**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 
 **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, 2005
 OR
 
 o
        TRANSITION REPORT
        PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
        1934
 
 For
        the
        transition period from _________to___________
 
 Commission
        File Number 000-25781
  
  **NET
        PERCEPTIONS, INC.**
 **(Exact
        Name of Registrant as Specified in its Charter)**
  
  **Delaware**
              **41-1844584****(State
                  or Other Jurisdiction**
              **(I.R.S.
                  Employer Identification No.)****of
                  Incorporation or Organization)****One
                  Landmark Square, Stamford, Connecticut**
              **06901****(Address
                  of Principal Executive Offices)**
              **(Zip
                  Code)**
 **(203)
        428-2040**
 **(Registrant’s
        telephone number, including area code)**
 
 **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)**
 
 **Preferred
        Stock Purchase Rights**
 **(Title
        of class)**
 
 Indicate
        by check mark if the registrant is a well-known seasoned issuer, as defined
        in
        Rule 405 of the Securities Act.
 YES o NO x
 
 Indicate
        by check mark if the registrant is not required to file reports pursuant
        to
        Section 13 or Section 15(d) of the Exchange
 Act.
        YES
oNO x
 
 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 xNO 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 the definitive proxy or information statement
        incorporated by reference in Part
 III
        of
        this Form 10-K or any amendment to this Form 10-K.x
  Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Large
        accelerated filer oAccelerated
        filer
 Non-accelerated
        filer x
 
 Indicate
        by check mark whether the Registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act) YES oNO x
 
 The
        aggregate market value of voting and non-voting stock held by non-affiliates
        of
        the Registrant, based upon the last sale price of the Registrant’s Common Stock,
        par value $0.0001 per share, reported on the OTC Pink Sheets Electronic
        Quotation Service on June 30, 2005 was $21,877,236.
 
 As
        of
        March 15, 2006, there were outstanding 28,917,745 shares of the Registrant’s
        Common Stock, $0.0001 par value.
 
 **DOCUMENT
        INCORPORATED BY REFERENCE**
 Portions
        of our Proxy Statement for the 2006 Annual Meeting of Stockholders to be
        filed
        with the Securities and Exchange Commission within 120 days of the Registrant’s
        2005 fiscal year end are incorporated by reference into Part III of this
        report.
 
 
 
 
 **NET
        PERCEPTIONS, INC.**
 **ANNUAL
        REPORT ON FORM 10-K**
 **FOR
        THE YEAR ENDED DECEMBER 31, 2005**
 
 **TABLE
        OF CONTENTS**
 
 ******Page****PART
                  I**ITEM
                  1.
              BUSINESS
              1ITEM
                  2.
              PROPERTIES
              7ITEM
                  3.
              LEGAL
                  PROCEEDINGS
              7ITEM
                  4.
              SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY HOLDERS
              7**PART
                  II**ITEM
                  5.
              MARKET
                  FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
                  PURCHASES OF EQUITY SECURITIES
              8ITEM
                  6.
              SELECTED
                  CONSOLIDATED FINANCIAL DATA
              9ITEM
                  7.
              MANAGEMENT’S
                  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                  OPERATIONS
              10ITEM
                  7A.
              QUANTITATIVE
                  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
              17ITEM
                  8.
              FINANCIAL
                  STATEMENTS AND SUPPLEMENTARY DATA
              18ITEM
                  9.
              CHANGES
                  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                  DISCLOSURE
              34ITEM
                  9A.
              CONTROLS
                  AND PROCEDURES
              34**PART
                  III**ITEM
                  10.
              DIRECTORS
                  AND EXECUTIVE OFFICERS OF THE REGISTRANT
              35ITEM
                  11.
              EXECUTIVE
                  COMPENSATION
              35ITEM
                  12.
              SECURITY
                  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
              35ITEM
                  13.
              CERTAIN
                  RELATIONSHIPS AND RELATED TRANSACTIONS
              36ITEM
                  14.
              PRINCIPAL
                  ACCOUNTANT FEES AND SERVICES
              36**PART
                  IV**ITEM
                  15.
              EXHIBITS,
                  FINANCIAL STATEMENT SCHEDULES
              37**SIGNATURES**
              
              39**EXHIBIT
                  INDEX**
              40
 
  
 **FORWARD-LOOKING
        STATEMENTS**
 
 This
        report contains certain forward-looking statements, including information
        about
        or related to our future results, certain projections and business trends.
        Assumptions relating to forward-looking statements involve judgments with
        respect to, among other things, future economic, competitive and market
        conditions and future business decisions, all of which are difficult or
        impossible to predict accurately and many of which are beyond our control.
        When
        used in this report, the words “estimate,” “project,” “intend,” “believe,”
“expect” and similar expressions are intended to identify forward-looking
        statements. Although we believe that our assumptions underlying the
        forward-looking statements are reasonable, any or all of the assumptions
        could
        prove inaccurate, and we may not realize the results contemplated by the
        forward-looking statements. Management decisions are subjective in many respects
        and susceptible to interpretations and periodic revisions based upon actual
        experience and business developments, the impact of which may cause us to
        alter
        our business strategy or capital expenditure plans that may, in turn, affect
        our
        results of operations. In light of the significant uncertainties inherent
        in the
        forward-looking information included in this report, you should not regard
        the
        inclusion of such information as our representation that we will achieve
        any
        strategy, objectives or other plans. The forward-looking statements contained
        in
        this report speak only as of the date of this report, and we have no obligation
        to update publicly or revise any of these forward-looking statements.
 
 These
        and
        other statements, which are not historical facts, are based largely upon
        our
        current expectations and assumptions and are subject to a number of risks
        and
        uncertainties that could cause actual results to differ materially from those
        contemplated by such forward-looking statements. These risks and uncertainties
        include, among others, our planned effort to redeploy our assets and use
        our
        cash, cash equivalent assets and marketable securities to enhance stockholder
        value following the sale of substantially all of our software business, which
        represented substantially all of our revenue generating operations and related
        assets, and the risks and uncertainties set forth in the section headed “Factors
        That May Affect Our Future Results” of Part I of this report and described in
“Management’s Discussion and Analysis of Financial Condition and Results of
        Operations” of Part II of this report. The Company cannot guarantee its future
        performance. We cannot assure you that we will be successful in our efforts
        to
        redeploy our assets or that any such redeployment will result in Net
        Perception’s future profitability. Our failure to redeploy our assets could have
        a material adverse effect on the market price of our common stock and our
        business, financial condition and results of operations.
 
 References
        in this report 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”), prior to its merger with and into the Company
        on September 9, 2003.
  **PART
        I**
 
 **ITEM
        1. BUSINESS**
 
 **Overview**
 
 Net
        Perceptions was formerly a provider of software solutions designed to enable
        customers to improve their marketing, selling and merchandising effectiveness.
        We are currently seeking to redeploy our cash, cash equivalent assets and
        marketable securities to enhance stockholder value and are seeking, analyzing
        and evaluating potential acquisition and merger candidates. We were incorporated
        in Delaware in July 1996. Our principal corporate office is located at One
        Landmark Square, Stamford, Connecticut 06901 and our telephone number is
        (203)
        428-2040.
  On
        April 21, 2004, we announced the simultaneous signing and closing of an
        investment into the Company by Olden Acquisition LLC (“Olden”), an affiliate of
        Kanders & Company, Inc., an
        entity owned and controlled by the Company’s Executive Chairman, Warren B.
        Kanders, for
        the purpose of initiating a strategy to redeploy our assets and use our cash,
        cash equivalent assets and marketable securities to enhance stockholder value.
  As
        part
        of our asset redeployment strategy, we are currently working to identify
        suitable merger or acquisition opportunities that can serve as a platform
        for
        future growth. Although we are not targeting specific business industries
        for
        potential mergers or acquisitions, we plan to seek businesses with cash flow,
        experienced management teams, and operations in markets offering stability
        and
        growth potential.
  We
        are
        attempting to limit our cash expenditure rate by, among other things, awarding
        executive management primarily non-cash deferred equity compensation. In
        connection with the consummation of an asset redeployment transaction, it
        is
        expected that management and/or Kanders & Company, Inc. will be awarded cash
        and/or equity compensation based upon the completion of the redeployment
        transaction.
  1
 **Business**
  On
        March
        31, 2004, we and Thalveg Data Flow, LLC, (“Thalveg”) executed an amendment to
        the patent purchase agreement which had been entered into on December 30,
        2003,
        and we completed the sale of our patent portfolio provided for therein for
        a
        purchase price of $1.8 million in cash. The patent purchase agreement, as
        amended, includes a royalty-free, non-exclusive license back to us. The license
        is transferable, subject to certain restrictions applicable to the transferee
        relating to revenues that can be generated by products covered by the license.
        This transaction did not involve any of our other intellectual property rights
        or assets, including our proprietary software products.
  In
        addition, on March 31, 2004, we announced that we had granted to a software
        company a non-exclusive source code license to a portion of the Company’s
        intellectual property and sold certain technology related to a product
        discontinued in 2002. The aggregate consideration for this sale and license
        was
        $325,000 which was recognized as license revenue in the first quarter of
        2004.
  On
        April
        1, 2004, we entered into an agreement with Tornago, Inc. (“Tornago”) a
        corporation formed by three former non-officer employees, to fulfill existing
        prepaid customer support obligations in exchange for future cash payments
        of
        approximately $60,000. This amount represented approximately 60% of the
        remaining prepaid deferred maintenance revenue amounts under the existing
        end
        user contracts when measured from April 1, 2004. The Company will continue
        to
        recognize the deferred revenue as earned and the payments to Tornago will
        be
        reflected as cost of revenue. Under the terms of the agreement, Tornago received
        a non-transferable license to relevant intellectual property solely to provide
        support and consulting services to end users of our products. Under the
        agreement, we will receive a 15% royalty on any follow-on services sold by
        Tornago through April 1, 2006. In connection with the agreement with Tornago,
        we
        terminated the employment of the remaining members of our engineering staff,
        effective March 31, 2004, and paid severance to these employees in accordance
        with existing agreements. While we expect to continue to service our existing
        customers through Tornago and may continue to derive a declining level of
        revenues from software licenses and royalties, software maintenance and
        professional services relating to existing customers, we are no longer directly
        marketing or supporting our products and have not retained any employees
        to do
        so.
  On
        April 21, 2004, we announced the simultaneous signing and closing of the
        investment into the Company by Olden , for
        the purpose of initiating a strategy to redeploy our assets and use our cash,
        cash equivalent assets and marketable securities to enhance stockholder value.
        We issued and sold to Olden a 2% ten-year Convertible Subordinated Note,
        which
        is convertible after one year (or
        earlier upon a call by the Company and in certain other circumstances) at
        a conversion price of $0.45 per share of Company common stock into approximately
        19.9% of the outstanding common equity of the Company as of the closing date.
        Proceeds to the Company from this transaction totaled approximately $2.5
        million
        before transaction costs of $288,000.
  As
        previously disclosed in our Report on Form 8-K filed with the Securities
        and
        Exchange Commission on September 1, 2004, our securities were delisted from
        the
        Nasdaq SmallCap Market effective with the opening of business on September
        3,
        2004. The delisting followed a determination by the Nasdaq Listing
        Qualifications Panel that the Company was a “public shell” and should be
        delisted due to policy concerns raised under Nasdaq Marketplace Rules 4300
        and
        4300(a)(3). The Company’s common stock is now quoted on the OTC Pink Sheets
        Electronic Quotation Service under the symbol “NETP.PK.”
  **Prior
        Business**
  We
        previously developed and marketed software solutions designed to enable our
        customers to interact more intelligently with their customers. Our solutions
        integrated and analyzed information about customers, products and transaction
        activity to generate specific actions our customers could take to improve
        their
        marketing, selling and merchandising effectiveness. We combined our software
        products with industry expertise and professional services to create
        industry-specific solutions that were designed to integrate with and add
        value
        to existing custom or purchased systems, including customer relationship
        management, or CRM, systems and processes.
  Our
        initial product was shipped in January 1997. From inception through late
        2000,
        we expanded our organization by hiring personnel in key areas. Our total
        number
        of employees was 315 on December 31, 2000. During 2001, 2002 and 2003, we
        instituted certain restructuring plans to align our cost structure with our
        business outlook and general economic conditions. In connection with our
        restructuring activities, our total number of employees was reduced to 98
        as of
        December 31, 2001, 52 as of December 31, 2002, and nine as of December 31,
        2003.
        As of December 31, 2005, the Company had six employees, two of whom are
        executive officers.
  Until
        2005, we had sustained losses on an annual basis since inception. As of December
        31, 2005, we had an accumulated deficit of $222.0 million. Our net income
        was
        $207,000 for the year ended December 31, 2005, compared to a net loss of
        $61,000
        in the prior year. This increase in net income was principally due to a
        reduction in general and administrative expenses and to a lesser extent
        non-recurring items including $118,000 of royalty revenue and a gain from
        the
        settlement of a litigation of $223,000. The accumulated deficit referred
        to in
        this paragraph resulted from significant costs incurred related to restructuring
        activities, significant costs for outside professional services related to
        the
        exploration of various strategic alternatives for the Company, as well as
        a
        decline in our revenues since the third quarter of 2000.
 
 2
 In
        February 2003, we engaged U.S. Bancorp Piper Jaffray to act as our financial
        advisor in connection with the potential sale of the Company. On September
        2,
        2003, we paid a return of capital cash distribution to stockholders of record
        as
        of August 18, 2003 in the amount of $1.50 per share or a total of approximately
        $42.2 million, which was reflected as a reduction to additional paid-in capital.
        We also reduced our workforce by 12 positions to ten full-time employees.
  On
        October 21, 2003, we announced that our board of directors had unanimously
        approved a Plan of Complete Liquidation and Dissolution, referred to as the
        plan
        of liquidation. The plan of liquidation was submitted to the Company’s
        stockholders for approval and adoption at a special meeting of stockholders
        originally scheduled for March 12, 2004, which was adjourned and was reconvened
        on March 23, 2004. At the reconvened special meeting, the proposal to approve
        and adopt the plan of liquidation did not receive the affirmative vote of
        a
        majority of the 28,145,338 shares of common stock outstanding as of the record
        date for the special meeting required to approve the proposal. Of the 15,773,134
        shares represented in person or by proxy at the reconvened special meeting,
        13,810,233 shares voted in favor of the proposal, 1,925,694 shares voted
        against
        and 37,207 shares abstained.
 
 **Employees**
 
 All
        of
        our employees are based in the United States. As of December 31, 2005, we
        had
        six employees, two of whom are executive officers, and all of whom are located
        in our Stamford, Connecticut headquarters. Our employees only devote as much
        of
        their time as is necessary to the affairs of the Company and also serve in
        various capacities with other public and private entities. None of our employees
        are represented by a labor union or are subject to a collective bargaining
        agreement. We have not experienced any work stoppages and consider our
        relationship with our employees to be good.
 
 **FACTORS
        THAT MAY AFFECT OUR FUTURE RESULTS**
 
 *In
        addition to other information in this annual report on Form 10-K, the following
        risk factors should be carefully considered in evaluating our business because
        such factors may have a significant impact on our business, operating results,
        liquidity and financial condition. However, the risks and uncertainties
        described below are not the only ones we face. Additional risks and
        uncertainties not presently known to us or which are currently deemed immaterial
        may also impair our financial condition. If any of these risks actually occur,
        our financial condition could be materially adversely affected.*
 
 **RISKS
        RELATED TO NET PERCEPTIONS**
 
 **WE
        CONTINUE TO INCUR OPERATING LOSSES.**
 
 As
        a
        result of the sale or shutdown of substantially all of our software business,
        we
        will no longer generate revenue previously associated with the products and
        contracts comprising our software business. Absent non-recurring gains, our
        ongoing operations are not profitable and have incurred an accumulated deficit
        of $222.0 million from our inception through December 31, 2005. Our current
        ability to generate revenues and to achieve profitability and positive cash
        flow
        will depend on our ability to redeploy our assets and use our cash, cash
        equivalent assets and marketable securities to reposition our business whether
        it is through a merger or acquisition. Our ability to become profitable will
        depend, among other things, (i) on our success in identifying and acquiring
        a
        new operating business, (ii) on our development of new products or services
        relating to our new operating business, and (iii) on our success in distributing
        and marketing our new products or services.
 
 **WE
        MAY BE UNABLE TO REDEPLOY OUR ASSETS SUCCESSFULLY.**
 
 As
        part
        of our strategy to limit operating losses and enable the Company to redeploy
        its
        assets and use its cash, cash equivalent assets and marketable securities
        to
        enhance stockholder value, we have sold or shutdown our operating businesses,
        which represented substantially all of our revenue-generating operations
        and
        related assets. We are pursuing a strategy of identifying suitable merger
        partners and acquisition candidates that will serve as a platform company.
        Although we are not targeting specific business industries for potential
        acquisitions, we plan to seek businesses with cash flow, experienced management
        teams, and operations in markets offering stability and growth opportunities.
        We
        may be unsuccessful in acquiring such a business or in operating any business
        that we identify. We have been working without success since April 2004 to
        identify a suitable acquisition or merger partner and consummate a transaction.
        Failure to redeploy successfully will result in our inability to become
        profitable.
 
 3
 Even
        if
        we identify an appropriate acquisition opportunity, we may be unable to
        negotiate favorable terms for that acquisition. We may be unable to select,
        manage or absorb or integrate any future acquisitions successfully. Any
        acquisition, even if effectively integrated, may not benefit our stockholders.
 
