NET PERCEPTIONS INC, S-1/A, 2000-03-23

NET PERCEPTIONS INC
S-1/A, 2000-03-23
PREPACKAGED SOFTWARE

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 23, 2000

REGISTRATION NO. 333-31230
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- --------------------------------------------------------------------------------

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

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AMENDMENT NO. 3

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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NET PERCEPTIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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<TABLE>
<S> <C> <C>
DELAWARE 7372 41-1844584
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>

7901 FLYING CLOUD DRIVE
MINNEAPOLIS, MINNESOTA 55344
(612) 903-9424
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

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STEVEN J. SNYDER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
NET PERCEPTIONS, INC.
7901 FLYING CLOUD DRIVE
MINNEAPOLIS, MINNESOTA 55344
(612) 903-9424
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)

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COPIES TO:

<TABLE>
<S> <C>
KENT A. COIT, ESQ. JODIE M. BOURDET, ESQ.
SKADDEN, ARPS, SLATE, COOLEY GODWARD LLP
MEAGHER & FLOM LLP ONE MARITIME PLAZA
ONE BEACON STREET 20TH FLOOR
BOSTON, MASSACHUSETTS 02108-3194 SAN FRANCISCO, CALIFORNIA 94111
TELEPHONE: (617) 573-4800 TELEPHONE: (415) 693-2000
</TABLE>

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date hereof.

If any of the securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [ ]

If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] __________

If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________

If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE> 2

THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL SECURITIES, AND WE ARE NOT SOLICITING
OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS
NOT PERMITTED.

SUBJECT TO COMPLETION, DATED MARCH 23, 2000

[NET PERCEPTIONS LOGO]

2,625,471 SHARES

COMMON STOCK

Net Perceptions is offering 2,000,000 shares of common stock and the
selling stockholders are selling an additional 625,471 shares. Net Perceptions'
common stock is currently quoted on the Nasdaq National Market under the symbol
"NETP." The last reported sale price of the common stock on the Nasdaq National
Market on March 21, 2000 was $38.00 per share.

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INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 8.

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<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -------
<S> <C> <C>
Public Offering Price....................................... $ $
Underwriting Discounts and Commissions...................... $ $
Proceeds to Net Perceptions................................. $ $
Proceeds to Selling Stockholders............................ $ $
</TABLE>

THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.

We and certain selling stockholders together have granted the underwriters
a 30-day option to purchase up to an additional 393,820 shares of common stock
to cover over-allotments.

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

ROBERTSON STEPHENS
CHASE H&Q
U.S. BANCORP PIPER JAFFRAY
DAIN RAUSCHER WESSELS
ADAMS, HARKNESS & HILL, INC.

THE DATE OF THIS PROSPECTUS IS , 2000.
<PAGE> 3

[Text of inside front cover:

Net Perceptions is a leading provider of real time personalization and precision
marketing software solutions for Internet and multi-channel retailers.

Net Perceptions' solutions are designed to help retailers understand customers
individually, optimize product assortments, prices and inventories and offer the
right product to the right customer at the right price.]
<PAGE> 4

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF THE COMMON STOCK. IN THIS PROSPECTUS, UNLESS THE
CONTEXT OTHERWISE REQUIRES, "NET PERCEPTIONS," "WE," "US" AND "OUR" REFER TO NET
PERCEPTIONS, INC. AND OUR SUBSIDIARIES.

UNTIL , 2000 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
-------------------------

TABLE OF CONTENTS

<TABLE>
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PAGE
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<S> <C>
Summary..................................................... 4
Risk Factors................................................ 8
Forward-Looking Statements.................................. 22
Use of Proceeds............................................. 23
Price Range of Common Stock................................. 23
Dividend Policy............................................. 23
Capitalization.............................................. 24
Dilution.................................................... 25
Selected Consolidated Financial Data........................ 26
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 27
Business.................................................... 37
Management.................................................. 52
Certain Transactions........................................ 61
Principal and Selling Stockholders.......................... 62
Description of Capital Stock................................ 64
Shares Eligible for Future Sale............................. 68
Material United States Federal Income Tax Consequences to
Non-U.S. Holders.......................................... 70
Underwriting................................................ 73
Legal Matters............................................... 75
Experts..................................................... 75
Where You Can Find Additional Information................... 76
Index to Financial Statements............................... F-1
</TABLE>

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Industry data included in this prospectus has been obtained from third
parties and has not been independently verified by us.

We have the following registered trademarks in the United States: Net
Perceptions, the Net Perceptions logo and GroupLens. This prospectus also
includes common law trademarks, including common law trademarks that are the
subject of pending trademark applications, belonging to Net Perceptions and
trademarks of other companies that are the property of their respective owners.

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SUMMARY

This summary highlights information contained elsewhere in this prospectus.
You should read this summary together with the more detailed information, our
financial statements and notes and Knowledge Discovery One's financial
statements and notes appearing elsewhere in this prospectus. This summary may
not contain all of the information that you should consider before investing in
our common stock. You should read the entire prospectus carefully. This
prospectus contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ significantly from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this prospectus.

NET PERCEPTIONS

Net Perceptions is a leading provider of real time personalization and
precision marketing software solutions for Internet and multi-channel retailers.
Our solutions are designed to help retailers understand customers individually,
optimize product assortments, prices and inventories and offer the right product
to the right customer at the right price.

We design our solutions to benefit retailers by converting browsers into
buyers, increasing cross-sell and up-sell success rates and enhancing overall
customer satisfaction. In addition, we help retailers reduce customer
acquisition and retention costs, improve advertising effectiveness, optimize
in-store and on-line retail floor space and improve customer service. Our
customers currently include major Internet and multi-channel retailers such as
Art.com, Bertelsmann, CDNOW, Egghead.com, eToys.com, Fingerhut, Hudson's Bay
Company, J.C. Penney, Procter & Gamble, Tower Records and Walgreens.

