10 to the
Consolidated Financial Statements. Due to the uncertainties
related to both the amount and range of loss, we are unable to
make a reasonable estimate of the liability that could result
from an unfavorable outcome. As additional information becomes
available, we will assess the potential liability and revise our
estimates accordingly. Revisions in our estimates of the
potential liability could materially impact our results of
operations and financial position.

Valuation of long-lived and intangible assets
and goodwill.We periodically review
the carrying amounts of property and equipment, identifiable
intangible assets and goodwill, both purchased in the normal
course of business and acquired through business combinations,
to determine whether current events or circumstances, as defined
in Statement of Financial Accounting Standards
(SFAS) No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of, warrant adjustments to such carrying amounts.
In reviewing the carrying values of property and equipment,
identifiable intangible assets and goodwill, we consider, among
other things, the future cash flows expected to result from the
use of the asset and its eventual disposition less the future
cash outflows expected to be necessary to obtain those inflows.
Goodwill recorded from the KD1 acquisition in February 2000
is evaluated at the enterprise level.

We assess the impairment of identifiable
intangibles, long-lived assets and related goodwill and
enterprise level goodwill whenever events or changes in
circumstances indicate that the carrying value may not be
recoverable. Factors we consider important which could trigger
an impairment assessment include the following:



| |   |                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------
| |  | significant underperformance relative to expected
	historical or projected future operating results;          
|
| |  | significant changes in the manner of our use of
	the acquired assets or the strategy for our overall business;
|
| |  | significant negative industry or economic trends;                                                             
|
| |  | significant decline in our stock price for a
	sustained period; and                                           
|
| |  | our market capitalization relative to net book
	value.                                                        

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When we determine that the carrying value of
intangibles, long-lived assets and related goodwill and
enterprise level goodwill may not be recoverable based upon the
existence of one or more of the above indicators of impairment,
we measure any impairment based on a projected discounted cash
flow method using a discount rate determined by our management
to be commensurate with the risk inherent in our current
business model.

In 2002, in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets, we will no
longer amortize goodwill. In lieu of amortization, we are
required to perform an initial impairment review of our goodwill
in 2002 and an impairment review at least annually thereafter.
We expect to complete our initial review no later than
June 30, 2002.

We currently do not expect to record an
impairment charge upon completion of the initial impairment
review. However, there can be no assurance that at the time the
review is completed a material impairment charge will not be
recorded.

Results of Operations for the Years Ended December 31,
2001, 2000 and 1999

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

|                     |                                              |                          |        |      |       |      |      |    |     |  |     |    |     | 
|-------------------- | -------------------------------------------- | ------------------------ | ------ | ---- | ----- | ---- | ---- | -- | --- |  | --- | -- | --- | 
|                     |                                              |                         
|                     |                                              | Year Ended December 31, 
|                     |                                              |                         
|                     |                                              | 2001                     |        | 2000 |       | 1999
|                     |                                              |                          |        |      |       |     
|Revenues:            |                                              |                          |        |      |       |      |      |    |     |  |     |   
|                     | Product                                      |                          |        | 29   | %     |      |      | 69 | %   |  |     | 75 | %  
|                     | Service and maintenance                      |                          |        | 71   |       |      |      | 31 |     |  |     | 25 |    
|                     |                                              |                          |        |      |       |      |      |    |     |  |     |   
|                     |                                              | Total revenues           |        |      | 100   |      |      |    | 100 |  |     |    | 100 | 
|Cost of revenues:    |                                              |                          |        |      |       |      |      |    |     |  |     |   
|                     | Product                                      |                          |        | 9    |       |      |      | 5  |     |  |     | 2  |    
|                     | Service and maintenance                      |                          |        | 47   |       |      |      | 29 |     |  |     | 18 |    
|                     |                                              |                          |        |      |       |      |      |    |     |  |     |   
|                     |                                              | Total cost of revenues   |        |      | 56    |      |      |    | 34  |  |     |    | 20  | 
|Gross margin         |                                              |                          | 44     |      |       |      | 66   |    |     |  | 80  |   
|Operating expenses:  |                                              |                          |        |      |       |      |      |    |     |  |     |   
|                     | Sales and marketing                          |                          |        | 150  |       |      |      | 70 |     |  |     | 85 |    
|                     | Research and development                     |                          |        | 104  |       |      |      | 53 |     |  |     | 57 |    
|                     | General and administrative                   |                          |        | 61   |       |      |      | 31 |     |  |     | 27 |    
|                     | Lease abandonment expense                    |                          |        | 2    |       |      |      | 3  |     |  |     |   |    
|                     | Restructuring related charges                |                          |        | 153  |       |      |      |   |     |  |     |   |    
|                     | Amortization of intangibles                  |                          |        | 95   |       |      |      | 69 |     |  |     |   |    
|                     | Impairment of goodwill and other intangibles |                          |        | 741  |       |      |      |   |     |  |     |   |    
|                     |                                              |                          |        |      |       |      |      |    |     |  |     |   
|                     |                                              | Total operating expenses |        |      | 1,306 |      |      |    | 226 |  |     |    | 169 | 
|                     |                                              |                          |        |      |       |      |      |    |     |  |     |   
|Loss from operations |                                              |                          | (1,262 | )    |       |      | (160 | )  |     |  | (89 | ) 
|                     |                                              |                          |        |      |       |      |      |    |     |  |     |   
|Other income, net    |                                              |                          | 44     |      |       |      | 14   |    |     |  | 9   |   
|                     |                                              |                          |        |      |       |      |      |    |     |  |     |   
|Net loss             |                                              |                          | (1,218 | )%   |       |      | (146 | )% |     |  | (80 | )%
|                     |                                              |                          |        |      |       |      |      |    |     |  |     |   

Revenues

Total revenues.Total revenues declined 72% to $10.2
million in 2001, from $36.6 million in 2000. Revenues increased
142% in 2000 from $15.1 million in 1999. Revenues from sales in
the United States were $8.2 million in 2001 compared to $28.4
million in 2000 and $12.7 million in 1999, representing 80%, 78%
and 84% of total revenues, respectively. Revenues from
international sales in 2001 were $2.0 million, or 20% of total
revenues, compared to $8.2 million, or 22% of total revenues, in
2000 and $2.4 million, or 16% of total revenues, in 1999. The
majority of international sales were made in Europe and Asia by
our

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direct sales organizations based in the United
States and the United Kingdom. International sales are generally
denominated in United States dollars. Revenues from three
customers represented 12%, 11% and 10% of our total revenues in
2001. Revenues from one customer represented 11% of our total
revenues in both 2000 and 1999.


Product revenues.Product revenues declined 88% to $3.0
million in 2001 from $25.1 million in 2000. Product revenues
increased 120% in 2000 from $11.4 million in 1999. Product
revenues comprised 29%, 69%, and 75% of total revenues for 2001,
2000 and 1999. The decrease in product revenues in 2001 was
attributable to a combination of factors, including the rapid
deterioration of Internet retailers, a longer sales cycle due to
our pursuit of larger transactions with larger organizations,
increased competition, and the deferral of purchase decisions by
our current and potential customers due to economic uncertainty.
Prior percentage growth rates of our product revenues have not
been sustainable and we do not currently expect to achieve such
prior percentage growth rates in the future.

Service and maintenance revenues.Service and maintenance revenues
consist primarily of professional and maintenance services and,
secondarily, product hosting services. Our professional service
revenues include business consulting, implementation support,
data warehousing and processing and educational services and are
generally offered on a time and materials basis. Maintenance
revenues are generally derived from annual service agreements
and are recognized ratably over the term of the agreement.
Service and maintenance revenues decreased 38% to $7.2 million
in 2001 from $11.5 million in 2000. Service and maintenance
revenues increased 209% in 2000 from $3.7 million in 1999.
Service and maintenance revenues comprised 71%, 31% and 25% of
total revenues for 2001, 2000 and 1999, respectively. The
decrease in service and maintenance revenues in absolute dollars
in 2001 reflects lower levels of consulting and maintenance
services due to the combined effect of fewer new customer
acquisitions and a decline in our customer base, particularly
Internet retailers. Prior percentage growth rates of our service
and maintenance revenues have not been sustainable and we do not
currently expect to achieve such prior percentage growth rates
in the future.

Cost of Revenues

Cost of product
revenues.Cost of product revenues
consists primarily of the cost of royalties paid to third-party
vendors, amortization of acquired technology costs, product
media and duplication, manuals, packaging materials and shipping
expenses. Cost of product revenues decreased 48% to $943,000 in
2001 from $1.8 million in 2000. Cost of product revenues
increased 532% in 2000 from $286,000 in 1999. Cost of product
revenues represented 32%, 7% and 3% of related product revenues
in 2001, 2000, and 1999, respectively. The decrease in cost of
product revenues in absolute dollars in 2001 compared to 2000 is
primarily attributable to a decrease in amortization of acquired
technology cost in connection with our acquisition of KD1 in
February 2000 and to reduced product revenues and royalties
payable to third parties. Since all internal development costs
incurred in the research and development of new software
products and enhancements to existing software products have
been expensed as incurred, cost of product revenues includes no
amortization of capitalized software development costs. We
believe that the cost of product revenues will decline as a
percentage of product revenues in 2002 as we decrease our
reliance on licensed third-party technology.

Cost of service and maintenance revenues.Cost of service and maintenance
revenues consists primarily of personnel-related and
infrastructure costs incurred in providing telephone and
Web-based support of our software products, as well as
professional, consulting, educational and hosted product related
services to customers. Cost of service and maintenance revenues
decreased 55% to $4.8 million in 2001 from $10.7 million in
2000. Cost of service and maintenance revenues increased 291% in
2000 from $2.7 million in 1999. Cost of service and maintenance
revenues in 2001, 2000 and 1999 represented 67%, 93% and 74% of
the related services and maintenance revenues, respectively. The
decrease in cost of services and maintenance revenues in
absolute dollars and as a percentage of revenues in 2001
compared to prior years is primarily due to headcount reductions
in our service organization as a result of our March 2001
and third quarter 2001 restructuring and decreased use of
third-party consultants to staff

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consulting engagements. Cost of service and
maintenance revenues may vary significantly from quarter to
quarter depending upon the mix of services that we provide and
the utilization rate of our service personnel.


Operating Expenses

Sales and marketing.Sales and marketing expenses consist
primarily of salaries, other employee-related costs, commissions
and other incentive compensation, travel and entertainment and
expenditures for marketing programs, such as collateral
materials, trade shows, public relations and creative services.
Sales and marketing expenses decreased 41% to $15.2 million in
2001 compared to $25.6 million in 2000. Sales and marketing
expenses increased 99% in 2000 from $12.9 million in 1999. As a
percent of total revenues, sales and marketing expenses were
150%, 70% and 85% in 2001, 2000 and 1999, respectively. The
decrease in sales and marketing expenses in absolute dollars in
2001 was primarily due to headcount reductions as a result of
our restructuring efforts and decreased spending on marketing
programs. The increases in sales and marketing expenses in
absolute dollar amounts in 2000 reflected the cost of hiring
additional sales and marketing personnel, developing and
expanding our sales and distribution channels, launching new
products and expanding promotional activities.

Research and development.Research and development expenses
consist primarily of salaries, other employee-related costs and
consulting fees relating to the development of our products.
Research and development expenses decreased 45% to $10.6 million
in 2001 from $19.4 million in 2000. Research and development
expenses increased 126% in 2000 from $8.6 million in 1999. As a
percent of total revenues, research and development expenses
were 104%, 53% and 57% in 2001, 2000 and 1999, respectively. The
decrease in research and development expenses in absolute
dollars in 2001 is primarily due to headcount reductions as a
result of our restructuring efforts. The increases in research
and development expenses in absolute dollars in 2000 was
primarily due to the cost of hiring additional research and
development personnel for the enhancement of existing products
and the development of new products.

General and administrative.General and administrative expenses
consist primarily of salaries, other employee-related costs,
provision for doubtful accounts and professional service fees.
General and administrative expenses decreased 44% to
$6.2 million in 2001 from $11.1 million in 2000.
General and administrative expenses increased 178% in 2000 from
$4.0 million in 1999. As a percent of total revenues,
general and administrative expenses were 61%, 30% and 27% in
2001, 2000 and 1999, respectively. General and administrative
expenses decreased in absolute dollars in 2001 due primarily to
lower headcount as a result of our restructuring efforts. The
increase in general and administrative expenses in absolute
dollar amounts in 2000 reflected the cost of hiring additional
general and administrative personnel, increased professional
fees, additional provision for doubtful accounts and additional
infrastructure to support our expanding operations.

Lease abandonment expense.Lease abandonment expenses relate to
our August 2000 abandonment of our previous headquarters
facility upon our move to new corporate headquarters. We
recorded lease abandonment expense totaling $225,000 in 2001,
representing 2% of total revenues compared to lease abandonment
expense totaling approximately $1.3 million in 2000,
representing 3% of total 2000 revenues. The additional $225,000
of lease abandonment expense recorded in 2001 was in response to
declining conditions in the Minneapolis area real estate market.
In October 2001, we entered into an agreement to sublease
the majority of our previous headquarters facility to a third
party.

Restructuring related charges.We recorded restructuring related
charges totaling $15.6 million in 2001, representing 153%
of total revenues. In March 2001, we instituted a restructuring
plan to better align our cost structure with our business
outlook and general economic conditions. Under the restructuring
plan, we reduced our workforce by approximately 46%, or 124
positions throughout the organization, and recorded a
restructuring related charge of $13.9 million to reorganize
the company and exit certain facilities in various United States
and international locations. This $13.9 million charge
included $10.2 million related to facility consolidation,
$1.2 million of employee termination costs and

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$2.5 million of losses on the disposal of
assets and other restructuring charges. During the third quarter
of 2001, we reduced our workforce by 45 employees and
recorded an additional $1.8 million restructuring related
charge. This $1.8 million charge included $878,000 for
estimated losses on the disposal of fixed assets, $449,000 for
leasehold write-offs related to facility consolidation and
$444,000 for employee severance payments. During the fourth
quarter of 2001, we decreased the total restructuring charge by
$140,000 to reflect the actual costs of exiting certain
marketing activities in connection with the restructuring. See
also Liquidity and Capital Resources below and Note
5 to the Consolidated Financial Statements.


Amortization of
intangibles.Amortization expense
related to goodwill and other intangibles acquired in the
February 2000 acquisition of KD1 was $10.1 million and
$26.6 million (including $443,000 and $1.2 million of
amortization of goodwill and other intangibles included in the
cost of product revenues) in 2001 and 2000, respectively. This
represented 99% and 73% of 2001 and 2000 total revenues,
respectively. Total amortization of goodwill and other
intangibles is expected to be significantly lower for 2002 and
through the first quarter of 2003 due to the $75.3 million
impairment of goodwill and other intangibles charge recorded in
the first quarter of 2001 discussed below and our scheduled
adoption of Statements of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other
Intangible Assets on January 1, 2002, under which we
will no longer amortize goodwill. See also Notes 2 and 4 to
the Consolidated Financial Statements.

Impairment of goodwill and other intangibles.At March 31, 2001, we performed
an impairment assessment of the goodwill and other intangible
assets recorded in connection with the acquisition of KD1. The
assessment was performed primarily due to lower than expected
revenues in the first quarter of 2001 (product revenues declined
87% from the same period in 2000 and 72% from the fourth quarter
of 2000) and a downward revision in the first quarter of 2001 of
our internal projections based on the general economic
conditions in the information technology sector, combined with
changes in valuation models for technology companies, a
continued decline in our first quarter 2001 stock price and our
March 2001 plan of restructuring. As a result of our
review, we recorded a $75.3 million impairment charge to
reduce goodwill and other intangible assets to their estimated
fair values. The charge was determined based upon our estimated
discounted cash flows over the estimated remaining useful life
of the goodwill and other intangible assets, a terminal value at
the end of this estimated life and using a discount rate of 40%.
The assumptions supporting the cash flows, including the
discount rate and estimated terminal value were determined using
managements best estimates available at the time the
impairment assessment was made. The estimated cash flows were
consistently based on our internal operating plan. The discount
rate was based upon the historical time-weighted returns for
venture capital type investments for the ten year period ended
December 31, 2000  a rate considered appropriate
given our recent revenue levels. The estimated terminal value
was based on our recent revenue multiple based on trailing
twelve months revenues as objectively observed from the stock
markets valuation of the Company. In accordance with SFAS
No. 142, beginning January 1, 2002, we will no longer
amortize goodwill and certain other intangibles, resulting in a
reduction of annual amortization expense of approximately
$3.1 million in 2002. Instead, we will test these assets at
least annually for impairment. Amortization expense related to
other intangible assets is expected to be $257,000 and $32,000
for 2002 and the first quarter of 2003, respectively. However,
as noted above, the remaining unamortized goodwill and
intangible asset not subject to amortization of
$6.5 million are subject to periodic impairment analysis,
which could require a write-down of these assets in the future.

Stock compensation expense.Compensation charges related to stock
options totaled $230,000 in 2001, $1.1 million in 2000 and
$1.5 million in 1999. Stock compensation expense for 2001
includes $42,000 related to accelerated vesting. Stock
compensation expense was recorded in the functional expense
categories within operating expenses. See Note 8 to the
Consolidated Financial Statements.

Other income, net.Other income, net, consists of
interest income, interest expense, the Companys share in
gains or losses of a joint venture, foreign currency transaction
gains or losses and other expense. Net other income decreased
12% to $4.5 million in 2001 from $5.1 million in 2000. Net
other income increased 264% in 2000 from $1.4 million in
1999. The decrease in net other income in 2001 compared to

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2000 was primarily due to a decrease in interest
income earned on the proceeds from our follow-on public offering
completed in March 2000.


Provision for Income Taxes

We have incurred significant operating losses for
all periods from inception through December 31, 2001. As of
December 31, 2001, we had net operating loss carry-forwards
of approximately $91.6 million available to reduce future
taxable income expiring at various dates beginning in 2011. In
addition, as of December 31, 2001, we had $195,000 of tax
credit carry-forwards expiring at various dates beginning in
2011. Under the provisions of the Internal Revenue Code of 1986,
as amended, if certain substantial changes in our ownership were
to occur, we could be limited in the future in the amount of net
operating loss and tax credit carry-forwards that could be
utilized annually to offset future taxable income.

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

Selected Consolidated Quarterly Operating Results

The following table sets forth quarterly
unaudited financial data for 2001 and 2000, as well as the
percentage of our total revenues represented by each item. This
unaudited financial data has been prepared on the same basis as
the audited financial statements included in this report and
includes all adjustments, consisting only of normal recurring
accruals that are considered necessary for a fair presentation
of such information when read in conjunction with our audited
financial statements and notes thereto appearing elsewhere in
this report. You should not draw any conclusions from the
operating results for any quarter.