 Any
        acquisitions that we attempt or complete may involve a number of unique risks
        including: (i) executing successful due diligence; (ii) our exposure to
        unforeseen liabilities of acquired companies; and (iii) our ability to integrate
        and absorb the acquired company successfully. We may be unable to address
        these
        problems successfully. Our failure to redeploy our assets could have a material
        adverse effect on the market price of our common stock and our business,
        financial condition and results of operations.
 
 **WE
        WILL INCUR SIGNIFICANT COSTS IN CONNECTION WITH OUR EVALUATION OF SUITABLE
        MERGER PARTNERS AND ACQUISITION CANDIDATES.**
 
 As
        part
        of our plan to redeploy our assets, our management is seeking, analyzing
        and
        evaluating potential acquisition and merger candidates. We have incurred
        and
        will continue to incur significant costs, such as due diligence and legal
        and
        other professional fees and expenses, as part of these redeployment efforts
        during due diligence and negotiation of potential acquisitions. Notwithstanding
        these efforts and expenditures, we cannot give any assurance that we will
        identify an appropriate acquisition opportunity in the near term, or at all.
 
 **WE
        WILL LIKELY HAVE NO OPERATING HISTORY IN OUR NEW LINE OF BUSINESS, WHICH
        IS YET
        TO BE DETERMINED, AND THEREFORE WE WILL BE SUBJECT TO THE RISKS INHERENT
        IN
        ESTABLISHING A NEW BUSINESS.**
 
 We
        have
        not identified what our new line of business will be; therefore, we cannot
        fully
        describe the specific risks presented by such business. It is likely that
        we
        will have had no operating history in the new line of business and it is
        possible that the target company may have a limited operating history in
        its
        business. Accordingly, there can be no assurance that our future operations
        will
        generate operating or net income, and as such, our success will be subject
        to
        the risks, expenses, problems and delays inherent in establishing a new line
        of
        business for the Company. The ultimate success of such new business cannot
        be
        assured.
 
 **THE
        REPORTING REQUIREMENTS UNDER RULES ADOPTED BY THE SECURITIES AND EXCHANGE
        COMMISSION RELATING TO SHELL COMPANIES MAY DELAY OR PREVENT US FROM MAKING
        CERTAIN ACQUISITIONS.**
 
 As
        a
        result of the final rules adopted by the Securities and Exchange Commission
        on
        June 29, 2005, Net Perceptions may be deemed to be a shell company. The rules
        are designed to ensure that investors in shell companies that acquire operations
        have timely access to the same kind of information as is available to investors
        in public companies generally. The rules prohibit the use by shell companies
        of
        a Form S-8 and revise the Form 8-K to require a shell company to include
        extensive registration-level information required to register a class of
        securities under the Securities Exchange Act of 1934 (the “Exchange Act”), in
        the filing on Form 8-K that the shell company files to report the acquisition
        of
        a business.
 
 The
        extensive registration-level information includes a detailed description
        of a
        company’s business and properties, management, executive compensation, related
        party transactions, legal proceedings and historical market price information,
        as well as audited historical financial statements and management’s discussion
        and analysis of results of operations. The revised Form 8-K rules also require
        a
        shell company to file pro forma financial statements giving effect to the
        acquisition not later than four business days after completion of the
        acquisition, instead of 75 days as required by non-shell companies.
 
 The
        time
        and additional costs that may be incurred by some acquisition prospects to
        prepare such detailed disclosures and obtain audited financial statements
        may
        significantly delay or essentially preclude consummation of an otherwise
        desirable acquisition by Net Perceptions, or deter potential targets from
        negotiating with Net Perceptions. If Net Perceptions were to be deemed a
        shell
        company, any increased difficulty in Net Perceptions’ ability to identify and
        consummate an acquisition with an appropriate merger candidate can materially
        adversely affect Net Perceptions’ ability to successfully implement its
        redeployment strategy.
 
 4
 **WE
        MAY BE UNABLE TO REALIZE THE BENEFITS OF OUR NET OPERATING LOSS (“NOL”) AND TAX
        CREDIT CARRYFORWARDS.**
 
 NOLs
        may
        be carried forward to offset federal and state taxable income in future years
        and eliminate income taxes otherwise payable on such taxable income, subject
        to
        certain adjustments. Based on current federal corporate income tax rates,
        our
        NOL and other carryforwards could provide a benefit to us, if fully utilized,
        of
        significant future tax savings. However, our ability to use these tax benefits
        in future years will depend upon the amount of our otherwise taxable income.
        If
        we do not have sufficient taxable income in future years to use the tax benefits
        before they expire, we will lose the benefit of these NOL carryforwards
        permanently. Consequently, our ability to use the tax benefits associated
        with
        our substantial NOL will depend significantly on our success in identifying
        suitable merger partners and/or acquisition candidates, and once identified,
        successfully consummate a merger with and/or acquisition of these candidates.
 
 Additionally,
        if we underwent an ownership change, the NOL carryforward limitations would
        impose an annual limit on the amount of the taxable income that may be offset
        by
        our NOL generated prior to the ownership change. If an ownership change were
        to
        occur, we may be unable to use a significant portion of our NOL to offset
        taxable income. In general, an ownership change occurs when, as of any testing
        date, the aggregate of the increase in percentage points of the total amount
        of
        a corporation’s stock owned by “5-percent stockholders” within the meaning of
        the NOL carryforward limitations whose percentage ownership of the stock
        has
        increased as of such date over the lowest percentage of the stock owned by
        each
        such “5-percent stockholder” at any time during the three-year period preceding
        such date is more than 50 percentage points. In general, persons who own
        5% or
        more of a corporation’s stock are “5-percent stockholders,” and all other
        persons who own less than 5% of a corporation’s stock are treated, together, as
        a single, public group “5-percent stockholder,” regardless of whether they own
        an aggregate of 5% of a corporation’s stock.
 
 The
        amount of NOL and tax credit carryforwards that we have claimed has not been
        audited or otherwise validated by the U.S. Internal Revenue Service (“IRS”). The
        IRS could challenge our calculation of the amount of our NOL or our
        determinations as to when a prior change in ownership occurred and other
        provisions of the Internal Revenue Code may limit our ability to carry forward
        our NOL to offset taxable income in future years. If the IRS were successful
        with respect to any such challenge, the potential tax benefit of the NOL
        carryforwards to us could be substantially reduced.
 
 **WE
        COULD BE REQUIRED TO REGISTER AS AN INVESTMENT COMPANY UNDER THE INVESTMENT
        COMPANY ACT OF 1940, WHICH COULD SIGNIFICANTLY LIMIT OUR ABILITY TO OPERATE
        AND
        ACQUIRE AN ESTABLISHED BUSINESS.**
 
 The
        Investment Company Act of 1940 (the “Investment Company Act”) requires
        registration, as an investment company, for companies that are engaged primarily
        in the business of investing, reinvesting, owning, holding or trading
        securities. We have sought to qualify for an exclusion from registration
        including the exclusion available to a company that does not own “investment
        securities” with a value exceeding 40% of the value of its total assets on an
        unconsolidated basis, excluding government securities and cash items. This
        exclusion, however, could be disadvantageous to us and/or our stockholders.
        If
        we were unable to rely on an exclusion under the Investment Company Act and
        were
        deemed to be an investment company under the Investment Company Act, we would
        be
        forced to comply with substantive requirements of the Investment Company
        Act,
        including: (i) limitations on our ability to borrow; (ii) limitations on
        our
        capital structure; (iii) restrictions on acquisitions of interests in associated
        companies; (iv) prohibitions on transactions with affiliates; (v) restrictions
        on specific investments; (vi) limitations on our ability to issue stock options;
        and (vii) compliance with reporting, record keeping, voting, proxy disclosure
        and other rules and regulations. Registration as an investment company would
        subject us to restrictions that would significantly impair our ability to
        pursue
        our fundamental business strategy of acquiring and operating an established
        business. In the event the Securities and Exchange Commission or a court
        took
        the position that we were an investment company, our failure to register
        as an
        investment company would not only raise the possibility of an enforcement
        action
        by the Securities and Exchange Commission or an adverse judgment by a court,
        but
        also could threaten the validity of corporate actions and contracts entered
        into
        by us during the period we were deemed to be an unregistered investment company.
        Moreover, the Securities and Exchange Commission could seek an enforcement
        action against us to the extent we were not in compliance with the Investment
        Company Act during any point in time.
 
 **RISKS
        RELATED TO OUR COMMON STOCK**
 
 **OUR
        COMMON STOCK IS NO LONGER LISTED ON THE NASDAQ SMALL CAP MARKET**
 
 On
        September 3, 2004, our common stock was delisted from the Nasdaq Small Cap
        Market. The delisting followed a determination by the Nasdaq Listing
        Qualifications Panel that the Company was a “public shell” and should be
        delisted due to policy concerns raised under Nasdaq Marketplace Rules 4300
        and
        4300(a)(3). Additional information concerning the delisting is set forth
        in the
        Company’s Report on Form 8-K filed with the Securities and Exchange Commission
        on September 1, 2004. The Company’s common stock is now quoted on the OTC Pink
        Sheets Electronic Quotation Service under the symbol “NETP.PK.” As a result of
        the delisting, stockholders may find it more difficult to dispose of, or
        to
        obtain accurate quotations as to the price of our common stock, the liquidity
        of
        our stock may be reduced, making it difficult for a stockholder to buy or
        sell
        our stock at competitive market prices or at all, we may lose support from
        institutional investors and/or market makers that currently buy and sell
        our
        stock and the price of our common stock could decline.
 
 5
 **WE
        ARE VULNERABLE TO VOLATILE MARKET CONDITIONS.**
 
 The
        market prices of our common stock have been highly volatile. The market has
        from
        time to time experienced significant price and volume fluctuations that are
        unrelated to the operating performance of particular companies. Please see
        the
        table contained in Item 5 of this Report which sets forth the range of high
        and
        low closing prices of our common stock for the calendar quarters indicated.
 
 **WE
        DO NOT EXPECT TO PAY DIVIDENDS ON OUR COMMON STOCK IN THE FORESEEABLE FUTURE.**
 
 Although
        our stockholders may receive dividends if, as and when declared by our Board
        of
        Directors, we do not intend to pay dividends on our common stock in the
        foreseeable future. Therefore, you should not purchase our common stock if
        you
        need immediate or future income by way of dividends from your investment.
 
 **OUR
        AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AUTHORIZES THE ISSUANCE
        OF
        SHARES OF PREFERRED STOCK.**
 
 Our
        Amended and Restated Certificate of Incorporation provides that our Board
        of
        Directors will be authorized to issue from time to time, without further
        stockholder approval, up to 5,000 shares of preferred stock in one or more
        series and to fix or alter the designations, preferences, rights and any
        qualifications, limitations or restrictions of the shares of each series,
        including the dividend rights, dividend rates, conversion rights, voting
        rights,
        terms of redemption, including sinking fund provisions, redemption price
        or
        prices, liquidation preferences and the number of shares constituting any
        series
        or designations of any series. Such shares of preferred stock could have
        preferences over our common stock with respect to dividends and liquidation
        rights. We may issue additional preferred stock in ways which may delay,
        defer
        or prevent a change in control of the Company without further action by our
        stockholders. Such shares of preferred stock may be issued with voting rights
        that may adversely affect the voting power of the holders of our common stock
        by
        increasing the number of outstanding shares having voting rights, and by
        the
        creation of class or series voting rights.
 
 **WE
        MAY ISSUE A SUBSTANTIAL AMOUNT OF EQUITY AND CASH COMPENSATION AND OTHER
        SHARES
        OF OUR COMMON STOCK IN THE FUTURE WHICH COULD CAUSE DILUTION TO OLD INVESTORS
        AND OTHERWISE ADVERSELY AFFECT OUR STOCK PRICE.**
 
 A
        key
        element of our growth strategy is to make acquisitions. As part of our
        acquisition strategy, we may issue additional shares of common stock as
        consideration for such acquisitions. In addition, we have limited cash
        compensation to management pending consummation of a redeployment transaction
        and expect to award cash and equity compensation to management in connection
        with such a transaction. These issuances could be significant. To the extent
        that we make acquisitions and issue our shares of common stock as consideration
        or as compensation to management, your equity interest in us will be diluted.
        Any such issuance will also increase the number of outstanding shares of
        common
        stock that will be eligible for sale in the future. Persons receiving shares
        of
        our common stock in connection with these acquisitions may be more likely
        to
        sell off their common stock, which may influence the price of our common
        stock.
        In addition, the potential issuance of additional shares in connection with
        anticipated acquisitions could lessen demand for our common stock and result
        in
        a lower price than might otherwise be obtained. We may issue common stock
        in the
        future for other purposes as well, including in connection with financings,
        for
        compensation purposes, in connection with strategic transactions or for other
        purposes. Cash payments as compensation or otherwise can also significantly
        diminish cash that is available to the Company for working capital and other
        purposes, which could have a material adverse effect on the
        Company.
 
 **WHERE
        YOU CAN FIND MORE INFORMATION**
 
 We
        file
        annual, quarterly and special reports, proxy statements and other information
        with the Securities and Exchange Commission, and we have an internet website
        address at www.netperceptions.com. We make available free of charge on our
        internet website address our annual report on Form 10-K, quarterly reports
        on
        Form 10-Q, current reports on Form 8-K, and amendments to those reports filed
        or
        furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon
        as
        reasonably practicable after we electronically file such material with, or
        furnish it to, the Securities and Exchange Commission. You may also read
        and
        copy any document we file at the Securities and Exchange Commission’s public
        reference room located at 100 F Street, NE, Washington, DC 20549. You also
        can
        request copies of such documents, upon payment of a duplicating fee, by writing
        to the Securities and Exchange Commission at 100 F Street, NE, Washington,
        DC
        20549 or obtain copies of such documents from the Securities and Exchange
        Commission’s website at http://www.sec.gov.
 
 6
 **ITEM
        2. PROPERTIES**
 
 Our
        corporate headquarters is currently located in Stamford, Connecticut, where
        we
        occupy space made available to us by Kanders & Company, Inc., an entity
        owned and controlled by the Company’s Executive Chairman, Warren B. Kanders.
        This arrangement is subject to termination at any time.
 
 The
        Company believes that its current facilities are suitable and adequate for
        its
        present and anticipated near-term needs.
 
 **ITEM
        3. LEGAL PROCEEDINGS**
 
 Except
        as
        set forth below, we are not a party to nor are any of our properties subject
        to
        any pending legal, administrative or judicial proceedings other than routine
        litigation incidental to our business.
 
 *Public
        Offering Securities Litigation*
 
 On
        November 2, 2001, Timothy J. Fox filed a purported class action lawsuit against
        the Company; FleetBoston Robertson Stephens, Inc., the lead underwriter of
        the
        Company’s April 1999 initial public offering; several other underwriters who
        participated in the initial public offering; Steven J. Snyder, the Company’s
        then president and chief executive officer; and Thomas M. Donnelly, the
        Company’s then chief financial officer. The lawsuit was filed in the United
        States District Court for the Southern District of New York and was assigned
        to
        the pretrial coordinating judge for substantially similar lawsuits involving
        more than 300 other issuers. An amended class action complaint, captioned *In
        re
        Net Perceptions, Inc. Initial Public Offering Securities*  *Litigation,* 01
        Civ.
        9675 (SAS), was filed on April 22, 2002, expanding the basis for the action
        to
        include allegations relating to the Company’s March 2000 follow-on public
        offering in addition to those relating to its initial public offering.  The
        action against the Company was thereafter coordinated with the other
        substantially similar class actions as *In
        re
        Initial Public Offering Securities Litigation* ,
        21 MC
        (SAS) (the “Coordinated Class Actions”).
 
 The
        amended complaint generally alleges that the defendants violated federal
        securities laws by not disclosing certain actions taken by the underwriter
        defendants in connection with the Company’s initial public offering and
        follow-on public offering. The amended complaint alleges specifically that
        the
        underwriter defendants, with the Company’s direct participation and agreement
        and without disclosure thereof, conspired to and did raise and increase their
        underwriters’ compensation and the market prices of the Company’s common stock
        following its initial public offering and in its follow-on public offering
        by
        requiring their customers, in exchange for receiving allocations of shares
        of
        the Company’s common stock sold in its initial public offering, to pay excessive
        commissions on transactions in other securities, to purchase additional shares
        of the Company’s common stock in the initial public offering aftermarket at
        pre-determined prices above the initial public offering price, and to purchase
        shares of the Company’s common stock in its follow-on public offering. The
        amended complaint seeks unspecified monetary damages and certification of
        a
        plaintiff class consisting of all persons who acquired the Company’s common
        stock between April 22, 1999 and December 6, 2000. The plaintiffs have since
        agreed to dismiss the claims against Mr. Snyder and Mr. Donnelly without
        prejudice, in return for their agreement to toll any statute of limitations
        applicable to those claims; and those claims have been dismissed without
        prejudice.
 
 On
        August
        31, 2005, the Court gave preliminary approval to a settlement reached by
        the
        plaintiffs and issuer defendants in the Coordinated Class Actions and has
        scheduled a fairness hearing for April 24, 2006, to hear objections and to
        make
        a final determination whether to approve the settlement as fair, adequate
        and
        reasonable.  In the opinion of management, the ultimate disposition of this
        matter will not have a material effect on the Company’s financial position,
        results of operation or cash flows.
 