Using sophisticated, proprietary analytical techniques, our solutions
analyze and report on past and current customer behavior, including purchase
history, stated preferences and Internet browsing behavior. Our solutions also
provide analysis of item placement and item price effectiveness in
advertisements, typical item purchase combinations, segmentation of customers
based on purchasing and demographic data and customer-specific and
product-specific profitability reporting. We base our solutions on a distributed
architecture that is flexible enough to integrate with our customers' new or
existing systems, including website, call center, marketing campaign management
and point of sale software.

We offer three principal product lines: commerce solutions; knowledge
management solutions; and products for original equipment manufacturers.

- Our commerce solutions include the following products:

Net Perceptions for E-commerce, which allows on-line retailers to create a
personalized shopping experience for their customers by dynamically
predicting which products to recommend to each customer browsing an
electronic commerce site;

Net Perceptions for Call Centers, which allows retailers that use call
centers to recommend products to customers using real time personalization,
resulting in improved cross-sell and up-sell rates;

Net Perceptions for Marketing Campaigns, which is designed to manage and
personalize outbound promotional electronic mail campaigns;

GreenLight Ad, which uses sophisticated analytical techniques to help
retailers maximize the return they receive from newspaper circular
advertising;

GreenLight Go!, which provides on-line retailers with an in-depth
assessment of how customers are shopping on their website; and

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GreenLight RDS, which is a strategic reporting and analysis solution that
helps retailers understand customer purchase behavior across all customer
touch-points, from the Web to the retail store.

- Our current knowledge management offering is Net Perceptions for
Knowledge Management, which applies our real time personalization
capabilities to corporate intranets.

- Our products for original equipment manufacturers include the following:

Net Perceptions Recommendation Engine, which allows our original equipment
manufacturers to add our real time personalization capabilities to their
existing applications; and

Knowledge Refinery, which is a scalable data processing and analysis
engine that underlies our GreenLight family of products and creates models
that enable precision marketing.

Our objective is to extend our leadership position in providing real time
personalization and precision marketing solutions to Internet and multi-channel
retailers. To achieve this objective, we intend to:

- maintain and extend our technological leadership through continued
investment in the development of our proprietary recommendation engine
and other analytical technologies;

- expand our application service provider offerings;

- broaden our distribution channels;

- leverage our technology investments into new applications;

- expand our service offerings; and

- continue to build our international presence to address international
demand for real time personalization and precision marketing software
solutions.

ACQUISITION OF KNOWLEDGE DISCOVERY ONE

In February 2000, we completed our acquisition of Knowledge Discovery One,
Inc., which we refer to in this prospectus as KD One. KD One is a leading
supplier of advanced data analysis solutions for multi-channel retailers. We
believe that our acquisition of KD One will enable us to provide enhanced
services and solutions to our customers across all touch points, including call
centers, points of sale and websites. In this transaction we acquired all of the
outstanding securities of KD One in exchange for 1,969,630 shares of our common
stock. These shares were allocated as follows:

- 1,759,630 of these shares were delivered to the former KD One
stockholders at the closing of the acquisition; and

- 210,000 of these shares were placed in escrow for a one-year period to
satisfy potential indemnification claims that we may have against the
former stockholders of KD One.

In the acquisition, we also assumed all outstanding options to purchase KD
One common stock. We have reserved 268,297 shares of our common stock for
issuance upon the exercise of these options. This transaction has been accounted
for under the purchase method of accounting.

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CORPORATE INFORMATION

We were incorporated in Delaware on July 3, 1996. Our principal executive
offices are located at 7901 Flying Cloud Drive, Minneapolis, Minnesota 55344. We
lease offices in other locations, including San Francisco, California; New York,
New York; Austin, Texas; Richardson, Texas and Berkshire, United Kingdom. Our
telephone number is (612) 903-9424. Our website address is
www.netperceptions.com. The information on our website is not incorporated by
reference into this prospectus and should not be considered as part of this
prospectus.

THE OFFERING

Common stock offered by Net Perceptions......... 2,000,000 shares

Common stock offered by the selling
stockholders.................................... 625,471 shares

Common stock to be outstanding after the
offering........................................ 25,995,346 shares

Over-allotment option granted by us............. 318,863 shares

Over-allotment option granted by certain selling
stockholders.................................... 74,957 shares

Use of proceeds................................. For working capital and
general corporate purposes
and for potential
acquisitions of complementary
businesses, products or
technologies. See "Use of
Proceeds."

Nasdaq National Market symbol................... NETP

Common stock to be outstanding after the offering is based on 22,025,716
shares of common stock outstanding as of December 31, 1999 plus the 1,969,630
shares of common stock issued in the KD One acquisition. This number does not
include:

- 2,528,766 shares of common stock subject to outstanding options under our
1996 Stock Plan and our 1999 Equity Incentive Plan as of December 31,
1999; and

- 20,000 shares of common stock subject to outstanding options under our
1999 Non-Employee Director Option Plan as of December 31, 1999.

As of March 1, 2000, we had granted options to purchase an additional
678,388 shares of common stock. In February 2000, in connection with the KD One
acquisition, we also assumed all outstanding options to purchase KD One common
stock. We have reserved 268,297 shares of our common stock for issuance upon the
exercise of these options. We also have reserved 36,000 shares of our common
stock for issuance under options that we may grant to a business partner.

Except as otherwise noted, all information in this prospectus:

- assumes that the underwriters' over-allotment option is not exercised;
and

- reflects our acquisition of KD One.

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SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short term investments..... $36,854 $ 37,935 $109,045
Working capital....................................... 37,372 35,675 106,785
Total assets.......................................... 58,748 180,135 251,245
Long-term liabilities, net of current portion......... 707 1,120 1,120
Total stockholders' equity............................ 48,388 164,364 235,474
</TABLE>

See Note 2 of the notes to Net Perceptions' financial statements for an
explanation of the methods used to determine the number of shares used in
computing net loss per share data.

The pro forma financial information reflects the acquisition of KD One and
is derived from the unaudited pro forma combined financial statements, and
should be read in conjunction with those pro forma financial statements and the
notes thereto, which are included elsewhere in this prospectus. The unaudited
pro forma financial information is intended for informational purposes only and
is not necessarily indicative of the future financial position or future results
of the operations of the consolidated company, or of the financial position or
results of operations of the consolidated company that would have actually
occurred had the acquisition been effected as of the dates indicated above.