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|                                     |                                              |                                                 |        |          |       |         |        |         |       |         |        |          |       |         |          |         |         |   |         |       |        |   |         |       |        |   |         |       |        |   |        |       |        | 
|------------------------------------ | -------------------------------------------- | ----------------------------------------------- | ------ | -------- | ----- | ------- | ------ | ------- | ----- | ------- | ------ | -------- | ----- | ------- | -------- | ------- | ------- | - | ------- | ----- | ------ | - | ------- | ----- | ------ | - | ------- | ----- | ------ | - | ------ | ----- | ------ | 
|                                     |                                              | Dec. 31                                         |        | Sept. 30 |       | June 30 |        | Mar. 31 |       | Dec. 31 |        | Sept. 30 |       | June 30 |          | Mar. 31
|                                     |                                              | 2001                                            |        | 2001     |       | 2001    |        | 2001    |       | 2000    |        | 2000     |       | 2000    |          | 2000   
|                                     |                                              |                                                 |        |          |       |         |        |         |       |         |        |          |       |         |          |        
|                                     |                                              |                                                
|                                     |                                              | (Amounts in thousands except per share amounts)
|                                     |                                              | (Unaudited)                                    
|Results of Operations:               |                                              |                                                 |        |          |       |         |        |         |       |         |        |          |       |         |          |         |         |   |         |       |        |   |         |       |        |   |         |       |        |   |        |      
|Revenues:                            |                                              |                                                 |        |          |       |         |        |         |       |         |        |          |       |         |          |         |         |   |         |       |        |   |         |       |        |   |         |       |        |   |        |      
|                                     | Product                                      |                                                 | $      | 911      |       |         | $      | 674     |       |         | $      | 386      |       |         | $        | 1,008   |         |   | $       | 3,631 |        |   | $       | 4,424 |        |   | $       | 9,508 |        |   | $      | 7,524 |       
|                                     | Service and maintenance                      |                                                 |        | 1,431    |       |         |        | 1,509   |       |         |        | 2,011    |       |         |          | 2,233   |         |   |         | 3,338 |        |   |         | 3,301 |        |   |         | 2,894 |        |   |        | 1,968 |       
|                                     |                                              |                                                 |        |          |       |         |        |         |       |         |        |          |       |         |          |         |         |   |         |       |        |   |         |       |        |   |         |       |        |   |        |      
|                                     |                                              | Total revenues                                  |        |          | 2,342 |         |        |         | 2,183 |         |        |          | 2,397 |         |          |         | 3,241   |   |         |       | 6,969  |   |         |       | 7,725  |   |         |       | 12,402 |   |        |       | 9,492  | 
|                                     |                                              |                                                 |        |          |       |         |        |         |       |         |        |          |       |         |          |         |         |   |         |       |        |   |         |       |        |   |         |       |        |   |        |      
|Cost of revenues:                    |                                              |                                                 |        |          |       |         |        |         |       |         |        |          |       |         |          |         |         |   |         |       |        |   |         |       |        |   |         |       |        |   |        |      
|                                     | Product                                      |                                                 |        | 264      |       |         |        | 158     |       |         |        | 80       |       |         |          | 441     |         |   |         | 454   |        |   |         | 526   |        |   |         | 553   |        |   |        | 274   |       
|                                     | Service and maintenance                      |                                                 |        | 639      |       |         |        | 739     |       |         |        | 1,216    |       |         |          | 2,198   |         |   |         | 3,139 |        |   |         | 3,019 |        |   |         | 2,724 |        |   |        | 1,809 |       
|                                     |                                              |                                                 |        |          |       |         |        |         |       |         |        |          |       |         |          |         |         |   |         |       |        |   |         |       |        |   |         |       |        |   |        |      
|                                     |                                              | Total cost of revenues                          |        |          | 903   |         |        |         | 897   |         |        |          | 1,296 |         |          |         | 2,639   |   |         |       | 3,593  |   |         |       | 3,545  |   |         |       | 3,277  |   |        |       | 2,083  | 
|                                     |                                              |                                                 |        |          |       |         |        |         |       |         |        |          |       |         |          |         |         |   |         |       |        |   |         |       |        |   |         |       |        |   |        |      
|Gross margin                         |                                              |                                                 | 1,439  |          |       |         | 1,286  |         |       |         | 1,101  |          |       |         | 602      |         |         |   | 3,376   |       |        |   | 4,180   |       |        |   | 9,125   |       |        |   | 7,409  |      
|                                     |                                              |                                                 |        |          |       |         |        |         |       |         |        |          |       |         |          |         |         |   |         |       |        |   |         |       |        |   |         |       |        |   |        |      
|Operating expenses:                  |                                              |                                                 |        |          |       |         |        |         |       |         |        |          |       |         |          |         |         |   |         |       |        |   |         |       |        |   |         |       |        |   |        |      
|                                     | Sales and marketing                          |                                                 |        | 1,750    |       |         |        | 2,454   |       |         |        | 3,041    |       |         |          | 7,970   |         |   |         | 6,852 |        |   |         | 6,372 |        |   |         | 6,354 |        |   |        | 6,011 |       
|                                     | Research and development                     |                                                 |        | 2,156    |       |         |        | 2,121   |       |         |        | 2,262    |       |         |          | 4,033   |         |   |         | 5,125 |        |   |         | 5,582 |        |   |         | 4,928 |        |   |        | 3,719 |       
|                                     | General and administrative                   |                                                 |        | 768      |       |         |        | 1,014   |       |         |        | 2,129    |       |         |          | 2,287   |         |   |         | 3,446 |        |   |         | 2,647 |        |   |         | 2,772 |        |   |        | 2,281 |       
|                                     | Lease abandonment expense                    |                                                 |        |         |       |         |        |        |       |         |        |         |       |         |          | 225     |         |   |         | 450   |        |   |         |      |        |   |         | 800   |        |   |        |      |       
|                                     | Restructuring related charges                |                                                 |        | (140     | )     |         |        | 1,771   |       |         |        |         |       |         |          | 13,920  |         |   |         |      |        |   |         |      |        |   |         |      |        |   |        |      |       
|                                     | Amortization of intangibles                  |                                                 |        | 798      |       |         |        | 798     |       |         |        | 798      |       |         |          | 7,256   |         |   |         | 7,255 |        |   |         | 7,255 |        |   |         | 7,256 |        |   |        | 3,628 |       
|                                     | Impairment of goodwill and other intangibles |                                                 |        |         |       |         |        |        |       |         |        |         |       |         |          | 75,298  |         |   |         |      |        |   |         |      |        |   |         |      |        |   |        |      |       
|                                     |                                              |                                                 |        |          |       |         |        |         |       |         |        |          |       |         |          |         |         |   |         |       |        |   |         |       |        |   |         |       |        |   |        |      
|                                     |                                              | Total operating expenses                        |        |          | 5,332 |         |        |         | 8,158 |         |        |          | 8,230 |         |          |         | 110,989 |   |         |       | 23,128 |   |         |       | 21,856 |   |         |       | 22,110 |   |        |       | 15,639 | 
|                                     |                                              |                                                 |        |          |       |         |        |         |       |         |        |          |       |         |          |         |         |   |         |       |        |   |         |       |        |   |         |       |        |   |        |      
|Loss from operations                 |                                              |                                                 | (3,893 | )        |       |         | (6,872 | )       |       |         | (7,129 | )        |       |         | (110,387 | )       |         |   | (19,752 | )     |        |   | (17,676 | )     |        |   | (12,985 | )     |        |   | (8,230 | )    
|Other income, net                    |                                              |                                                 | 881    |          |       |         | 714    |         |       |         | 1,295  |          |       |         | 1,593    |         |         |   | 1,285   |       |        |   | 1,907   |       |        |   | 1,255   |       |        |   | 649    |      
|                                     |                                              |                                                 |        |          |       |         |        |         |       |         |        |          |       |         |          |         |         |   |         |       |        |   |         |       |        |   |         |       |        |   |        |      
|Net loss                             |                                              | $                                               | (3,012 | )        |       | $       | (6,158 | )       |       | $       | (5,834 | )        |       | $       | (108,794 | )       |         | $ | (18,467 | )     |        | $ | (15,769 | )     |        | $ | (11,730 | )     |        | $ | (7,581 | )    
|                                     |                                              |                                                 |        |          |       |         |        |         |       |         |        |          |       |         |          |         |         |   |         |       |        |   |         |       |        |   |         |       |        |   |        |      
|Basic and diluted net loss per share |                                              | $                                               | (0.11  | )        |       | $       | (0.23  | )       |       | $       | (0.22  | )        |       | $       | (4.05    | )       |         | $ | (0.69   | )     |        | $ | (0.60   | )     |        | $ | (0.46   | )     |        | $ | (0.34  | )    
|                                     |                                              |                                                 |        |          |       |         |        |         |       |         |        |          |       |         |          |         |         |   |         |       |        |   |         |       |        |   |         |       |        |   |        |      

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|                              |                                              |                          |      |          |     |         |      |         |     |         |      |          |     |         |        |         |       |  |      |     |     |  |      |    |     |  |      |    |     |  |     |    |     | 
|----------------------------- | -------------------------------------------- | ------------------------ | ---- | -------- | --- | ------- | ---- | ------- | --- | ------- | ---- | -------- | --- | ------- | ------ | ------- | ----- |  | ---- | --- | --- |  | ---- | -- | --- |  | ---- | -- | --- |  | --- | -- | --- | 
|                              |                                              | Dec. 31                  |      | Sept. 30 |     | June 30 |      | Mar. 31 |     | Dec. 31 |      | Sept. 30 |     | June 30 |        | Mar. 31
|                              |                                              | 2001                     |      | 2001     |     | 2001    |      | 2001    |     | 2000    |      | 2000     |     | 2000    |        | 2000   
|                              |                                              |                          |      |          |     |         |      |         |     |         |      |          |     |         |        |        
|                              |                                              |                         
|                              |                                              | (Amounts in thousands)  
|                              |                                              | (Unaudited)             
|Percentage of Total Revenues: |                                              |                          |      |          |     |         |      |         |     |         |      |          |     |         |        |         |       |  |      |     |     |  |      |    |     |  |      |    |     |  |     |   
|Revenues:                     |                                              |                          |      |          |     |         |      |         |     |         |      |          |     |         |        |         |       |  |      |     |     |  |      |    |     |  |      |    |     |  |     |   
|                              | Product                                      |                          |      | 39       | %   |         |      | 31      | %   |         |      | 16       | %   |         |        | 31      | %     |  |      | 52  | %   |  |      | 57 | %   |  |      | 77 | %   |  |     | 79 | %  
|                              | Service and maintenance                      |                          |      | 61       |     |         |      | 69      |     |         |      | 84       |     |         |        | 69      |       |  |      | 48  |     |  |      | 43 |     |  |      | 23 |     |  |     | 21 |    
|                              |                                              |                          |      |          |     |         |      |         |     |         |      |          |     |         |        |         |       |  |      |     |     |  |      |    |     |  |      |    |     |  |     |   
|                              |                                              | Total revenues           |      |          | 100 |         |      |         | 100 |         |      |          | 100 |         |        |         | 100   |  |      |     | 100 |  |      |    | 100 |  |      |    | 100 |  |     |    | 100 | 
|                              |                                              |                          |      |          |     |         |      |         |     |         |      |          |     |         |        |         |       |  |      |     |     |  |      |    |     |  |      |    |     |  |     |   
|Cost of revenues:             |                                              |                          |      |          |     |         |      |         |     |         |      |          |     |         |        |         |       |  |      |     |     |  |      |    |     |  |      |    |     |  |     |   
|                              | Product                                      |                          |      | 11       |     |         |      | 7       |     |         |      | 3        |     |         |        | 13      |       |  |      | 7   |     |  |      | 7  |     |  |      | 4  |     |  |     | 3  |    
|                              | Service and maintenance                      |                          |      | 27       |     |         |      | 34      |     |         |      | 51       |     |         |        | 68      |       |  |      | 45  |     |  |      | 39 |     |  |      | 22 |     |  |     | 19 |    
|                              |                                              |                          |      |          |     |         |      |         |     |         |      |          |     |         |        |         |       |  |      |     |     |  |      |    |     |  |      |    |     |  |     |   
|                              |                                              | Total cost of revenues   |      |          | 38  |         |      |         | 41  |         |      |          | 54  |         |        |         | 81    |  |      |     | 52  |  |      |    | 46  |  |      |    | 26  |  |     |    | 22  | 
|                              |                                              |                          |      |          |     |         |      |         |     |         |      |          |     |         |        |         |       |  |      |     |     |  |      |    |     |  |      |    |     |  |     |   
|Gross margin                  |                                              |                          | 62   |          |     |         | 59   |         |     |         | 46   |          |     |         | 19     |         |       |  | 48   |     |     |  | 54   |    |     |  | 74   |    |     |  | 78  |   
|                              |                                              |                          |      |          |     |         |      |         |     |         |      |          |     |         |        |         |       |  |      |     |     |  |      |    |     |  |      |    |     |  |     |   
|Operating expenses:           |                                              |                          |      |          |     |         |      |         |     |         |      |          |     |         |        |         |       |  |      |     |     |  |      |    |     |  |      |    |     |  |     |   
|                              | Sales and marketing                          |                          |      | 75       |     |         |      | 113     |     |         |      | 127      |     |         |        | 246     |       |  |      | 98  |     |  |      | 83 |     |  |      | 51 |     |  |     | 64 |    
|                              | Research and development                     |                          |      | 92       |     |         |      | 97      |     |         |      | 94       |     |         |        | 124     |       |  |      | 74  |     |  |      | 72 |     |  |      | 40 |     |  |     | 39 |    
|                              | General and administrative                   |                          |      | 33       |     |         |      | 46      |     |         |      | 89       |     |         |        | 71      |       |  |      | 49  |     |  |      | 34 |     |  |      | 22 |     |  |     | 24 |    
|                              | Lease abandonment expense                    |                          |      |         |     |         |      |        |     |         |      |         |     |         |        | 7       |       |  |      | 6   |     |  |      |   |     |  |      | 7  |     |  |     |   |    
|                              | Restructuring related charges                |                          |      | (6       | )   |         |      | 81      |     |         |      |         |     |         |        | 430     |       |  |      |    |     |  |      |   |     |  |      |   |     |  |     |   |    
|                              | Amortization of intangibles                  |                          |      | 34       |     |         |      | 37      |     |         |      | 33       |     |         |        | 224     |       |  |      | 104 |     |  |      | 94 |     |  |      | 59 |     |  |     | 38 |    
|                              | Impairment of goodwill and other intangibles |                          |      |         |     |         |      |        |     |         |      |         |     |         |        | 2,323   |       |  |      |    |     |  |      |   |     |  |      |   |     |  |     |   |    
|                              |                                              |                          |      |          |     |         |      |         |     |         |      |          |     |         |        |         |       |  |      |     |     |  |      |    |     |  |      |    |     |  |     |   
|                              |                                              | Total operating expenses |      |          | 228 |         |      |         | 374 |         |      |          | 343 |         |        |         | 3,425 |  |      |     | 331 |  |      |    | 283 |  |      |    | 179 |  |     |    | 165 | 
|                              |                                              |                          |      |          |     |         |      |         |     |         |      |          |     |         |        |         |       |  |      |     |     |  |      |    |     |  |      |    |     |  |     |   
|Loss from operations          |                                              |                          | (166 | )        |     |         | (315 | )       |     |         | (297 | )        |     |         | (3,406 | )       |       |  | (283 | )   |     |  | (229 | )  |     |  | (105 | )  |     |  | (87 | ) 
|Other income, net             |                                              |                          | 38   |          |     |         | 33   |         |     |         | 54   |          |     |         | 49     |         |       |  | 18   |     |     |  | 25   |    |     |  | 10   |    |     |  | 7   |   
|                              |                                              |                          |      |          |     |         |      |         |     |         |      |          |     |         |        |         |       |  |      |     |     |  |      |    |     |  |      |    |     |  |     |   
|Net loss                      |                                              |                          | (128 | )%       |     |         | (282 | )%      |     |         | (243 | )%       |     |         | (3,357 | )%      |       |  | (265 | )%  |     |  | (204 | )% |     |  | (95  | )% |     |  | (80 | )%
|                              |                                              |                          |      |          |     |         |      |         |     |         |      |          |     |         |        |         |       |  |      |     |     |  |      |    |     |  |      |    |     |  |     |   

Liquidity and Capital Resources

Since inception, we have financed our operations
primarily through the sale of equity securities. In
March 2000 we completed a follow-on public offering,
selling 2,000,000 shares of common stock at a price of
$45.25 per share, raising a total of $84.6 million in net
proceeds after payment of underwriting discounts and commissions
and offering expenses. At December 31, 2001, we had $73.6
million of cash, cash equivalents and short-term investments,
compared to $96.2 million at December 31, 2000. At
December 31, 2001 we held no marketable securities compared
to $27.4 million held at December 31, 2000.

Cash used in operations was $22.3 million for the
year ended December 31, 2001, compared to
$21.7 million for 2000 and $10.2 million for 1999. Cash
used in operations in all years resulted primarily from net
losses, as adjusted for non-cash expenses.

A total of $21.3 million in net cash was provided
from investing activities for the year ended December 31,
2001, compared to a cash use of $64.2 million in 2000 and a cash
use of $30.8 million in 1999. Our investing activities consisted
primarily of purchases and sales of short-term investments and
marketable securities and property and equipment. To date, we
have not invested in financial instruments that involve a high
level of complexity or risk. We will continue to invest cash in
excess of current requirements in investment grade,
interest-bearing securities.

Net cash used for financing activities was
$498,000 for the year ended December 31, 2001. Cash
provided by financing activities was $84.8 million in 2000,
reflecting the receipt of net proceeds from our follow-on public
offering. Cash provided by financing activities was $57.5
million in 1999, reflecting the

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$53.2 million of net proceeds from our initial
public offering and borrowings under a short-term convertible
note payable.


Capital expenditures were $248,000,
$9.4 million and $4.6 million for the years ended
December 31, 2001, 2000 and 1999, respectively. Our capital
expenditures consisted of leasehold improvements and purchases
of property and equipment, primarily computer equipment,
software and furniture. Capital expenditures were higher in
prior years and reflected our rapidly growing employee base and
expanded operations infrastructure. In April 2000, we
signed a ten-year lease for a new corporate facility in Edina,
Minnesota, with annual total rent payments beginning at $1.4
million per year, excluding operating expenses. The move to the
new headquarters facility was completed in August 2000 and
required a net investment in 2000 of approximately $3.0 million
in leasehold improvements, furniture and equipment.

As part of our March 2001 and third quarter
2001 restructuring, we recorded restructuring related charges of
$15.6 million in 2001. A total of $8.1 million was charged
against the restructuring reserve as of December 31, 2001,
lowering the accrued restructuring liability to $7.4 million.
These charges included $2.9 million of non-cash leasehold
write-offs, $2.9 million of other non-cash fixed assets
write-offs, $1.5 million in employee severance payments, $1.9
million in rent payments, $301,000 of real estate broker fees
and $258,000 in other office consolidation expenses. These
charges were partially offset by a $1.1 million application of
deferred rent against the charge, $261,000 of proceeds on the
sale of fixed assets and $280,000 of sublease income.

Of the $7.4 million restructuring reserve
remaining as of December 31, 2001, management estimates
that approximately $7 million will be a use of cash in future
periods for remaining rent commitments and other carrying costs,
less estimated sublease income, related to facilities we have
vacated. Cash payments related to the restructuring are expected
to total up to $3 million in 2002, less any benefit from
incremental real estate subleasing activities. The remaining
$400,000 of accrued restructuring costs relates to non-cash
items. Although we believe that our lease commitment estimates
are appropriate in the current circumstances, future changes in
real estate markets could impact the ultimate amount of cash
paid to resolve these obligations.

As of March 22, 2002, we have signed
agreements to sublease approximately 114,000 square feet of our
existing facilities through the remaining terms of the
respective leases. We are actively seeking to sublease our
remaining excess facilities. Specifically, we are currently
seeking to sublease an additional portion of our headquarters
facility, our entire Roseland, New Jersey office space and a
portion of our office space in Austin, Texas. However, there is
a risk that we may not be able to sublease these facilities
under favorable terms, if at all, which could negatively impact
our cash flow and future operating results.

As of December 31, 2001, we had no material
long-term commitments for capital expenditures.

Since 1999, we have purchased property and
equipment with cash. From inception through 1998, we generally
funded the purchase of property and equipment with capital
leases. At December 31, 2001, we had $674,000 in short and
long-term liabilities, of which approximately $577,000 comprised
deferred rent credits. Approximately $97,000 of the short and
long-term liabilities represent loans, consisting primarily of
capital lease obligations. These obligations include installment
loans with third-party financing sources that are secured by the
equipment financed by the third parties. The loans bear interest
at rates between 14.4% and 15.1% and mature between
February 2002 and August 2002.

The following summarizes our contractual
obligations at December 31, 2001, and the effect such
obligations are expected to have on our liquidity and cash flow
in future periods (in thousands).

|                                   |  |      |       |      |  |      |       |      |  |            |       |  |  |   |       |  |  |   |        | 
|---------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ---------- | ----- |  |  | - | ----- |  |  | - | ------ | 
|                                   |  | 2002 |       | 2003 |  | 2004 |       | 2005 |  | Thereafter
|                                   |  |      |       |      |  |      |       |      |  |           
|Capital leases                     |  | $    | 97    |      |  | $    |      |      |  | $          |      |  |  | $ |      |  |  | $ |       | 
|Operating leases                   |  |      | 4,001 |      |  |      | 4,056 |      |  |            | 3,294 |  |  |   | 3,240 |  |  |   | 14,789 | 
|                                   |  |      |       |      |  |      |       |      |  |            |       |  |  |   |       |  |  |   |        | 
|Total contractual cash obligations |  | $    | 4,098 |      |  | $    | 4,506 |      |  | $          | 3,294 |  |  | $ | 3,240 |  |  | $ | 14,789 | 
|                                   |  |      |       |      |  |      |       |      |  |            |       |  |  |   |       |  |  |   |        | 

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Operating lease obligations relate to our
existing facilities. As of March 22, 2002, we have signed
agreements to sublease approximately 114,000 square feet of our
existing facilities. Under the terms of the sublease agreements
currently in effect, we expect to receive sublease payments of
$1,729,000, $2,240,000, $1,792,000, $1,645,000 and $7,551,000 in
2002, 2003, 2004, 2005 and thereafter, respectively. However,
there is a risk that one or more of the subtenants may breach
the terms of the sublease agreements, which could negatively
impact our cash flow and future operating results.

We believe that existing cash and investments
will be sufficient to meet our working capital and capital
expenditure needs for at least the next 12 months. If we need to
raise additional funds, we may not be able to do so on favorable
terms or at all. If we raise additional funds through the
issuance of equity securities, the percentage ownership of our
stockholders will be reduced.

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Risks That May Affect Future Results

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

We are an early-stage company and we expect to encounter
risks and difficulties frequently encountered by early-stage
companies in new and rapidly evolving markets.

We were founded in July 1996. We began
shipping products in the first quarter of 1997. The market for
our products is unproven and our limited operating history makes
an evaluation of our future prospects very difficult. We will
encounter risks and difficulties frequently encountered by
early-stage companies in new and rapidly evolving markets. We
may not successfully address any of these risks. If we do not
successfully address these risks, we may not achieve
profitability and we could suffer increased operating losses.

Our quarterly operating results are volatile and difficult to
predict. If we fail to meet the expectations of public market
analysts and investors, the market price of our common stock may
decrease significantly.