 **ITEM
        4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**
 
 No
        matters were submitted to a vote of security holders during the fourth quarter
        of the fiscal year covered by this report.
 
  7
 **PART
        II**
 
 **ITEM
        5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
        AND**  **ISSUER
        PURCHASES OF EQUITY SECURITIES**
 
 Our
        common stock was listed on the Nasdaq National Market System on April 23,
        1999
        until September 3, 2004, when our common stock was delisted from the Nasdaq
        SmallCap Market following a determination by the Nasdaq Listing Qualifications
        Panel that the Company was a “public shell” and should be delisted due to policy
        concerns raised under Nasdaq Marketplace Rules 4300 and 4300(a)(3). Additional
        information concerning the delisting is set forth in the Company’s Report on
        Form 8-K filed with the Securities and Exchange Commission on September 1,
        2004.
        The Company’s common stock is now quoted on the OTC Pink Sheets Electronic
        Quotation Service under the symbol “NETP.PK”.
 
 The
        following table sets forth, for the indicated periods, the high and low closing
        sales prices for our common stock as reported by the NASDAQ prior to September
        3, 2004 and the range of high and low bids for our common stock as reported
        by
        the OTC Pink Sheets Electronic Quotation Service on and after September 3,
        2004.
        The quotes listed below, on and after September 3, 2004, reflect inter-dealer
        prices or transactions solely between market-makers, without retail mark-up,
        mark-down or commission and may not represent actual transactions.
 
 **Price
                  Range of**
                **Common
                  Stock****High**
              
              **Low****2004**First
                  Quarter
              
              $
              0.43
              
              $
              0.39Second
                  Quarter
              
              $
              1.03
              
              $
              0.41Third
                  Quarter
              
              $
              0.92
              
              $
              0.68Fourth
                  Quarter
              
              $
              0.91
              
              $
              0.72**2005**First
                  Quarter
              
              $
              0.86
              
              $
              0.70Second
                  Quarter
              
              $
              1.00
              
              $
              0.62Third
                  Quarter
              
              $
              1.14
              
              $
              0.72Fourth
                  Quarter
              
              $
              0.78
              
              $
              0.60**2006**First
                  Quarter (through
                  March 13, 2006)
              
              $
              0.75
              
              $
              0.55
 
 **STOCKHOLDERS**
 
 As
        of
        March 15, 2006, there were 213 stockholders of record registered with our
        transfer agent, Wells Fargo Bank Minnesota, N.A. Because many of these shares
        are held by brokers and other institutions on behalf of stockholders, we
        are
        unable to estimate the total number of stockholders represented by the record
        holders.
 
 **DIVIDENDS**
 
 We
        currently anticipate that we will retain our cash and all potential future
        earnings for use in our business and do not anticipate that we will pay any
        cash
        dividends in the foreseeable future. The payment of any future dividends
        will be
        at the discretion of our Board of Directors and will depend upon, among other
        things, our results of operations, capital requirements, general business
        conditions, contractual restrictions on payment of dividends, if any, legal
        and
        regulatory restrictions on the payment of dividends, and other factors our
        Board
        of Directors deems relevant.
  8
 **ITEM
        6. SELECTED CONSOLIDATED FINANCIAL DATA**
 
 In
        the
        table below we provide you with selected historical financial data of the
        Company, 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 years in
        the
        periods ended December 31, 2005, 2004, and 2003, and the balance sheet data
        at
        December 31, 2005 and 2004, 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 years ended December 31, 2002 and 2001
        and
        the balance sheet data at December 31, 2003, 2002 and 2001 are derived from
        audited financial statements not included in this report.
 
 **FIVE
        YEAR CONSOLIDATED FINANCIAL DATA**
  **Year
                    Ended December 31,****2005**
                
                **2004**
                
                **2003**
                
                **2002**
                
                **2001****(in
                    thousands, except per share amounts)****Statement
                    of Operations Data**Revenues:Product
                
                $
                —
                
                $
                405
                
                $
                962
                
                $
                1,703
                
                $
                2,979Service,
                    maintenance and royalty
                
                
                118
                
                
                522
                
                
                1,622
                
                
                3,541
                
                
                7,535Total
                    revenues
                
                
                118
                
                
                927
                
                
                2,584
                
                
                5,244
                
                
                10,514Cost
                    of revenues:Product
                
                
                —
                
                
                —
                
                
                12
                
                
                292
                
                
                943Service,
                    maintenance and royalty
                
                
                —
                
                
                220
                
                
                755
                
                
                2,101
                
                
                5,143Total
                    cost of revenues
                
                
                —
                
                
                220
                
                
                767
                
                
                2,393
                
                
                6,086Gross
                    margin
                
                
                118
                
                
                707
                
                
                1,817
                
                
                2,851
                
                
                4,428Operating
                    expenses:Sales
                    and marketing
                
                
                —
                
                
                —
                
                
                1,347
                
                
                4,550
                
                
                15,215Research
                    and development
                
                
                —
                
                
                250
                
                
                2,112
                
                
                5,933
                
                
                10,572General
                    and administrative
                
                
                553
                
                
                2,428
                
                
                2,261
                
                
                2,819
                
                
                6,198Lease
                    abandonment expense
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                225Restructuring
                    related charges and impairments (1)
                
                
                —
                
                
                (7
                )
                
                2,251
                
                
                768
                
                
                15,551Gain
                    on sale of patents
                
                
                —
                
                
                (1,800
                )
                
                —
                
                
                —
                
                
                —Amortization
                    of intangibles
                
                
                —
                
                
                —
                
                
                —
                
                
                110
                
                
                9,650Impairment
                    of goodwill and other intangibles (2)
                
                
                —
                
                
                —
                
                
                —
                
                
                6,546
                
                
                75,298Gain
                    from litigation settlement
                
                
                (223
                )
                
                —
                
                
                —
                
                
                —
                
                
                —Total
                    operating expenses
                
                
                330
                
                
                871
                
                
                7,971
                
                
                20,726
                
                
                132,709Loss
                    from operations
                
                
                (212
                )
                
                (164
                )
                
                (6,154
                )
                
                (17,875
                )
                
                (128,281
                )Other
                    income, net
                
                
                419
                
                
                103
                
                
                861
                
                
                1,141
                
                
                4,483Net
                    income/(loss)
                
                $
                207
                
                $
                (61
                )
                $
                (5,293
                )
                $
                (16,734
                )
                $
                (123,798
                )Basic
                    net income/(loss) per share
                
                $
                0.01
                
                $
                0.00
                
                $
                (0.19
                )
                $
                (0.61
                )
                $
                (4.59
                )Shares
                    used in basic calculation
                
                
                28,918
                
                
                28,574
                
                
                27,683
                
                
                27,216
                
                
                26,951Diluted
                    net income/(loss) per share
                
                $
                0.01
                
                $
                0.00
                
                $
                (0.19
                )
                $
                (0.61
                )
                $
                (4.59
                )Shares
                    used in diluted calculation
                
                
                33,438
                
                
                28,574
                
                
                27,683
                
                
                27,216
                
                
                26,951Cash
                    distributions paid (3)
                
                $
                —
                
                $
                —
                
                $
                1.50
                
                $
                —
                
                $
                —**Balance
                    Sheet Data**Cash
                    and cash equivalents
                
                $
                203
                
                $
                14,444
                
                $
                11,932
                
                $
                62,959
                
                $
                73,605Marketable
                    securities
                
                
                14,659
                
                
                —
                
                
                —
                
                
                —
                
                
                —Working
                    capital
                
                
                14,631
                
                
                14,306
                
                
                11,600
                
                
                57,031
                
                
                64,321Total
                    assets
                
                
                15,195
                
                
                14,723
                
                
                12,803
                
                
                65,796
                
                
                88,878Long-term
                    liabilities, net of current portion
                
                
                2,533
                
                
                2,517
                
                
                —
                
                
                510
                
                
                577Total
                    stockholders’ equity
                
                
                12,308
                
                
                12,028
                
                
                11,635
                
                
                58,342
                
                
                75,407
 
 (1)
              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. In 2002, we incurred a restructuring
                  related charge of $768,000 consisting primarily of charges relating
                  to
                  employee terminations. In 2003, we incurred a restructuring related
                  charge
                  of $2.3 million, consisting of charges relating to facility consolidation,
                  lease terminations and employee terminations. See Note 4 to the
                  Consolidated Financial Statements.
  9
  (2)
              At
                  March 31, 2001, we performed an impairment assessment of the goodwill
                  and
                  other intangible assets recorded in connection with the acquisition
                  of
                  Knowledge Discovery One, Inc. (“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. At December 31,
                  2002, we
                  performed an additional impairment assessment of the remaining
                  goodwill
                  and other intangible assets recorded in connection with the acquisition
                  of
                  KD1. As a result of our review, we recorded a $6.5 million impairment
                  charge to reduce goodwill and other intangible assets to zero
                  value.
 
 (3)
              On
                  September 2, 2003, we paid a return of capital cash distribution
                  to
                  stockholders of record as of August 18, 2003 in the amount of $1.50
                  per
                  share. See Note 8 to the Consolidated Financial
                  Statements.
 
 **ITEM
        7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS**  **OF
        OPERATIONS**
 
 This
        report contains certain forward-looking statements, including information
        about
        or related to our future results, certain projections and business trends.
        Assumptions relating to forward-looking statements involve judgments with
        respect to, among other things, future economic, competitive and market
        conditions and future business decisions, all of which are difficult or
        impossible to predict accurately and many of which are beyond our control.
        When
        used in this report, the words “estimate,” “project,” “intend,” “believe,”
“expect” and similar expressions are intended to identify forward-looking
        statements. Although we believe that our assumptions underlying the
        forward-looking statements are reasonable, any or all of the assumptions
        could
        prove inaccurate, and we may not realize the results contemplated by the
        forward-looking statements. Management decisions are subjective in many respects
        and susceptible to interpretations and periodic revisions based upon actual
        experience and business developments, the impact of which may cause us to
        alter
        our business strategy or capital expenditure plans that may, in turn, affect
        our
        results of operations. In light of the significant uncertainties inherent
        in the
        forward-looking information included in this report, you should not regard
        the
        inclusion of such information as our representation that we will achieve
        any
        strategy, objectives or other plans. The forward-looking statements contained
        in
        this report speak only as of the date of this report, and we have no obligation
        to update publicly or revise any of these forward-looking statements.
 
 These
        and
        other statements, which are not historical facts, are based largely upon
        our
        current expectations and assumptions and are subject to a number of risks
        and
        uncertainties that could cause actual results to differ materially from those
        contemplated by such forward-looking statements. These risks and uncertainties
        include, among others, our planned effort to redeploy our assets and use
        our
        substantial cash, cash equivalent assets and marketable securities to enhance
        stockholder value following the sale of substantially all of our software
        business, which represented substantially all of our revenue generating
        operations and related assets, and the risks and uncertainties set forth
        in the
        section headed “Factors That May Affect Our Future Results” of Part I of this
        Report. We cannot assure you that we will be successful in our efforts to
        redeploy our assets or that any such redeployment will result in Net
        Perceptions’ future profitability. Our failure to redeploy our assets could have
        a material adverse effect on the market price of our common stock and our
        business, financial condition and results of operations.
 
 **OVERVIEW**
 
 **AS
        PART OF OUR PREVIOUSLY ANNOUNCED STRATEGY TO LIMIT OPERATING LOSSES AND ENABLE
        THE COMPANY TO REDEPLOY ITS ASSETS AND USE ITS CASH, CASH EQUIVALENT ASSETS
        AND
        MARKETABLE SECURITIES TO ENHANCE STOCKHOLDER VALUE, ALL OF OUR OPERATIONS
        OTHER
        THAN ADMINISTRATIVE FUNCTIONS HAVE BEEN SUBSTANTIALLY TERMINATED. THE
        INFORMATION APPEARING BELOW, WHICH RELATES TO PRIOR PERIODS, IS THEREFORE
        NOT
        INDICATIVE OF THE RESULTS THAT MAY BE EXPECTED FOR ANY SUBSEQUENT PERIODS.
        THE
        YEAR ENDED DECEMBER 31, 2005 PRIMARILY REFLECTS, AND FUTURE PERIODS PRIOR
        TO A
        REDEPLOYMENT OF OUR ASSETS ARE EXPECTED TO PRIMARILY REFLECT, GENERAL AND
        ADMINISTRATIVE EXPENSES AND TRANSACTION EXPENSES ASSOCIATED WITH THE CONTINUING
        ADMINISTRATION OF THE COMPANY AND ITS EFFORTS TO REDEPLOY ITS
        ASSETS.**
 
 **CRITICAL
        ACCOUNTING POLICIES AND ESTIMATES**
 
 Our
        discussion and analysis of financial condition and results of operations
        is
        based upon our consolidated financial statements, which have been prepared
        in
        accordance with accounting principles generally accepted in the United States.
        The preparation of these financial statements requires us to make estimates
        and
        judgments that affect the reported amounts of assets, liabilities, revenues
        and
        expenses, and related disclosure of contingent assets and liabilities. On
        an
        on-going basis, we evaluate our estimates, including those related to bad
        debts,
        investments, intangible assets, restructuring liabilities, contingencies
        and
        litigation. We base our estimates on historical experience and on various
        other
        assumptions that are believed to be reasonable under the circumstances, the
        results of which form the basis for making judgments about the carrying values
        of assets and liabilities that are not readily apparent from other sources.
        Actual results may differ from these estimates under different assumptions
        or
        conditions.
 
 10
 We
        believe the following critical accounting policies affect significant judgments
        and estimates used in the preparation of our consolidated financial statements.
        Events occurring subsequent to the preparation of the consolidated financial
        statements may cause us to re-evaluate these policies.
 
 *Revenue
        Recognition.* Our
        revenues were recognized in accordance with the American Institute of Certified
        Public Accountants Statement of Position (“SOP”) 97-2, “Software Revenue
        Recognition,” as amended by SOP 98-4 and SOP 98-9, as well as Technical Practice
        Aids issued from time to time by the American Institute of Certified Public
        Accountants and in accordance with the Securities and Exchange Commission
        Staff
        Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition in Financial
        Statements.” We previously derived revenues from software licenses, software
        maintenance and professional services. Maintenance included telephone and
        Web-based technical support, bug fixes and rights to unspecified upgrades
        on a
        when-and-if available basis. Professional services included project planning,
        implementation and testing, consulting, and ongoing customer
        support.
 
 For
        software arrangements that included multiple software products, maintenance
        or
        services, we allocated 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, were
        deferred and the remaining (residual) arrangement fee was recognized as software
        product revenue. For software arrangements in which we did not have
        vendor-specific objective evidence of undelivered elements, revenue was deferred
        until the earlier of when vendor-specific objective evidence was determined
        for
        the undelivered elements or when all elements for which we did not have
        vendor-specific objective evidence had been delivered.
 
 Revenues
        from license fees were recognized when a non-cancelable agreement had been
        executed, the product had been shipped or electronically delivered, there
        were
        no uncertainties surrounding product acceptance, the fee was fixed or
        determinable and collection of the related receivable was considered probable.
        If the fee due from the customer was not fixed or determinable, revenues
        were
        recognized as payments became due from the customer. If we did not consider
        collection to be probable, then revenues were recognized when the fee was
        collected.
 
 License
        revenues related to license terms of less than twenty-four months and were
        recognized ratably over the term of the license period. When we offered products
        and services on a hosted basis, up front set-up fees were deferred and
        recognized ratably over the estimated service period.
 
 We
        recognized revenues allocable to maintenance ratably over the term of the
        agreement. We evaluated arrangements that included professional and/or data
        processing services to determine whether those services were essential to
        the
        functionality of other elements of the arrangement. If services were considered
        essential, revenues from the arrangement were recognized using contract
        accounting, generally on a percentage-of-completion basis. When we did not
        consider the professional services to be essential, we recognized the revenues
        allocable to the services as they were performed.
 
 Revenue
        recognition rules for software companies are very complex. We followed specific
        and detailed guidelines in determining the proper amount of revenue to be
        recorded; however, certain judgments affected the application of our revenue
        recognition policy.
 
 The
        most
        significant judgments for revenue recognition typically involved whether
        there
        were any significant uncertainties regarding customer acceptance and whether
        collectibility could be considered probable. In addition, our transactions
        often
        consisted of multiple element arrangements that needed to be analyzed to
        determine the relative fair value of each element, the amount of revenue
        to be
        recognized upon shipment, if any, and the period and conditions under which
        deferred revenue should be recognized.
 
 *Allowance
        for doubtful accounts.* We
        maintained 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 had deteriorated, resulting in an impairment of
        their
        ability to make payments, additional allowances were required.
 