The pro forma operating expenses for the year ended December 31, 1999 of
$64,304 consist of sales and marketing expense of $15,421, research and
development expense of $11,174, general and administrative expense of $5,887,
stock compensation expense of $1,805 and amortization of intangibles of $30,017.

The pro forma as adjusted amounts reflect the receipt of the estimated net
proceeds from the sale of the 2,000,000 shares of common stock offered by us, at
an estimated offering price of $38.00 per share, after deducting the
underwriting discount and estimated offering expenses payable by us.

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RISK FACTORS

An investment in shares of our common stock involves a high degree of risk.
You should consider carefully the following information about these risks,
together with the other information contained in this prospectus, before you
decide to buy our common stock. If any of the following risks actually occur,
our business, results of operations and financial condition would likely suffer.
In these circumstances, the market price of our common stock could decline, and
you may lose all or part of the money you paid to buy our common stock.

RISKS ASSOCIATED WITH OUR BUSINESS

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

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

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

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

We cannot predict our future quarterly revenues with any degree of
certainty for a variety of reasons. For example:

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

- the market in which we compete is relatively new and rapidly evolving and
has many new entrants;

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

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

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

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

Our expense levels are relatively fixed in the short term and are based, in
part, on our expectations as to our future revenues. As a result, any delay in
generating or recognizing revenues

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could cause significant variations in our operating results from quarter to
quarter and could result in increased operating losses.

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

We had net losses of $4.7 million in 1997, $5.0 million in 1998 and $12.0
million in 1999. As of December 31, 1999, we had an accumulated deficit of $22.8
million. We have not had a profitable quarter and do not expect to have a
profitable quarter in 2000 or 2001. We expect that our losses will continue to
increase in 2000. We expect to continue to incur significant sales and
marketing, research and development and general and administrative expenses. As
a result of the KD One acquisition, we expect to have substantial expenses
associated with the amortization of goodwill and other intangible assets. We
will need to generate significant additional revenues to achieve profitability.
We may never achieve profitability. Although our revenues have grown in recent
quarters, we do not believe that we can sustain these growth rates, or that
these growth rates are indicative of future revenue growth rates.

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

We currently derive a substantial portion of our revenues from our Net
Perceptions for E-commerce product. We anticipate that Net Perceptions for
E-commerce will continue to account for a substantial portion of our revenues
for the foreseeable future. Consequently, a decline in the price of or demand
for Net Perceptions for E-commerce, or its failure to achieve broad market
acceptance would result in decreased revenues and increased operating losses.

WE FACE INTENSE COMPETITION AND, IF WE ARE UNABLE TO COMPETE SUCCESSFULLY, WE
MAY BE UNABLE TO INCREASE OUR PRODUCT SALES AND MARKET SHARE.

The market for our products is intensely competitive, evolving and subject
to rapid technological change. We expect the intensity of competition to
increase in the future. Competitors vary in size and in the scope and breadth of
the products and services offered. In the license of commerce solutions, we
primarily encounter competition from Accrue Software, Andromedia (a division of
Macromedia), Broadbase, DataSage (recently acquired by Vignette), the EHNC
division of HNC Software, E.piphany and Personify. Microsoft has acquired
FireFly Network, a company with collaborative filtering technology and, as a
result, we expect that we may encounter competition from Microsoft in the
future.

In the marketing of Net Perceptions for Marketing Campaigns, we primarily
encounter competition from Exchange Applications, Annuncio Software, Prime
Response and Rubric, which was recently acquired by Broadbase. We expect that if
we are successful in our strategy to leverage our technology into new vertical
markets, we will encounter many additional, market-specific competitors. For
example, RightPoint Software, recently acquired by E.piphany, is an established
firm serving call centers that we expect to increasingly encounter in the
marketing of Net Perceptions for Call Centers. In addition, because there are
relatively low barriers to entry in the software market, we expect additional
competition from other established and emerging companies as the Internet
software market continues to develop and expand. We also expect increasing
competition from network-based providers of personalization technology such as
Cogit and TriVida, which was recently acquired by Be Free.

In the marketing of our GreenLight RDS product, we primarily encounter
competition from Brio, Seagate, Comshare, IBM and SAS.

In the marketing of our Net Perceptions for Knowledge Management, we
primarily encounter competition from Orbital Software and Tacit Knowledge
Systems.

We believe that the principal competitive factors affecting our market
include core technology, product features, product quality and performance,
customer service and price. Although we believe

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that our products currently compete favorably with respect to such factors, our
market is relatively new and is rapidly evolving. We may not be able to maintain
our competitive position against current and potential competitors, especially
those with significantly greater financial, marketing, service, support,
technical and other resources.

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

THERE ARE NUMEROUS RISKS AND UNCERTAINTIES ASSOCIATED WITH OUR RECENT
ACQUISITION OF KD ONE THAT MAY AFFECT THE PRICE OF OUR COMMON STOCK.

If the costs associated with the acquisition of KD One exceed the benefits
realized, we may experience increased losses and the market price of our common
stock may decline.

We cannot account for the acquisition of KD One as a pooling of interests.
A significant portion of the purchase price for the acquisition will be
allocated to goodwill and other intangible assets, which will be amortized by us
over their estimated useful lives. As a result, we will record non-cash charges
against our future operating results, which will adversely affect our reported
financial results. If we had completed the acquisition on December 31, 1999, we
would have recorded approximately $117.4 million in goodwill and other
intangible assets in connection with the acquisition. The actual amount of
goodwill and other intangible assets will be higher due to KD One's net losses
between December 31, 1999 and the closing of the acquisition on February 14,
2000. The actual amount of goodwill and other intangible assets recorded will be
amortized primarily over a four-year period. If the benefits of this transaction
do not ultimately exceed the associated costs, including any dilution to our
stockholders resulting from the issuance of shares of our common stock in
connection with the acquisition, we could continue to incur increased losses, or
be required to write down some or all of the unamortized goodwill and other
intangible assets.