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

We cannot predict our future quarterly revenues
with any degree of certainty for a variety of reasons, because:



| |   |                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we operate with a limited order backlog, and
	revenues in any quarter are substantially dependent on orders
	booked and shipped in that quarter;                                                                        
|
| |  | the market in which we compete is relatively new
	and rapidly evolving and has many new entrants;                                                                                                                       
|
| |  | we expect that, for the foreseeable future,
	revenues will come from sales to a small number of customers, so
	delays or cancellations of orders by a few customers can
	significantly impact revenues within a quarter;
|
| |  | our sales cycle varies substantially from
	customer to customer; and                                                                                                                                                    
|
| |  | the timing of large orders can significantly
	affect revenues within a quarter.                                                                                                                                         

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

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

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Our business could be materially adversely affected as a
result of general economic and market conditions.

We are subject to the effects of general global
economic and market conditions. The U.S. economy is much weaker
now then it has been in recent history, and may be in recession
for the remainder of 2002, if not longer. A general economic
slowdown could have serious negative consequences for our
business and operating results. For example, an economic
slowdown may cause some current or potential customers to defer
purchases, to go out of business or to have insufficient capital
to buy our products. An economic slowdown could also cause a
significant reduction in the value of our investments. If
economic and market conditions do not improve, our business,
results of operations or financial condition could be materially
adversely affected.

We have a history of losses and expect to incur losses in the
future.

We had net losses of $4.7 million in 1997, $5.0
million in 1998, $12.0 million in 1999, $53.5 million in 2000
(including $27.6 million of amortization of goodwill and other
intangibles related to the acquisition of KD1 and non-cash stock
compensation expense) and $123.8 million (including $15.6
million in restructuring related charges, $10.3 million of
amortization of goodwill and other intangibles and non-cash
stock compensation expense and a $75.3 million charge for the
impairment of goodwill and other intangibles related to the
acquisition of KD1) for the year ended December 31, 2001.
As of December 31, 2001, we had an accumulated deficit of
$200.1 million. We have not had a profitable quarter and do not
expect to have a profitable quarter in 2002. We expect to
continue to incur significant sales and marketing, research and
development and general and administrative expenses. We will
need to generate significant additional revenues to achieve
profitability. We may never achieve profitability.

A decline in the price of, demand for, or market acceptance
of our products would seriously harm our business.

We currently derive a substantial portion of our
revenues from two products  Personalization
Managerand Advertising Advisor. We anticipate that
these products will continue to account for a substantial
portion of our revenues for the foreseeable future.
Consequently, a decline in the price of or demand for these
products, or their failure to achieve broad market acceptance,
would result in decreased revenues and increased operating
losses.

We face intense competition and, if we are unable to compete
successfully, we may be unable to increase our product sales and
market share.

The market for our products is intensely
competitive, evolving and subject to rapid technological change.
We expect the intensity of competition to increase in the
future. Competitors vary in size and in the scope and breadth of
the products and services offered.

We believe that the principal competitive factors
affecting our market include core technology, product features,
product quality and performance, customer service and price.
Although we believe that our products currently compete
favorably with respect to such factors, our market is relatively
new and is rapidly evolving. We may not be able to maintain our
competitive position against current and potential competitors,
especially those with significantly greater financial,
marketing, service, support, technical and other resources.

Many of our competitors have longer operating
histories, significantly greater financial, technical, marketing
and other resources, significantly greater name recognition and
a larger installed base of customers than we have. In addition,
many of our competitors have well-established relationships with
current and potential customers of ours, have extensive
knowledge of our industry and are capable of offering a
single-vendor solution. As a result, our competitors may be able
to respond more quickly to new or emerging technologies and
changes in customer requirements, or to devote greater resources
to the development, promotion and sale of their products than we
can. In addition, current and potential

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competitors have established or may establish
cooperative relationships among themselves or with third parties
to increase the ability of their products to address customer
needs. Also, relationships with large systems integrators such
as Accenture, large consulting firms and others are an important
factor in successfully achieving widespread deployment of these
solutions. Many of our competitors have such relationships in
place today, and this may hinder our ability to gain equivalent
access to systems integration resources. Accordingly, it is
possible that new competitors or alliances among competitors may
emerge and rapidly acquire significant market share. We also
expect that competition will increase as a result of software
industry consolidations. Increased competition is likely to
result in price reductions, reduced gross margins and loss of
market share. We may not be able to compete successfully against
current and future competitors.


We may need to make acquisitions to remain competitive.

A component of our business strategy is to seek
to buy businesses, products and technologies that complement or
augment our existing businesses, products and technologies.
Acquisitions are difficult to identify and complete for a number
of reasons, including the cost of potential transactions,
competition among prospective buyers and the need for regulatory
approvals. We may not be able to complete any given acquisition.
Furthermore, in order to finance a potential acquisition, we may
need to raise additional funds by selling our stock or borrowing
money. We may not be able to find financing on favorable terms,
and the sale of our stock may result in the dilution of our
existing stockholders. If we do undertake any transaction of
this sort, the process of integrating an acquired business,
product or technology may result in unforeseen operating
difficulties and expenditures and may absorb significant
management attention that would otherwise be available for
ongoing development of our business. Moreover, we may fail to
realize the anticipated benefits of any acquisition.

Our products have a lengthy sales cycle. As a result, it is
difficult to predict the quarter in which a sale may occur.

Our solutions are relatively new to the
marketplace. As a result, we must use significant resources to
educate potential customers on the use and benefits of our
products. In addition, we believe that the purchase of our
products is relatively discretionary and involves a significant
commitment of capital and other resources by a customer. As a
result, it usually takes our sales organization several months
to finalize a sale. This makes it difficult to predict the
quarter in which a sale may occur.

Our products have a lengthy implementation cycle. In
addition, only a limited number of our customers have a deployed
and operating application that utilizes our products. As a
result, we cannot be certain that our products will perform and
be received as expected.

The implementation, including application design
and deployment, of our products requires a commitment of
resources by our customers. The time required for implementation
of our products has varied depending on the customers
application of the product.

We have licensed one or more of our products to
more than 200 customers. However, only a limited number of these
customers have a fully deployed operating application that
utilizes our products. In addition, a significant number of
Internet retailer customers have gone out of business, and are
no longer utilizing our products. Because many of our customers
have not yet fully implemented and deployed our products, we
cannot be certain that our products will:



| |   |                                                                                      
| | - | -------------------------------------------------------------------------------------
| |  | perform as designed;                                                                 
|
| |  | deliver the desired level of economic benefit to
	our customers;                     
|
| |  | meet the other expectations and needs of our
	customers;                             
|
| |  | achieve any significant degree of market
	acceptance; or                             
|
| |  | perform to the level necessary to generate repeat
	customers and customer references.

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If implementation services performed by us
constitute a significant part of a product sales transaction, we
recognize a substantial portion of our revenues from the sales
transaction upon the delivery of the implementation services. As
a result, delays in service delivery could cause significant
reduction in our license revenues and operating results for any
particular period.

We have several new products which may not achieve market
acceptance.

Since January 2000, we have announced the
commercial launch of several new or enhanced products including
Personalization Manager, Advertising Advisor, Retail Analystand Distribution Analyst. In addition, we expect to
introduce new and enhanced products during 2002.

These products have not received a significant
degree of market acceptance. There are significant risks
inherent in product introductions such as these. These products
may not address some or all of the needs of customers and may
contain undetected errors or failures. A lack of necessary
features or errors or failures in the products will likely
result in loss or delay of market acceptance. We expect that our
future financial performance will depend significantly on the
successful sales, implementation and market acceptance of these
new or enhanced products which may not occur on a timely basis
or at all.

Our new products are subject to significant
technical risks. We may fail to introduce or deploy new products
on a timely basis, or at all. In the past, we have experienced
some delays in the commencement of commercial shipments of our
new releases and new products. These delays caused customer
frustrations and delay or loss of product revenues. Some of our
competitors currently offer products with features and
functionality similar to those of some of our new products. In
the past, we have also experienced delays in purchases of our
products by customers anticipating our launch of new releases or
new products. We could experience increased expenses or lost
revenues if customers defer material orders in anticipation of
new releases or new product introductions.

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

Acts of terrorism or war may hurt global economic conditions,
which could harm our business.

Our business is subject to and affected by
forces, pressures and events affecting global economic
conditions. The September 11, 2001 terrorist attacks
exacerbated global economic conditions and adversely impacted
many businesses, including that of Net Perceptions. Since the
terrorist attacks, we have experienced delays in closing
significant business transactions. We believe these delays have
resulted, at least in part, from the terrorist attacks. Future
terrorist acts or acts of war may cause damage or disruption to
our employees, facilities, customers and suppliers, which could
have a material adverse effect on our business, results of
operations and financial condition.

If we fail to generate repeat or expanded business from our
current and future customers, we may be unable to build a
critical mass of customers necessary to achieve increased sales
and market share.

Our success is dependent on the continued growth
of our customer base and the retention of our customers. We
currently depend on a limited number of key, high-profile
customers. Our ability to attract new customers will depend on a
variety of factors, including the accuracy, scalability,
reliability and cost-effectiveness of our products and services
and our ability to effectively market such products and
services. In the past, we have lost potential customers to
competitors for various reasons, including lower prices and
other incentives not matched by us. Many of our current
customers initially purchase a limited

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license for our products and services for
evaluation. If such evaluation is successful, the customer may
purchase a license to expand the use of our products in its
organization or license additional products and services. If we
fail to generate repeat and expanded business from our current
and future customers, we may be unable to build a critical mass
of customers necessary to achieve increased sales and market
share.


If we fail to substantially expand our direct sales
operations, we may be unable to increase market awareness and
sales of our products and services.

Our products and services require a sophisticated
sales effort targeted at the senior management of our
prospective customers. As of December 31, 2001, our direct
sales organization consisted of 23 employees. We may need
to hire additional direct sales personnel in the future.
Competition for qualified sales personnel is intense, and we
might not be able to hire the kind and number of sales personnel
we are targeting. New hires will require extensive training and
typically take several months to achieve productivity. We cannot
be certain that our recent hires will be as productive as
necessary. If we are unable to hire additional skilled sales
personnel as needed, we may not be able to capture increased
market share for our products and services.

If we cannot expand our indirect sales channel, we may be
unable to increase our customer base and achieve
profitability.

We intend to increase the proportion of our
customers licensed through our indirect channel, which includes
resellers, systems integrators and original equipment
manufacturers. Our agreements with resellers are generally not
exclusive and in many cases may be terminated by either party
without cause. Many of these resellers do not have minimum
purchase or resale requirements. In addition, many of these
resellers carry product lines that are competitive with our
product lines. These resellers may not give a high priority to
the marketing of our products or may not continue to carry our
products. They may give a higher priority to other products,
including the products of competitors. We may not retain any of
our current resellers or successfully recruit additional
resellers. Events or occurrences of this nature could seriously
impair our ability to increase our sales and market share. In
addition, any sales through resellers will have lower gross
margins than direct sales.

We have established an effort dedicated to the
development of the indirect sales channel for our products.
Competition for qualified sales personnel is intense, and we
might not be able to retain our existing personnel. We cannot be
certain that our recent hires will be as productive as necessary.

If we are unsuccessful in improving and increasing the size
of our professional services organization, we may lose current
customers or be unable to attract new customers.

Customers that license our software typically
engage our professional services organization to assist with
support, training, consulting and implementation. We believe
that growth in our product sales depends on our ability to
provide our customers with these services and to educate
resellers on how to use our products. From time to time, we
receive customer complaints about the timeliness and accuracy of
our customer support. As of December 31, 2001, our
professional services and customer support organization
consisted of 23 employees. There are a limited number of people
who have the skills needed to provide the services that our
customers demand. Competition for qualified service personnel is
intense. We cannot be certain that we can attract or retain a
sufficient number of the highly qualified service personnel that
our business needs.

We depend on international sales and, therefore, our business
is susceptible to numerous risks associated with international
operations.

Licenses and services sold to customers outside
of the United States accounted for approximately 16% of our
total revenues in 1999, 22% in 2000 and 20% in 2001. We expect
international revenues to

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account for a significant percentage of total
revenues in the future, and we believe that we must retool and
expand our international sales and marketing activities in order
to be successful. To successfully expand international sales we
must:




| |   |                                                                     
| | - | --------------------------------------------------------------------
| |  | retool and expand our international operations;                     
|
| |  | hire international personnel; and                                   
|
| |  | recruit additional international resellers and
	systems integrators.

This will require significant management
attention and financial resources and could seriously harm our
operating margins. We have limited experience in marketing,
selling, distributing and supporting our products and services
internationally.

International operations are generally subject to
a number of other risks as well, including:



| |   |                                                                                   
| | - | ----------------------------------------------------------------------------------
| |  | expenses associated with customizing products and
	services for foreign countries;
|
| |  | protectionist laws and business practices that
	favor local competition;          
|
| |  | conflicting and changing governmental laws and
	regulations;                      
|
| |  | longer sales cycles;                                                              
|
| |  | difficulties in collecting accounts receivable;                                   
|
| |  | foreign currency exchange rate fluctuations; and                                  
|
| |  | political and economic instability.                                               

In 1999, we established operations in the United
Kingdom and established operations in Japan through a joint
venture that created Net Perceptions Japan. As of
December 31, 2001, we had four employees located in the
United Kingdom and one employee located in Canada. All other
employees were located in the United States.

We may be unable to sublease or find suitable tenants for a
portion of our principal executive offices and some of our other
offices.

In April 2000, we executed a ten-year lease
for a new facility for our principal executive offices in Edina,
Minnesota. We have sublet a significant portion of this facility
to third parties and are currently seeking to sublease an
additional portion of this facility. We have also sublet all of
the space at our Berkshire, United Kingdom facility and a
portion of the space at our San Francisco, California facility.
We are also currently seeking to sublease our Roseland, New
Jersey office space and a portion of our office space in Austin,
Texas. We may not be able to find suitable sub-tenants for these
properties in a timely manner, if at all. If we are unable to
find suitable sub-tenants in a timely manner, we may experience
greater than anticipated operating expenses in the future.

If our intellectual property is not protected adequately, we
may lose our competitive advantage in the market.

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

We have 17 pending United States patent
applications and three issued United States patents. We also
have license rights to three issued United States patents from
the University of Minnesota and one

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allowed United States patent application. It is
possible that no patents will issue from the currently pending
patent applications. It is also possible that our current
patents and potential future patents may be invalid or
unenforceable. It is also possible that any patent issued to us
may not provide us with any competitive advantages. Moreover, we
may not develop future proprietary products or technologies that
are patentable, and the patents of others may seriously limit
our ability to conduct our business. In this regard, we have not
performed any comprehensive analysis of patents of others that
may limit our ability to conduct our business.


Our efforts to protect our proprietary rights may
not succeed. Copyright and trade secret laws afford only limited
protection for our proprietary rights in our software,
documentation and other written materials. Unauthorized parties
may be able to copy aspects of our products or to obtain and use
information that we regard as confidential and proprietary.
Policing unauthorized use of our products is difficult, and
while we are unable to determine the extent to which piracy of
our software products exists, software piracy can be expected to
be a persistent problem. In addition, the laws of some foreign
countries do not protect our proprietary rights to as great an
extent as the laws of the United States. Our means of protecting
our proprietary rights may not be adequate and our competitors
may independently develop similar technology, duplicate our
products or design around patents issued to us or our other
intellectual property. We may not be able to detect infringement
or enforce our patent or other rights and, as a result, our
competitive position in the market may suffer.

Third-party infringement claims against us or our technology
suppliers could result in delays in product development, the
loss of customers, or costly and time-consuming litigation.

There has been a substantial amount of litigation
in the software industry regarding intellectual property rights.
We have from time to time received claims that we are infringing
third parties intellectual property rights. It is possible
that in the future third parties may claim that our current or
potential future products infringe their intellectual property
rights. We expect that software companies such as Net
Perceptions will increasingly be subject to infringement claims
as the number of products and competitors in our industry
segment grows and the functionality of products in different
industry segments overlaps. Any such claims, with or without
merit, could be time-consuming, result in costly litigation,
cause product shipment delays or require us to enter into
royalty or licensing agreements in order to secure continued
access to required technology. Royalty or licensing agreements,
if required, may not be available on terms acceptable to us or
at all. Claims of intellectual property infringement may also
require us to pay significant damages or subject us to an
injunction against the use of our products. Any successful claim
of intellectual property infringement against us could have an
immediate and significant impact on our ability to carry on our
business and market our products.

In addition, in all of our paid software license
agreements, we generally indemnify our customers against losses
attributable to intellectual property infringement by our
software. Should a third party bring a suit against a customer
alleging that the customers use of our software infringes
its intellectual property rights, we could incur substantial
costs in defending and resolving the suit.

If we are unable to continue to utilize technology licensed
from third parties, we may be unable to conduct our business.

We license technology from various third parties
for integration into our products. Licenses to such third-party
technology may not continue to be available to us on
commercially reasonable terms. We may not be able to renew
existing agreements or to license or develop alternative
technology. If we cannot maintain license rights to key
third-party software, develop similar technology or license
similar technology from another source on a timely or
commercially feasible basis, we may be unable to market our
current products or develop new products in a timely manner.

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Our ability to increase our customer base and our sales
depends on the continuing contribution of our key personnel and
our ability to attract, assimilate and retain other highly
qualified personnel.

Our future success depends on the continued
service of our key personnel. The loss of the services of one or
more of our key employees could seriously harm our ability to
increase our customer base and sales. As of December 31,
2001, we had 98 employees. We do not carry any key person life
insurance policies.

Our future success also depends on our continuing
ability to attract, hire, train and retain a substantial number
of highly skilled managerial, technical, sales, marketing and
customer support personnel. Competition for skilled personnel is
intense, and we may fail to retain our key employees, or
attract, assimilate or retain other highly qualified personnel
in the future. If so, we may be unable to service our current
customers, attract new customers and increase our sales.

The market price of our common stock has been
volatile and has fluctuated significantly in the past. To the
extent this volatility and fluctuation continues, equity-based
compensation policies and plans, which have historically been
significant in our attracting, hiring and retaining highly
skilled personnel, may not be as effective as in the past.

We may need to raise additional capital that may not be
available on reasonable terms, or at all.

We believe we have sufficient cash and
investments to meet our working capital and capital expenditure
needs for at least the next 12 months. After that, we may
need to raise additional funds and we cannot be certain that we
will be able to obtain additional financing on favorable terms,
or at all. If we raise additional funds through the issuance of
equity or convertible debt, the percentage ownership of our
stockholders will be reduced, and these newly issued securities
may have rights, preferences or privileges senior to those of
our existing stockholders. If we cannot raise funds as needed on
acceptable terms, we may not be able to develop or enhance our
products, take advantage of future opportunities or respond to
competitive pressures or unanticipated requirements.

Future sales of our common stock could depress its market
price.

If our stockholders sell substantial amounts of
our common stock, or there is a belief that such sales could
occur, the market price of our common stock could fall. These
factors could also make it more difficult for us to raise funds
through future offerings of common stock. As of
December 31, 2001, we had outstanding 27,128,817 shares of
common stock and options to acquire an aggregate of 3,719,019
shares of common stock, of which 1,075,431 were exercisable.
Substantially all of our outstanding shares are freely tradeable
and all shares acquired upon exercise of options will be freely
tradeable. Those shares which are not freely tradeable may be
resold publicly at any time, subject to the volume and other
restrictions of Rule 144 under the Securities Act. If large
numbers of these shares are sold over a short period of time,
the price of our common stock could be adversely affected.

The market price of our common stock may be volatile, which
could result in substantial losses for individual
stockholders.

The market price for our common stock has been
and is likely to continue to be highly volatile and subject to
wide fluctuations in response to factors including the
following, some of which are beyond our control:



| |   |                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------
| |  | actual or anticipated variations in our quarterly
	operating results;                                                               
|
| |  | announcements of new technological innovations,
	increased cost of operations or new products or services by us
	or our competitors;
|
| |  | changes in financial estimates by securities
	analysts;                                                                             
|
| |  | conditions or trends in the industries into which
	we sell our products and services;                                               

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| |   |                                                                                             
| | - | --------------------------------------------------------------------------------------------
| |  | changes in the economic performance and/or market
	valuations of other comparable companies;



| |   |                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | volatility in the stock markets, particularly
	with respect to technology stocks, and decreases in the
	availability of capital for technology-related businesses;
|
| |  | announcements by us or our competitors of
	significant acquisitions, strategic partnerships, joint ventures
	or capital commitments;                              
|
| |  | additions or departures of key personnel;                                                                                                                         
|
| |  | sales of additional shares of common stock; and                                                                                                                   
|
| |  | potential litigation.                                                                                                                                             

From April 23, 1999 (the first day of public
trading of our common stock), through December 31, 2001,
the high and low sales prices for our common stock fluctuated
between $66.50 and $0.85. On March 22, 2002, the last
reported sale price of our common stock on the Nasdaq National
Market was $1.69. In the past, securities class action
litigation has often been brought against a company following
periods of volatility in the market price of its securities.