 *Litigation.* We
        have
        not recorded an estimated liability related to the pending class action lawsuit
        in which we are named. For a discussion of this matter, see the section of
        this
        report entitled “Legal Proceedings.” Due to the uncertainties related to both
        the likelihood and the amount of any potential loss, no estimate was made
        of the
        liability that could result from an unfavorable outcome. As additional
        information becomes available, we will assess the potential liability and
        make
        or revise our estimate(s) accordingly, which could materially impact our
        results
        of operations and financial position.
  11
 **RESULTS
        OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003**
 
 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,****2005**
                
                **2004**
                
                **2003**Revenues:Product
                
                
                0
                %
                
                44
                %
                
                37
                %Service,
                    maintenance and royalty
                
                
                100
                
                
                56
                
                
                63Total
                    revenues
                
                
                100
                
                
                100
                
                
                100Cost
                    of revenues:Product
                
                
                —
                
                
                —
                
                
                1Service,
                    maintenance and royalty
                
                
                —
                
                
                24
                
                
                29Total
                    cost of revenues
                
                
                —
                
                
                24
                
                
                30Gross
                    margin
                
                
                100
                
                
                76
                
                
                70Operating
                    expenses:Sales
                    and marketing
                
                
                —
                
                
                —
                
                
                52Research
                    and development
                
                
                —
                
                
                27
                
                
                82General
                    and administrative
                
                
                469
                
                
                262
                
                
                87Restructuring
                    related charges and impairments
                
                
                —
                
                
                (1
                )
                
                87Gain
                    on sale of patents
                
                
                —
                
                
                (194
                )
                
                —Gain
                    from litigation settlement
                
                
                (189
                )
                
                —
                
                
                —Total
                    operating expenses
                
                
                280
                
                
                94
                
                
                308Loss
                    from operations
                
                
                (180
                )
                
                (18
                )
                
                (238
                )Other
                    income, net
                
                
                355
                
                
                11
                
                
                33Net
                    income/(loss)
                
                
                175
                %
                
                (7
                )%
                
                (205
                )%
  **COMPARISON
        OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND
        2003**
 
 THE
        COMPANY HAS TERMINATED ITS OPERATING ACTIVITIES AND IS NOW EVALUATING
        ALTERNATIVE WAYS TO REDEPLOY ITS ASSETS INTO NEW BUSINESSES. THE DISCUSSION
        BELOW IS THEREFORE NOT MEANINGFUL TO AN UNDERSTANDING OF FUTURE REVENUE,
        EARNINGS, OPERATIONS, BUSINESS OR PROSPECTS OF THE COMPANY FOLLOWING SUCH
        A
        REDEPLOYMENT OF ITS ASSETS.
 
 REVENUES
 
 *Total
        revenues* .
        Total
        revenues decreased 87% to $0.1 million for the year ended December 31, 2005
        from
        $0.9 million in 2004. Total revenues decreased 64% to $0.9 million for the
        year
        ended December 31, 2004 from $2.6 million in 2003. Revenues from sales in
        the
        United States were $---0.1 million in 2005 compared to $0.9 million in 2004
        and
        $2.3 million in 2003 representing 100%, 100% and 89% of total revenues,
        respectively. There were no revenues from international sales in 2004 or
        2005,
        compared to $284,000, or 11% of total revenues, in 2003. As a result of the
        termination of our business and operations, we no longer maintain a direct
        sales
        force.
 
 As
        described in this Item 7 under “Overview”, we are no longer actively marketing
        our products, and we do not expect that future revenues from these product
        or
        services related to these products, if any, will be significant.
 
 *Product
        revenues* .
        Product
        revenues decreased 100% to $0 for the year ended December 31, 2005, compared
        to
        $405,000 for the year ended December 31, 2004. Product revenues declined
        58% in
        2004 from $962,000 in 2003. Product revenues comprised 0% of total revenues
        for
        2005 compared to 44% and 37% for 2004 and 2003, respectively. We do not expect
        any product revenues for the foreseeable future.
 
 12
 *Service,
        maintenance and royalty revenues.* Service
        and maintenance revenues consisted primarily of professional and maintenance
        services. Our professional service revenues included business consulting,
        implementation support and educational services and were generally offered
        on a
        time and materials basis. Maintenance revenues were generally derived from
        annual service agreements and were recognized ratably over the term of the
        license agreement for our prior suite of software products. On April 1, 2004,
        we
        entered into an agreement with Tornago, Inc. to fulfill our existing prepaid
        customer support obligations. Royalty revenues are derived from resales of
        our
        product by Tornago, Inc. Service, maintenance and royalty revenues decreased
        77%
        to $0.1 million for the year ended December 31, 2005 from $0.5 million for
        the
        year ended December 31, 2004. Service, maintenance and royalty revenues
        comprised 100% and 56% of total revenues for the year ended December 31,
        2005
        and 2004, respectively *.* We do
        not anticipate entering into additional service and maintenance agreements
        with
        customers as the Company terminated its revenue generating operations as
        discussed above. Therefore, we expect there will be no further service and
        maintenance revenues in 2006. The agreement with Tornago, Inc has the potential
        to generate royalty revenue through April 2006. After April 2006, we do not
        expect any royalty revenues for the foreseeable future.
 
 COST
        OF
        REVENUES
 
 *Cost
        of product revenues* .
        Cost of
        product revenues consisted primarily of the cost of royalties paid to
        third-party vendors and amortization of acquired technology costs. For the
        years
        ended December 31, 2005 and 2004, the cost of product revenues was zero.
        Cost of
        product revenues was $12,000 for the year ended December 31, 2003. Cost of
        product revenue in 2005, 2004 and 2003 represented 0%, 0% and 1% of the product
        revenues, respectively. As a result of the termination of the Company’s revenue
        generating operations in connection with its efforts to redeploy its assets
        as
        discussed earlier, we do not expect to incur costs of product revenues for
        the
        foreseeable future.
 
 *Cost
        of service and maintenance revenues* .
        Cost of
        service and maintenance revenues consisted primarily of personnel-related
        and
        infrastructure costs incurred in providing telephone and Web-based support
        of
        our software products, as well as professional, consulting and educational
        related services to customers. Cost of service and maintenance revenues
        decreased 100% to $0 for the year ended December 31, 2005 from $220,000 for
        the
        year ended December 31, 2004. Cost of service and maintenance revenue decreased
        71% in 2004 from $755,000 in 2003. Cost of service and maintenance revenue
        in
        2005, 2004 and 2003 represented 0%, 42% and 47% of the related service and
        maintenance revenues, respectively. The decrease in cost of service and
        maintenance revenues in absolute dollars and as a percentage of revenues
        is
        primarily due to continued headcount reductions in our technical organization
        as
        a result of our restructuring efforts. As described above because we entered
        into a contract with Tornago to fulfill certain prepaid support obligations
        and
        in connection therewith terminated the employment of the remaining members
        of
        our engineering staff, we do not expect to incur further cost of service
        and
        maintenance revenues in 2006.
 
 OPERATING
        EXPENSES
 
 In
        the
        first quarter of 2003, we reduced our operating expenses through the closure
        of
        three remote offices and a reduction in workforce affecting 22 employees.
        On
        August 6, 2003, we reduced our workforce by an additional 12 employees. At
        December 31, 2003, we had nine full-time employees, which was determined
        to be
        the minimum number necessary at that time to serve customers, preserve the
        value
        of our intellectual property and administer our limited ongoing business
        affairs. In March 2004, we terminated the employment of the remaining members
        of
        our engineering staff. At December 31, 2005, we had six employees, two of
        whom
        are executive officers. As described in this Item 7 under “Overview”, we are no
        longer actively marketing our products and do not expect to incur any operating
        expenses in 2005 relating to sales and marketing of our products.
 
 *Sales
        and marketing* .
        Sales
        and marketing expenses consisted 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 100% to zero for the years ended December 31, 2005 and 2004 compared
        to $1.3 million recorded for the year ended December 31, 2003. Sales and
        marketing expenses were 0%, 0% and 52% of total revenues for the years ended
        December 31, 2005, 2004 and 2003, respectively. The decrease in sales and
        marketing expenses in absolute dollars is primarily due to headcount reductions
        as a result of our restructuring efforts and our decision to no longer actively
        market our products.
 
 *Research
        and development* .
        Research and development expenses consisted primarily of salaries, other
        employee-related costs and consulting fees related to the development of
        our
        products. Research and development expenses decreased 100% to $0 for the
        year
        ended December 31, 2005 compared to $250,000 for the year ended December
        31,
        2004. Research and development expenses decreased 88% in 2004 compared to
        $2.1
        million in 2003. Research and development expenses were 0%, 27% and 82% of
        total
        revenues for the years ended December 31, 2005, 2004 and 2003, respectively.
        The
        decrease in research and development expenses in absolute dollars is primarily
        due to continued headcount reductions as a result of our restructuring efforts
        and no future support of the products. As described above, we terminated
        the
        employment of the remaining members of our engineering staff effective March
        31,
        2004 and we do not expect to incur future research and development costs
        for the
        foreseeable future.
 
 13
 *General
        and administrative* .
        General
        and administrative expenses consist primarily of salaries, other
        employee-related costs, provision for doubtful accounts and professional
        service
        fees. Current executive management did not receive salaries in 2004 or 2005,
        however, executive management was awarded compensation of $75,000 for the
        year
        ended December 31, 2005. General and administrative expenses decreased 77%
        to
        $0.6 million for the year ended December 31, 2005 compared to $2.4 million
        for
        the year ended December 31, 2004. The decrease in general and administrative
        expenses for the year ended December 31, 2005 was due to a reduction in
        personnel-related expenses, professional fees and insurance expense. This
        trend
        is consistent with management’s stated strategy to limit our expenditure rate,
        to the extent practicable, to levels of our investment income until the
        completion of an acquisition or merger. General and administrative expenses
        include employee compensation, insurance and legal, accounting and other
        professional fees as well as public company expenses such as transfer agent
        expenses. General and administrative expenses increased 7% in 2004 compared
        to
        $2.3 million in 2003. General and administrative expenses were 469%, 262%
        and
        87% of total revenue for the years ended December 31, 2005, 2004 and 2003,
        respectively. The increase in general and administrative expenses in absolute
        dollars during the year ended December 31, 2004 was primarily due to the
        increased professional fees associated with the settlement or other resolution
        of our existing obligations and liabilities, the exploration of asset
        dispositions, and our continued consideration and evaluation of strategic
        alternatives.
 
 *Restructuring
        related charges and impairments.* The
        Company did not incur any restructuring related charges or impairments for
        the
        year ended December 31, 2005. For the year ended December 31, 2004, the Company
        reduced its accrual by $7,000 relating to restructuring charges. During 2003,
        we
        continued instituting certain restructuring plans to better align our cost
        structure with our business outlook and general economic conditions that
        we
        started in 2001. Under the restructuring plans, we recorded restructuring
        related charges totaling $3.0 million. These amounts represented 0%, (1)%
        and
        87% of total revenues for the years ended December 31, 2005, 2004 and 2003,
        respectively. All restructuring related charges had been paid as of December
        31,
        2004.
 
 *Sale
        of patents.* On
        March
        31, 2004, we and Thalveg Data Flow, LLC, (“Thalveg”) executed an amendment to
        the patent purchase agreement which had been entered into on December 30,
        2003,
        and we completed the sale of our patent portfolio provided for therein for
        a
        purchase price of $1.8 million in cash. The patent purchase agreement, as
        amended, includes a royalty-free, non-exclusive license back to us. The license
        is transferable, subject to certain restrictions applicable to the transferee
        relating to revenues that can be generated by products covered by the license.
        This transaction did not involve any of our other intellectual property rights
        or assets, including our proprietary software products. There was no comparable
        amount for the year ended December 31, 2005.
 
 *Gain from
        litigation settlement* .
        In
        February 2005, the Company received $229,000 from the settlement of its lawsuit
        for a breach of contract claim with i2 Technologies Inc. The Company recorded
        the gain from this settlement in the first quarter of 2005. During the
        third and fourth quarters of 2005, the Company incurred $6,000 in additional
        costs associated with the litigation settlement.
 
 *Amortization
        of intangibles* .
        The
        Company did not incur any amortization expense for the years ended December
        31,
        2005, 2004 and 2003, respectively. Goodwill and other intangible assets were
        written down to a zero value in the fourth quarter of 2002. Until a redeployment
        of assets occurs, the Company does not expect to incur any amortization expense.
 
 *Interest
        income.* Interest
        income increased 164% to $0.5 million for the year ended December 31, 2005
        from
        $0.2 million, for the year ended December 31, 2004. The increase in interest
        income was due to an increase in the interest rates we received on our cash,
        cash equivalent and marketable securities. Interest income decreased 72%
        to $0.2
        million in 2004 compared to $0.6 million in 2003. The decrease in interest
        income for the period ended December 31, 2004 was due to lower levels of
        cash
        and cash equivalents to invest and lower interest rates.
 
 *Interest
        expense.* Interest
        expense decreased 9% to $68,000 for the year ended December 31, 2005 compared
        to
        $75,000 for the year ended December 31, 2004. There was no comparable number
        during the year ended December 31, 2003. The decrease in interest expense
        was
        due to the beneficial conversion portion of the note to Olden Acquisition
        LLC
        being fully expensed during 2005. The increase in interest expense for the
        year
        ended December 31, 2004 was due to the issuance of long-term debt related
        to the
        investment in the Company in the second quarter of 2004 by Olden Acquisition
        LLC, an affiliate of Kanders & Company, Inc., an entity owned and controlled
        by the Company’s Executive Chairman, Warren B. Kanders.
 
 14
 *Other
        income.* Other
        income consists of miscellaneous tax refunds partially offset by other
        miscellaneous expenses. Other income increased 451% to $33,000 for the year
        ended December 31, 2005 compared to $6,000 for the year ended December 31,
        2004.
 
 PROVISION
        FOR INCOME TAXES
 
 We
        have
        incurred significant operating losses for all periods from inception through
        December 31, 2005. For income tax purposes, the Company has available federal
        net operating loss carry-forwards of approximately $120.9 million and research
        and development credit carry-forwards of approximately $151,000 at December
        31,
        2005. The net operating loss and research and development credit carry-forwards
        expire in 2011 through 2024 if not previously utilized. The utilization of
        these
        carry-forwards may be subject to limitations based on past and future changes
        in
        ownership of the Company pursuant to Internal Revenue Code Section 382. If
        the
        Company were to be acquired at its recent stock value such that Section 382
        is
        applicable, this would eliminate the ability to use a substantial majority
        of
        these carry-forwards. Future tax benefits have not been recognized in the
        financial statements, as their utilization is not considered probable based
        on
        the weight of available information.
  SELECTED
        CONSOLIDATED QUARTERLY OPERATING RESULTS
 
 The
        following tables set forth quarterly unaudited financial data for 2005 and
        2004,
        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.
 
 **THREE
        MONTHS ENDED**
 **Dec.
                    31**
                  **2005**
                
                **Sep.
                    30**
                  **2005**
                
                **Jun.
                    30**
                  **2005**
                
                **Mar.
                    31**
                  **2005**
                
                **Dec.
                    31**
                  **2004**
                
                **Sep.
                    30**
                  **2004**
                
                **Jun.
                    30**
                  **2004**
                
                **Mar.
                    31**
                  **2004****(Amounts
                    in thousands, except per share amounts)**
                  **(Unaudited)****Results
                    of Operations:**Revenues:Product
                
                $
                —
                
                $
                —
                
                $
                —
                
                $
                —
                
                $
                —
                
                $
                —
                
                $
                51
                
                $
                354Service,
                    maintenance and royalty
                
                
                59
                
                
                17
                
                
                32
                
                
                10
                
                
                30
                
                
                25
                
                
                321
                
                
                146Total
                    revenues
                
                
                59
                
                
                17
                
                
                32
                
                
                10
                
                
                30
                
                
                25
                
                
                372
                
                
                500Cost
                    of revenues:Service,
                    maintenance and royalty
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                4
                
                
                11
                
                
                103
                
                
                102Total
                    cost of revenues
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                4
                
                
                11
                
                
                103
                
                
                102Gross
                    margin
                
                
                59
                
                
                17
                
                
                32
                
                
                10
                
                
                26
                
                
                14
                
                
                269
                
                
                398Operating
                    expenses:Research
                    and development
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                250General
                    and administrative
                
                
                276
                
                
                108
                
                
                109
                
                
                60
                
                
                332
                
                
                170
                
                
                898
                
                
                1,028Gain
                    on sale of patents
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (1,800
                )(Gain)/loss
                    from litigation settlement
                
                
                1
                
                
                5
                
                
                —
                
                
                (229
                )
                
                —
                
                
                —
                
                
                —
                
                
                —Restructuring
                    related charges and impairments
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (7
                )Total
                    operating expenses
                
                
                277
                
                
                113
                
                
                109
                
                
                (169
                )
                
                332
                
                
                170
                
                
                898
                
                
                (529
                )(Loss)/income
                    from operations
                
                
                (218
                )
                
                (96
                )
                
                (77
                )
                
                179
                
                
                (306
                )
                
                (156
                )
                
                (629
                )
                
                927Interest
                    income
                
                
                142
                
                
                125
                
                
                104
                
                
                83
                
                
                66
                
                
                48
                
                
                32
                
                
                26Interest
                    expense
                
                
                (13
                )
                
                (13
                )
                
                (15
                )
                
                (27
                )
                
                (27
                )
                
                (26
                )
                
                (22
                )
                
                —Other
                    income (expense), net
                
                
                (42
                )
                
                2
                
                
                49
                
                
                24
                
                
                (89
                )
                
                41
                
                
                29
                
                
                25Net
                    (loss)/income
                
                $
                (131
                )
                $
                18
                
                $
                61
                
                $
                259
                
                $
                (356
                )
                $
                (93
                )
                $
                (590
                )
                $
                978Basic
                    net (loss)/income per share
                
                $
                0.00
                
                $
                0.00
                
                $
                0.00
                
                $
                0.01
                
                $
                (0.01
                )
                $
                (0.00
                )
                $
                (0.02
                )
                $
                0.03Shares
                    used in basic calculation
                