In addition, the market price of our common stock may decline as a result
of the acquisition if the integration of Net Perceptions and KD One is
unsuccessful, if we do not achieve the perceived benefits of the acquisition as
rapidly as, or to the extent anticipated by, financial or industry analysts, or
if the effect of the acquisition on our financial results is not consistent with
the expectations of financial or industry analysts.

If we do not successfully integrate KD One's operations and personnel or
effectively manage the combined company, the benefits of the acquisition may not
be achieved and key personnel and customers may be lost.

We acquired KD One with the expectation that the transaction would result
in significant benefits. Achieving these benefits depends on the timely,
efficient and successful execution of a number of post-acquisition events,
including integrating the operations and personnel of the two companies. The
successful execution of these post-acquisition events involves considerable risk
and

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may not be successful. For example, KD One's principal executive offices are
located in Austin, Texas, while our principal executive offices are located in
Minneapolis, Minnesota. There are currently no plans to combine these offices.

In addition, current and prospective KD One employees may experience
uncertainty about their future roles with us until our strategies with regard to
KD One are executed. This uncertainty may result in a loss of employees or may
adversely affect KD One's ability to attract and retain key management, sales,
marketing and technical personnel.

If we do not integrate KD One's technology quickly and effectively, many of the
potential benefits of the acquisition may not be realized.

We intend to integrate KD One's technology into our own products in
addition to offering KD One's products separately. We may not be able to
integrate KD One's technology quickly and effectively. In order to obtain the
benefits of the acquisition, we must make KD One's technology, products and
services operate together with our technology, products and services. We may be
required to spend additional time or money on integration that would otherwise
be spent on developing our products and services or other matters. If we do not
integrate our technology effectively or if management and technical staff spend
too much time on integration issues, we could experience increased operating
expenses and the costs of the acquisition could exceed the benefits.

If we fail to successfully cross-market our products and KD One's products, or
to develop new products, we may be unable to increase or maintain our customer
base or revenues.

We and KD One initially intend to offer our respective products and
services to each other's customers. We cannot assure you that either company's
customers will purchase the other company's products and services. The failure
of these cross-marketing efforts could diminish or eliminate any potential
benefits of the transaction. We also intend to develop new products and services
that combine the knowledge and resources of both businesses. We cannot assure
you that these integrated products or services will be successful. As a result,
we may not be able to increase or maintain our customer base. To date, the
companies have not thoroughly investigated the obstacles, including
technological, market-driven or other obstacles, to developing and marketing
these new products and services in a timely and efficient way. We may not be
able to overcome these obstacles in developing new products and services.

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

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

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

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

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We have currently licensed one or more of our products to more than 160
customers, including customers of KD One. However, only a limited number of
these customers have a deployed and operating application that utilizes our
products. Because most of our customers have not yet fully implemented and
deployed our products, we cannot be certain that our products will:

- perform as designed;

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

- meet the other expectations and needs of our customers;

- achieve any significant degree of market acceptance; or

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

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

WE HAVE SEVERAL NEW PRODUCTS WHICH MAY NOT ACHIEVE MARKET ACCEPTANCE.

We recently announced the commercial launch of the following new products:

- Net Perceptions for Marketing Campaigns, which is a solution designed to
manage and personalize outbound promotional electronic mail campaigns;

- Net Perceptions for Knowledge Management, which applies our real time
personalization capabilities to corporate intranets;

- Net Perceptions Recommendation Engine, which allows original equipment
manufacturers to add our real time personalization capabilities to their
existing applications;

- GreenLight Ad, which uses sophisticated analytical techniques to help
retailers maximize the return they receive from newspaper circular
advertising; and

- GreenLight Go!, which provides retailers with an in-depth assessment of
how customers are shopping on their websites.

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

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

The software products we offer are complex and may contain undetected
errors or failures when first introduced, or as new versions are released. We
have in the past discovered software errors in our new releases and new products
after their introduction. We experienced delays in release and lost revenues
during the period required to correct these errors. We may discover errors in
new releases or new products after the commencement of commercial shipments,
despite testing by our personnel and

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our current and potential customers. This may result in loss of or delay in
market acceptance of our products, which could seriously impair our ability to
achieve profitability.

IF WE FAIL TO GENERATE REPEAT OR EXPANDED BUSINESS FROM OUR CURRENT AND FUTURE
CUSTOMERS, WE MAY BE UNABLE TO BUILD A CRITICAL MASS OF CUSTOMERS NECESSARY TO
ACHIEVE INCREASED SALES AND MARKET SHARE.

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

IF WE FAIL TO SUBSTANTIALLY EXPAND OUR DIRECT SALES OPERATIONS, WE MAY BE UNABLE
TO INCREASE MARKET AWARENESS AND SALES OF OUR PRODUCTS AND SERVICES.

Our products and services require a sophisticated sales effort targeted at
the senior management of our prospective customers. As of March 15, 2000, our
direct sales organization consisted of 63 employees, including KD One employees.
We plan to hire additional direct sales personnel. Competition for qualified
sales personnel is intense, and we might not be able to hire the kind and number
of sales personnel we are targeting. New hires will require extensive training
and typically take several months to achieve productivity. We cannot be certain
that our recent hires will be as productive as necessary. If we are unable to
hire additional skilled sales personnel as needed, we may not be able to capture
increased market share for our products and services.

IF WE CANNOT EXPAND OUR INDIRECT SALES CHANNEL, WE MAY BE UNABLE TO INCREASE OUR
CUSTOMER BASE AND ACHIEVE PROFITABILITY.

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

We intend to increase sales through original equipment manufacturers. We
are currently investing, and intend to continue to invest, resources to develop
this sales channel. These investments could seriously harm our operating
margins. We depend on our original equipment manufacturers' abilities to develop
product enhancements or new products on a timely and cost-effective basis that
will meet changing customer needs and respond to emerging industry standards and
other

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technological changes. Our original equipment manufacturers may not effectively
meet these challenges. These original equipment manufacturers:

- are not within our control;

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

- are not obligated to purchase our products.

Our original equipment manufacturers may not continue to carry our
products. In addition, any sales through original equipment manufacturers will
have lower gross margins than direct sales. Our inability to recruit, or our
loss of, important original equipment manufacturers could seriously impair our
ability to increase our customer base and achieve profitability.