On November 2, 2001, Timothy J. Fox filed a
purported class action lawsuit against us, FleetBoston Robertson
Stephens, Inc., the lead underwriter of our initial public
offering in April 1999, several other underwriters who
participated in our initial public offering, Steven J. Snyder,
our then president and chief executive officer, and Thomas M.
Donnelly, our chief financial officer and chief operating
officer. For a discussion of this matter, see the section of
this report entitled Legal Proceedings. We may in
the future be the target of other similar litigation. Securities
litigation could result in substantial costs and divert
managements attention and resources.

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

Because our customers use our products for
important applications, errors or defects in, or other
performance problems with, our products could result in
financial or other damages to our customers. Our customers could
seek damages for losses from us. Although our license agreements
typically contain provisions designed to limit our exposure to
product liability claims, existing or future laws or unfavorable
judicial decisions could negate these limitation of liability
provisions. Any product liability claim brought against us, even
if unsuccessful, would likely be time-consuming and costly, and
potential liabilities could exceed our available insurance
coverage.

Our current revenue recognition practices may need to change,
which could seriously harm our business.

The American Institute of Certified Public
Accountants issued Statement of Position 97-2,
Software Revenue Recognition, in October 1997
and amended it by Statements of Position 98-4
and 98-9. There may be additional pronouncements issued in
the future. Our current revenue accounting practices may need to
change and such changes could seriously harm our future revenues
and earnings.

Provisions of our corporate organizational documents and
rights agreement could delay or prevent a change of control,
even if it would be beneficial to our stockholders.

Various provisions of our certificate of
incorporation and bylaws could have the effect of delaying or
preventing a change in control and make it more difficult for a
third party to acquire us, even if doing so would be beneficial
to our stockholders. In addition, the rights issued under our
rights agreement may be a substantial deterrent to a person
acquiring 15% or more of our common stock without the approval
of our board of directors. These provisions in our certificate
of incorporation, by-laws and rights agreement could reduce the
price that investors might be willing to pay for shares of our
common stock in the future and result in the market price being
lower than it would be without these provisions.

38



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Our business could be seriously impacted by privacy and
security concerns.

In some cases, our customers capture user
preference and profile information each time a user interacts
with the application utilizing our products or volunteers
information in response to survey questions. Our customers
generally have implemented security measures to protect such
customer data from unauthorized disclosure or interception by
third parties. However, the security measures may not be
effective against all potential security threats. If a breach of
customer data security were to be publicized, our products may
be perceived as less desirable, and our future sales could be
negatively impacted. More importantly, even the perception of
privacy and security concerns, whether or not valid, may
indirectly inhibit market acceptance of our products. In
addition, legislative or regulatory requirements may heighten
such concerns if, for example, our customers were required to
notify users that the data captured after these interactions may
be used by marketing entities to direct product promotion and
advertising to that user. Legislation has been proposed at the
federal and state levels that address some aspect of the
Internet, including a number of bills that specifically address
Internet privacy matters. Such proposed legislation indicates
that some federal and state legislators believe that certain
aspects of the Internet and e-commerce, including data privacy,
are appropriate matters for regulation and review. Various other
countries and political entities, such as the European Union,
have adopted legislation or regulatory requirements addressing
issues, such as data privacy, that may directly impact some of
our customers. If user privacy concerns are not adequately
addressed or if restrictive legislation is adopted in the United
States, our business could be seriously harmed and we could
experience increased operating losses.

If we do not respond to rapid technological changes, our
products could become obsolete and we could lose our competitive
advantage in the market.

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

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



| |   |                                                                                
| | - | -------------------------------------------------------------------------------
| |  | keep pace with technological developments and
	emerging industry standards; and
|
| |  | address the increasingly sophisticated needs of
	our customers.                

In addition, we may:



| |   |                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | fail to develop and market new products and
	enhancements to existing products that respond to technological
	changes or evolving industry standards;                        
|
| |  | experience difficulties that could delay or
	prevent the successful development, introduction and marketing
	of these new products and enhancements to existing products; and
|
| |  | fail to develop new products and enhancements to
	existing products that adequately meet the requirements of the
	marketplace or achieve market acceptance.                  

If any of these events occur, we may be unable to
compete successfully in the market for our products and
services, and as a result, our business could fail.

The growth of the market for our products and services would
be impaired if the use of the Internet and electronic commerce
do not grow as anticipated, and third parties do not continue to
develop and improve the Internet infrastructure.

Our future revenues depend, in part, upon the
increased acceptance and use of the Internet and other on-line
services as a medium of commerce. Rapid growth in the use of the
Internet, the Web and

39



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on-line services is a recent phenomenon.
Acceptance and use may not continue to develop at historical
rates and a sufficiently broad base of customers may not adopt
or continue to use the Internet and other on-line services as a
medium of commerce. Demand and market acceptance for
recently-introduced services and products over the Internet are
subject to a high level of uncertainty and few proven services
and products exist.


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

The growth of the market for our products and
services would be impaired if:



| |   |                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | use of the Internet, the Web and other on-line
	services does not continue to increase or increases more slowly
	than expected;                                                                                       
|
| |  | the infrastructure for the Internet, the Web and
	other on-line services does not effectively support expansion
	that may occur; or                                                                                   
|
| |  | the Internet, the Web and other on-line services
	do not become a viable commercial marketplace, which would
	inhibit the development of electronic commerce and of the need
	for our Personalization Manager product.

Increasing government regulation could limit the market for
our products and services, which could seriously impair the
growth of our business or expose us to unanticipated
liabilities.

As Internet commerce evolves, we expect that
federal, state or foreign governmental authorities will enact
laws or adopt regulations covering issues such as user privacy,
pricing, content and quality of products and services. If
enacted, such laws, rules or regulations could limit the market
for our products and services. Although many of these
regulations may not apply to our business directly, we expect
that laws regulating the solicitation, collection or processing
of personal/customer information could indirectly affect our
business.

Our common stock may be delisted from Nasdaq.

We may fail to maintain the minimum closing bid
price of $1.00 for 30 consecutive business days as required by
the Nasdaq National Market. If we are unable to demonstrate
compliance with this or any other Nasdaq requirement, Nasdaq may
take further action with respect to a potential delisting of our
common stock. We may appeal any such decision by Nasdaq to the
Nasdaq Listing Qualifications Panel. If our common stock were
delisted from Nasdaq this could result, among other things, in a
number of negative implications, including reduced liquidity in
our common stock as a result of the loss of market efficiencies
associated with Nasdaq, as well as the potential loss of
confidence by suppliers, customers and employees, the loss of
analyst coverage and institutional investor interest, fewer
business development opportunities and greater difficulty in
obtaining financing.






|         |                                                          
|-------- | ---------------------------------------------------------
|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Through December 31, 2001, the majority of
our recognized revenues were denominated in United States
dollars and were primarily from customers in the United States,
and our exposure to foreign currency exchange rate changes has
been immaterial. We expect, however, that future product license

40



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and service revenues may increasingly be derived
from international markets and may be denominated in the
currency of the applicable market. As a result, our operating
results may become subject to significant fluctuations based
upon changes in the exchange rates of certain currencies in
relation to the United States dollar. Furthermore, to the extent
that we engage in international sales denominated in United
States dollars, an increase in the value of the United States
dollar relative to foreign currencies could make our products
less competitive in international markets. Although we will
continue to monitor our exposure to currency fluctuations, and,
when appropriate, may use financial hedging techniques in the
future to minimize the effect of these fluctuations, exchange
rate fluctuations may adversely affect our financial results in
the future.


Our exposure to market risk is otherwise limited
to interest income sensitivity, which is affected by changes in
the general level of United States interest rates, particularly
because the majority of our investments are in debt securities
issued by corporations and the United States government. A
hypothetical 100 basis point increase in interest rates would
result in an approximate $496,000 decrease in the fair value of
our investments as of December 31, 2001. Our objective in
managing our exposure to interest rate risk is to preserve
principal while at the same time maximizing the income we
receive from our investments. To minimize this risk, we maintain
our portfolio of cash equivalents and short-term investments in
a variety of securities in addition to debt and have adopted
practices and policies to ensure that our portfolio remains
adequately diversified. Due to the conservative nature of our
investments and relatively short duration, interest risk is
mitigated. Furthermore, we place our investments with
high-quality issuers and limit the amount of credit exposure to
any one issuer. We do not have any derivative financial
instruments and do not hold any instruments for trading purposes.






|        |                                            
|------- | -------------------------------------------
|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements required by this item
are included on pages F-1 through F-21 of this report. The
supplementary financial information required by this Item is
included in the section of this report captioned
Managements Discussion and Analysis of Operating
Results under the heading Selected Consolidated
Quarterly Operating Results.






|        |                                                 
|------- | ------------------------------------------------
|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON

ACCOUNTING AND FINANCIAL DISCLOSURE


None.




PART III






|         |                                                   
|-------- | --------------------------------------------------
|ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

We will file with the Securities and Exchange
Commission a definitive Proxy Statement (the Proxy
Statement) not later than 120 days after the close of
the fiscal year ended December 31, 2001. The information
required by this item is incorporated herein by reference to the
Proxy Statement.






|         |                       
|-------- | ----------------------
|ITEM 11. | EXECUTIVE COMPENSATION

The information required by this item is
incorporated herein by reference to the Proxy Statement.






|         |                                                     
|-------- | ----------------------------------------------------
|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
	OWNERS AND

MANAGEMENT


The information required by this item is
incorporated herein by reference to the Proxy Statement.






|         |                                                
|-------- | -----------------------------------------------
|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED
	TRANSACTIONS

The information required by this item is
incorporated herein by reference to the Proxy Statement.

41



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PART IV






|         |                                                                 
|-------- | ----------------------------------------------------------------
|ITEM 14. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
	8-K

(a) 1. Financial Statements

The financials statements filed as part of this
report are listed on the Index to Consolidated Financial
Statements on page F-1.

2. Financial Statement
Schedules

All schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange
Commission are not required. The information required to be set
forth therein is not applicable or is shown in the Consolidated
Financial Statements or notes thereto included in this report.

3. Exhibits

|        |        |             |  |                                                                                                                                                                      
|------- | ------ | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |            
|Number  |        | Description
|        |        |            
|        | 3.1(a) |             |  | Amended and Restated Certificate of
	Incorporation(1).                                                                                                               
|        | 3.1(b) |             |  | Certificate of Amendment to the Amended and
	Restated Certificate of Incorporation(2).                                                                               
|        | 3.2    |             |  | Amended and Restated Bylaws as amended through
	April 18, 2001(3).                                                                                                   
|        | 4.1    |             |  | Amended and Restated Investor Rights Agreement,
	dated December 18, 1997, among Net Perceptions, Inc. and
	the investors and founders named therein, as amended(1).  
|        | 4.2    |             |  | Specimen common stock certificate(1).                                                                                                                                
|        | 4.3    |             |  | Specimen common stock certificate (including
	Rights Agreement Legend)(4).                                                                                           
|        | 4.4    |             |  | Rights Agreement between Net Perceptions, Inc.
	and Wells Fargo Bank Minnesota, as Rights Agent(5).                                                                  
|        | 4.5    |             |  | Form of Certificate of Designation of
	Series A Junior Participating Preferred Stock (attached as
	Exhibit A to the Rights Agreement filed as Exhibit 4.4
	hereto)(5)
|        | 4.6    |             |  | Form of Rights Certificate (attached as
	Exhibit B to the Rights Agreement filed as Exhibit 4.4
	hereto)(5)                                                          
|        | 10.1   |             |  | Form of Indemnification Agreement entered into
	between Net Perceptions, Inc. and its directors and officers(1).                                                     
|        | 10.2   |             |  | 1996 Stock Plan(1).                                                                                                                                                  
|        | 10.3   |             |  | 1999 Equity Incentive Plan(1).                                                                                                                                       
|        | 10.4   |             |  | Amended and Restated 1999 Non-Employee Director
	Option Plan, as amended through April 2, 2001(3).                                                                   
|        | 10.5   |             |  | Employee Stock Purchase Plan(1).                                                                                                                                     
|        | 10.6   |             |  | Knowledge Discovery One, Inc. 1996 Stock Option/
	Stock Issuance Plan(6).                                                                                            
|        | 10.7   |             |  | Office Lease Agreement between DRF Holding LLC
	and Net Perceptions, Inc. dated April 5, 2000(7).                                                                    
|        | 10.8   |             |  | 2000 Stock Plan(2).                                                                                                                                                  
|        | 10.9   |             |  | Change in Control Severance Plan and Summary Plan
	Description(1).                                                                                                   
|        | 10.10  |             |  | Employment Agreement, dated as of May 24,
	2001 between Net Perceptions, Inc. and Donald C. Peterson(5).                                                             

42



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##### Table of Contents



|        |       |             |  |                                                                                                         
|------- | ----- | ----------- |  | --------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 10.11 |             |  | Severance Agreement, dated as of November 9,
	2001 between Net Perceptions, Inc. and Thomas M. Donnelly.
|        | 21.1  |             |  | List of Subsidiaries.                                                                                   
|        | 23.1  |             |  | Consent of PricewaterhouseCoopers LLP,
	independent accountants.                                        






|    |                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to Net
	Perceptions Registration Statement on Form S-1
	(Registration No. 333-71919).                       
|   
|(2) | Incorporated by reference to Net
	Perceptions Quarterly Report on Form 10-Q for the
	Quarter Ended June 30, 2000 (File No. 000-25781) 
|   
|(3) | Incorporated by reference to Net
	Perceptions Quarterly Report on Form 10-Q for the
	Quarter Ended March 31, 2001 (File No. 000-25781)
|   
|(4) | Incorporated by reference to Net
	Perceptions Quarterly Report on Form 10-Q for the
	Quarter Ended June 30, 2001 (File No. 000-25781) 
|   
|(5) | Incorporated by reference to Net
	Perceptions Registration Statement on Form 8-A filed
	June 6, 2001 (File No. 000-25781)             
|   
|(6) | Incorporated by reference to Net
	Perceptions Registration Statement on Form S-1
	(Registration No. 333-31230).                       
|   
|(7) | Incorporated by reference to Net
	Perceptions Quarterly Report on Form 10-Q for the
	Quarter Ended March 31, 2000 (File No. 000-25781)

(b) Reports on Form 8-K

During the fourth quarter of 2001 the Company did
not file any Current Reports on Form 8-K.

43



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##### Table of Contents






ITEM 8.     FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA

NET PERCEPTIONS, INC.






INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS


|                                                                         |  |      |     | 
|------------------------------------------------------------------------ |  | ---- | --- | 
|                                                                         |  | Page
|                                                                         |  |     
|Report of Independent Accountants                                        |  |      | F-2 | 
|Consolidated Balance Sheets                                              |  |      | F-3 | 
|Consolidated Statements of Operations                                    |  |      | F-4 | 
|Consolidated Statement of Stockholders
	Equity and Comprehensive Income |  |      | F-5 | 
|Consolidated Statements of Cash Flows                                    |  |      | F-6 | 
|Notes to the Consolidated Financial Statements                           |  |      | F-7 | 

F-1



---



##### Table of Contents






REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors

and Stockholders of


Net Perceptions, Inc.:


In our opinion, the accompanying consolidated
balance sheets and the related consolidated statements of
operations, of stockholders equity and comprehensive
income and of cash flows present fairly, in all material
respects, the financial position of Net Perceptions, Inc. and
its subsidiaries at December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001 in
conformity with accounting principles generally accepted in the
United States of America. These financial statements are the
responsibility of the Companys management; our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally
accepted in the United States of America, which require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

Minneapolis, Minnesota


January 25, 2002


F-2



---



##### Table of Contents



NET PERCEPTIONS, INC

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share
amounts)


ASSETS

|                                                |                                                                                                                                                           |                                            |       |          |        |  |        |         |         | 
|----------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----- | -------- | ------ |  | ------ | ------- | ------- | 
|                                                |                                                                                                                                                           |                                           
|                                                |                                                                                                                                                           | December 31,                              
|                                                |                                                                                                                                                           |                                           
|                                                |                                                                                                                                                           | 2001                                       |       | 2000    
|                                                |                                                                                                                                                           |                                            |       |         
|Current assets:                                 |                                                                                                                                                           |                                            |       |          |        |  |        |        
|                                                | Cash and cash equivalents                                                                                                                                 |                                            | $     | 14,929   |        |  | $      | 16,396  |        
|                                                | Short-term investments                                                                                                                                    |                                            |       | 58,676   |        |  |        | 52,484  |        
|                                                | Accounts receivable, net                                                                                                                                  |                                            |       | 1,309    |        |  |        | 6,449   |        
|                                                | Royalties receivable, net                                                                                                                                 |                                            |       |         |        |  |        | 671     |        
|                                                | Prepaid expenses and other current assets                                                                                                                 |                                            |       | 2,301    |        |  |        | 1,729   |        
|                                                |                                                                                                                                                           |                                            |       |          |        |  |        |        
|                                                |                                                                                                                                                           | Total current assets                       |       |          | 77,215 |  |        |         | 77,729  | 
|Marketable securities                           |                                                                                                                                                           |                                            |      |          |        |  | 27,356 |        
|Property and equipment, net                     |                                                                                                                                                           |                                            | 3,679 |          |        |  | 12,760 |        
|Goodwill and other intangible assets, net       |                                                                                                                                                           |                                            | 6,802 |          |        |  | 92,194 |        
|Other assets                                    |                                                                                                                                                           |                                            | 1,182 |          |        |  | 1,795  |        
|                                                |                                                                                                                                                           |                                            |       |          |        |  |        |        
|                                                |                                                                                                                                                           | Total assets                               |       | $        | 88,878 |  |        | $       | 211,834 | 
|                                                |                                                                                                                                                           |                                            |       |          |        |  |        |        
|LIABILITIES AND STOCKHOLDERS
	EQUITY          
|Current liabilities:                            |                                                                                                                                                           |                                            |       |          |        |  |        |        
|                                                | Accounts payable                                                                                                                                          |                                            | $     | 314      |        |  | $      | 1,426   |        
|                                                | Accrued liabilities                                                                                                                                       |                                            |       | 3,215    |        |  |        | 5,614   |        
|                                                | Deferred revenue                                                                                                                                          |                                            |       | 1,835    |        |  |        | 3,743   |        
|                                                | Accrued restructuring costs                                                                                                                               |                                            |       | 7,433    |        |  |        |        |        
|                                                | Current portion of long-term liabilities                                                                                                                  |                                            |       | 97       |        |  |        | 582     |        
|                                                |                                                                                                                                                           |                                            |       |          |        |  |        |        
|                                                |                                                                                                                                                           | Total current liabilities                  |       |          | 12,894 |  |        |         | 11,365  | 
|Long-term liabilities, net of current portion   |                                                                                                                                                           |                                            | 577   |          |        |  | 1,951  |        
|                                                |                                                                                                                                                           |                                            |       |          |        |  |        |        
|                                                |                                                                                                                                                           | Total liabilities                          |       |          | 13,471 |  |        |         | 13,316  | 
|                                                |                                                                                                                                                           |                                            |       |          |        |  |        |        
|Commitments and contingencies (Notes 8
	and 10) |                                                                                                                                                           |                                            |       |          |        |  |        |        
|Stockholders equity:                           |                                                                                                                                                           |                                            |       |          |        |  |        |        
|                                                | Preferred stock  $.0001 par value;
	5,000 shares authorized; no shares issued or outstanding                                                             |                                            |       |         |        |  |        |        |        
|                                                | Common stock  $.0001 par value;
	100,000 shares authorized; 27,129 and 26,870 shares issued and
	outstanding at December 31, 2001 and 2000, respectively |                                            |       | 2        |        |  |        | 2       |        
|                                                | Additional paid-in capital                                                                                                                                |                                            |       | 274,869  |        |  |        | 274,458 |        
|                                                | Accumulated other comprehensive income                                                                                                                    |                                            |       | 637      |        |  |        | 361     |        
|                                                | Accumulated deficit                                                                                                                                       |                                            |       | (200,101 | )      |  |        | (76,303 | )      
|                                                |                                                                                                                                                           |                                            |       |          |        |  |        |        
|                                                |                                                                                                                                                           | Total stockholders equity                 |       |          | 75,407 |  |        |         | 198,518 | 
|                                                |                                                                                                                                                           |                                            |       |          |        |  |        |        
|                                                |                                                                                                                                                           | Total liabilities and stockholders equity |       | $        | 88,878 |  |        | $       | 211,834 | 
|                                                |                                                                                                                                                           |                                            |       |          |        |  |        |        

See accompanying notes to the consolidated
financial statements.