                
                28,918
                
                
                28,918
                
                
                28,918
                
                
                28,918
                
                
                28,916
                
                
                28,669
                
                
                28,504
                
                
                28,206Diluted
                    net (loss)/income per share
                
                $
                0.00
                
                $
                0.00
                
                $
                0.00
                
                $
                0.01
                
                $
                (0.01
                )
                $
                (0.00
                )
                $
                (0.02
                )
                $
                0.03Shares
                    used in diluted calculation
                
                
                28,918
                
                
                34,894
                
                
                29,217
                
                
                29,172
                
                
                28,916
                
                
                28,669
                
                
                28,504
                
                
                28,641
 15
 **THREE
        MONTHS ENDED** **Dec.
                    31**
                  **2005**
                
                **Sep.
                    30**
                  **2005**
                
                **Jun.
                    30**
                  **2005**
                
                **Mar.
                    31**
                  **2005**
                
                **Dec.
                    31**
                  **2004**
                
                **Sep.
                    30**
                  **2004**
                
                **Jun.
                    30**
                  **2004**
                
                **Mar.
                    31**
                  **2004****(Unaudited)****Percentage
                    of Total****Revenues**Revenues:Product
                
                
                —
                %
                
                —
                %
                
                —
                %
                
                —
                %
                
                —
                %
                
                —
                %
                
                14
                %
                
                71
                %Service,
                    maintenance and royalty
                
                
                100
                
                
                100
                
                
                100
                
                
                100
                
                
                100
                
                
                100
                
                
                86
                
                
                29Total
                    revenues
                
                
                100
                
                
                100
                
                
                100
                
                
                100
                
                
                100
                
                
                100
                
                
                100
                
                
                100Cost
                    of revenues:Service,
                    maintenance and royalty
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                13
                
                
                44
                
                
                28
                
                
                20Total
                    cost of revenues
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                13
                
                
                44
                
                
                28
                
                
                20Gross
                    margin
                
                
                100
                
                
                100
                
                
                100
                
                
                100
                
                
                87
                
                
                56
                
                
                72
                
                
                80Operating
                    expenses:Research
                    and development
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                50General
                    and administrative
                
                
                468
                
                
                635
                
                
                341
                
                
                600
                
                
                1,107
                
                
                680
                
                
                241
                
                
                205(Gain)
                    on sale of patent rights
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (360
                )(Gain)/loss
                    from litigation settlement
                
                
                2
                
                
                29
                
                
                —
                
                
                (2,290
                )
                
                —
                
                
                —
                
                
                —
                
                
                —Restructuring
                    related charges and impairments
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (1
                )Total
                    operating expenses
                
                
                470
                
                
                664
                
                
                341
                
                
                (1,690
                )
                
                1,107
                
                
                680
                
                
                241
                
                
                (106
                )(Loss)/income
                    from operations
                
                
                (370
                )
                
                (564
                )
                
                (241
                )
                
                1,790
                
                
                (1,020
                )
                
                (624
                )
                
                (169
                )
                
                186Interest
                    income
                
                
                241
                
                
                735
                
                
                325
                
                
                830
                
                
                220
                
                
                192
                
                
                9
                
                
                5Interest
                    expense
                
                
                (22
                )
                
                (76
                )
                
                (47
                )
                
                (270
                )
                
                (90
                )
                
                (104
                )
                
                (6
                )
                
                ─Other
                    income/(expense)
                
                
                (71
                )
                
                12
                
                
                153
                
                
                240
                
                
                (297
                )
                
                164
                
                
                7
                
                
                5Net
                    (loss)/income
                
                
                (222
                )%
                
                107
                %
                
                190
                %
                
                2,590
                %
                
                (1,187
                )%
                
                (372
                )%
                
                (159
                )%
                
                196
                %
  LIQUIDITY
        AND CAPITAL RESOURCES
 
 Since
        inception, we have financed operations primarily through the sale of equity
        securities. The Company’s cash and cash equivalents decreased to $0.2 million at
        December 31, 2005 from $14.4 million at December 31, 2004 due to a shift
        in the
        composition of the investment portfolio to investments with longer duration
        that
        are characterized as marketable securities instead of cash equivalents under
        accounting principles generally accepted in the United States. Marketable
        securities increased to $14.7 million at December 31, 2005 from zero at December
        31, 2004. The overall combined increase of $0.4 million in cash and cash
        equivalents and marketable securities is primarily due to the i2 Technology
        litigation settlement and better interest yields on our investments offset
        by
        the liquidation of investments required to fund operating
        activities.
 
 Cash
        provided by operations was $0.2 million for the twelve months ended December
        31,
        2005. The cash provided was primarily attributable to adjustments for non-cash
        expenses such as amortization of debt issuance costs and stock-based
        compensation, and an increase in accrued expenses offset by a an increase
        in
        prepaid and other current assets and non-cash amortization of discount on
        marketable securities. Cash provided by operations was $0.1 million for the
        twelve months ended December 31, 2004. The cash provided was primarily
        attributable to adjustments for non-cash expenses, decreases in accounts
        receivables and prepaids and other assets and increases in accrued liabilities
        and deferred revenue. We do not expect to receive any significant amounts
        of
        cash from future operations, and we expect that we will continue to incur
        public
        company administrative expenses, transaction costs and other ongoing costs
        that
        will constitute a material use of cash.
 
 Cash
        used
        by investing activities was approximately $14.5 million during 2005. The
        cash
        was used for the purchase of marketable securities partially offset by the
        maturity of marketable securities. There was no cash provided by or used
        by
        investing activities for 2004.
 
 There
        was
        no cash provided by or used by financing activities in 2005. Cash provided
        by
        financing activities during 2004 was attributable to the issuance of long-term
        debt and stock option exercises. Cash provided by financing activities was
        approximately $2.4 million during 2004.
 
 16
 During
        2003 and 2002, we instituted certain restructuring plans to better align
        our
        cost structure with our business outlook and general economic conditions.
        Under
        the restructuring plans, we recorded restructuring related charges totaling
        $2.3
        million and $768,000 during 2003 and 2002, respectively. A total of
        approximately $6.9 million was charged against the restructuring reserve
        during
        2003, and in 2004 the balance of approximately $37,000 was fully utilized
        bringing the restructuring liability to zero.
 
 There
        were no capital expenditures for the twelve months ended December 31, 2005,
        2004
        and 2003. As of December 31, 2005, we had no long-term commitments for capital
        expenditures and we do not anticipate entering into any further commitments
        for
        capital expenditures until our assets are redeployed.
 
 CONTRACTUAL
        OBLIGATIONS
 
 The
        Company had no contractual obligations and commercial commitments at December
        31, 2005. The operating lease obligation for the vacated facility in San
        Francisco, California was terminated in August 2004.
 
 We
        believe that existing cash and investments will be sufficient to meet our
        expected working capital needs for at least the next twelve months.
 
 RECENTLY
        ISSUED ACCOUNTING PRONOUNCEMENTS
 
 In
        December 2004, the Financial Accounting Standards Board (“FASB”) issued
        Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004),
“Share-Based Payment” (“SFAS No. 123R”). This statement requires that the
        compensation cost relating to share-based payment transactions be recognized
        in
        the financial statements. Compensation cost is to be measured based on the
        estimated fair value of the equity-based compensation awards issued as of
        the
        grant date. The related compensation expense will be based on the estimated
        number of awards expected to vest and will be recognized over the requisite
        service period (often the vesting period) for each grant. The statement requires
        the use of assumptions and judgments about future events and some of the
        inputs
        to the valuation models will require considerable judgment by management.
        SFAS
        No. 123R replaces FASB Statement No. 123 (“SFAS No. 123”), “Accounting for
        Share-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for
        Stock Issued to Employees.” The provisions of SFAS No. 123R are required to be
        applied by public companies as of the first annual reporting period that
        begins
        after June 15, 2005 (as of January 1, 2006 for the Company). Accordingly,
        as of
        January 1, 2006, the Company plans on using the modified prospective application
        transition method without restatement of prior interim periods in the year
        of
        adoption. This will result in the Company recognizing compensation cost based
        on
        the requirements of SFAS No. 123R for all equity-based compensation awards
        issued after January 1, 2006. For all equity-based compensation awards that
        are
        unvested as of January 1, 2006, compensation cost will be recognized for
        the
        unamortized portion of compensation cost not previously included in the SFAS
        No.
        123 pro forma footnote disclosure.
 
 **ITEM
        7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
        RISK**
 
 Through
        December 31, 2005, the majority of our recognized revenues were denominated
        in
        United States dollars and were primarily from customers in the United States,
        and our exposure to foreign currency exchange rate changes has been immaterial.
        As described elsewhere in this report, we are no longer actively marketing
        our
        products. Accordingly, we do not consider significant our exposure to foreign
        currency exchange rate changes arising from revenues being denominated in
        foreign currencies.
 
 Our
        exposure to market risk is limited to interest income sensitivity, which
        is
        affected by changes in the general level of United States interest rates
        because
        all of our investments are in debt securities issued by the United States
        government. Our investments consist of U.S. Government Agency and Treasury
        Securities in order to preserve principal, liquidity and stabilize interest
        income. Therefore, due to the conservative nature of our investments, our
        future
        interest income sensitivity is limited.
 
 We
        do not
        have any derivative financial instruments and do not hold any instruments
        for
        trading purposes.
  17
 **ITEM
        8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**
  **NET
        PERCEPTIONS, INC.**
 
 **Index
        to Consolidated Financial Statements**
 **Page**Report
                  of Independent Registered Public Accounting Firm
              19Consolidated
                  Balance Sheets - December 31, 2005 and 2004
              20Consolidated
                  Statements of Operations - Years ended December 31, 2005,
                2004
                  and 2003
              21Consolidated
                  Statement of Stockholders’ Equity and Comprehensive Income/
                (Loss)
                  - Years Ended December 31, 2005, 2004 and 2003
              22Consolidated
                  Statements of Cash Flows - Years Ended December 31, 2005,
                2004
                  and 2003
              23Notes
                  to the Consolidated Financial Statements
              24
 
  18
 **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 
 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/(loss) and of cash flows present fairly, in all material respects,
        the
        financial position of Net Perceptions, Inc. and its subsidiaries (“the Company”)
        at December 31, 2005 and 2004, and the results of their operations and their
        cash flows for each of the three years in the period ended December 31, 2005
        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 the standards of the Public Company Accounting Oversight
        Board
        (United States). Those standards 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.
 
 As
        discussed in Note 1 to the consolidated financial statements, the Company
        has
        curtailed substantially all of its business operations.
 
 /s/ PricewaterhouseCoopers
                LLPCharlotte,
                North CarolinaMarch
                31,
                2006
   19
 **NET
          PERCEPTIONS, INC.**
 **CONSOLIDATED
          BALANCE SHEETS**
 **December
          31, 2005 and 2004**
 **(in
          thousands, except per share amounts)**
  **December
                    31,****2005**
                
                **2004****ASSETS**Current
                    assets:Cash
                    and cash equivalents
                
                $
                203
                
                $
                14,444Marketable
                    securities
                
                
                14,659
                
                
                —Prepaid
                    expenses and other current assets
                
                
                123
                
                
                40Total
                    current assets
                
                
                14,985
                
                
                14,484Other
                    assets
                
                
                210
                
                
                239Total
                    assets
                
                $
                15,195
                
                $
                14,723**LIABILITIES
                    AND STOCKHOLDERS’ EQUITY**Current
                    liabilities:Accrued
                    liabilities
                
                $
                354
                
                $
                178Total
                    current liabilities
                
                
                354
                
                
                178Note
                    payable - related party (Note 7)
                
                
                2,533
                
                
                2,517Total
                    liabilities
                
                
                2,887
                
                
                2,695Commitments
                    and contingencies (Note 9)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; 29,348 and 29,282
                    shares issued and 28,918 and 28,574outstanding
                    at December 31, 2005 and 2004, respectively
                
                
                2
                
                
                2Additional
                    paid-in capital
                
                
                234,400
                
                
                234,350Unearned
                    stock compensation
                
                
                (108
                )
                
                (135
                )Accumulated
                    other comprehensive loss
                
                
                (4
                )
                
                —Accumulated
                    deficit
                
                
                (221,982
                )
                
                (222,189
                )Total
                    stockholders’ equity
                
                
                12,308
                
                
                12,028Total
                    liabilities and stockholders’ equity
                
                $
                15,195
                
                $
                14,723
 
 See
          accompanying notes to the consolidated financial statements.
 20
 **NET
          PERCEPTIONS, INC.**
 **CONSOLIDATED
          STATEMENTS OF OPERATIONS**
 **Years
          Ended December 31, 2005, 2004 and 2003**
 **(in
          thousands, except per share amounts)**
 
 ******Year
                    Ended December 31,****2005**
                
                **2004**
                
                **2003**Revenues:Product
                
                $
                —
                
                $
                405
                
                $
                962Service,
                    maintenance and royalty
                
                
                118
                
                
                522
                
                
                1,622Total
                    revenues
                
                
                118
                
                
                927
                
                
                2,584Cost
                    of revenues:Product
                
                
                —
                
                
                —
                
                
                12Service,
                    maintenance and royalty
                
                
                —
                
                
                220
                
                
                755Total
                    cost of revenues
                
                
                —
                
                
                220
                
                
                767Gross
                    margin
                
                
                118
                
                
                707
                
                
                1,817Operating
                    expenses:Sales
                    and marketing
                
                
                —
                
                
                —
                
                
                1,347Research
                    and development
                
                
                —
                
                
                250
                
                
                2,112General
                    and administrative
                
                
                553
                
                
                2,428
                
                
                2,261Gain
                    from litigation settlement
                
                
                (223
                )
                
                —
                
                
                —Gain
                    on sale of patents
                
                
                —
                
                
                (1,800
                )
                
                —Restructuring
                    related charges and impairments
                
                
                —
                
                
                (7
                )
                
                2,251Total
                    operating expenses
                
                
                330
                
                
                871
                
                
                7,971Loss
                    from operations
                
                
                (212
                )
                
                (164
                )
                
                (6,154
                )Other
                    income (expense):Interest
                    income
                
                
                454
                
                
                172
                
                
                610Interest
                    expense
                
                
                (68
                )
                
                (75
                )
                
                —Other
                    income
                
                
                33
                
                
                6
                
                
                251Total
                    other income, net
                
                
                419
                
                
                103
                
                
                861Net
                    income/(loss)
                
                $
                207
                
                $
                (61
                )
                $
                (5,293
                )Basic
                    net income/(loss) per share
                
                $
                0.01
                
                $
                0.00
                
                $
                (0.19
                )Shares
                    used in basic calculation
                
                
                28,918
                
                
                28,574
                
                
                27,683Diluted
                    net income/(loss) per share
                
                $
                0.01
                
                $
                0.00
                
                $
                (0.19
                )Shares
                    used in diluted calculation
                
                
                33,438
                
                
                28,574
                
                
                27,683
 
 See
          accompanying notes to the consolidated financial statements.
 21
 **NET
          PERCEPTIONS, INC.**
 **CONSOLIDATED
          STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE
          INCOME/(LOSS)**
 **Years
          Ended December 31, 2005, 2004 and 2003**
 **(in
          thousands)**
  **Common
                      Stock**
                
                
                **Additional**
                  **Paid-in**
                
                
                **Accumulated**
                  **Other**
                  **Comprehensive**
                
                
                **Unearned
                    Stock**
                
                
                **Accumulated**
                
                
                **Total**
                  **Stockholders’**
                
                
                **Comprehensive**
                  **Income/****Shares**
                
                
                **Amount**
                
                
                **Capital**
                
                
                **Income/
                    (Loss)**
                
                
                **Compensation**
                
                
                **Deficit**
                
                
                **Equity**
                
                
                **(Loss)**Balance,
                    December 31, 2002
                
                
                27,332
                
                $
                2
                
                $
                275,053
                
                $
                122
                
                $
                —
                
                $
                (216,835
                )
                $
                58,342Exercise
                    of stock options
                
                
                801
                
                
                —
                
                
                894
                
                
                —
                
                
                —
                
                
                —
                
                
                894Issuance
                    of common stock under employee stock purchase plan
                
                
                12
                
                
                —
                
                
                12
                
                
                —
                
                
                —
                
                
                —
                
                
                12Change
                    in unrealized loss on available-for-sale investments
                
                
                —
                
                
                —
                
                
                —
                
                
                (122
                )
                
                —
                
                
                —
                
                
                (122
                )
                
                $
                (122
                )Cash
                    distribution to stockholders
                
                
                —
                
                
                —
                
                
                (42,198
                )
                
                —
                
                
                —
                
                
                —
                
                
                (42,198
                )Net
                    loss
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (5,293
                )
                
                (5,293
                )
                
                $
                (5,293
                )Balance,
                    December 31, 2003
                
                
                28,145
                
                
                2
                
                
                233,761
                
                
                —
                
                
                —
                
                
                (222,128
                )
                
                11,635
                
                
                $
                (5,415
                )Exercise
                    of stock options
                
                
                529
                
                
                —
                
                
                153
                
                
                —
                
                
                —
                
                
                —
                
                
                153Discount
                    on note payable related to beneficial conversion feature
                
                
                —
                
                
                —
                
                
                56
                
                
                —
                
                
                —
                
                
                —
                
                
                56Restricted
                    stock grant and related compensation
                
                
                608
                
                
                —
                
                
                380
                
                
                —
                
                
                (135
                )
                