We recently established a sales force dedicated to the development of the
indirect sales channel for our products. As of March 15, 2000, our indirect
sales organization consisted of ten employees. We plan to hire additional
indirect sales personnel. Competition for qualified sales personnel is intense,
and we might not be able to retain our existing personnel or hire and retain the
kind and number of sales personnel we are targeting. New hires will require
extensive training and typically take several months to achieve productivity. We
cannot be certain that our recent hires will be as productive as necessary.

IF WE ARE UNSUCCESSFUL IN IMPROVING AND INCREASING THE SIZE OF OUR PROFESSIONAL
SERVICES ORGANIZATION, WE MAY LOSE CURRENT CUSTOMERS OR BE UNABLE TO ATTRACT NEW
CUSTOMERS.

Customers that license our software typically engage our professional
services organization to assist with support, training, consulting and
implementation. We believe that growth in our product sales depends on our
ability to provide our customers with these services and to educate resellers on
how to use our products. From time to time, we receive customer complaints about
the timeliness and accuracy of our customer support. We plan to add more
customer support personnel in order to address current customer support needs.
As of March 15, 2000, our professional services and customer support
organization consisted of 64 employees, including KD One employees. We are in a
new market and there are a limited number of people who have the skills needed
to provide the services that our customers demand. Competition for qualified
service personnel is intense. We cannot be certain that we can attract or retain
a sufficient number of the highly-qualified service personnel that our business
needs.

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

Licenses and services sold to customers outside of the United States
accounted for approximately 13% of our total revenues in 1998 and 16% in 1999.
We expect international revenues to account for a significant percentage of
total revenues in the future, and we believe that we must continue to expand our
international sales and marketing activities in order to be successful. To
successfully expand international sales, we must:

- expand our international operations;

- hire international personnel; and

- recruit additional international resellers and systems integrators.

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

During the third quarter of 1999, we established operations in the United
Kingdom. During the third quarter of 1999, we established operations in Japan
through a joint venture that created Net

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Perceptions Japan. As of March 15, 2000, we had 11 employees located in Europe
and one employee located in Asia. All other employees were located in North
America.

The acceptance and use of the Internet in international markets are in
earlier stages of development than in the United States, particularly the use of
the Internet as a method for conducting commerce. If the Internet or electronic
commerce fail to gain sufficient acceptance in international markets or we fail
to further expand our international operations in a timely manner, we may be
unable to generate sufficient revenues to cover our expenses related to
international operations. In addition, we may fail to maintain or increase
international market demand for our products.

IF OUR INTELLECTUAL PROPERTY IS NOT PROTECTED ADEQUATELY, WE MAY LOSE OUR
COMPETITIVE ADVANTAGE IN THE MARKET.

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

We have 13 pending United States patent applications. We also have license
rights to two issued United States patents and one allowed United States patent
application from the University of Minnesota. We have four pending foreign
patent applications, but we have no issued foreign patents. It is possible that
no patents will issue from the currently pending patent applications. It is also
possible that our current patents and potential future patent may be invalid or
unenforceable. It is also possible that any patent issued to us may not provide
us with any competitive advantages. Moreover, we may not develop future
proprietary products or technologies that are patentable, and the patents of
others may seriously limit our ability to conduct our business. In this regard,
we have not performed any comprehensive analysis of patents of others that may
limit our ability to conduct our business.

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

THIRD-PARTY INFRINGEMENT CLAIMS AGAINST US OR OUR TECHNOLOGY SUPPLIERS COULD
RESULT IN DELAYS IN PRODUCT DEVELOPMENT, THE LOSS OF CUSTOMERS, OR COSTLY AND
TIME CONSUMING LITIGATION.

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litigation, cause product shipment delays or require us to enter into royalty or
licensing agreements in order to secure continued access to required technology.
Royalty or licensing agreements, if required, may not be available on terms
acceptable to us or at all. Claims of intellectual property infringement may
also require us to pay significant damages or subject us to an injunction
against the use of our products. Any successful claim of intellectual property
infringement against us could have an immediate and significant impact on our
ability to carry on our business and market our products.

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

IF WE ENGAGE IN FUTURE ACQUISITIONS, WE WILL INCUR A VARIETY OF COSTS AND MAY
NEVER REALIZE THE ANTICIPATED BENEFITS OF THE ACQUISITION.

If appropriate opportunities become available, we may attempt to acquire
businesses, products or technologies that we believe are a strategic fit with
our business. We currently have no commitments or agreements for any
acquisitions. If we do undertake any transaction of this sort, the process of
integrating an acquired business, product or technology may result in unforeseen
operating difficulties and expenditures and may absorb significant management
attention that would otherwise be available for ongoing development of our
business. Moreover, we may fail to realize the anticipated benefits of any
acquisition. Future acquisitions could dilute your ownership interest in us and
could cause us to incur debt, expose us to future liabilities and result in
amortization expenses related to goodwill and other intangible assets.

IF WE ARE UNABLE TO CONTINUE TO UTILIZE TECHNOLOGY LICENSED FROM THIRD PARTIES,
WE MAY BE UNABLE TO CONDUCT OUR BUSINESS.

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

OUR ABILITY TO INCREASE OUR CUSTOMER BASE AND OUR SALES DEPENDS ON THE
CONTINUING CONTRIBUTION OF OUR KEY PERSONNEL AND OUR ABILITY TO ATTRACT,
ASSIMILATE AND RETAIN OTHER HIGHLY QUALIFIED PERSONNEL.

Our future success depends on the continued service of our senior
management, product development and sales personnel. The loss of the services of
one or more of our key personnel could seriously harm our ability to increase
our customer base and sales. As of December 31, 1999, we had 213 employees, not
including KD One employees. We do not carry any significant key person life
insurance policies.