F-3



---



##### Table of Contents



NET PERCEPTIONS, INC

CONSOLIDATED STATEMENTS OF
OPERATIONS

(in thousands, except per share
amounts)


|                                                               |                                              |                          |          |        |         |      |         |        |        |   |         |        |        | 
|-------------------------------------------------------------- | -------------------------------------------- | ------------------------ | -------- | ------ | ------- | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                                               |                                              |                         
|                                                               |                                              | Year Ended December 31, 
|                                                               |                                              |                         
|                                                               |                                              | 2001                     |          | 2000   |         | 1999
|                                                               |                                              |                          |          |        |         |     
|Revenues:                                                      |                                              |                          |          |        |         |      |         |        |        |   |         |       
|                                                               | Product                                      |                          | $        | 2,979  |         |      | $       | 25,087 |        |   | $       | 11,408 |       
|                                                               | Service and maintenance                      |                          |          | 7,184  |         |      |         | 11,501 |        |   |         | 3,721  |       
|                                                               |                                              |                          |          |        |         |      |         |        |        |   |         |       
|                                                               |                                              | Total revenues           |          |        | 10,163  |      |         |        | 36,588 |   |         |        | 15,129 | 
|                                                               |                                              |                          |          |        |         |      |         |        |        |   |         |       
|Cost of revenues:                                              |                                              |                          |          |        |         |      |         |        |        |   |         |       
|                                                               | Product                                      |                          |          | 943    |         |      |         | 1,807  |        |   |         | 286    |       
|                                                               | Service and maintenance                      |                          |          | 4,792  |         |      |         | 10,691 |        |   |         | 2,735  |       
|                                                               |                                              |                          |          |        |         |      |         |        |        |   |         |       
|                                                               |                                              | Total cost of revenues   |          |        | 5,735   |      |         |        | 12,498 |   |         |        | 3,021  | 
|                                                               |                                              |                          |          |        |         |      |         |        |        |   |         |       
|Gross margin                                                   |                                              |                          | 4,428    |        |         |      | 24,090  |        |        |   | 12,108  |       
|                                                               |                                              |                          |          |        |         |      |         |        |        |   |         |       
|Operating expenses:                                            |                                              |                          |          |        |         |      |         |        |        |   |         |       
|                                                               | Sales and marketing                          |                          |          | 15,215 |         |      |         | 25,589 |        |   |         | 12,883 |       
|                                                               | Research and development                     |                          |          | 10,572 |         |      |         | 19,354 |        |   |         | 8,625  |       
|                                                               | General and administrative                   |                          |          | 6,198  |         |      |         | 11,146 |        |   |         | 4,005  |       
|                                                               | Lease abandonment expense                    |                          |          | 225    |         |      |         | 1,250  |        |   |         |       |       
|                                                               | Restructuring related charges                |                          |          | 15,551 |         |      |         |       |        |   |         |       |       
|                                                               | Amortization of intangibles                  |                          |          | 9,650  |         |      |         | 25,394 |        |   |         |       |       
|                                                               | Impairment of goodwill and other intangibles |                          |          | 75,298 |         |      |         |       |        |   |         |       |       
|                                                               |                                              |                          |          |        |         |      |         |        |        |   |         |       
|                                                               |                                              | Total operating expenses |          |        | 132,709 |      |         |        | 82,733 |   |         |        | 25,513 | 
|                                                               |                                              |                          |          |        |         |      |         |        |        |   |         |       
|Loss from operations                                           |                                              |                          | (128,281 | )      |         |      | (58,643 | )      |        |   | (13,405 | )     
|                                                               |                                              |                          |          |        |         |      |         |        |        |   |         |       
|Other income (expense):                                        |                                              |                          |          |        |         |      |         |        |        |   |         |       
|                                                               | Interest income                              |                          |          | 4,494  |         |      |         | 5,851  |        |   |         | 1,841  |       
|                                                               | Interest expense                             |                          |          | (88    | )       |      |         | (160   | )      |   |         | (212   | )     
|                                                               | Other income (expense)                       |                          |          | 77     |         |      |         | (595   | )      |   |         | (263   | )     
|                                                               |                                              |                          |          |        |         |      |         |        |        |   |         |       
|                                                               |                                              | Total other income, net  |          |        | 4,483   |      |         |        | 5,096  |   |         |        | 1,366  | 
|                                                               |                                              |                          |          |        |         |      |         |        |        |   |         |       
|Net loss                                                       |                                              | $                        | (123,798 | )      |         | $    | (53,547 | )      |        | $ | (12,039 | )     
|                                                               |                                              |                          |          |        |         |      |         |        |        |   |         |       
|Basic and diluted net loss per share                           |                                              | $                        | (4.59    | )      |         | $    | (2.12   | )      |        | $ | (0.78   | )     
|                                                               |                                              |                          |          |        |         |      |         |        |        |   |         |       
|Shares used in computing basic and diluted net
	loss per share |                                              |                          | 26,951   |        |         |      | 25,209  |        |        |   | 15,402  |       
|                                                               |                                              |                          |          |        |         |      |         |        |        |   |         |       

See accompanying notes to the consolidated
financial statements.

F-4



---



##### Table of Contents



NET PERCEPTIONS, INC

CONSOLIDATED STATEMENT OF STOCKHOLDERS
EQUITY AND COMPREHENSIVE INCOME

(in thousands)


|                                                                                                            |  |                 |        |                 |  |                 |   |              |  |            |        |        |  |        |   |        |  |         |   |  |  |  |   |  |  |  |        |   |  |   |   |  |  |   |         |  
|----------------------------------------------------------------------------------------------------------- |  | --------------- | ------ | --------------- |  | --------------- | - | ------------ |  | ---------- | ------ | ------ |  | ------ | - | ------ |  | ------- | - |  |  |  | - |  |  |  | ------ | - |  | - | - |  |  | - | ------- | -
|                                                                                                            |  |                 |        |                 |  |                 |   |              |  |            |        |        |  |       
|                                                                                                            |  | Series B        |        | Series C        |  |                 |   |              |  |            |        |        |  |       
|                                                                                                            |  | Convertible     |        | Convertible     |  |                 |   |              |  |           
|                                                                                                            |  | Preferred Stock |        | Preferred Stock |  | Preferred Stock |   | Common Stock |  | Additional
|                                                                                                            |  |                 |        |                 |  |                 |   |              |  | Paid-in   
|                                                                                                            |  | Shares          |        | Amount          |  | Shares          |   | Amount       |  | Shares     |        | Amount |  | Shares |   | Amount |  | Capital
|                                                                                                            |  |                 |        |                 |  |                 |   |              |  |            |        |        |  |        |   |        |  |        
|Balance, December 31, 1998                                                                                  |  |                 | 3,865  |                 |  |                 |  |              |  |            | 4,636  |        |  |        |  |        |  |         |  |  |  |  |  |  |  |  | 6,633  |   |  | $ | 1 |  |  | $ | 11,137  |  
|Conversion of preferred stock to common stock                                                               |  |                 | (3,865 | )               |  |                 |  |              |  |            | (4,636 | )      |  |        |  |        |  |         |  |  |  |  |  |  |  |  | 10,669 |   |  |   | 1 |  |  |   | 650     |  
|Proceeds from initial public offering, net of
	$5,543 offering costs                                        |  |                 |       |                 |  |                 |  |              |  |            |       |        |  |        |  |        |  |         |  |  |  |  |  |  |  |  | 4,198  |   |  |   |  |  |  |   | 53,213  |  
|Conversion of note payable to common stock                                                                  |  |                 |       |                 |  |                 |  |              |  |            |       |        |  |        |  |        |  |         |  |  |  |  |  |  |  |  | 291    |   |  |   |  |  |  |   | 4,073   |  
|Exercise of common stock warrant                                                                            |  |                 |       |                 |  |                 |  |              |  |            |       |        |  |        |  |        |  |         |  |  |  |  |  |  |  |  | 11     |   |  |   |  |  |  |   | 16      |  
|Issuance of common stock under employee stock
	purchase plan                                                |  |                 |       |                 |  |                 |  |              |  |            |       |        |  |        |  |        |  |         |  |  |  |  |  |  |  |  | 42     |   |  |   |  |  |  |   | 505     |  
|Exercise of stock options                                                                                   |  |                 |       |                 |  |                 |  |              |  |            |       |        |  |        |  |        |  |         |  |  |  |  |  |  |  |  | 288    |   |  |   |  |  |  |   | 169     |  
|Repurchase of unvested common stock                                                                         |  |                 |       |                 |  |                 |  |              |  |            |       |        |  |        |  |        |  |         |  |  |  |  |  |  |  |  | (106   | ) |  |   |  |  |  |   | (27     | )
|Compensation relating to stock options                                                                      |  |                 |       |                 |  |                 |  |              |  |            |       |        |  |        |  |        |  |         |  |  |  |  |  |  |  |  |       |   |  |   |  |  |  |   | 1,495   |  
|Unrealized loss on available-for-sale investments                                                           |  |                 |       |                 |  |                 |  |              |  |            |       |        |  |        |  |        |  |         |  |  |  |  |  |  |  |  |       |   |  |   |  |  |  |   |        |  
|Net loss                                                                                                    |  |                 |       |                 |  |                 |  |              |  |            |       |        |  |        |  |        |  |         |  |  |  |  |  |  |  |  |       |   |  |   |  |  |  |   |        |  
|                                                                                                            |  |                 |        |                 |  |                 |   |              |  |            |        |        |  |        |   |        |  |         |   |  |  |  |   |  |  |  |        |   |  |   |   |  |  |   |         |  
|Balance, December 31, 1999                                                                                  |  |                 |       |                 |  |                 |  |              |  |            |       |        |  |        |  |        |  |         |  |  |  |  |  |  |  |  | 22,026 |   |  |   | 2 |  |  |   | 71,231  |  
|Issuance of common stock for acquisition of
	Knowledge Discovery One, Inc., net of $2,175 acquisition costs |  |                 |       |                 |  |                 |  |              |  |            |       |        |  |        |  |        |  |         |  |  |  |  |  |  |  |  | 1,969  |   |  |   |  |  |  |   | 115,640 |  
|Proceeds from follow-on public offering net of
	$5,853 offering costs                                       |  |                 |       |                 |  |                 |  |              |  |            |       |        |  |        |  |        |  |         |  |  |  |  |  |  |  |  | 2,000  |   |  |   |  |  |  |   | 84,647  |  
|Issuance of common stock under employee stock
	purchase plan                                                |  |                 |       |                 |  |                 |  |              |  |            |       |        |  |        |  |        |  |         |  |  |  |  |  |  |  |  | 216    |   |  |   |  |  |  |   | 1,174   |  
|Exercise of stock options                                                                                   |  |                 |       |                 |  |                 |  |              |  |            |       |        |  |        |  |        |  |         |  |  |  |  |  |  |  |  | 764    |   |  |   |  |  |  |   | 779     |  
|Repurchase of unvested common stock                                                                         |  |                 |       |                 |  |                 |  |              |  |            |       |        |  |        |  |        |  |         |  |  |  |  |  |  |  |  | (105   | ) |  |   |  |  |  |   | (65     | )
|Compensation relating to stock options                                                                      |  |                 |       |                 |  |                 |  |              |  |            |       |        |  |        |  |        |  |         |  |  |  |  |  |  |  |  |       |   |  |   |  |  |  |   | 1,052   |  
|Change in unrealized gain (loss) on
	available-for-sale investments                                         |  |                 |       |                 |  |                 |  |              |  |            |       |        |  |        |  |        |  |         |  |  |  |  |  |  |  |  |       |   |  |   |  |  |  |   |        |  
|Net loss                                                                                                    |  |                 |       |                 |  |                 |  |              |  |            |       |        |  |        |  |        |  |         |  |  |  |  |  |  |  |  |       |   |  |   |  |  |  |   |        |  
|                                                                                                            |  |                 |        |                 |  |                 |   |              |  |            |        |        |  |        |   |        |  |         |   |  |  |  |   |  |  |  |        |   |  |   |   |  |  |   |         |  
|Balance, December 31, 2000                                                                                  |  |                 |       |                 |  |                 |  |              |  |            |       |        |  |        |  |        |  |         |  |  |  |  |  |  |  |  | 26,870 |   |  |   | 2 |  |  |   | 274,458 |  
|Exercise of stock options                                                                                   |  |                 |       |                 |  |                 |  |              |  |            |       |        |  |        |  |        |  |         |  |  |  |  |  |  |  |  | 115    |   |  |   |  |  |  |   | 59      |  
|Repurchase of unvested common stock                                                                         |  |                 |       |                 |  |                 |  |              |  |            |       |        |  |        |  |        |  |         |  |  |  |  |  |  |  |  | (2     | ) |  |   |  |  |  |   | (6      | )
|Compensation relating to stock options                                                                      |  |                 |       |                 |  |                 |  |              |  |            |       |        |  |        |  |        |  |         |  |  |  |  |  |  |  |  |       |   |  |   |  |  |  |   | 230     |  
|Issuance of common stock under employee stock
	purchase plan                                                |  |                 |       |                 |  |                 |  |              |  |            |       |        |  |        |  |        |  |         |  |  |  |  |  |  |  |  | 146    |   |  |   |  |  |  |   | 128     |  
|Change in unrealized gain (loss) on
	available-for-sale investments                                         |  |                 |       |                 |  |                 |  |              |  |            |       |        |  |        |  |        |  |         |  |  |  |  |  |  |  |  |       |   |  |   |  |  |  |   |        |  
|Net loss                                                                                                    |  |                 |       |                 |  |                 |  |              |  |            |       |        |  |        |  |        |  |         |  |  |  |  |  |  |  |  |       |   |  |   |  |  |  |   |        |  
|                                                                                                            |  |                 |        |                 |  |                 |   |              |  |            |        |        |  |        |   |        |  |         |   |  |  |  |   |  |  |  |        |   |  |   |   |  |  |   |         |  
|Balance, December 31, 2001                                                                                  |  |                 |       |                 |  |                 |  |              |  |            |       |        |  |        |  |        |  |         |  |  |  |  |  |  |  |  | 27,129 |   |  | $ | 2 |  |  | $ | 274,869 |  
|                                                                                                            |  |                 |        |                 |  |                 |   |              |  |            |        |        |  |        |   |        |  |         |   |  |  |  |   |  |  |  |        |   |  |   |   |  |  |   |         |  

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                                                            |  |               |     |  
|----------------------------------------------------------------------------------------------------------- |  | ------------- | --- | -
|                                                                                                            |  | Accumulated  
|                                                                                                            |  | Other        
|                                                                                                            |  | Comprehensive
|                                                                                                            |  | Income(Loss) 
|                                                                                                            |  |              
|Balance, December 31, 1998                                                                                  |  | $             |    |  
|Conversion of preferred stock to common stock                                                               |  |               |    |  
|Proceeds from initial public offering, net of
	$5,543 offering costs                                        |  |               |    |  
|Conversion of note payable to common stock                                                                  |  |               |    |  
|Exercise of common stock warrant                                                                            |  |               |    |  
|Issuance of common stock under employee stock
	purchase plan                                                |  |               |    |  
|Exercise of stock options                                                                                   |  |               |    |  
|Repurchase of unvested common stock                                                                         |  |               |    |  
|Compensation relating to stock options                                                                      |  |               |    |  
|Unrealized loss on available-for-sale investments                                                           |  |               | (89 | )
|Net loss                                                                                                    |  |               |    |  
|                                                                                                            |  |               |     |  
|Balance, December 31, 1999                                                                                  |  |               | (89 | )
|Issuance of common stock for acquisition of
	Knowledge Discovery One, Inc., net of $2,175 acquisition costs |  |               |    |  
|Proceeds from follow-on public offering net of
	$5,853 offering costs                                       |  |               |    |  
|Issuance of common stock under employee stock
	purchase plan                                                |  |               |    |  
|Exercise of stock options                                                                                   |  |               |    |  
|Repurchase of unvested common stock                                                                         |  |               |    |  
|Compensation relating to stock options                                                                      |  |               |    |  
|Change in unrealized gain (loss) on
	available-for-sale investments                                         |  |               | 450 |  
|Net loss                                                                                                    |  |               |    |  
|                                                                                                            |  |               |     |  
|Balance, December 31, 2000                                                                                  |  |               | 361 |  
|Exercise of stock options                                                                                   |  |               |    |  
|Repurchase of unvested common stock                                                                         |  |               |    |  
|Compensation relating to stock options                                                                      |  |               |    |  
|Issuance of common stock under employee stock
	purchase plan                                                |  |               |    |  
|Change in unrealized gain (loss) on
	available-for-sale investments                                         |  |               | 276 |  
|Net loss                                                                                                    |  |               |    |  
|                                                                                                            |  |               |     |  
|Balance, December 31, 2001                                                                                  |  | $             | 637 |  
|                                                                                                            |  |               |     |  

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                                                            |  |             |          |  
|----------------------------------------------------------------------------------------------------------- |  | ----------- | -------- | -
|                                                                                                            |  | Accumulated
|                                                                                                            |  | Deficit    
|                                                                                                            |  |            
|Balance, December 31, 1998                                                                                  |  | $           | (10,717  | )
|Conversion of preferred stock to common stock                                                               |  |             |         |  
|Proceeds from initial public offering, net of
	$5,543 offering costs                                        |  |             |         |  
|Conversion of note payable to common stock                                                                  |  |             |         |  
|Exercise of common stock warrant                                                                            |  |             |         |  
|Issuance of common stock under employee stock
	purchase plan                                                |  |             |         |  
|Exercise of stock options                                                                                   |  |             |         |  
|Repurchase of unvested common stock                                                                         |  |             |         |  
|Compensation relating to stock options                                                                      |  |             |         |  
|Unrealized loss on available-for-sale investments                                                           |  |             |         |  
|Net loss                                                                                                    |  |             | (12,039  | )
|                                                                                                            |  |             |          |  
|Balance, December 31, 1999                                                                                  |  |             | (22,756  | )
|Issuance of common stock for acquisition of
	Knowledge Discovery One, Inc., net of $2,175 acquisition costs |  |             |         |  
|Proceeds from follow-on public offering net of
	$5,853 offering costs                                       |  |             |         |  
|Issuance of common stock under employee stock
	purchase plan                                                |  |             |         |  
|Exercise of stock options                                                                                   |  |             |         |  
|Repurchase of unvested common stock                                                                         |  |             |         |  
|Compensation relating to stock options                                                                      |  |             |         |  
|Change in unrealized gain (loss) on
	available-for-sale investments                                         |  |             |         |  
|Net loss                                                                                                    |  |             | (53,547  | )
|                                                                                                            |  |             |          |  
|Balance, December 31, 2000                                                                                  |  |             | (76,303  | )
|Exercise of stock options                                                                                   |  |             |         |  
|Repurchase of unvested common stock                                                                         |  |             |         |  
|Compensation relating to stock options                                                                      |  |             |         |  
|Issuance of common stock under employee stock
	purchase plan                                                |  |             |         |  
|Change in unrealized gain (loss) on
	available-for-sale investments                                         |  |             |         |  
|Net loss                                                                                                    |  |             | (123,798 | )
|                                                                                                            |  |             |          |  
|Balance, December 31, 2001                                                                                  |  | $           | (200,101 | )
|                                                                                                            |  |             |          |  

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                                                            |  |               |          |               |  |   |          |  
|----------------------------------------------------------------------------------------------------------- |  | ------------- | -------- | ------------- |  | - | -------- | -
|                                                                                                            |  | Total         |          | Comprehensive
|                                                                                                            |  | Stockholders |          | Income       
|                                                                                                            |  | Equity        |          | (Loss)       
|                                                                                                            |  |               |          |              
|Balance, December 31, 1998                                                                                  |  | $             | 421      |               |  | $ | (4,968   | )
|Conversion of preferred stock to common stock                                                               |  |               | 651      |               |  |   |         |  
|Proceeds from initial public offering, net of
	$5,543 offering costs                                        |  |               | 53,213   |               |  |   |         |  
|Conversion of note payable to common stock                                                                  |  |               | 4,073    |               |  |   |         |  
|Exercise of common stock warrant                                                                            |  |               | 16       |               |  |   |         |  
|Issuance of common stock under employee stock
	purchase plan                                                |  |               | 505      |               |  |   |         |  
|Exercise of stock options                                                                                   |  |               | 169      |               |  |   |         |  
|Repurchase of unvested common stock                                                                         |  |               | (27      | )             |  |   |         |  
|Compensation relating to stock options                                                                      |  |               | 1,495    |               |  |   |         |  
|Unrealized loss on available-for-sale investments                                                           |  |               | (89      | )             |  |   | (89      | )
|Net loss                                                                                                    |  |               | (12,039  | )             |  |   | (12,039  | )
|                                                                                                            |  |               |          |               |  |   |          |  
|Balance, December 31, 1999                                                                                  |  |               | 48,388   |               |  |   | (12,128  | )
|Issuance of common stock for acquisition of
	Knowledge Discovery One, Inc., net of $2,175 acquisition costs |  |               | 115,640  |               |  |   |         |  
|Proceeds from follow-on public offering net of
	$5,853 offering costs                                       |  |               | 84,647   |               |  |   |         |  
|Issuance of common stock under employee stock
	purchase plan                                                |  |               | 1,174    |               |  |   |         |  
|Exercise of stock options                                                                                   |  |               | 779      |               |  |   |         |  
|Repurchase of unvested common stock                                                                         |  |               | (65      | )             |  |   |         |  
|Compensation relating to stock options                                                                      |  |               | 1,052    |               |  |   |         |  
|Change in unrealized gain (loss) on
	available-for-sale investments                                         |  |               | 450      |               |  |   | 450      |  
|Net loss                                                                                                    |  |               | (53,547  | )             |  |   | (53,547  | )
|                                                                                                            |  |               |          |               |  |   |          |  
|Balance, December 31, 2000                                                                                  |  |               | 198,518  |               |  |   | (53,097  | )
|Exercise of stock options                                                                                   |  |               | 59       |               |  |   |         |  
|Repurchase of unvested common stock                                                                         |  |               | (6       | )             |  |   |         |  
|Compensation relating to stock options                                                                      |  |               | 230      |               |  |   |         |  
|Issuance of common stock under employee stock
	purchase plan                                                |  |               | 128      |               |  |   |         |  
|Change in unrealized gain (loss) on
	available-for-sale investments                                         |  |               | 276      |               |  |   | 276      |  
|Net loss                                                                                                    |  |               | (123,798 | )             |  |   | (123,798 | )
|                                                                                                            |  |               |          |               |  |   |          |  
|Balance, December 31, 2001                                                                                  |  | $             | 75,407   |               |  | $ | (123,522 | )
|                                                                                                            |  |               |          |               |  |   |          |  

See accompanying notes to the consolidated
financial statements.