                ——
                
                
                245Net
                    loss
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (61
                )
                
                (61
                )
                
                $
                (61
                )Balance,
                    December 31, 2004
                
                
                29,282
                
                
                2
                
                
                234,350
                
                
                —
                
                
                (135
                )
                
                (222,189
                )
                
                12,028
                
                
                $
                (61
                )Restricted
                    stock grant and related compensation
                
                
                66
                
                
                —
                
                
                50
                
                
                —
                
                
                27
                
                
                —
                
                
                77Change
                    in unrealized loss on available-for-sale investments
                
                
                —
                
                
                —
                
                
                —
                
                
                (4
                )
                
                —
                
                
                —
                
                
                (4
                )
                
                $
                (4
                )Net
                    income
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                ———
                
                
                207
                
                
                207
                
                
                $
                207Balance,
                    December 31, 2005
                
                
                29,348
                
                $
                2
                
                $
                234,400
                
                $
                (4
                )
                $
                (108
                )
                $
                (221,982
                )
                $
                12,308
                
                
                $
                203
 
  See
          accompanying notes to the consolidated financial statements.
 22
 **NET
          PERCEPTIONS, INC.**
 
 **CONSOLIDATED
          STATEMENTS OF CASH FLOWS**
 **(in
          thousands)**
 
 **Year
                    Ended December 31,****2005**
                
                **2004**
                
                **2003**Cash
                    flows from operating activities:Net
                    income (loss)
                
                $
                207
                
                $
                (61
                )
                $
                (5,293
                )Reconciliation
                    of net income (loss) to net cash provided by (used in) operating
                    activities:Depreciation
                    and amortization
                
                
                —
                
                
                —
                
                
                484Provision
                    for doubtful accounts
                
                
                —
                
                
                (22
                )
                
                (54
                )Amortization
                    of debt issuance costs
                
                
                29
                
                
                49
                
                
                —Amortization
                    of discount on notes payable
                
                
                16
                
                
                40
                
                
                —Stock
                    based compensation
                
                
                77
                
                
                245
                
                
                —Restructuring
                    related charges and impairments
                
                
                —
                
                
                (7
                )
                
                2,251Amortization
                    of (discount) premium on investments, net
                
                
                (174
                )
                
                —
                
                
                183Changes
                    in assets and liabilities:Accounts
                    receivable
                
                
                —
                
                
                377
                
                
                88Prepaid
                    expenses and other current assets
                
                
                (83
                )
                
                441
                
                
                146Other
                    assets
                
                
                —
                
                
                35
                
                
                690Accounts
                    payable
                
                
                —
                
                
                —
                
                
                (52
                )Accrued
                    liabilities
                
                
                176
                
                
                (573
                )
                
                (6,993
                )Deferred
                    revenue
                
                
                —
                
                
                (380
                )
                
                (370
                )Other
                    liabilities
                
                
                —
                
                
                (30
                )
                
                (510
                )Net
                    cash provided by (used in) operating activities
                
                
                248
                
                
                114
                
                
                (9,430
                )Cash
                    flows from investing activities:Purchases
                    of short-term investments and marketable securities
                
                
                (20,539
                )
                
                —
                
                
                (16,121
                )Sales
                    and maturities of short-term investments and marketable
                    securities
                
                
                6,050
                
                
                —
                
                
                39,046Net
                    cash (used in) provided by investing activities
                
                
                (14,489
                )
                
                —
                
                
                22,925Cash
                    flows from financing activities:Proceeds
                    from issuance of stock under employee stock purchase plan
                
                
                —
                
                
                —
                
                
                12Proceeds
                    from exercise of stock options and warrants, net of stock
                    repurchases
                
                
                —
                
                
                153
                
                
                894Cash
                    distribution to stockholders
                
                
                —
                
                
                —
                
                
                (42,198
                )Proceeds
                    from issuance of convertible subordinate note, net of offering
                    costs of
                    $288
                
                
                —
                
                
                2,245
                
                
                —Net
                    cash provided by (used in) financing activities
                
                
                —
                
                
                2,398
                
                
                (41,292
                )Net
                    (decrease) increase in cash and cash equivalents
                
                
                (14,241
                )
                
                2,512
                
                
                (27,797
                )Cash
                    and cash equivalents at beginning of year
                
                
                14,444
                
                
                11,932
                
                
                39,729Cash
                    and cash equivalents at end of year
                
                $
                203
                
                $
                14,444
                
                $
                11,932
 
 See
          accompanying notes to the consolidated financial statements.
 23
 **NET
        PERCEPTIONS, INC.**
 
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **December
        31, 2005, 2004 and 2003**
 **(in
        thousands, except per share amounts)**
 
 **1.
        Organization**
 
 Net
        Perceptions, Inc. (the “Company”) was incorporated in Delaware on July 3, 1996.
        The Company developed and marketed software solutions that enabled its customers
        to interact more intelligently with their customers. On
        April 21, 2004, we announced the simultaneous signing and closing of an
        investment into the Company by Olden Acquisition LLC, an affiliate of Kanders
        & Company, Inc., an
        entity owned and controlled by the Company’s Executive Chairman, Warren B.
        Kanders, for
        the purpose of initiating a strategy to redeploy our assets and use our cash,
        cash equivalent assets and marketable securities to enhance stockholder value.
 
 The
        Company has curtailed substantially all of its business operations and at
        March
        1, 2006 had six employees.
 
 **2.
        Summary of significant accounting policies**
 
 *Basis
        of presentation*
 
 The
        consolidated financial statements include accounts of the Company and its
        wholly-owned subsidiaries. All inter-company accounts and transactions have
        been
        eliminated.
 
 *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 recognized 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. 104, “Revenue Recognition in Financial Statements.” The Company
        derived revenues from software licenses, software maintenance, professional
        services and royalties. Maintenance included telephone and Web-based technical
        support, bug fixes and rights to unspecified upgrades on a when-and-if available
        basis. Professional services included project planning and management,
        implementation and testing, data analysis, data warehousing, user and partner
        training, consulting, product hosting and ongoing customer support. Royalty
        revenues are derived from resales of our product by Tornago, Inc.
 
 For
        software arrangements that included multiple elements ( *e.g* .,
        software products, and/or maintenance or services), the Company allocated
        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, was deferred and the remaining (residual)
        arrangement fee was recognized as software product revenue. In software
        arrangements in which the Company did not have vendor-specific objective
        evidence of undelivered elements, revenue was deferred until the earlier
        of when
        vendor-specific objective evidence was determined for the undelivered elements
        or when all elements had been delivered.
 
 24
 Revenues
        from license fees were recognized when a non-cancelable agreement had been
        executed, the product had been shipped or electronically delivered, there
        were
        no uncertainties surrounding product acceptance, the fee was fixed or
        determinable and collection of the related receivable was considered probable.
        If the fee due from the customer was not fixed or determinable, revenues
        were
        recognized as payments became due from the customer. If the Company did not
        consider collection to be probable, then revenues were recognized when the
        fee
        was collected.
  License
        revenues which related to license terms with less than twenty-four months
        were
        recognized ratably over the term of the license period. When the Company
        offered
        products and services on a hosted basis, up front set-up fees were deferred
        and
        recognized ratably over the estimated service period.
 
 Revenues
        allocable to maintenance were recognized ratably over the term of the agreement.
        The Company evaluated arrangements that included professional and/or data
        processing services to determine whether those services were essential to
        the
        functionality of other elements of the arrangement. If professional services
        were considered essential, revenues from the arrangement were recognized
        using
        contract accounting, generally on a percentage-of-completion basis. When
        the
        Company did not consider the professional services to be essential, revenues
        allocable to the services were recognized as they were performed.
 
 Under
        general contract terms, the Company included an indemnification clause in
        its
        software licensing agreement that indemnified the licensee against liability
        and
        damages arising from any claims of patent, copyright, trademark or trade
        secret
        infringement by the Company’s software. The Company had incurred insignificant
        costs as a result of this type of indemnification clause and the Company
        did not
        maintain a product warranty liability related to such indemnification
        clauses.
 
 *Concentrations
        of credit risk and significant customers*
 
 Financial
        instruments that potentially subject the Company to credit risk consisted
        primarily of accounts receivable. The Company granted credit to customers
        in the
        ordinary course of business. Total revenues for 2005 were comprised of royalty
        revenue from one party. Three customers accounted for 54%, 11% and 6% of
        total
        revenues for 2004. For the periods ended December 31, 2005 and 2004,
        respectively, there was no outstanding accounts receivable.
 
 *Cash
        and cash equivalents*
 
 The
        Company considers all highly liquid investments purchased with an original
        maturity of three months or less to be cash equivalents. The Company had
        approximately $0.2 million and $14.4 million in cash and cash equivalents
        included in the accompanying consolidated balance sheets for the years ended
        December 31, 2005 and 2004, respectively.
 
 *Marketable
        securities*
 
 Marketable
        securities for the period ended December 31, 2005 consist of government notes
        and bonds. The Company accounts for its marketable securities under the
        provisions of SFAS No. 115, “Accounting for Certain Investments in Debt and
        Equity Securities”. Pursuant to the provisions of SFAS No. 115, the Company has
        classified its marketable securities as available-for-sale. Available-for-sale
        securities have been recorded at fair value and related unrealized gains
        and
        losses have been excluded from earnings and are reported as a separate component
        of stockholders’ equity until realized. At December 31, 2005, marketable
        securities had a fair market value of $14.7 million with an amortized cost
        of
        $14.7 million and unrealized loss of $4,000. The maturities of all securities
        are less than 12 months at December 31, 2005.
 
 *Fair
        value of financial instruments*
 
 The
        carrying amounts of the Company’s financial instruments, which include cash and
        cash equivalents, marketable securities, accrued liabilities and note payable,
        approximate their fair values at December 31, 2005 and 2004.
 
 *Other
        assets*
 
 Other
        assets consist primarily of costs associated with the issuance of long-term
        debt
        related to the investment in the Company by Olden Acquisition LLC in the
        second
        quarter of 2004.
 
 25
 *Research
        and development*
 
 Research
        and development expenditures, which included software development costs,
        were
        expensed as incurred. SFAS No. 86, “Accounting for the Costs of Computer
        Software to Be Sold, Leased or Otherwise Marketed,” required the capitalization
        of certain software development costs once technological feasibility was
        established, which the Company defined as the completion of a working model.
        The
        period between achieving technological feasibility and the general availability
        of such software had been short and software development costs qualifying
        for
        capitalization were insignificant. Accordingly, the Company did not capitalize
        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 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.
 
 *Earnings
        per share*
  Basic
        earnings per share is computed using net income (loss) and the weighted average
        number of common shares outstanding. Diluted earnings per share reflects
        the
        weighted average number of common shares outstanding plus any potentially
        dilutive shares outstanding during the period. Potentially dilutive shares
        consist of shares issuable upon the exercise of stock options, convertible
        notes, and restricted stock awards.
 
 The
        diluted net income (loss) per share computation for the year ended December
        31,
        2005, includes the impact of 299 potential common shares from the exercise
        of
        stock options and restricted stock awards and 4,221 potential common shares
        from
        the convertible note all of which were dilutive. Shares used in the diluted
        net
        income (loss) per share computation for the year ended December 31, 2004
        exclude
        the impact of 367 potential common shares from the exercise of stock options
        and
        restricted stock which were anti-dilutive. Shares used in the diluted net
        income
        (loss) per share computation for the year ended December 31, 2003 exclude
        the
        impact of 2,029 potential common shares from the exercise of stock options
        which
        were anti-dilutive.
 
 *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 accompanying
        consolidated statements of stockholders’ equity and comprehensive
        income/(loss).
 
 *Stock-based
        compensation*
 
 In
        December 2002, the Financial Accounting Standards Board (“FASB”) issued
        Statement No. 148, “Accounting for Stock-Based Compensation - Transition and
        Disclosure” which amends SFAS No. 123, “Accounting for Stock-Based
        Compensation”, to provide alternative methods of transition for a change to the
        fair based-value method of accounting for stock-based employee compensation.
        In
        addition, SFAS No.148 amends the disclosure requirements of SFAS No. 123
        to
        require prominent disclosures in both annual and interim financial statements
        about the method of accounting for stock-based employee compensation and
        the
        effect of the method used on reported results. As permitted by SFAS 148 and
        SFAS
        123, the Company has elected to follow the guidance of Accounting Principles
        Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” in
        measuring and recognizing its stock-based transactions with employees. As
        such,
        compensation expense is measured on the date of grant only if the current
        market
        price on the date of the grant of the underlying stock exceeds the exercise
        price. Such compensation expense is recorded on a straight-line basis over
        the
        related vesting period.
 
 26
 The
        following table shows the effect on net loss and earnings per share if the
        fair
        value method of accounting had been applied. For purposes of this pro forma
        disclosure, the estimated fair value of an option utilizing the Black-Scholes
        option pricing model is assumed to be amortized to expense over the option’s
        vesting periods (in thousands, except per share amounts):
  **Year
                    Ended December 31********2005**
                
                **2004**
                
                **2003**Net
                    income/(loss), as reported
                
                $
                207
                
                $
                (61
                )
                $
                (5,293
                )Add:
                    Stock-based employee compensation expense included in reported
                    net
                    income/(loss)
                
                
                77
                
                
                245
                
                
                —Deduct:
                    Total stock-based employee compensation expense determined under
                    fair
                    value
                  based
                    method for all awards, net of related tax effects
                
                
                (96
                )
                
                (277
                )
                
                (1,274
                )Pro
                    forma net income/(loss)
                
                $
                188
                
                $
                (93
                )
                $
                (6,597
                )Basic
                    net income/(loss) per share:As
                    reported
                
                $
                0.01
                
                $
                0.00
                
                $
                (0.19
                )Pro
                    forma
                
                $
                0.01
                
                $
                0.00
                
                $
                (0.24
                )Diluted
                    net income/(loss) per share:As
                    reported
                
                $
                0.01
                
                $
                0.00
                
                $
                (0.19
                )Pro
                    forma
                
                $
                0.01
                
                $
                0.00
                
                $
                (0.24
                )
 
 Compensation
        expense for pro forma purposes is reflected over the vesting period. 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 2005, 2004 and 2003, respectively: dividend
        yield
        of 0% for option grants in all years; risk-free interest rates of 4.0%, 3.0%
        and
        3.0%; expected lives of five years for option grants in all years; and
        volatility factors of 57%, 50% and 50%. The weighted-average fair value of
        options adjustments during 2005, 2004 and 2003 using the Black-Scholes
        option-pricing model was $0.37, $0.31 and $0.16 per share,
        respectively.
 
 *Recently
        issued accounting pronouncements*
 
 In
        December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based
        Payment” (“SFAS No. 123R”). This statement requires that the compensation cost
        relating to share-based payment transactions be recognized in the financial
        statements. Compensation cost is to be measured based on the estimated fair
        value of the equity-based compensation awards issued as of the grant date.
        The
        related compensation expense will be based on the estimated number of awards
        expected to vest and will be recognized over the requisite service period
        (often
        the vesting period) for each grant. The statement requires the use of
        assumptions and judgments about future events and some of the inputs to the
        valuation models will require considerable judgment by management. SFAS No.
        123R
        replaces FASB Statement No. 123 (“SFAS No. 123”), “Accounting for Share-Based
        Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued
        to Employees.” The provisions of SFAS No. 123R are required to be applied by
        public companies as of the first annual reporting period that begins after
        June
        15, 2005 (as of January 1, 2006 for the Company). Accordingly, as of January
        1,
        2006 the Company uses the modified prospective application transition method
        without restatement of prior interim periods in the year of adoption. This
        will
        result in the Company recognizing compensation cost based on the requirements
        of
        SFAS No. 123R for all equity-based compensation awards issued after January
        1,
        2006. For all equity-based compensation awards that are unvested as of January
        1, 2006, compensation cost will be recognized for the unamortized portion
        of
        compensation cost not previously included in the SFAS No. 123 pro forma footnote
        disclosure.
 
 **3.
        Marketable securities**
 
 As
        of
        December 31, 2005, and 2004, those investments with an original maturity
        of
        three months or less are classified as cash equivalents and those investments
        with original maturities beyond three months are classified as marketable
        securities. Pursuant to the provisions of SFAS No. 115, the Company has
        classified all of its marketable securities as available-for-sale.
 
 At
        December 31, 2005, marketable securities consisted of government notes and
        bonds
        with a fair market value of $14.7 million. The amortized cost of marketable
        securities at December 31, 2005 was $14.7 million with an unrealized loss
        of
        $4,000.
 
 The
        maturities of all securities are less than 12 months at December 31, 2005.
 27
 **4.
        Financial statement components**
 
 Certain
        balance sheet components consist of the following:
 
 Rollforward
        of the allowance for doubtful accounts:
  Balance,
                    December 31, 2002
                
                $
                85Provision
                
                
                (54
                )Write-offs
                
                
                (3
                )Recoveries
                
                
                2Balance,
                    December 31, 2003
                
                
                30Provision
                
                
                (22
                )Write-offs
                
                
                (8
                )Recoveries
                
                
                —Balance,
                    December 31, 2004
                
                
                —Provision
                
                
                —Write-offs
                
                
                —Recoveries
                
                
                —Balance,
                    December 31, 2005
                
                $
                —
 Accrued
        liabilities include the following as of December 31, 2005 and 2004 (in
        thousands):
  **2005**
                
                **2004**Accounts
                    payable
                
                $
                46
                
                $
                —Accrued
                    compensation, benefits and commissions
                
                
                100
                
                
                —Interest
                    payable
                
                
                87
                
                
                35Accrued
                    professional services
                
                
                67
                
                
                105Accrued
                    franchise taxes
                
                
                44
                
                
                —Other
                
                
                10
                
                
                38$
                354
                
                $
                178
 
 **5.
        Restructuring related charges and impairments**
 
 During
        2003 and 2002, continuing from 2001, the Company instituted certain
        restructuring plans to better align its cost structure with its business
        outlook
        and general economic conditions. Under the restructuring plans, the Company
        recorded restructuring related charges totaling $2,251 and $768 during 2003
        and
        2002, respectively.
 