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

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

We have recently experienced a period of significant expansion of our
operations that has placed a significant strain upon our management systems and
resources. In addition, we have recently hired a significant number of employees
and plan to further increase our total headcount. Our headcount, not including
KD One employees, has increased from 14 at December 31, 1996 to 34 at December
31, 1997 to 70 at December 31, 1998 and to 213 at December 31, 1999. In
addition, at December 31, 1999, KD One had 51 full-time employees. We may not be
able to manage our growing operations effectively, and, as a result, we may have
difficulty in retaining current, or attracting additional, employees.

We also plan to expand the geographic scope of our customer base and
operations. This expansion has resulted and will continue to result in
substantial demands on our management resources. Our ability to compete
effectively and to manage future expansion of our operations, if any, will
require us to continue to improve our financial and management controls,
reporting systems and procedures on a timely basis, and expand, train and manage
our employee work force.

WE MAY NEED TO RAISE ADDITIONAL CAPITAL THAT MAY NOT BE AVAILABLE ON REASONABLE
TERMS, OR AT ALL.

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

WE ARE SUBJECT TO POTENTIAL PRODUCT LIABILITY CLAIMS THAT COULD RESULT IN COSTLY
AND TIME-CONSUMING LITIGATION.

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

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

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

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RISKS ASSOCIATED WITH THE INTERNET INDUSTRY

OUR BUSINESS COULD BE SERIOUSLY IMPACTED BY PRIVACY AND SECURITY CONCERNS.

Typically, our products capture user preference and profile information
each time a user interacts with the application utilizing our products or
volunteers information in response to survey questions. Privacy concerns may
cause users to resist providing the personal data necessary to support this
profiling capability. Our customers generally have implemented security measures
to protect customer data from unauthorized disclosure or interception by third
parties. However, the security measures may not be effective against all
potential security threats. If a breach of customer data security were to be
publicized, our products may be perceived as less desirable, and our future
sales negatively impacted. More importantly, even the perception of privacy and
security concerns, whether or not valid, may indirectly inhibit market
acceptance of our products. In addition, legislative or regulatory requirements
may heighten such concerns if users must be notified that the data captured
after these interactions may be used by marketing entities to direct product
promotion and advertising to that user. We are not aware of any such legislation
or regulatory requirements currently in effect in the United States. However,
various other countries and political entities, such as the European Economic
Community, have adopted these types of legislation or regulatory requirements.
The federal and state governments may adopt similar legislation or regulatory
requirements. If user privacy concerns are not adequately addressed or if
restrictive legislation is adopted in the United States, our business could be
seriously harmed and we could experience increased operating losses.

Our products can use data captured with "cookies" to track demographic
information and user preferences. A "cookie" is a bit of information keyed to a
specific server, file pathway or directory location that is stored on a computer
user's hard drive, possibly without the user's knowledge. Some countries have
imposed laws limiting the use of cookies, and a number of Internet commentators,
advocates and governmental bodies in the United States and other countries have
urged passage of laws limiting or abolishing the use of cookies. If laws of this
type are passed, our business could be adversely impaired and we could suffer
increased operating losses. In addition, Internet users can, if they choose,
configure their Web browsers to limit the collection of user data. Should many
Internet users choose to limit the collection of user data in this matter, or if
major countries or regions adopt legislation or other restrictions on the use of
customer data, our software would be less useful to our customers and market
acceptance of our products could be adversely impacted.

IF WE DO NOT RESPOND TO RAPID TECHNOLOGICAL CHANGES, OUR PRODUCTS COULD BECOME
OBSOLETE AND WE COULD LOSE OUR COMPETITIVE ADVANTAGE IN THE MARKET.

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

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

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

- address the increasingly sophisticated needs of our customers.

In addition, we may:

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

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

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

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

THE GROWTH OF THE MARKET FOR OUR PRODUCTS AND SERVICES WOULD BE IMPAIRED IF THE
USE OF THE INTERNET AND ELECTRONIC COMMERCE DO NOT GROW AS ANTICIPATED, AND
THIRD PARTIES DO NOT CONTINUE TO DEVELOP AND IMPROVE THE INTERNET
INFRASTRUCTURE.

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

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

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

- use of the Internet, the Web and other on-line services does not continue
to increase or increases more slowly than expected;

- the infrastructure for the Internet, the Web and other on-line services
does not effectively support expansion that may occur; or

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

INCREASING GOVERNMENT REGULATION COULD LIMIT THE MARKET FOR OUR PRODUCTS AND
SERVICES, WHICH COULD SERIOUSLY IMPAIR THE GROWTH OF OUR BUSINESS OR EXPOSE US
TO UNANTICIPATED LIABILITIES.

As Internet commerce evolves, we expect that federal, state or foreign
agencies will adopt regulations covering issues such as user privacy, pricing,
content and quality of products and services. If enacted, such laws, rules or
regulations could limit the market for our products and services. Although many
of these regulations may not apply to our business directly, we expect that laws
regulating the solicitation, collection or processing of personal/customer
information could indirectly affect our business. The Telecommunications Act of
1996 prohibits some types of information and content from being transmitted over
the Internet. The prohibitions' scope and the liability associated with a
Telecommunications Act violation are currently unsettled. In addition, although
substantial portions of the Communications Decency Act were held to be
unconstitutional, we cannot be certain

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that similar legislation will not be enacted and upheld in the future. It is
possible that such legislation could expose companies involved in Internet
commerce to liability, which could limit the growth of Internet commerce
generally. Legislation like the Telecommunications Act and the Communications
Decency Act could dampen the growth in Web usage and decrease its acceptance as
a communications and commercial medium.

RISKS ASSOCIATED WITH THIS OFFERING

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

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

MANAGEMENT MAY APPLY THE PROCEEDS OF THIS OFFERING TO USES THAT DO NOT INCREASE
OUR PROFITS OR MARKET VALUE.

Our management will have complete discretion in the application of our net
proceeds from this offering and you will not have the opportunity, as part of
your investment decision, to assess whether the proceeds are being used
appropriately. The net proceeds may be used for corporate purposes that do not
increase our profitability or our market value. Pending application of the
proceeds, they may be placed in investments that do not produce income or that
lose value.

PROVISIONS OF OUR CORPORATE CHARTER DOCUMENTS COULD DELAY OR PREVENT A CHANGE OF
CONTROL.