F-5



---



##### Table of Contents



NET PERCEPTIONS, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(in thousands)


|                                                                       |                                                                                                                   |                                                                              |                                           |                                                      |        |        |         |          |        |        |         |         |       |        |         |  
|---------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ----------------------------------------- | ---------------------------------------------------- | ------ | ------ | ------- | -------- | ------ | ------ | ------- | ------- | ----- | ------ | ------- | -
|                                                                       |                                                                                                                   |                                                                             
|                                                                       |                                                                                                                   | Year Ended December 31,                                                     
|                                                                       |                                                                                                                   |                                                                             
|                                                                       |                                                                                                                   | 2001                                                                         |                                           | 2000                                                 |        | 1999  
|                                                                       |                                                                                                                   |                                                                              |                                           |                                                      |        |       
|Cash flows from operating activities:                                  |                                                                                                                   |                                                                              |                                           |                                                      |        |        |         |          |        |        |         |        
|                                                                       | Net loss                                                                                                          |                                                                              | $                                         | (123,798                                             | )      |        | $       | (53,547  | )      |        | $       | (12,039 | )    
|                                                                       | Reconciliation of net loss to net cash used by
	operating activities:                                             |                                                                              |                                           |                                                      |        |        |         |          |        |        |         |         |      
|                                                                       |                                                                                                                   | Depreciation and amortization                                                |                                           |                                                      | 13,528 |        |         |          | 29,975 |        |         |         | 826   |       
|                                                                       |                                                                                                                   | Provision for doubtful accounts                                              |                                           |                                                      | 1,051  |        |         |          | 2,073  |        |         |         | 534   |       
|                                                                       |                                                                                                                   | Lease abandonment expense                                                    |                                           |                                                      | 225    |        |         |          | 1,250  |        |         |         |      |       
|                                                                       |                                                                                                                   | Compensation expense related to stock options                                |                                           |                                                      | 230    |        |         |          | 1,052  |        |         |         | 1,495 |       
|                                                                       |                                                                                                                   | Restructuring related charges                                                |                                           |                                                      | 15,551 |        |         |          |       |        |         |         |      |       
|                                                                       |                                                                                                                   | Impairment of goodwill and other intangibles                                 |                                           |                                                      | 75,298 |        |         |          |       |        |         |         |      |       
|                                                                       |                                                                                                                   | Amortization of discounts on investments                                     |                                           |                                                      | (135   | )      |         |          |       |        |         |         |      |       
|                                                                       |                                                                                                                   | Loss on disposal of assets                                                   |                                           |                                                      | 22     |        |         |          | 23     |        |         |         |      |       
|                                                                       |                                                                                                                   | Equity in losses of joint venture                                            |                                           |                                                      |       |        |         |          | 197    |        |         |         | 197   |       
|                                                                       |                                                                                                                   | Changes in assets and liabilities excluding
	effect of business combination: |                                           |                                                      |        |        |         |          |        |        |         |         |       |       
|                                                                       |                                                                                                                   |                                                                              | Accounts receivable                       |                                                      |        | 3,979  |         |          |        | 278    |         |         |       | (5,028 | )      
|                                                                       |                                                                                                                   |                                                                              | Royalties receivable                      |                                                      |        | 671    |         |          |        | 464    |         |         |       | (922   | )      
|                                                                       |                                                                                                                   |                                                                              | Prepaid expenses and other current assets |                                                      |        | (462   | )       |          |        | (177   | )       |         |       | (781   | )      
|                                                                       |                                                                                                                   |                                                                              | Other assets                              |                                                      |        | 613    |         |          |        | (1,314 | )       |         |       | (338   | )      
|                                                                       |                                                                                                                   |                                                                              | Accounts payable                          |                                                      |        | (1,112 | )       |          |        | (2,167 | )       |         |       | 2,294  |        
|                                                                       |                                                                                                                   |                                                                              | Accrued expenses                          |                                                      |        | (5,957 | )       |          |        | 663    |         |         |       | 1,959  |        
|                                                                       |                                                                                                                   |                                                                              | Deferred revenue                          |                                                      |        | (1,908 | )       |          |        | (110   | )       |         |       | 1,229  |        
|                                                                       |                                                                                                                   |                                                                              | Other long-term liabilities               |                                                      |        | (92    | )       |          |        | (340   | )       |         |       | 325    |        
|                                                                       |                                                                                                                   |                                                                              |                                           |                                                      |        |        |         |          |        |        |         |        
|                                                                       |                                                                                                                   |                                                                              |                                           | Net cash used in operating activities                |        |        | (22,296 | )        |        |        | (21,680 | )       |       |        | (10,249 | )
|                                                                       |                                                                                                                   |                                                                              |                                           |                                                      |        |        |         |          |        |        |         |        
|Cash flows from investing activities:                                  |                                                                                                                   |                                                                              |                                           |                                                      |        |        |         |          |        |        |         |        
|                                                                       | Purchases of short-term investments and
	marketable securities                                                    |                                                                              |                                           | (132,886                                             | )      |        |         | (136,853 | )      |        |         | (26,803 | )    
|                                                                       | Sales and maturities of short-term investments
	and marketable securities                                         |                                                                              |                                           | 154,461                                              |        |        |         | 83,177   |        |        |         | 1,000   |      
|                                                                       | Investment in joint venture                                                                                       |                                                                              |                                           |                                                     |        |        |         |         |        |        |         | (394    | )    
|                                                                       | Purchases of property and equipment                                                                               |                                                                              |                                           | (248                                                 | )      |        |         | (9,390   | )      |        |         | (4,556  | )    
|                                                                       | Net cash paid in acquisition, net of cash acquired                                                                |                                                                              |                                           |                                                     |        |        |         | (1,156   | )      |        |         |        |      
|                                                                       |                                                                                                                   |                                                                              |                                           |                                                      |        |        |         |          |        |        |         |        
|                                                                       |                                                                                                                   |                                                                              |                                           | Net cash (used in) provided by investing
	activities |        |        | 21,327  |          |        |        | (64,222 | )       |       |        | (30,753 | )
|                                                                       |                                                                                                                   |                                                                              |                                           |                                                      |        |        |         |          |        |        |         |        
|Cash flows from financing activities:                                  |                                                                                                                   |                                                                              |                                           |                                                      |        |        |         |          |        |        |         |        
|                                                                       | Proceeds from public stock offerings, net of
	offering costs of $5,853 and $5,543 in 2000 and 1999,
	respectively |                                                                              |                                           |                                                     |        |        |         | 84,647   |        |        |         | 53,213  |      
|                                                                       | Proceeds from borrowings under notes payable                                                                      |                                                                              |                                           |                                                     |        |        |         |         |        |        |         | 4,000   |      
|                                                                       | Proceeds from issuance of stock under employee
	stock purchase plan                                               |                                                                              |                                           | 128                                                  |        |        |         | 1,174    |        |        |         | 505     |      
|                                                                       | Proceeds from exercise of stock options and
	warrants, net of stock repurchases                                   |                                                                              |                                           | 53                                                   |        |        |         | 714      |        |        |         | 159     |      
|                                                                       | Repayment of acquired entity bank loan                                                                            |                                                                              |                                           |                                                     |        |        |         | (1,000   | )      |        |         |        |      
|                                                                       | Principal payments under capital lease
	obligations and notes payable                                             |                                                                              |                                           | (679                                                 | )      |        |         | (694     | )      |        |         | (390    | )    
|                                                                       |                                                                                                                   |                                                                              |                                           |                                                      |        |        |         |          |        |        |         |        
|                                                                       |                                                                                                                   |                                                                              |                                           | Net cash (used in) provided by financing
	activities |        |        | (498    | )        |        |        | 84,841  |         |       |        | 57,487  |  
|                                                                       |                                                                                                                   |                                                                              |                                           |                                                      |        |        |         |          |        |        |         |        
|Net (decrease) increase in cash and cash
	equivalents                  |                                                                                                                   |                                                                              | (1,467                                    | )                                                    |        |        | (1,061  | )        |        |        | 16,485  |        
|Cash and cash equivalents at beginning of year                         |                                                                                                                   |                                                                              | 16,396                                    |                                                      |        |        | 17,457  |          |        |        | 972     |        
|                                                                       |                                                                                                                   |                                                                              |                                           |                                                      |        |        |         |          |        |        |         |        
|Cash and cash equivalents at end of year                               |                                                                                                                   | $                                                                            | 14,929                                    |                                                      |        | $      | 16,396  |          |        | $      | 17,457  |        
|                                                                       |                                                                                                                   |                                                                              |                                           |                                                      |        |        |         |          |        |        |         |        
|Supplemental schedule of non-cash investing and
	financing activities: |                                                                                                                   |                                                                              |                                           |                                                      |        |        |         |          |        |        |         |        
|                                                                       | Issuance of common stock for acquisition of
	Knowledge Discovery One, Inc.                                        |                                                                              | $                                         |                                                     |        |        | $       | 117,815  |        |        | $       |        |      
|                                                                       | Conversions of preferred stock to common stock                                                                    |                                                                              |                                           |                                                     |        |        |         |         |        |        |         | 651     |      
|                                                                       | Conversion of note payable to common stock                                                                        |                                                                              |                                           |                                                     |        |        |         |         |        |        |         | 4,073   |      
|                                                                       | Insurance policy financed with note payable                                                                       |                                                                              |                                           |                                                     |        |        |         |         |        |        |         | 450     |      
|Supplemental schedule of cash activity:                                |                                                                                                                   |                                                                              |                                           |                                                      |        |        |         |          |        |        |         |        
|                                                                       | Interest paid                                                                                                     |                                                                              |                                           | 88                                                   |        |        |         | 160      |        |        |         | 123     |      

See accompanying notes to the consolidated
financial statements.

F-6



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##### Table of Contents



NET PERCEPTIONS, INC.






NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS


(in thousands, except per share
amounts)


1. Organization

Net Perceptions, Inc. (the Company)
was incorporated in Delaware on July 3, 1996. The Company
develops and markets software solutions that enable its
customers to interact more intelligently with their customers.
The Companys solutions integrate and analyze information
about customers, products and promotional activity to generate
specific actions its customers can take to improve their
marketing, selling, merchandising and advertising effectiveness,
leading to increased revenue, improved profit, decreased costs
and enhanced customer satisfaction. The Company combines its
software products with industry expertise and professional
services to create highly-focused, industry-specific solutions
that are designed to integrate with and add significant value to
existing custom or purchased customer relationship management,
or CRM, systems and processes.

Sales to customers located outside of the United
States totaled 20%, 22% and 16% of total revenues in 2001, 2000
and 1999 respectively. International sales to customers in any
one individual foreign country did not exceed 10% of total
revenues in 2001, 2000 or 1999.

The Company is subject to risks and uncertainties
common to technology-based companies, including rapid
technological change, growth of electronic commerce, dependence
on principal products and third-party technology, new product
development and acceptance, actions of competitors, dependence
on key personnel, international expansion, lengthy sales cycle,
availability of sufficient capital and a limited operating
history.

2. Summary of significant
accounting policies

Basis of presentation

The consolidated financial statements include
accounts of the Company and its wholly owned subsidiaries
operating in six foreign countries. All significant
inter-company accounts and transactions have been eliminated.
Revenues and identifiable assets attributable to the
Companys foreign subsidiaries were less than 10% of their
respective totals. The equity method of accounting is used to
account for the Companys equity investment in a Japanese
joint venture (see Note 9).

Use of estimates

The preparation of financial statements in
conformity with generally accepted accounting principles in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts therein.
Managements estimates are based on historical experience
and on various other assumptions that are believed to be
reasonable under the circumstances. Managements estimates
and assumptions are evaluated on an on-going basis. Due to the
inherent uncertainty involved in making estimates, actual
results may differ from those estimates.

Revenue recognition

The Company recognizes revenues in accordance
with the American Institute of Certified Public Accountants
(AICPA) Statement of Position (SOP)
97-2, Software Revenue Recognition, as amended by
SOP 98-4, Deferral of the Effective Date of a
Provision of SOP 97-2 and SOP 98-9,
Modification of SOP 97-2, Software Revenue
Recognition with Respect to Certain Transactions and in
accordance with the Securities and Exchange Commission Staff
Accounting Bulletin (SAB) No. 101,
Revenue Recognition in Financial Statements. The
Company derives revenues from software licenses, software
maintenance and professional services. Maintenance includes
telephone and Web-based technical support, bug fixes and rights
to unspecified upgrades on a when-and-if available basis.
Professional services include project planning and management,
implementation and testing, data

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##### Table of Contents



NET PERCEPTIONS, INC.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

(in thousands, except per share
amounts)


analysis, data warehousing, user and partner
training, consulting, product hosting and ongoing customer
support.

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

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

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

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

The allowance for doubtful accounts was $149,
$1,594 and $672 at December 31, 2001, 2000 and 1999,
respectively.

Concentrations of credit risk and significant customers

Financial instruments that potentially subject
the Company to credit risk consist primarily of accounts
receivable. The Company grants credit to customers in the
ordinary course of business. To minimize credit risk, ongoing
credit evaluations are performed. Three customers accounted for
12%, 11% and 10% of total 2001 revenues and four customers
accounted for 31%, 24%, 14% and 11% of accounts receivable at
December 31, 2001. One customer accounted for 11% of total
2000 revenues and three customers accounted for 41%, 16% and 11%
of accounts receivable at December 31, 2000. One customer
accounted for 11% of total 1999 revenues and another customer
accounted for 22% of accounts receivable at December 31,
1999. Royalties receivable are from the same customer at both
December 31, 2000 and 1999.

Cash equivalents, short-term investments and marketable
securities

Cash equivalents, short-term investments and
marketable securities consist principally of commercial paper,
government agency notes and money market funds. Cash equivalents
are all highly liquid temporary cash investments purchased with
original maturities of 90 days or less. The Company

F-8



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##### Table of Contents



NET PERCEPTIONS, INC.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

(in thousands, except per share
amounts)


determines the appropriate classification of
short-term investments and marketable securities at the time of
purchase and reevaluates such designation as of each balance
sheet date. As of December 31, 2001, all of the
Companys short-term investments and marketable securities
were classified as available-for-sale. Available-for-sale
securities are stated at fair market value with unrealized
holding gains or losses recorded as a separate component of
stockholders equity.

Fair value of financial instruments

The carrying amounts of the Companys
financial instruments, which include cash equivalents,
short-term investments, marketable securities, accounts
receivable, accounts payable, accrued expenses and capital lease
obligations, approximate their fair values at December 31,
2001 and 2000.

Property and equipment

Property and equipment are stated at cost.
Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the
individual assets; or the shorter of the estimated useful lives
or underlying lease term (in the case of leasehold improvements
and capital lease equipment). Estimated useful lives generally
range from three to ten years.

Impairment of long-lived assets

The Company periodically reviews the carrying
amounts of property and equipment, identifiable intangible
assets and goodwill, both purchased in the normal course of
business and acquired through business combinations, to
determine whether current events or circumstances, as defined in
Statement of Financial Accounting Standards (SFAS)
No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of,
warrant adjustments to such carrying amounts. In reviewing the
carrying values of property and equipment, identifiable
intangible assets and goodwill, the Company considers, among
other things, the future cash flows expected to result from the
use of the asset and its eventual disposition less the future
cash outflows expected to be necessary to obtain those inflows.
Goodwill recorded from the KD1 acquisition in February 2000
is evaluated at the enterprise level (see Note 4).

Other assets

Other assets consist primarily of capital and
operating lease deposits and long-term interest receivable.

Research and development

Research and development expenditures, which
include software development costs, are expensed as incurred.
SFAS No. 86, Accounting for the Costs of Computer
Software to Be Sold, Leased or Otherwise Marketed,
requires the capitalization of certain software development
costs once technological feasibility is established, which the
Company defines as the completion of a working model. To date,
the period between achieving technological feasibility and the
general availability of such software has been short and
software development costs qualifying for capitalization have
been insignificant. Accordingly, the Company has not capitalized
any software development costs.

Income taxes

The Company calculates income taxes in accordance
with the provisions of SFAS No. 109, Accounting for
Income Taxes, which requires the use of the liability
method of accounting for income

F-9



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##### Table of Contents



NET PERCEPTIONS, INC.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

(in thousands, except per share
amounts)


taxes. Income taxes are deferred for all
temporary differences between the financial statement and income
tax basis of assets and liabilities. Deferred taxes are recorded
using the enacted tax rates scheduled by tax law to be in effect
when the temporary differences are expected to settle or be
realized. Deferred tax assets are reduced by a valuation
allowance to the extent that utilization is considered uncertain.

Advertising expense

The Company recognizes advertising expense as
incurred. Advertising expense has been insignificant since
inception.

Net loss per share

Net loss per share is computed under SFAS
No. 128, Earnings Per Share. Basic net loss per
share is computed using the weighted-average number of shares of
common stock outstanding, excluding shares of common stock
subject to repurchase. Such shares of common stock subject to
repurchase aggregated 10, 87 and 819 shares at December 31,
2001, 2000 and 1999, respectively (see Note 8). Diluted net loss
per share does not differ from basic net loss per share since
potential shares of common stock from conversion of preferred
stock, stock options and warrants and outstanding shares of
common stock subject to repurchase are anti-dilutive for all
periods presented. Options to purchase 3,719, 3,452 and 2,549
shares of the Companys common stock were outstanding as of
December 31, 2001, 2000 and 1999, respectively, and could
potentially dilute earnings per share in future periods.

Foreign currency translation

All assets and liabilities of the Companys
foreign subsidiaries and affiliates are translated from local
currencies to United States dollars at period end rates of
exchange, while revenues and expenses are translated at the
average exchange rates during the period. The functional
currency for each of the Companys foreign subsidiaries and
affiliates is the respective local currency. Gains or losses
resulting from foreign currency transactions (transactions
denominated in a currency other than the entitys local
currency) are included in the consolidated statement of
operations and are not significant.

Comprehensive income (loss)

Comprehensive income (loss), as defined by SFAS
No. 130, Reporting Comprehensive Income,
includes net loss and items defined as other comprehensive
income. SFAS No. 130 requires that items defined as other
comprehensive income (loss), such as foreign currency
translation adjustments and unrealized gains and losses on
certain investments in debt securities, be separately classified
in the financial statements. Such disclosures are included in
the consolidated statements of stockholders equity and
comprehensive loss.

Stock-based compensation

The Company accounts for stock-based employee
compensation arrangements in accordance with the provisions of
Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to
Employees and FASB Interpretation of No. 44,
Accounting for Certain Transactions Involving Stock
Compensation  an Interpretation of APB Opinion
No. 25, and complies with the disclosure provisions
of SFAS No. 123, Accounting for Stock-Based
Compensation.

F-10



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##### Table of Contents



NET PERCEPTIONS, INC.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

(in thousands, except per share
amounts)


Recently issued accounting pronouncements

In June 2001, the Financial Accounting
Standards Board (FASB) approved Statements of
Financial Accounting Standards (SFAS) No. 141,
Business Combinations and No. 142,
Goodwill and Other Intangible Assets. The statements
eliminate the pooling-of-interests method of accounting for
business combinations and require that goodwill and certain
intangible assets not be amortized. Instead, the statements
provide that these assets should be tested, at least annually,
for impairment with any related losses recognized as incurred.
SFAS No. 141 is generally effective for business
combinations completed after June 30, 2001. SFAS
No. 142 is effective for the Company beginning
January 1, 2002 for existing goodwill and intangible
assets. The adoption of these statements is expected to reduce
2002 annual amortization by approximately $3,100. However, as
noted above, the remaining unamortized goodwill and intangible
assets not subject to amortization of $6,513 will be subject to
periodic impairment analysis, which could require a write-down
of these assets upon the adoption of SFAS No. 142 or
thereafter. The Company is currently evaluating the impairment
requirements of SFAS No. 142 and does not expect to
record an impairment charge upon completion of the initial
impairment review.

In October 2001, FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. This statement addresses financial
accounting and reporting for the impairment of long-lived assets
and for long-lived assets to be disposed of and supersedes SFAS
No. 121 and APB Opinion No. 30. SFAS No. 144
is effective for the Company beginning January 1, 2002. The
Company is currently evaluating the impact of this standard on
its financial position and results of operations and does not
expect any material affect on its financial position or results
of operations.