 The
        Company recorded restructuring related charges of $1,200 in the first quarter
        of
        2003 related primarily to the closure of operations in three satellite offices,
        employee termination costs due to a reduction of workforce by 22 positions
        and
        $413 for estimated losses on the disposal of fixed assets. The Company recorded
        additional restructuring related charges of $1,051 in the third quarter of
        2003
        related primarily to the termination of three real estate lease agreements,
        and
        employee termination costs due to a reduction of workforce by 12 positions.
        The
        aggregate cash payments for the lease terminations were approximately $5.4
        million.
 
 As
        of
        December 31, 2005, the Company had no outstanding lease obligations.
 
 The
        following table presents a summary of the restructuring related activities
        and
        accrued restructuring charges as of December 31, 2005:
 **Lease**
                  **Commitments**
                  **and
                    Related**
                  **Items**
                
                
                **Employee**
                  **Severance**
                  **and**
                  **Termination**
                  **Costs**
                
                
                **Subtotal**
                
                
                **Fixed**
                  **Asset**
                  **Disposals**
                  **and
                    Other**
                  **Costs**
                
                
                **Total****Accrued
                    Restructuring as of December 31, 2002**
                
                $
                4,554
                
                $
                70
                
                $
                4,624
                
                $
                48
                
                $
                4,672Restructuring
                    Related Charges and Impairments
                
                
                1,249
                
                
                589
                
                
                1,838
                
                
                413
                
                
                2,251Restructuring
                    Payments
                
                
                (8,094
                )
                
                (652
                )
                
                (8,746
                )
                
                (51
                )
                
                (8,797
                )Sublease
                    Income and Proceeds from the Sale of Fixed Assets
                
                
                1,832
                
                
                —
                
                
                1,832
                
                
                165
                
                
                1,997Non
                    Cash Asset Disposals and Deferred Rent Write-Off
                
                
                489
                
                
                —
                
                
                489
                
                
                (575
                )
                
                (86
                )**Accrued
                    Restructuring as of December 31, 2003**
                
                
                30
                
                
                7
                
                
                37
                
                
                —
                
                
                37Restructuring
                    Payments
                
                
                (30
                )
                
                —
                
                
                (30
                )
                
                —
                
                
                (30
                )Restructuring
                    Related (Reversal)
                
                
                —
                
                
                (7
                )
                
                (7
                )
                
                —
                
                
                (7
                )**Accrued
                    Restructuring as of December 31, 2004**
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —Restructuring
                    Payments
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —Restructuring
                    Related (Reversal)
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —**Accrued
                    Restructuring as of December 31, 2005**
                
                $
                —
                
                $
                —
                
                $
                —
                
                $
                —
                
                $
                —
 
 28
 **6.
        Income taxes**
 
 For
        income tax purposes, the Company has available federal net operating loss
        carry-forwards of approximately $120,900 and research and development credit
        carry-forwards of $151 at December 31, 2005. The net operating loss and research
        and development credit carry-forwards expire in 2011 through 2024, if not
        previously utilized. The utilization of these carry-forwards may be subject
        to
        limitations based on past and 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.
 
 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 are as follows:
  **December
                    31,****2005**
                
                **2004**Deferred
                    tax assets:Net
                    operating loss carry-forwards
                
                $
                43,511
                
                $
                43,273Research
                    and development credit carry-forwards
                
                
                151
                
                
                151Accrued
                    vacation and other current liabilities
                
                
                114
                
                
                12Total
                    deferred tax assets
                
                
                43,776
                
                
                43,436Valuation
                    allowance
                
                
                (43,776
                )
                
                (43,436
                )Total
                    net deferred income taxes
                
                $
                —
                
                $
                —
  **7.
        Note Payable**
 
 On
        April 21, 2004, the Company closed on an investment into the Company by Olden
        Acquisition LLC (“Olden”) , for
        the purpose of initiating a strategy to redeploy the Company’s assets and use
        the Company’s cash, cash equivalent assets and marketable securities to enhance
        stockholder value. The Company issued and sold to Olden a 2% ten-year
        Convertible Subordinated Note, which is convertible after one year (or
        earlier upon a call by the Company and in certain other circumstances) at
        a conversion price of $0.45 per share of Company common stock into approximately
        19.9% of the outstanding common equity of the Company as of the closing date.
        Proceeds to the Company from this transaction totaled approximately $2,533
        before transaction costs of $288. The transaction costs are being amortized
        over
        ten years, the term of the debt. Interest on the note accrues semi-annually
        but
        is not payable currently or upon conversion of the note. The note matures
        on
        April 21, 2014. The convertible subordinated note was deemed to include a
        beneficial conversion feature. At the date of issue, the Company allocated
        $56
        to the beneficial conversion feature and amortized the beneficial conversion
        feature over one year (the period after which the note is convertible). As
        of
        December 31, 2005, zero remains to be amortized of the note discount due
        to the
        beneficial conversion feature. Also in connection with this transaction,
        the
        Company entered into a Registration Rights Agreement, which requires the
        Company, upon request of the purchaser of the note or its assignee, to register
        under the Securities Act of 1933, as amended, the resale of the shares of
        common
        stock into which the note is convertible. In connection with this transaction,
        the board of directors adopted an amendment to the Company’s Rights Agreement
        such that the transaction would not trigger the rights thereunder.
 
 29
 **8.**  **Stockholders’
        equity**
 
 The
        Company is authorized to issue two classes of stock designated as common
        and
        preferred. As of December 31, 2005, 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. On August 6, 2003, the Company announced
        a cash
        distribution to stockholders of $1.50 per share, payable on September 2,
        2003 to
        stockholders of record as of August 18, 2003. On September 2, 2003, the Company
        distributed $42,198 to the common stockholders that was reflected as a reduction
        of additional paid in capital.
 
 *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 non-qualified 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. The
        total number of options available for future grants under the 2000 Plan was
        447
        at December 31, 2005. 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 non-qualified 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 2003, 1,000
        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 0
        and 1,356 shares in 2003 and 2002, respectively. The total number of options
        available for future grants under the 1999 Plan was 2,524 at December 31,
        2002.
        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 non-qualified
        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, 60, 195, and 30 options were granted in fiscal year 2003,
        2002 and 2001, respectively. As of December 31, 2003, 0 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 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 non-qualified 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 (all of which rights have
        expired
        with respect to options outstanding under the 1996 Plan), and generally expire
        ten years from the date of grant. Upon adoption of the 1999 Plan, the Company
        ceased granting options under the 1996 Plan.
 
 Stock
        compensation expense recorded in the functional expense categories within
        operating expenses in 2005, 2004 and 2003, was allocated as
        follows:
  **2005**
                
                **2004**
                
                **2003**General
                    and administrative
                
                $
                77
                
                $
                245
                
                $
                —$
                77
                
                $
                245
                
                $
                —
 As
        a
        result of the September 2, 2003 cash distribution paid to stockholders discussed
        above, the board of directors approved an adjustment to the exercise price
        of
        all of our outstanding options to take effect on the close of business on
        September 3, 2003. The adjustment was to in no event reduce the exercise
        price
        of any options to less than $0.01 per share or increase the number of shares
        subject to such options to a number exceeding the number of shares of common
        stock that are registered and available for issuance. In addition, no adjustment
        was made to any options with exercise prices above $2.00 per share. As a
        result
        of the adjustment, 870 stock options with an average exercise price of $1.51
        were adjusted to 3,715 stock options with an average exercise price of $0.32.
        In
        accordance with FIN 44, “Accounting for Certain Transactions involving Stock
        Compensation an interpretation of APB Opinion No. 25,” there was no accounting
        consequence due to the changes made to the exercise price or the number of
        shares other than future potential dilution to stockholders because the
        aggregate intrinsic value of each award immediately after the change was
        not
        greater than the aggregate intrinsic value of the award immediately before
        the
        change and the ratio of the exercise price per share to the market value
        per
        share was not reduced.
 
 
 30
 A
        summary
        of activity of the Company’s stock option plans is presented below:
  **Years
                    Ending December 31,****2005**
                
                **2004**
                
                **2003****Shares**
                
                **Weighted**
                  **Average**
                  **Exercise**
                  **Price**
                
                **Shares**
                
                **Weighted**
                  **Average**
                  **Exercise**
                  **Price**
                
                **Shares**
                
                **Weighted**
                  **Average**
                  **Exercise**
                  **Price**Outstanding
                    at beginning of year
                
                
                188
                
                $
                0.59
                
                
                2,029
                
                $
                1.83
                
                
                2,757
                
                $
                3.26Granted
                
                
                165
                
                
                0.71
                
                
                150
                
                
                0.66
                
                
                61
                
                
                1.639/3/03
                    pre-adjustment options
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (870
                )
                
                1.519/3/03
                    post-adjustment options
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                3,715
                
                
                0.32Exercised
                
                
                —
                
                
                —
                
                
                (529
                )
                
                0.29
                
                
                (801
                )
                
                1.12Forfeited
                
                
                (32
                )
                
                0.35
                
                
                (1,462
                )
                
                2.43
                
                
                (2,833
                )
                
                1.54Outstanding
                    at end of year
                
                
                321
                
                $
                0.68
                
                
                188
                
                $
                0.59
                
                
                2,029
                
                $
                1.83Vested
                    and exercisable
                
                
                81
                
                $
                0.63
                
                
                79
                
                $
                0.49
                
                
                847
                
                $
                3.86
 
 The
        following table summarizes information about fixed-price stock options
        outstanding at December 31, 2005
  **Options
                    Outstanding**
                
                
                **Options
                    Exercisable****Range****Of**
                  **Exercise
                    Prices**
                
                
                **Shares**
                
                
                **Weighted-Average**
                  **Remaining**
                  **Contractual
                    Life**
                
                
                **Weighted-Average**
                  **Exercise
                    Price**
                
                
                **Shares**
                
                
                **Weighted-Average**
                  **Exercise
                    Price**$0.23
                    — $0.23
                
                
                6
                
                
                5.25
                
                $
                0.23
                
                
                6
                
                $
                0.23$0.48
                    — $0.48
                
                
                50
                
                
                8.31
                
                
                0.48
                
                
                25
                
                
                0.48$0.69
                    — $0.69
                
                
                100
                
                
                9.86
                
                
                0.69
                
                
                0
                
                
                0.69$0.74
                    — $0.75
                
                
                165
                
                
                8.70
                
                
                0.74
                
                
                50
                
                
                0.74Total
                
                
                321
                
                
                8.94
                
                $
                0.68
                
                
                81
                
                $
                0.63
 *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, 2004, the number of shares
        of
        common stock reserved for issuance under the Purchase Plan was, in accordance
        with the terms of the Purchase Plan, automatically increased by the lesser
        of 2%
        of the total number of common shares then outstanding or 600 shares. The
        number
        of shares of common stock reserved for issuance under the Purchase Plan
        increased by 300 in each of 2003 and 2002. The Company terminated the Purchase
        Plan effective October 27, 2003. During 2003 and 2002, 12 and 68 shares,
        respectively, were issued under the Purchase Plan.
 
 31
 *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. Each share of common stock issued after the June 14th, 2001 record
        date
        has an attached Right. 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, upon payment of the exercise price of the Right (currently,
        $15), 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, upon payment
        of the exercise price of the Right, 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.
 
 On
        December 22, 2003, the board of directors adopted an amendment to the Rights
        Agreement. The amendment provides, in effect, that the rights issued under
        the
        Rights Agreement will not be separately distributed to the Company’s
        stockholders and become exercisable solely as a result of the commencement
        of a
        tender offer or exchange offer for all outstanding shares of the Company’s
        common stock. In addition, the amendment provides that the rights will not
        “flip-in” and entitle a holder to purchase shares of the Company’s common stock
        at a discount upon consummation of such an offer that results in the bidder
        beneficially owning at least 85% of the outstanding shares of the Company’s
        common stock, excluding for purposes of determining the number of shares
        of
        common stock outstanding those shares owned by directors who are also officers
        of the Company and shares owned by stock plans sponsored by the Company in
        which
        Company employee participants do not have the right to determine confidentially
        whether shares of Company common stock held subject to such stock plan(s)
        will
        be tendered in a tender offer or exchange offer. Also, pursuant to the
        amendment, the rights will not be triggered by a subsequent merger of the
        Company with such a bidder in which the Company’s stockholders receive the same
        consideration as was paid or issued in the tender offer or exchange offer.
        The
        amendment was intended to remove the Rights Agreement as an impediment to
        a
        bidder completing its offer and a subsequent merger, while also affording
        protection to stockholders who did not tender their shares in the bidder’s
        first-step tender or exchange offer, if the holders of a substantial majority
        of
        the Company’s stock elected to accept the bidder’s offer. The amendment also
        clarified that stockholders who entered into voting agreements or understandings
        solely regarding voting on the plan of liquidation would not be deemed, for
        purposes of the Rights Agreement, to beneficially own the shares owned by
        the
        other parties to such agreements or understandings. This aspect of the amendment
        was intended to allow stockholders to freely consult with one another, form
        groups, and enter into agreements, with respect to voting at the special
        meeting
        on the plan of liquidation, without triggering the rights under the Rights
        Agreement. However, since the plan of liquidation did not receive the requisite
        stockholder vote required for approval, this aspect of the amendment is no
        longer applicable.
 
 *Restricted
        stock*
 
 On
        April
        1, 2005, the Company granted restricted stock to Nigel Ekern, the Company’s
        Chief Administrative Officer, in the amount of 66 shares of the Company’s common
        stock under the Company’s incentive plans, vesting over three years. The fair
        value of $50 for the restricted stock will be amortized over the three-year
        vesting period. The Company recorded total compensation expense of $77 relating
        to the restricted stock grants for the year ended December 31,
        2005.
 
 On
        April
        21, 2004, the Company granted restricted stock to Nigel Ekern, the Company’s
        Chief Administrative Officer, and Gray Hudkins, formerly the Company’s Director
        of Corporate Development, in the amount of 364 and 243 shares, respectively,
        of
        the Company’s common stock under the Company’s incentive plans, vesting over
        three years. The fair value of $292 for the restricted stock will be amortized
        over the three-year vesting period. On October 1, 2004, Gray Hudkins resigned
        and the Company accelerated the
        vesting of his restricted stock grant resulting in additional compensation
        expense of $88 as well as immediate expensing of the remaining unamortized
        balance of the original grant. The Company recorded total compensation expense
        of $245 relating to restricted stock grants during the year ended December
        31,
        2004.
 
 32
 **9.
        Commitments and contingencies**
 
 *Operating
        leases*
 
 The
        Company had entered into operating lease commitments for its office space.
        In
        connection with the restructuring described in Note 5, the Company had
        terminated all of its office leases as of December 31, 2004.
 
 Our
        corporate headquarters is currently located in Stamford, Connecticut, where
        we
        occupy space made available to us at no cost by Kanders & Company, Inc., an
        entity owned and controlled by the Company’s Executive Chairman, Warren B.
        Kanders. This arrangement is subject to termination at any time.
 
 Rent
        expense totaled $0, $7 and $300 for the years ended December 31, 2005, 2004
        and
        2003, respectively.
 
 *Contingencies*
 
 Except
        as
        set forth below, we are not a party to nor are any of our properties subject
        to
        any pending legal, administrative or judicial proceedings other than routine
        litigation incidental to our business.
 
 *Public
        Offering Securities Litigation*
 
 On
        November 2, 2001, Timothy J. Fox filed a purported class action lawsuit against
        the Company; FleetBoston Robertson Stephens, Inc., the lead underwriter of
        the
        Company’s April 1999 initial public offering; several other underwriters who
        participated in the initial public offering; Steven J. Snyder, the Company’s
        then president and chief executive officer; and Thomas M. Donnelly, the
        Company’s then chief financial officer. The lawsuit was filed in the United
        States District Court for the Southern District of New York and was assigned
        to
        the pretrial coordinating judge for substantially similar lawsuits involving
        more than 300 other issuers. An amended class action complaint, captioned *In
        re
        Net Perceptions, Inc. Initial Public Offering Securities*  *Litigation,* 01
        Civ.
        9675 (SAS), was filed on April 22, 2002, expanding the basis for the action
        to
        include allegations relating to the Company’s March 2000 follow-on public
        offering in addition to those relating to its initial public offering.  The
        action against the Company was thereafter coordinated with the other
        substantially similar class actions as *In
        re
        Initial Public Offering Securities Litigation* ,
        21 MC
        (SAS) (the “Coordinated Class Actions”).
 