Various provisions of our certificate of incorporation and bylaws could
have the effect of delaying or preventing a change in control and make it more
difficult for a third party to acquire us, even if doing so would be beneficial
to our stockholders. These provisions, if used by our management, could
negatively affect our stock price. See "Description of Capital Stock."

FUTURE SALES OF OUR COMMON STOCK COULD CAUSE THE PRICE OF OUR SHARES TO DECLINE.

Upon completion of this offering, we will have 25,995,346 shares of common
stock outstanding. Of these shares, 24,304,886 will be transferable without
restriction or registration under the Securities Act of 1933, as amended, or
pursuant to the volume and other limitations of Rule 144 promulgated under the
Securities Act.

Shares of common stock held by our directors and officers and some of our
stockholders are subject to lock-up agreements between the holders of those
shares and the representatives of the underwriters, under which the holders have
agreed not to offer, sell, contract to sell or grant any option to purchase or
otherwise dispose of their common stock until 90 days after the effective date
of this prospectus, subject to limited exceptions. FleetBoston Robertson
Stephens Inc. may release stockholders from the lock-up agreement at any time
and without notice. Following the expiration of this lock-up period, these
shares will become available for immediate resale in the public market subject,
in some instances, to vesting restrictions or the volume and other limitations
of Rule 144. Resales of a substantial number of shares of our common stock into
the public market could cause its price to decline. This is particularly the
case because a substantial portion of our outstanding shares of common stock are
held by persons who purchased their shares at prices below recent market prices
of our stock. For additional information, please refer to the section in this
prospectus entitled "Shares Eligible for Future Sale."

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YOU WILL EXPERIENCE AN IMMEDIATE AND SUBSTANTIAL DILUTION IN THE BOOK VALUE OF
YOUR INVESTMENT.

The public offering price of our common stock is substantially higher than
what the net tangible book value per share of the common stock will be
immediately after this offering. If you purchase our common stock in this
offering, you will incur immediate dilution of approximately $33.46 in the net
tangible book value per share of our common stock from the price you pay for our
common stock based upon an assumed public offering price of $38.00 per share and
after deducting estimated underwriting discounts and commissions and estimated
offering expenses. The exercise of outstanding options and warrants may result
in further dilution. For additional information, please see the section in this
prospectus entitled "Dilution."

21
<PAGE> 23

FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. The forward-looking
statements are contained principally in the sections entitled "Prospectus
Summary," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business." These statements involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from any future
results, performances or achievements expressed or implied by the
forward-looking statements. Forward-looking statements include, but are not
limited to, statements about:

- our limited operating history;

- our estimates for future revenue and profitability;

- the progress of and delays in our product development;

- the market for our products and services and the status of our sales and
marketing efforts;

- changes in our product pricing policies;

- the development of Internet markets;

- our estimates regarding our capital requirements and our needs for
additional financing; and

- our ability to integrate recently acquired businesses or technologies and
our strategy regarding future acquisitions.

In some cases, you can identify forward-looking statements by terms such as
"may," "will," "should," "could," "would," "expects," "plans," "anticipates,"
"believes," "estimates," "projects," "predicts," "potential" and similar
expressions intended to identify forward-looking statements. These statements
reflect our current views with respect to future events and are based on
assumptions and subject to risks and uncertainties. Given these uncertainties,
you should not place undue reliance on these forward-looking statements. We
discuss many of these risks in this prospectus in greater detail under the
heading "Risk Factors." Also, these forward-looking statements represent our
estimates and assumptions only as of the date of this prospectus.

You should read this prospectus and the documents that we incorporate by
reference in this prospectus completely and with the understanding that our
actual future results may be materially different from what we expect. We
qualify all of our forward-looking statements by these cautionary statements.

22
<PAGE> 24

USE OF PROCEEDS

We estimate that we will receive net proceeds of approximately $71.1
million from the sale of 2,000,000 shares of common stock offered by us, or
$82.5 million if the over-allotment to purchase 318,863 shares granted to the
underwriters by us is exercised in full, based on an assumed public offering
price of $38.00 per share and after deducting the underwriting discounts and
commissions and estimated offering expenses payable by us. We will not receive
any portion of the proceeds from the sale of shares of common stock by the
selling stockholders.

The primary purposes of this offering are to obtain additional equity
capital, create a larger public float for our common stock, facilitate our
future access to public markets and allow for the orderly liquidation of a
portion of the investments made by some of our stockholders.

We expect to use the net proceeds for general corporate purposes, including
working capital. In addition, we also may use a portion of the net proceeds for
the acquisition of complementary businesses, products or technologies. We have
no current plans, agreements or commitments and are not currently engaged in any
negotiations with respect to any such transaction. Pending these uses, we will
invest the net proceeds of this offering in investment grade, interest-bearing
securities.

PRICE RANGE OF COMMON STOCK

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

<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
-------------------
HIGH LOW
------ -------
<S> <C> <C>
1999
Second Quarter (from April 23, 1999)........................ $35.00 $ 15.00
Third Quarter............................................... $23.50 $ 9.75
Fourth Quarter.............................................. $43.13 $ 14.75
2000
First Quarter (through March 21, 2000)...................... $66.50 $ 35.94
</TABLE>

On March 21, 2000, the last reported sale price of our common stock on the
Nasdaq National Market was $38.00 per share. As of March 15, 2000, there were
318 stockholders of record registered with our transfer agent, Norwest Bank
Minnesota, N.A.

DIVIDEND POLICY

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

23
<PAGE> 25

CAPITALIZATION

The following table sets forth the following information:

- the actual capitalization of Net Perceptions at December 31, 1999;

- our pro forma capitalization as of December 31, 1999 giving effect to the
KD One acquisition; and

- our pro forma as adjusted capitalization giving effect to the receipt of
the estimated net proceeds from the sale by us of 2,000,000 shares of
common stock in this offering at an assumed offering price of $38.00 per
share, after deducting the underwriting discounts and commissions and
estimated offering expenses payable by us.