3. Financial statement components

Property and equipment consist of the following:

|                                                |  |              |        |      |  |   |        |  
|----------------------------------------------- |  | ------------ | ------ | ---- |  | - | ------ | -
|                                                |  |             
|                                                |  | December 31,
|                                                |  |             
|                                                |  | 2001         |        | 2000
|                                                |  |              |        |     
|Computer hardware                               |  | $            | 5,663  |      |  | $ | 8,173  |  
|Leasehold improvements                          |  |              | 380    |      |  |   | 3,669  |  
|Purchased computer software                     |  |              | 1,369  |      |  |   | 2,097  |  
|Furniture, fixtures and equipment               |  |              | 1,216  |      |  |   | 3,183  |  
|                                                |  |              |        |      |  |   |        |  
|                                                |  |              | 8,628  |      |  |   | 17,122 |  
|Less: Accumulated depreciation and amortization |  |              | (4,949 | )    |  |   | (4,362 | )
|                                                |  |              |        |      |  |   |        |  
|                                                |  | $            | 3,679  |      |  | $ | 12,760 |  
|                                                |  |              |        |      |  |   |        |  

Accrued liabilities consist of the following:

|                                |  |              |       |      |  |   |       | 
|------------------------------- |  | ------------ | ----- | ---- |  | - | ----- | 
|                                |  |             
|                                |  | December 31,
|                                |  |             
|                                |  | 2001         |       | 2000
|                                |  |              |       |     
|Accrued wages and benefits      |  | $            | 1,424 |      |  | $ | 2,653 | 
|Accrued lease abandonment costs |  |              | 448   |      |  |   | 877   | 
|Other accrued expenses          |  |              | 1,343 |      |  |   | 2,084 | 
|                                |  |              |       |      |  |   |       | 
|                                |  | $            | 3,215 |      |  | $ | 5,614 | 
|                                |  |              |       |      |  |   |       | 

F-11



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##### Table of Contents



NET PERCEPTIONS, INC.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

(in thousands, except per share
amounts)


4. Acquisition of Knowledge Discovery One

In February 2000, the Company acquired
Knowledge Discovery One, Inc. (KD1), a developer and
marketer of advanced data analysis solutions for retailers. In
this transaction, the Company acquired all of the outstanding
shares of KD1 in exchange for 1,969 shares of its common stock,
and KD1 became the Companys wholly owned subsidiary. The
value of the Companys common stock issued for the KD1
acquisition was determined by the average of the Companys
stock price over a period ending shortly before the announcement
of the acquisition. The Company also assumed all outstanding
options to purchase KD1 common stock. The Company reserved 266
shares of its common stock for issuance upon the exercise of
these options.

The KD1 acquisition was accounted for under the
purchase method of accounting. Accordingly, the total purchase
price of $117,815 was allocated to the acquired assets and
liabilities assumed at their fair market values as of the
transaction closing date, and the Companys consolidated
statements of operations do not include any revenues or expenses
related to the acquisition prior to the closing date. Such
acquired assets included intangible assets related to acquired
technology, customer list, workforce and goodwill of $4,000,
$3,000, $1,000 and $110,755, respectively. The Company also
assumed net liabilities of approximately $940.

At March 31, 2001, the Company performed an
impairment assessment of the goodwill and other intangible
assets recorded in connection with the acquisition of KD1. The
assessment was performed primarily due to lower than expected
revenues in the first quarter of 2001 (product revenues declined
87% from the same period in 2000 and 72% from the fourth quarter
of 2000) and a downward revision in the first quarter of 2001 of
the Companys internal revenue projections based on the
general economic conditions in the information technology
sector, combined with changes in valuation models for technology
companies, a continued decline in the Companys first
quarter 2001 stock price and its March 2001 plan of
restructuring. As a result of its review, the Company recorded a
$75.3 million impairment charge to reduce goodwill and other
intangible assets to their estimated fair values. The charge was
determined based upon the Companys estimated discounted
cash flows over the estimated remaining useful life of the
goodwill and other intangible assets, a terminal value at the
end of this estimated life and using a discount rate of 40%. The
assumptions supporting the cash flows, including the discount
rate and estimated terminal value were determined using
managements best estimates available at the time the
impairment assessment was made. The estimated cash flows were
consistently based on the Companys internal operating
plan. The discount rate was based upon the historical
time-weighted returns for venture capital type investments for
the ten year period ended December 31, 2000  a
rate considered appropriate given the Companys recent
revenue levels. The estimated terminal value was based on the
Companys recent revenue multiple based on trailing twelve
months revenues as objectively observed from the stock
markets valuation of the Company. In accordance with FAS
No. 142, beginning January 1, 2002, goodwill and
certain other intangible assets will no longer be amortized,
resulting in a reduction of annual amortization expense of
approximately $3,100 in 2002. Instead, these assets will be
tested at least annually for impairment. Amortization expense
related to other intangible assets is expected to be $257 and
$32 for 2002 and the first quarter of 2003, respectively.
However, as noted above, the remaining unamortized goodwill and
intangible asset not subject to amortization of $6,500 are
subject to periodic impairment analysis, which could require a
write-down of these assets in the future.

F-12



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##### Table of Contents



NET PERCEPTIONS, INC.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

(in thousands, except per share
amounts)


The following table presents the consolidated
results of operations on an unaudited pro forma basis as if the
acquisition of KD1 had taken place at the beginning of the
periods presented:

|                   |  |              |         |             |  |   |         |  
|------------------ |  | ------------ | ------- | ----------- |  | - | ------- | -
|                   |  |             
|                   |  | Year Ended  
|                   |  | December 31,
|                   |  |             
|                   |  | 2000         |         | 1999       
|                   |  |              |         |            
|                   |  | (unaudited)  |         | (unaudited)
|Total revenues     |  | $            | 37,052  |             |  | $ | 18,644  |  
|Net loss           |  | $            | (58,906 | )           |  | $ | (50,561 | )
|Net loss per share |  | $            | (2.31   | )           |  | $ | (2.91   | )

The unaudited pro forma results of operations are
for comparative purposes only and do not necessarily reflect the
results that would have occurred had the acquisition occurred at
the beginning of the periods presented or the results which may
occur in the future.

5. Restructuring related charges

The Company recorded restructuring related
charges totaling $15,551 in 2001. In March 2001, the
Company instituted a restructuring plan to better align its cost
structure with its business outlook and general economic
conditions. Under the restructuring plan, the Company reduced
its workforce by approximately 46%, or 124 positions throughout
the organization, and recorded a charge of $13,920 to reorganize
the Company and exit certain facilities in various United States
and international locations. This $13,920 charge included
$10,200 related to facility consolidation, $1,190 of employee
termination costs and $2,530 of losses on the disposal of assets
and other restructuring charges. During the third quarter of
2001, the Company reduced its workforce by 45 employees and
recorded an additional $1,771 restructuring related charge. This
$1,771 charge included $878 for estimated losses on the disposal
of fixed assets, $449 for leasehold write-offs related to
facility consolidation and $444 for employee severance payments.
During the fourth quarter of 2001, the total restructuring
charge was decreased by $140 to reflect the actual costs of
exiting certain marketing activities in connection with the
restructuring.

A total of $8,118 was charged against the
restructuring reserve as of December 31, 2001, lowering the
accrued restructuring liability to $7,433. These charges
included $2,887 of non-cash leasehold write-offs, $2,908 of
other non-cash fixed assets write-offs, $1,523 in employee
severance payments, $1,869 in rent payments, $301 of real estate
broker fees and $258 in other office consolidation expenses.
These charges were partially offset by a $1,087 application of
deferred rent against the charge, $261 of proceeds on the sale
of fixed assets and $280 of sublease income. In conjunction with
the restructuring related charges recorded, the Company made
certain estimates regarding future sublease income that have a
significant impact on its anticipated cash obligations. Although
the Company believes that the lease commitment estimates are
appropriate in the current circumstances, future changes in real
estate markets could impact the ultimate amount of cash paid to
resolve these obligations.

F-13



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##### Table of Contents



NET PERCEPTIONS, INC.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

(in thousands, except per share
amounts)


The following table presents a summary of the
restructuring related activities and accrued restructuring
charges as of December 31, 20001:

|                                         |          |               |        |               |  |               |        |               |   |               |     |     |  |   |        |        |   |   |       |       | 
|---------------------------------------- | -------- | ------------- | ------ | ------------- |  | ------------- | ------ | ------------- | - | ------------- | --- | --- |  | - | ------ | ------ | - | - | ----- | ----- | 
|                                         |          |               |        |               |  | Sublease      |        | Non-Cash      |   | Accrued      
|                                         |          |               |        |               |  | Income and    |        | Asset         |   | Restructuring
|                                         |          | Restructuring |        |               |  | Proceeds from |        | Disposals and |   | as of        
|                                         |          | Charges, Net  |        | Restructuring |  | the Sale of   |        | Deferred Rent |   | December 31, 
|Description                              |          | of Reversal   |        | Payments      |  | Fixed Assets  |        | Write-Off     |   | 2001         
|                                         |          |               |        |               |  |               |        |               |   |              
|Lease commitments and related items      |          | $             | 10,649 |               |  | $             | (2,233 | )             |   | $             | 280 |     |  | $ | (1,800 | )      |   | $ | 6,896 |      
|Employee severance and termination costs |          |               | 1,634  |               |  |               | (1,523 | )             |   |               |    |     |  |   |       |        |   |   | 111   |      
|                                         |          |               |        |               |  |               |        |               |   |               |     |     |  |   |        |        |   |   |       |      
|                                         | Subtotal |               |        | 12,283        |  |               |        | (3,756        | ) |               |     | 280 |  |   |        | (1,800 | ) |   |       | 7,007 | 
|Fixed asset disposals and other costs    |          |               | 3,268  |               |  |               | (195   | )             |   |               | 261 |     |  |   | (2,908 | )      |   |   | 426   |      
|                                         |          |               |        |               |  |               |        |               |   |               |     |     |  |   |        |        |   |   |       |      
|                                         |          | $             | 15,551 |               |  | $             | (3,951 | )             |   | $             | 541 |     |  | $ | (4,708 | )      |   | $ | 7,433 |      
|                                         |          |               |        |               |  |               |        |               |   |               |     |     |  |   |        |        |   |   |       |      

6. Income taxes

For income tax purposes, the Company has
available net operating loss carry-forwards of approximately
$91,600 and research and development credit carry-forwards of
$195 at December 31, 2001. The net operating loss and
research and development credit carry-forwards expire in 2011
through 2020 if not previously utilized. The utilization of
these carry-forwards may be subject to limitations based on
future changes in ownership of the Company pursuant to Internal
Revenue Code Section 382. Future tax benefits have not been
recognized in the financial statements as their utilization is
considered uncertain based on the weight of available
information. Historically, the effective tax benefit rate
differs from the statutory federal tax benefit rate of 35%
primarily due to state income taxes. For the year ended
December 31, 2001, the effective tax benefit rate differs
from the statutory federal tax benefit rate of 35% primarily due
to nondeductible goodwill amortization, impairment of goodwill
and other intangibles and state income taxes.

Deferred income taxes reflect the tax effects of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the
Companys deferred tax assets (liabilities) are as
follows:

|                     |                                                |                                 |         |        |        |  |         |        |        | 
|-------------------- | ---------------------------------------------- | ------------------------------- | ------- | ------ | ------ |  | ------- | ------ | ------ | 
|                     |                                                |                                
|                     |                                                | December 31,                   
|                     |                                                |                                
|                     |                                                | 2001                            |         | 2000  
|                     |                                                |                                 |         |       
|Deferred tax assets: |                                                |                                 |         |        |        |  |         |       
|                     | Net operating loss carry-forwards              |                                 | $       | 32,646 |        |  | $       | 16,200 |       
|                     | Restructuring related costs                    |                                 |         | 5,530  |        |  |         |       |       
|                     | Research and development credit carry-forwards |                                 |         | 195    |        |  |         | 195    |       
|                     | Accrued vacation and other current liabilities |                                 |         | 403    |        |  |         | 1,805  |       
|                     | Accounts receivable allowance                  |                                 |         | 58     |        |  |         | 622    |       
|                     |                                                |                                 |         |        |        |  |         |       
|                     |                                                | Total deferred tax assets       |         |        | 38,832 |  |         |        | 18,822 | 
|Valuation allowance  |                                                |                                 | (38,832 | )      |        |  | (18,822 | )     
|                     |                                                |                                 |         |        |        |  |         |       
|                     |                                                | Total net deferred income taxes |         | $      |       |  |         | $      |       | 
|                     |                                                |                                 |         |        |        |  |         |       

F-14



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##### Table of Contents



NET PERCEPTIONS, INC.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

(in thousands, except per share
amounts)


7. Long-term liabilities

Long-term liabilities consist of the following:

|                      |  |              |     |      |  |   |       |  
|--------------------- |  | ------------ | --- | ---- |  | - | ----- | -
|                      |  |             
|                      |  | December 31,
|                      |  |             
|                      |  | 2001         |     | 2000
|                      |  |              |     |     
|Capital leases        |  | $            | 97  |      |  | $ | 682   |  
|Note payable          |  |              |    |      |  |   | 94    |  
|Deferred rent         |  |              | 577 |      |  |   | 1,757 |  
|                      |  |              |     |      |  |   |       |  
|                      |  |              | 674 |      |  |   | 2,533 |  
|Less: Current portion |  |              | (97 | )    |  |   | (582  | )
|                      |  |              |     |      |  |   |       |  
|                      |  | $            | 577 |      |  | $ | 1,951 |  
|                      |  |              |     |      |  |   |       |  

Capital leases

The Company has maintained lease lines of credit
with leasing companies for the acquisition of property and
equipment under capital lease arrangements. The lease lines of
credit expired on December 31, 1999. Existing borrowings
bear interest at 14.4% to 15.1% and are due in varying monthly
installments through August 2002.

8. Stockholders equity

The Company is authorized to issue two classes of
stock designated as common and preferred. As of
December 31, 2001, the total number of shares that the
Company was authorized to issue was 105,000 shares, of which
100,000 were common stock and 5,000 were preferred stock. The
Company has completed two public stock offerings. In
March 2000, the Company completed a follow-on public stock
offering, selling 2,000 shares of common stock at a price of
$45.25 per share, raising a total of $84,647 in net proceeds
after payment of underwriting discounts, commissions and
offering expenses. In April and May 1999, the Company
completed an initial public offering (IPO), selling
4,198 shares of common stock at a price of $14 per share,
including 548 shares sold pursuant to the exercise of an
over-allotment option, raising a total of $53,213 in net
proceeds after payment of underwriting discounts, commissions
and offering expenses.

Preferred stock

There was no preferred stock outstanding at
December 31, 2001 or December 31, 2000. All shares of
the Companys preferred stock outstanding at
December 31, 1998 (10,669 shares) were converted to common
stock in connection with the IPO. Shares of the Companys
preferred stock were convertible, at the option of the holder,
into common stock on a share for share basis, included voting
rights and provided for certain preferential dividend,
liquidation, redemption and other rights.

Stock warrant

In October 1997, the Company issued a
warrant to purchase Series C Preferred Stock to a bank
pursuant to a business loan agreement that expired in 1998. The
warrant was for shares of Series C Preferred Stock at
$1.535 per share, but converted to a warrant for shares of
common stock upon the closing of the IPO. The warrant had a
nominal value on the date of issuance and was exercised in
August 1999.

F-15



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##### Table of Contents



NET PERCEPTIONS, INC.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

(in thousands, except per share
amounts)


Common stock

Total shares of common stock outstanding at
December 31, 2001 were 27,129, of which 10 are subject to a
repurchase option, which is at the Companys discretion, at
the original sale price in the event the employee holding the
shares terminates employment with the Company. In general, the
Companys repurchase option expires to the extent of 25% of
the applicable shares after the first year of service and then
in equal amounts over the next 36 months. The remaining
repurchase option on shares of common stock, including common
stock underlying unexercised stock options may lapse in the
event of a change in control.

Loan converted to common stock

In February 1999, a foreign corporate
investor loaned $4,000 to the Company at an interest rate of 8%.
The note and accrued interest were converted into 291 shares of
unregistered common stock in April 1999 in connection with
the IPO at a conversion price equal to the IPO offering price of
$14 per share.

Stock option plans

In April 2000, the Companys Board of
Directors adopted the 2000 Stock Plan (the 2000
Plan), which provides for the issuance of nonqualified
stock options to employees who are not officers. The options
allow the holder to purchase shares of the Companys common
stock at fair market value on the date of the grant. During
fiscal year 2001, 18 options were granted under the 2000 Plan.
The total number of options available for future grant under the
2000 Plan was 336 at December 31, 2001. Stock options
granted under the 2000 Plan typically vest over four years and
generally expire ten years from the date of grant.

In February 1999, the Companys Board
of Directors adopted the 1999 Equity Incentive Plan (the
1999 Plan), which provides for the issuance of both
incentive and nonqualified stock options. The options allow the
holder to purchase shares of the Companys common stock at
fair market value on the date of the grant. For options granted
to holders of more than 10% of the outstanding common stock, the
option price at the date of the grant must be at least equal to
110% of the fair market value of the stock. During fiscal year
2001, 2,633 options were granted under the 1999 Plan. Each year,
beginning January 1, 2000 and ending January 1, 2002,
the number of shares of common stock reserved for issuance under
the 1999 Plan will, in accordance with the terms of the 1999
Plan, be increased automatically by the lesser of 5% of the
total number of common shares then outstanding or 1,500 shares.
Accordingly, the number of shares of common stock reserved for
issuance under the 1999 Plan increased by 1,344 and 1,101 shares
in 2001 and 2000, respectively. The total number of options
available for future grant under the 1999 Plan was 1,742 at
December 31, 2001. Stock options granted under the 1999
Plan typically vest over four years and generally expire ten
years from the date of grant.

In February 1999, the Companys Board
of Directors adopted the 1999 Non-Employee Director Option Plan
(the 1999 Non-Employee Plan) under which
nonqualified stock options are granted to non-employee directors
of the Company. The 1999 Non-Employee Plan was amended and
restated in April 2001. Under the 1999 Non-Employee Plan,
195, 30 and 20 options were granted in fiscal year 2001, 2000
and 1999, respectively. As of December 31, 2001, 255
options were available for future grant under the 1999
Non-Employee Plan. Stock options granted under the 1999
Non-Employee Plan to a director upon his or her initial election
or appointment typically become exercisable over a two-year
period after issuance and expire ten years from the date of
grant. Stock options granted under the 1999

F-16



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##### Table of Contents



NET PERCEPTIONS, INC.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

(in thousands, except per share
amounts)


Non-Employee Plan to a director at each annual
meeting of the Companys stockholders typically are
immediately exercisable and expire ten years from the date of
grant.

The Companys 1996 stock option plan (the
1996 Plan) provides for the issuance of both
incentive and nonqualified stock options to employees. The
incentive options allow the holder to purchase shares of the
Companys common stock at fair market value on the date of
the grant, subject to certain repurchase rights held by the
Company. For options granted to holders of more than 10% of the
outstanding common stock, the option price at the date of the
grant must be at least equal to 110% of the fair market value of
the stock. Stock options granted under the 1996 Plan are
immediately exercisable but are subject to certain discretionary
repurchase rights by the Company, and generally expire ten years
from the date of grant. In general, common stock underlying
options are subject to repurchase by the Company at the original
exercise price. The repurchase feature generally expires for 25%
of the shares after the first year of service and then expires
ratably over the next 36 months. Upon adoption of the 1999 Plan,
the Company ceased granting options under the 1996 Plan.

Deferred compensation related to stock options
granted below fair market value in 1999 and 1998 totaled $2,826.
Such compensation is considered deferred compensation and
amortized over the four-year repurchase period of the common
stock underlying the related options. Related amortization of
stock compensation expense was $173, $625 and $1,495 in fiscal
years 2001, 2000 and 1999, respectively, and will total $59 in
2002.

Stock compensation expense related to accelerated
vesting of stock options was $42 and $427 in 2001 and 2000,
respectively. In 2001, the Company recognized $15 of other stock
compensation expense.