 The
        amended complaint generally alleges that the defendants violated federal
        securities laws by not disclosing certain actions taken by the underwriter
        defendants in connection with the Company’s initial public offering and
        follow-on public offering. The amended complaint alleges specifically that
        the
        underwriter defendants, with the Company’s direct participation and agreement
        and without disclosure thereof, conspired to and did raise and increase their
        underwriters’ compensation and the market prices of the Company’s common stock
        following its initial public offering and in its follow-on public offering
        by
        requiring their customers, in exchange for receiving allocations of shares
        of
        the Company’s common stock sold in its initial public offering, to pay excessive
        commissions on transactions in other securities, to purchase additional shares
        of the Company’s common stock in the initial public offering aftermarket at
        pre-determined prices above the initial public offering price, and to purchase
        shares of the Company’s common stock in its follow-on public offering. The
        amended complaint seeks unspecified monetary damages and certification of
        a
        plaintiff class consisting of all persons who acquired the Company’s common
        stock between April 22, 1999 and December 6, 2000. The plaintiffs have since
        agreed to dismiss the claims against Mr. Snyder and Mr. Donnelly without
        prejudice, in return for their agreement to toll any statute of limitations
        applicable to those claims; and those claims have been dismissed without
        prejudice.
 
 On
        August
        31, 2005, the Court gave preliminary approval to a settlement reached by
        the
        plaintiffs and issuer defendants in the Coordinated Class Actions and has
        scheduled a fairness hearing for April 24, 2006, to hear objections and to
        make
        a final determination whether to approve the settlement as fair, adequate
        and
        reasonable.  In the opinion of management, the ultimate disposition of this
        matter will not have a material effect on the Company’s financial position,
        results of operation or cash flows.
 
 **10.
        Segment data**
 
 The
        Company viewed its previous operations and managed its business as one segment,
        the development and marketing of computer software and related services.
        Factors
        used to identify the Company’s single operating segment include the
        organizational structure of the Company and the financial information available
        for evaluation by the chief operating decision maker in making decisions
        about
        how to allocate resources and assess performance. In addition, the Company
        does
        not allocate operating expenses to any segments, nor does it allocate specific
        assets to any segments. Therefore, segment information is identical to the
        consolidated balance sheet and consolidated statement of
        operations.
 
 33
 Sales
        to
        customers located outside of the United States totaled 0%, 0% and 11% of
        total
        revenues in 2005, 2004 and 2003, respectively. International sales to customers
        in any one individual foreign country did not exceed 10% of total revenues
        in
        2003. As of December 31, 2005, the Company had no international
        assets.
 
 **11.
        Related Party Transactions**
 
 We
        occupy
        space made available to us at no cost by Kanders & Company, Inc., an entity
        owned and controlled by the Company’s Executive Chairman, Warren B. Kanders.
        This arrangement can be terminated at any time. In connection with the
        consummation of an asset redeployment transaction, it is expected that
        management and/or Kanders & Company, Inc. will be awarded cash and/or equity
        compensation based upon the completion of the redeployment
        transaction.
 
 During
        the year ended December 31, 2005, the Company reimbursed Clarus Corporation
        (“Clarus”“) and aggregate of $34,600 for telecommunication,
        professional and general office expenses which Clarus incurred on behalf of
        the Company. Warren B. Kanders, our Executive Chairman, also serves as the
        Executive Chairman of Clarus.
 
 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 bear interest at 8% per
        annum and were 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 were to
        be
        forgiven if the officer’s employment was terminated other than voluntarily or
        for cause, or if there was a change in control of the Company as defined
        in the
        agreement. Additionally, one-third of the original principal and accrued
        interest were to be forgiven for each year that the officer remained
        continuously employed by the Company subsequent to April 2001. Otherwise,
        principal and accrued interest were to be payable by the officer in April
        2004.
        The principal balance of the loan was amortized to expense ratably over the
        term
        of the agreement commencing in April 2001. As of April 1, 2004, the note
        was
        completely forgiven in accordance with its terms.
 
 
 **ITEM
        9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
        AND**  **FINANCIAL
        DISCLOSURE**
 
 None.
 
 **ITEM
        9A. CONTROLS AND PROCEDURES**
 
 **Evaluation
        of Disclosure Controls and Procedures**
 
 The
        Company’s management carried out an evaluation, under the supervision and with
        the participation of the Company’s Chief Administrative Officer and Controller,
        its principal executive officer and principal financial officer, respectively
        of
        the effectiveness of the design and operation of the Company’s disclosure
        controls and procedures (as such term is defined in Rules 13a-15(e) and
        15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”) as of
        December 31, 2005, pursuant to Exchange Act Rule 13a-15. Such disclosure
        controls and procedures are designed to ensure that information required
        to be
        disclosed by the Company is accumulated and communicated to the appropriate
        management on a basis that permits timely decisions regarding disclosure.
        Based
        upon that evaluation, the Company’s Chief Administrative Officer and Controller
        concluded that the Company’s disclosure controls and procedures as of December
        31, 2005 are effective.
 
 34
 **Changes
        in Internal Control Over Financial Reporting**
 
 No
        changes in the Company’s internal control over financial reporting have come to
        management’s attention during the fourth quarter ended December 31, 2005 that
        have materially affected, or are reasonably likely to materially affect the
        Company’s internal control over financial reporting.
 
 **PART
        III**
 
 **ITEM
        10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT** **AND
        RELATED STOCKHOLDER MATTERS**
 
 The
        information set forth under the caption “Election of Directors” in our Proxy
        Statement used in connection with our 2006 Annual Meeting of Stockholders,
        is
        incorporated herein by reference.
 
 The
        Company has adopted a code of ethics that applies to its Chief Administrative
        Officer and Controller, its principal executive officer and principal financial
        officer, and to all of its other officers, directors and employees. The code
        of
        ethics may be accessed at www.netperceptions.com ,
        our
        Internet website, at the tab “Corporate Governance”. The Company intends to
        disclose future amendments to, or waivers from, certain provisions of its
        code
        of ethics, if any, on the above website within four business days following
        the
        date of such amendment or waiver.
 
 Other
        information required by Item 10, including information regarding directors,
        membership and function of the audit committee, including the financial
        expertise of its members, and Section 16(a) compliance, appearing under the
        captions “Election of Directors”, “Information Regarding Board of Directors and
        Committees” and “Other Matters” in our Proxy Statement used in connection with
        our 2006 Annual Meeting of Stockholders, is incorporated herein by reference.
  **ITEM
        11. EXECUTIVE COMPENSATION**
 
 The
        information set forth under the caption “Executive Compensation” in our Proxy
        Statement used in connection with our 2006 Annual Meeting of Stockholders,
        is
        incorporated herein by reference.
 
 **ITEM
        12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**
 
 The
        information set forth under the caption “Principal Stockholders” in our Proxy
        Statement used in connection with our 2006 Annual Meeting of Stockholders,
        is
        incorporated herein by reference.
 35
  **Equity
        Compensation Plan Information**
 
 The
        following table sets forth certain information regarding our equity plans
        as of
        December 31, 2005:
  Plan
                    Category
                
                
                (A)
                  Number
                    of securities to be issued upon exercise of outstanding options,
                    warrants
                    and rights
                
                
                (B)
                  Weighted-average
                    exercise price of outstanding options, warrants and
                    rights
                
                
                (C)
                  Number
                    of securities remaining available for future issuance under equity
                    compensation plans (excluding securities reflected in column
                    (A))Number
                    of securities remaining available for future issuance under equity
                    compensation plans (excluding securities reflected in column
                    (a))Equity
                    compensation plans approved by security holders
                
                
                320,621
                
                $
                0.68
                
                
                2,028,637
                    (1
                )Equity
                    compensation plans not approved by security holders (2)
                
                
                0
                
                $
                0.00
                
                
                490,043Total
                
                
                320,621
                
                $
                0.68
                
                
                2,518,680
 (1)
              In
                  addition to stock options, awards under our 1999 Equity Incentive
                  Plan
                  (the “1999 Plan”) may take the form of restricted stock, stock
                  appreciation rights and stock units as specified in such plan.
                  If such
                  awards are granted, they will reduce the number of shares of common
                  stock
                  available for issuance pursuant to future stock option awards.
                  674,955
                  shares of restricted stock have been issued from the “1999 Plan” in 2004
                  and 2005 and therefore reduced the number of shares common stock
                  available
                  for future issuance.
  (2)
              The
                  Company’s 2000 Stock Plan (the “2000 Plan”) was adopted by the Board
                  effective April 20, 2000. The Company has reserved 500,000 shares
                  of
                  common stock for issuance under the “2000 Plan”. Nonstatutory options and
                  restricted stock awards may be granted under the 2000 Stock Plan
                  to
                  employees of the Company (or any parent or subsidiary corporation)
                  who are
                  neither officers nor Board members at the time of grant or consultants.
                  All option grants will have an exercise price per share equal to
                  not less
                  than 85% of the fair market value per share of common stock on
                  the grant
                  date. Each option will vest in installments over the optionee’s period of
                  service with the Company. The purchase price for newly issued restricted
                  shares awarded under the 2000 Stock Plan may be paid in cash, by
                  promissory note or by the rendering of past or future services.
                  Outstanding options will vest on an accelerated basis in the event
                  the
                  Company is acquired and those options are not assumed or replaced
                  by the
                  acquiring entity. An option or award will become fully exercisable
                  or
                  fully vested if the holder’s employment or service is involuntarily
                  terminated within 18 months following the acquisition. The Board
                  may amend
                  or terminate the 2000 Stock Plan at any time. The 2000 Stock Plan
                  will
                  continue in effect indefinitely unless the Board decides to terminate
                  it.
 
 **ITEM
        13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**
 
 The
        information set forth under the caption “Certain Relationships and Related
        Transactions” in our Proxy Statement used in connection with our 2006 Annual
        Meeting of Stockholders, is incorporated herein by reference.
  **ITEM
        14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**
 
 The
        information set forth under the caption “Principal Accountant Fees and Services”
in our Proxy Statement used in connection with our 2006 Annual Meeting of
        Stockholders, is incorporated herein by reference.
  36
 **PART
        IV**
 
 **ITEM
        15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES**
  *(a)*
                *Financial
                    Statements*
 *1.*
                The financial statements filed as part of this
                  report are
                  listed on the Index to Consolidated Financial Statements on page
                  18.
 
 *2.*
                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.*
                **The
                    following Exhibits are hereby filed as part of this Annual Report
                    on Form
                    10-K:
 
 **Exhibit**
                **Number**
              
              **Description**2.1
              
              Patent
                  Purchase Agreement, dated December 30, 2003, between Thalveg Data
                  Flow LLC
                  and Net Perceptions, Inc., as amended on March 31, 2004
                  (1)3.1(a)
              
              Amended
                  and Restated Certificate of Incorporation (2).3.1(b)
              
              Certificate
                  of Amendment to the Amended and Restated Certificate of Incorporation
                  (3).3.2
              
              Amended
                  and Restated Bylaws as amended through August 5, 2003
                  (4).4.1
              
              Amended
                  and Restated Investor’s Rights Agreement, dated December 18, 1997, among
                  Net Perceptions, Inc. and the investors and founders named therein,
                  as
                  amended (2).4.2
              
              Specimen
                  common stock certificate (2).4.3
              
              Specimen
                  common stock certificate (including Rights Agreement Legend)
                  (5).4.4
              
              Rights
                  Agreement between Net Perceptions, Inc. and Wells Fargo Bank Minnesota,
                  as
                  Rights Agent (6).4.5
              
              Amendment
                  No. 1 to Rights Agreement dated as of December 22, 2003
                  (7).4.6
              
              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) (6).4.7
              
              Form
                  of Rights Certificate (attached as Exhibit B to the Rights Agreement
                  filed
                  as Exhibit 4.4 hereto) (6).10.1*
              
              Form
                  of Indemnification Agreement entered into between Net Perceptions,
                  Inc.
                  and its directors and officers (2).10.2*
              
              1996
                  Stock Plan (2).10.3*
              
              1999
                  Equity Incentive Plan (2).10.4*
              
              Amended
                  and Restated 1999 Non-Employee Director Option Plan, as amended
                  through
                  April 2, 2001 (8).10.5*
              
              Employee
                  Stock Purchase Plan (2).10.8*
              
              2000
                  Stock Plan (9).10.9*
              
              Change
                  in Control Severance Plan and Summary Plan Description
                  (2).10.10*
              
              2%
                  Convertible Subordinated Note Due April 21, 2014 (10)10.11*
              
              Form
                  of Net Perceptions, Inc. 1999 Equity Incentive Plan Stock Option
                  Agreement
                  (11)10.12*
              
              Form
                  of Net Perceptions, Inc. 2000 Stock Plan Stock Option Agreement
                  (11)23.1
              
              Consent
                  of PricewaterhouseCoopers LLP, independent registered public accounting
                  firm.31.1
              
              Certification
                  of principal executive officer pursuant to Exchange Act Rules Rule
                  13(a)-14(a) and15(a)-14(a), as adopted pursuant to Section 302
                  of the
                  Sarbanes-Oxley Act of 2002.31.2
              
              Certification
                  of principal financial officer pursuant to Exchange Act Rules Rule
                  13(a)-14(a) and15(a)-14(a), as adopted pursuant to Section 302
                  of the
                  Sarbanes-Oxley Act of 2002.32.1
              
              Certification
                  of principal executive officer pursuant to 18 U.S.C. Section 1350,
                  as
                  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                  2002.32.2
              
              Certification
                  of principal financial officer pursuant to 18 U.S.C. Section 1350,
                  as
                  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                  2002.


*  Represents
        a management contract or compensatory plan or arrangement.
 
 37
  (1)
              Incorporated
                  by reference to Net Perceptions’ Current Report on Form 8-K filed April 1,
                  2004.
 (2)
              Incorporated
                  by reference to Net Perceptions’ Registration Statement on Form S-1
                  (Registration No. 333-71919).
 (3)
              Incorporated
                  by reference to Net Perceptions’ Annual Report on Form 10-K for the Fiscal
                  Year Ended December 31, 2002.
 (4)
              Incorporated
                  by reference to Net Perceptions’ Quarterly Report on Form 10-Q for the
                  Quarter Ended June 30, 2003.
 (5)
              Incorporated
                  by reference to Net Perceptions’ Quarterly Report on Form 10-Q for the
                  Quarter Ended June 30, 2001.
 (6)
              Incorporated
                  by reference to Net Perceptions’ Registration Statement on Form 8-A filed
                  June 6, 2001.
 (7)
              Incorporated
                  by reference to Net Perceptions’ Current Report on Form 8-K filed December
                  23, 2003.
 (8)
              Incorporated
                  by reference to Net Perceptions’ Quarterly Report on Form 10-Q for the
                  Quarter Ended March 31, 2001.
 (9)
              Incorporated
                  by reference to Net Perceptions’ Quarterly Report on Form 10-Q for the
                  Quarter Ended June 30, 2000.
 (10)
              Incorporated
                  by reference to Net Perceptions’ Quarterly Report on Form 10-Q for the
                  Quarter Ended March 31, 2004.
 (11)
              Incorporated
                  by reference to Net Perceptions’ Quarterly Report on Form 10-Q for the
                  Quarter Ended September 30, 2005
 
 *(b)*
              The
                  exhibits are listed in Item 15. (a)(3)
                  above.
 
 *(c)*
              None.
  38
 **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.Date: Date:
                March 31, 2006
              By:
              /s/ *NIGEL
                P. EKERN*Nigel
                P. EkernChief
                Administrative Officer
   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 March 31, 2006.
 **Signature**
                
                **Title***/s/
                    NIGEL P. EKERN***
                
                Chief
                    Administrative Officer (Principal Executive Officer)Nigel
                    P. Ekern*/s/
                    SUSAN LUCKFIELD***
                
                Controller
                    (Principal Financial Officer)Susan
                    Luckfield*/s/
                    WARREN B. KANDERS*
                
                Executive
                    Chairman of the Board of DirectorsWarren
                    B. Kanders*/s/
                    GIANMARIA C. DELZANNO*
                
                DirectorGianmaria
                    C. Delzanno*/s/
                    DAVID A. JONES*
                
                DirectorDavid
                    A. Jones*/s/
                    NICHOLAS SOKOLOW*
                
                DirectorNicholas
                    Sokolow
  39
 EXHIBIT
          INDEX
 
 **Exhibit**
                **Number**
              
              **DESCRIPTION******23.1
              
              Consent
                  of PricewaterhouseCoopers LLP, independent registered public accounting
                  firm.31.1
              
              Certification
                  of principal executive officer pursuant to Exchange Act Rules Rule
                  13(a)-14(a) and15(a)-14(a), as adopted pursuant to Section 302
                  of the
                  Sarbanes-Oxley Act of 200231.2
              
              Certification
                  of principal financial officer pursuant to Exchange Act Rules Rule
                  13(a)-14(a) and15(a)-14(a), as adopted pursuant to Section 302
                  of the
                  Sarbanes-Oxley Act of 200232.1
              
              Certification
                  of principal executive officer pursuant to 18 U.S.C. Section 1350,
                  as
                  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                  2002.32.2
              
              Certification
                  of principal financial officer pursuant to 18 U.S.C. Section 1350,
                  as
                  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                  2002.
   40
 **CONSENT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 We
        hereby
        consent to the incorporation by reference in the Registration Statements
        on Form
        S-8 (Nos. 333-60286, 333-77219, 333-30464, 333-42964, 333-89464 and 333-104468)
        of Net Perceptions, Inc. of our report dated March 31, 2006 relating to the
        consolidated financial statements, which appears in this Form 10-K.
  /s/
                PricewaterhouseCoopers LLPCharlotte, North
                CarolinaMarch
                31,
                2006
 
 41