Stock compensation expense recorded in the
functional expense categories within operating expenses in 2001,
2000 and 1999, was allocated as follows:

|                           |  |      |     |      |  |      |       |  |  |   |       | 
|-------------------------- |  | ---- | --- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                           |  | 2001 |     | 2000 |  | 1999
|                           |  |      |     |      |  |     
|Sales and marketing        |  | $    | 39  |      |  | $    | 516   |  |  | $ | 784   | 
|Research and development   |  |      | 154 |      |  |      | 459   |  |  |   | 431   | 
|General and administrative |  |      | 37  |      |  |      | 77    |  |  |   | 280   | 
|                           |  |      |     |      |  |      |       |  |  |   |       | 
|                           |  | $    | 230 |      |  | $    | 1,052 |  |  | $ | 1,495 | 
|                           |  |      |     |      |  |      |       |  |  |   |       | 

A summary of activity of the Companys stock
option plans is presented below:

|                                 |  |                           |        |          |  |        |       |          |  |        |        |          |  |   |       |  |  |  |       |   |  |   |       | 
|-------------------------------- |  | ------------------------- | ------ | -------- |  | ------ | ----- | -------- |  | ------ | ------ | -------- |  | - | ----- |  |  |  | ----- | - |  | - | ----- | 
|                                 |  |                          
|                                 |  | Years Ending December 31,
|                                 |  |                          
|                                 |  |                           |        |          |  |       
|                                 |  | 2001                      |        | 2000     |  | 1999  
|                                 |  |                           |        |          |  |       
|                                 |  |                           |        | Weighted |  |        |       | Weighted |  |        |        | Weighted
|                                 |  |                           |        | Average  |  |        |       | Average  |  |        |        | Average 
|                                 |  |                           |        | Exercise |  |        |       | Exercise |  |        |        | Exercise
|                                 |  | Shares                    |        | Price    |  | Shares |       | Price    |  | Shares |        | Price   
|                                 |  |                           |        |          |  |        |       |          |  |        |        |         
|Outstanding at beginning of year |  |                           | 3,452  |          |  | $      | 14.16 |          |  |        | 2,549  |          |  | $ | 8.04  |  |  |  | 1,401 |   |  | $ | 0.52  | 
|Granted                          |  |                           | 2,846  |          |  |        | 1.40  |          |  |        | 2,759  |          |  |   | 19.97 |  |  |  | 1,525 |   |  |   | 13.67 | 
|KD1 options assumed              |  |                           |       |          |  |        |      |          |  |        | 266    |          |  |   | 2.31  |  |  |  |      |   |  |   |      | 
|Exercised                        |  |                           | (115   | )        |  |        | .53   |          |  |        | (765   | )        |  |   | 1.02  |  |  |  | (272  | ) |  |   | 0.62  | 
|Canceled                         |  |                           | (2,464 | )        |  |        | 13.74 |          |  |        | (1,357 | )        |  |   | 19.49 |  |  |  | (105  | ) |  |   | 8.84  | 
|                                 |  |                           |        |          |  |        |       |          |  |        |        |          |  |   |       |  |  |  |       |   |  |   |       | 
|Outstanding at end of year       |  |                           | 3,719  |          |  | $      | 4.97  |          |  |        | 3,452  |          |  | $ | 14.16 |  |  |  | 2,549 |   |  | $ | 8.04  | 
|                                 |  |                           |        |          |  |        |       |          |  |        |        |          |  |   |       |  |  |  |       |   |  |   |       | 

F-17



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##### Table of Contents



NET PERCEPTIONS, INC.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

(in thousands, except per share
amounts)


The following table summarizes information about
fixed-price stock options outstanding at December 31, 2001:

|                |  |                     |       |                     |  |                  |      |        |  |                  |       |  |  |  |       |  |  |   |       | 
|--------------- |  | ------------------- | ----- | ------------------- |  | ---------------- | ---- | ------ |  | ---------------- | ----- |  |  |  | ----- |  |  | - | ----- | 
|                |  |                     |       |                    
|                |  | Options Outstanding |       | Options Exercisable
|                |  |                     |       |                    
|                |  |                     |       | Weighted-Average    |  |                  |      |       
|Range Of        |  |                     |       | Remaining           |  | Weighted-Average |      |        |  | Weighted-Average
|Exercise Prices |  | Shares              |       | Contractual Life    |  | Exercise Price   |      | Shares |  | Exercise Price  
|                |  |                     |       |                     |  |                  |      |        |  |                 
|$0.13   $1.08  |  |                     | 329   |                     |  |                  | 7.04 |        |  | $                | 0.69  |  |  |  | 254   |  |  | $ | 0.58  | 
|$1.09   $1.09  |  |                     | 557   |                     |  |                  | 9.23 |        |  | $                | 1.09  |  |  |  | 137   |  |  | $ | 1.09  | 
|$1.10   $1.10  |  |                     | 503   |                     |  |                  | 9.81 |        |  | $                | 1.10  |  |  |  | 21    |  |  | $ | 1.10  | 
|$1.12   $1.40  |  |                     | 404   |                     |  |                  | 9.35 |        |  | $                | 1.33  |  |  |  | 64    |  |  | $ | 1.23  | 
|$1.72   $1.72  |  |                     | 750   |                     |  |                  | 9.39 |        |  | $                | 1.72  |  |  |  | 0     |  |  | $ | 0.00  | 
|$1.75   $3.56  |  |                     | 508   |                     |  |                  | 8.91 |        |  | $                | 3.07  |  |  |  | 165   |  |  | $ | 2.78  | 
|$4.00  $17.00  |  |                     | 430   |                     |  |                  | 7.71 |        |  | $                | 10.74 |  |  |  | 323   |  |  | $ | 9.87  | 
|$18.13  $50.56 |  |                     | 237   |                     |  |                  | 8.14 |        |  | $                | 38.13 |  |  |  | 110   |  |  | $ | 38.23 | 
|$57.33  $57.33 |  |                     | 1     |                     |  |                  | 8.04 |        |  | $                | 57.33 |  |  |  | 1     |  |  | $ | 57.33 | 
|                |  |                     |       |                     |  |                  |      |        |  |                  |       |  |  |  |       |  |  |   |       | 
|                |  |                     | 3,719 |                     |  |                  | 8.87 |        |  | $                | 4.97  |  |  |  | 1,075 |  |  | $ | 7.74  | 
|                |  |                     |       |                     |  |                  |      |        |  |                  |       |  |  |  |       |  |  |   |       | 

For the purposes of the SFAS No. 123 pro
forma disclosures below, the estimated fair value of the options
is amortized to expense over the four year repurchase period of
the common stock underlying the related options. Had
compensation expense for the Companys stock plan been
determined based on the minimum value at the grant date for
awards during 2001, 2000 and 1999 consistent with the provisions
of SFAS No. 123, the Companys net loss and basic and
diluted net loss per share for fiscal years 2001, 2000 and 1999
would have been the pro forma amounts indicated below:

|                                      |             |      |   |          |   |      |   |         |   |  |   |         |  
|------------------------------------- | ----------- | ---- | - | -------- | - | ---- | - | ------- | - |  | - | ------- | -
|                                      |             | 2001 |   | 2000     |   | 1999
|                                      |             |      |   |          |   |     
|Net loss:                             |             |      |   |          |   |      |   |         |   |  |   |        
|                                      | As reported |      | $ | (123,798 | ) |      | $ | (53,547 | ) |  | $ | (12,039 | )
|                                      | Pro forma   |      |   | (127,822 | ) |      |   | (61,148 | ) |  |   | (12,202 | )
|Basic and diluted net loss per share: |             |      |   |          |   |      |   |         |   |  |   |        
|                                      | As reported |      | $ | (4.59    | ) |      | $ | (2.12   | ) |  | $ | (0.78   | )
|                                      | Pro forma   |      |   | (4.74    | ) |      |   | (2.43   | ) |  |   | (0.79   | )

The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions used for
grants in 2001, 2000 and 1999, respectively; dividend yield of
0% for all years; risk-free interest rates of 4.6%, 6.1% and
5.8%; expected lives of 5 years, and volatility factors of
97%, 90% and 66% in 2001, 2000 and 1999 for grants after the
IPO. Volatility factors were not used for periods prior to the
IPO as this factor is not applicable to non-public companies for
these fair value calculations. The weighted-average fair value
of options granted during 2001, 2000 and 1999 using the
Black-Scholes option-pricing model was $1.24, $14.60 and $8.24
per share, respectively.

Employee Stock Purchase Plan

In February 1999, the Companys Board
of Directors adopted the Employee Stock Purchase Plan (the
Purchase Plan). The initial number of shares of
common stock reserved for issuance under the Purchase Plan was
1,000. Each year, beginning January 1, 2000 and ending
January 1, 2002, the number of shares of common stock
reserved for issuance under the Purchase Plan will, in
accordance with the terms of the Purchase Plan, be increased
automatically by the lesser of 2% of the total number of common
shares then outstanding or 300 shares. Accordingly, the number
of shares of common stock

F-18



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##### Table of Contents



NET PERCEPTIONS, INC.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

(in thousands, except per share
amounts)


reserved for issuance under the Purchase Plan
increased by 300 in each of 2001 and 2000. As of
December 31, 2001, 1,196 shares were available for future
purchase under the Employee Stock Purchase Plan. During 2001,
2000 and 1999, 146, 216 and 42 shares, respectively, were issued
under the Purchase Plan.

Stock split

On March 22, 1999, the Companys Board
of Directors authorized a 2-for-1 stock split of the then issued
and outstanding capital stock. All references to common stock
amounts and preferred stock amounts, shares and per share data
included in the financial statements and related notes have been
adjusted to give retroactive effect to the stock split.

Stockholders rights plan

In June 2001, the Company entered into a
Rights Agreement (the Rights Agreement), commonly
known as a poison pill. Under the Rights Agreement,
stockholders of record on June 14, 2001 were distributed
Rights (the Rights) to acquire one one-thousandth of
a share of the Companys Series A Junior Participating
Preferred Stock (the Preferred Stock), at a rate of
one Right for each share of the Companys common stock (the
Common Stock) held by stockholders on such date. The
Rights trade together with the Common Stock and generally become
exercisable on the tenth day after a person or group
(i) acquires 15% of more of the outstanding Common Stock or
(ii) commences a tender offer or exchange offer that would
result in such a person or group owning 15% or more of the
Common Stock. In the event that a person or group acquires 15%
or more of the Common Stock (a Stock Acquisition),
each Right not owned by the 15% or more stockholder (the
Acquiring Person) and its affiliates would become
exercisable for the exercise price of the Right (currently, $15)
for either Preferred Stock or Common Stock in an amount equal to
the then current exercise price of the Right divided by one half
the then current market price of the Common Stock.
Alternatively, in the event of certain business combinations
following a Stock Acquisition, each Right not owned by the
Acquiring Person and its affiliates would become exercisable for
the exercise price of the Right for common stock of the
Acquiring Person in an amount equal to the then current exercise
price of the Right divided by one half the market price of the
Acquiring Persons common stock. At any time until ten days
following a Stock Acquisition, the Rights are redeemable by the
Companys Board of Directors at a price of $.01 per Right.
The Rights have no voting privileges. The Rights will terminate
upon the earlier of the date of their redemption or ten years
from the date of issuance.

9. Joint venture

In July 1999, the Company entered into a
joint venture agreement under which the Company and three other
companies formed Net Perceptions Japan for the purpose of
distributing the Companys and other non-competing software
products in Japan. Under the agreement, the Company contributed
capital of $394 for a 45% interest in the joint venture. The
Company accounts for this joint venture investment using the
equity method of accounting, records its share of income or loss
in the income statement and correspondingly adjusts the carrying
value of the investment. In 2000 and 1999, the Company recorded
its 45% share of losses in Net Perceptions Japan, which were
$197 in each year, effectively reducing the Companys
original capital investment to zero.

F-19



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NET PERCEPTIONS, INC.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

(in thousands, except per share
amounts)


10. Commitments and contingencies

Operating leases

The Company has entered into operating lease
commitments for its office space. In connection with the
restructuring described in Note 5, the Company has subleased a
significant portion of its office space and is actively seeking
to sublease remaining excess space. However, the Company remains
obligated under these lease agreements. Minimum future lease
payments due under the agreements are as follows:

|                         |  |   |        | 
|------------------------ |  | - | ------ | 
|Year Ending December 31, |  |  
|                         |  |  
|2002                     |  | $ | 4,001  | 
|2003                     |  |   | 4,056  | 
|2004                     |  |   | 3,294  | 
|2005                     |  |   | 3,240  | 
|2006                     |  |   | 3,094  | 
|2007 and after           |  |   | 11,695 | 
|                         |  |   |        | 
|                         |  | $ | 29,380 | 
|                         |  |   |        | 

Under the terms of existing sublease agreements,
the Company expects to receive sublease payments of $1,729,
$2,240, $1,792, $1,645, $1,718 and $5,833 in 2002, 2003, 2004,
2005, 2006 and 2007 and thereafter, respectively. However, there
is a risk that one or more of the subtenants may breach the
terms of the sublease agreements and the Company may not receive
all of the expected payments.

Rent expense totaled $1,709, $2,333 and $847 for
the years ended December 31, 2001, 2000 and 1999,
respectively.

Contingencies

On or about November 2, 2001,
Timothy J. Fox filed a purported class action lawsuit
against the Company, FleetBoston Robertson Stephens, Inc., the
lead underwriter of the Companys IPO, several other
underwriters who participated in the Companys IPO,
Steven J. Snyder, the Companys then president and
chief executive officer, and Thomas M. Donnelly, the
Companys chief operating officer and chief financial
officer. The suit generally alleges that the defendants violated
federal securities laws by not disclosing certain actions taken
by the underwriter defendants in connection with the IPO. The
suit alleges specifically that the underwriter defendants, with
the Companys direct participation and agreement and
without disclosure thereof, conspired to and did raise and
increase their underwriters compensation and the market
prices of the Companys common stock following the
Companys initial public offering by requiring their
customers, in exchange for receiving allocations of shares of
common stock sold in the Companys initial public offering,
to pay excessive commissions on transactions in other securities
and to purchase additional shares of the Companys common
stock in the initial public offering aftermarket at
pre-determined prices above the initial public offering price.
The suit seeks unspecified monetary damages and certification of
a plaintiff class consisting of all persons who acquired the
Companys common stock between April 22, 1999 through
December 6, 2000.

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

F-20



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##### Table of Contents



NET PERCEPTIONS, INC.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

(in thousands, except per share
amounts)


11. 401(k) plan

The Company has a 401(k) employee retirement plan
under which eligible employees may contribute up to 20% of their
annual compensation, subject to certain limitations. Employees
vest immediately in their contributions and earnings thereon.
The plan allows for, but does not require, the Company to match
employee contributions. The Company has not made any such
matching contributions.

12. Segment data

The Company operates in one segment, selling
software products and related services. The Companys chief
operating decision-maker evaluates revenue and profitability
performance on an enterprise-wide basis to make operating and
strategic decisions. Approximately 56%, 80% and 100% of total
revenues in fiscal year 2001, 2000 and 1999, respectively, were
attributable to the Net Perceptions Personalization Manager(or predecessor products). Advertising Advisor(or
predecessor products), which the Company acquired in February
2000 as part of its acquisition of KD1, accounted for
approximately 42% and 13% of our total revenues in 2001 and
2000, respectively. Service revenues in all periods presented
were derived principally from implementation and support of the
Companys software products.

In addition, the Company does not allocate
operating expenses to any segments, nor does it allocate
specific assets to any segments. Therefore, segment information
is identical to the consolidated balance sheet and consolidated
statement of operations.

13. Related Party Transaction

In December 2000, the Company entered into a
full recourse secured promissory note and security agreement
with an officer of the Company. Under the terms of the
agreement, up to $300 could be loaned to the officer prior to
April 15, 2001 solely to pay federal income tax owed by the
officer in connection with the officers exercise in
March 2000 of an option to purchase shares of the
Companys stock. Amounts outstanding under the note shall
bear interest at 8% per annum and are partially secured by
33,000 shares of the Companys stock held by the officer
and pledged to the Company. On April 11, 2001, $258 was
loaned to the officer to pay alternative minimum tax relating to
the option exercise under the terms of the note.

Principal and interest owed by the officer shall
be forgiven if the officers employment is terminated other
than voluntarily or for cause, or if there is a change in
control of the Company as defined in the agreement.
Additionally, one-third of the original principal and accrued
interest will be forgiven for each year that the officer remains
continuously employed by the Company subsequent to
April 2001. Otherwise, principal and accrued interest are
payable by the officer in April 2003.

The principal balance of the loan is being
amortized to expense ratably over the term of the agreement
commencing in April 2001. As of December 31, 2001, the
balance of $193 is included in prepaid expenses and other
current assets.

F-21



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##### Table of Contents



SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, as amended, the
registrant has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.



| |                      
| | ---------------------
| | NET PERCEPTIONS, INC.



| |     |                       
| | --- | ----------------------
| | By: | /s/ DONALD C. PETERSON

| |                                      
| | -------------------------------------
| |                                      
| | Donald C. Peterson                   
| | President and Chief Executive Officer

Date: April 1, 2002

Pursuant to the requirements of the Securities
Exchange Act of 1934, as amended, this report has been signed
below by the following persons on behalf of the registrant in
the capacities indicated on April 1, 2002.

|                                         |  |                                                                                              
|---------------------------------------- |  | ---------------------------------------------------------------------------------------------
|Signature                                |  | Title                                                                                        
|                                         |  |                                                                                              
|/s/ DONALD C. PETERSONDonald C. Peterson |  | President, Chief Executive Officer, and Director
	(Principal Executive Officer)              
|                                        
|/s/ THOMAS M. DONNELLYThomas M. Donnelly |  | Chief Operating Officer, Chief Financial Officer
	and Secretary (Principal Financial Officer)
|                                        
|/s/ SHARRI E. MAJORSharri E. Major       |  | Vice President, Finance & Administration
	(Principal Accounting Officer)                     
|                                        
|/s/ JOHN T. RIEDLJohn T. Riedl           |  | Director                                                                                     
|                                        
|/s/ JOHN F. KENNEDYJohn F. Kennedy       |  | Director                                                                                     
|                                        
|/s/ WILLIAM LANSINGWilliam Lansing       |  | Director                                                                                     
|                                        
|/s/ STEVEN J. SNYDERSteven J. Snyder     |  | Director                                                                                     
|                                        
|/s/ ANN L. WINBLADAnn L. Winblad         |  | Director                                                                                     



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##### Table of Contents



EXHIBIT INDEX

|        |        |             |  |                                                                                                                                                                      
|------- | ------ | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |            
|Number  |        | Description
|        |        |            
|        | 3.1(a) |             |  | Amended and Restated Certificate of
	Incorporation(1).                                                                                                               
|        | 3.1(b) |             |  | Certificate of Amendment to the Amended and
	Restated Certificate of Incorporation(2).                                                                               
|        | 3.2    |             |  | Amended and Restated Bylaws as amended through
	April 18, 2001(3).                                                                                                   
|        | 4.1    |             |  | Amended and Restated Investor Rights Agreement,
	dated December 18, 1997, among Net Perceptions, Inc. and
	the investors and founders named therein, as amended(1).  
|        | 4.2    |             |  | Specimen common stock certificate(1).                                                                                                                                
|        | 4.3    |             |  | Specimen common stock certificate (including
	Rights Agreement Legend)(4).                                                                                           
|        | 4.4    |             |  | Rights Agreement between Net Perceptions, Inc.
	and Wells Fargo Bank Minnesota, as Rights Agent(5).                                                                  
|        | 4.5    |             |  | Form of Certificate of Designation of
	Series A Junior Participating Preferred Stock (attached as
	Exhibit A to the Rights Agreement filed as Exhibit 4.4
	hereto)(5)
|        | 4.6    |             |  | Form of Rights Certificate (attached as
	Exhibit B to the Rights Agreement filed as Exhibit 4.4
	hereto)(5)                                                          
|        | 10.1   |             |  | Form of Indemnification Agreement entered into
	between Net Perceptions, Inc. and its directors and officers(1).                                                     
|        | 10.2   |             |  | 1996 Stock Plan(1).                                                                                                                                                  
|        | 10.3   |             |  | 1999 Equity Incentive Plan(1).                                                                                                                                       
|        | 10.4   |             |  | Amended and Restated 1999 Non-Employee Director
	Option Plan, as amended through April 2, 2001(3).                                                                   
|        | 10.5   |             |  | Employee Stock Purchase Plan(1).                                                                                                                                     
|        | 10.6   |             |  | Knowledge Discovery One, Inc. 1996 Stock Option/
	Stock Issuance Plan(6).                                                                                            
|        | 10.7   |             |  | Office Lease Agreement between DRF Holding LLC
	and Net Perceptions, Inc. dated April 5, 2000(7).                                                                    
|        | 10.8   |             |  | 2000 Stock Plan(2).                                                                                                                                                  
|        | 10.9   |             |  | Change in Control Severance Plan and Summary Plan
	Description(1).                                                                                                   
|        | 10.10  |             |  | Employment Agreement, dated as of May 24,
	2001 between Net Perceptions, Inc. and Donald C. Peterson(5).                                                             
|        | 10.11  |             |  | Severance Agreement, dated as of November 9,
	2001 between Net Perceptions, Inc. and Thomas M. Donnelly.                                                             
|        | 21.1   |             |  | List of Subsidiaries.                                                                                                                                                
|        | 23.1   |             |  | Consent of PricewaterhouseCoopers LLP,
	independent accountants.                                                                                                     






|    |                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to Net
	Perceptions Registration Statement on Form S-1
	(Registration No. 333-71919).                       
|   
|(2) | Incorporated by reference to Net
	Perceptions Quarterly Report on Form 10-Q for the
	Quarter Ended June 30, 2000 (File No. 000-25781) 
|   
|(3) | Incorporated by reference to Net
	Perceptions Quarterly Report on Form 10-Q for the
	Quarter Ended March 31, 2001 (File No. 000-25781)
|   
|(4) | Incorporated by reference to Net
	Perceptions Quarterly Report on Form 10-Q for the
	Quarter Ended June 30, 2001 (File No. 000-25781) 



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|    |                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------
|(5) | Incorporated by reference to Net
	Perceptions Registration Statement on Form 8-A filed
	June 6, 2001 (File No. 000-25781)             
|   
|(6) | Incorporated by reference to Net
	Perceptions Registration Statement on Form S-1
	(Registration No. 333-31230).                       
|   
|(7) | Incorporated by reference to Net
	Perceptions Quarterly Report on Form 10-Q for the
	Quarter Ended March 31, 2000 (File No. 000-25781)