<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ------------ --------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C>
Long-term liabilities, less current portion...... $ 707 $ 1,120 $ 1,120
Stockholders' equity:
Preferred stock, $.0001 par value per share,
5,000,000 shares authorized; no shares issued
or outstanding actual, pro forma and pro forma
as adjusted.................................... -- -- --
Common stock, $.0001 par value per share,
50,000,000 shares authorized; 22,025,716 shares
issued and outstanding actual; 23,995,346
shares issued and outstanding pro forma;
25,995,346 shares issued and outstanding pro
forma as adjusted.............................. 2 2 2
Additional paid-in capital....................... 71,231 187,207 258,317
Accumulated other comprehensive loss............. (89) (89) (89)
Accumulated deficit.............................. (22,756) (22,756) (22,756)
-------- -------- --------
Total stockholders' equity.................. 48,388 164,364 235,474
-------- -------- --------
Total capitalization........................ $ 49,095 $165,484 $236,594
======== ======== ========
</TABLE>

This table excludes, as of December 31, 1999:

- 2,548,766 shares of common stock issuable upon the exercise of stock
options outstanding under our stock option plans, at a weighted average
exercise price of $8.04 per share;

- 1,035,578 shares of common stock reserved for grant of future options
under our stock option plans and 957,616 shares of common stock reserved
for issuance under our Employee Stock Purchase Plan; and

- options to purchase up to 36,000 shares of common stock that we may grant
to a business partner.

As of March 1, 2000, we had granted options to purchase an additional
678,388 shares of common stock. On February 14, 2000, in connection with the KD
One acquisition, we also assumed all outstanding options to purchase KD One
common stock. We have reserved 268,297 shares of our common stock for issuance
upon the exercise of these options, at a weighted average exercise price of
$2.31 per share.

24
<PAGE> 26

DILUTION

On a pro forma basis as of December 31, 1999, giving effect to the
acquisition of KD One, the net tangible book value of our common stock was $47.0
million, or approximately $1.96 per share. Net tangible book value per share
represents the amount of our total tangible assets less total liabilities,
divided by 23,995,346 shares of common stock outstanding.

Dilution in pro forma net tangible book value per share represents the
difference between the amount per share paid by purchasers of shares of our
common stock in this offering and the pro forma net tangible book value per
share of our common stock immediately after this offering. After giving effect
to our sale of 2,000,000 shares of common stock in this offering at an assumed
public offering price of $38.00 per share and after deducting the underwriting
discount and estimated offering expenses payable by us, our pro forma net
tangible book value would have been approximately $118.1 million, or $4.54 per
share. This represents an immediate increase in pro forma net tangible book
value of $2.58 per share to existing stockholders and an immediate dilution in
pro forma net tangible book value of $33.46 per share to new investors
purchasing shares of common stock in this offering. The following table
illustrates this dilution.

<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $ 38.00
Pro forma net tangible book value per share as of December
31, 1999............................................... $ 1.96
Increase per share attributable to new investors.......... 2.58
------
Pro forma net tangible book value per share after this
offering.................................................. 4.54
--------
Pro forma net tangible book value dilution per share to new
investors................................................. $ 33.46
========
</TABLE>

This information excludes options for the purchase of 2,548,766 shares of
common stock, at a weighted average exercise price of $8.04 per share,
outstanding as of December 31, 1999 under stock option plans. As of March 1,
2000, we had granted options to purchase an additional 678,388 shares of common
stock. On February 14, 2000, in connection with the KD One acquisition, we also
assumed all outstanding options to purchase KD One common stock. We have
reserved 268,297 shares of our common stock for issuance upon the exercise of
these options, at a weighted average exercise price of $2.31 per share. We also
have reserved 36,000 shares of common stock for issuance under options that we
may grant to a business partner. To the extent outstanding options are
exercised, there will be further dilution to new investors.

25
<PAGE> 27

SELECTED CONSOLIDATED FINANCIAL DATA

In the tables below we provide you with selected historical financial data
of Net Perceptions, which should be read in conjunction with the financial
statements and the notes to the financial statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations," which
are included elsewhere in this prospectus. The statement of operations data for
each of the three years in the period ended December 31, 1999, and the balance
sheet data at December 31, 1998 and 1999, are derived from, and are qualified by
reference to, the audited financial statements included elsewhere in this
prospectus. The statement of operations data for the period from July 3, 1996
(inception) to December 31, 1996, and the balance sheet data at December 31,
1996 and 1997 are derived from audited financial statements not included in this
prospectus. The pro forma financial information reflects the acquisition of KD
One and is derived from the unaudited pro forma combined financial statements
and should be read in conjunction with those pro forma financial statements and
notes thereto, which are included elsewhere in this prospectus.

<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED DECEMBER 31,
JULY 3, 1996 ---------------------------------------------
(INCEPTION) TO 1999
DECEMBER 31, -----------------------
1996 1997 1998 ACTUAL PRO FORMA
-------------- ------- ------- -------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Product............................................ $ -- $ 284 $ 3,955 $ 11,408 $ 12,326
Service and maintenance............................ 4 33 522 3,721 6,318
------- ------- ------- -------- ---------
Total revenues................................... 4 317 4,477 15,129 18,644
------- ------- ------- -------- ---------
Cost of revenues:
Product............................................ -- 14 52 286 935
Service and maintenance............................ 2 30 373 2,735 4,914
------- ------- ------- -------- ---------
Total cost of revenues........................... 2 44 425 3,021 5,849
------- ------- ------- -------- ---------
Gross margin......................................... 2 273 4,052 12,108 12,795
------- ------- ------- -------- ---------
Operating expenses:
Sales and marketing................................ 454 3,063 4,980 12,099 15,421
Research and development........................... 378 1,372 2,314 8,194 11,174
General and administrative......................... 210 585 1,424 3,725 5,887
Stock compensation expense......................... -- -- 366 1,495 1,805
Amortization of intangibles........................ -- -- -- -- 30,017
------- ------- ------- -------- ---------
Total operating expenses......................... 1,042 5,020 9,084 25,513 64,304
------- ------- ------- -------- ---------
Loss from operations................................. (1,040) (4,747) (5,032) (13,405) (51,509)
Other income, net.................................... 13 25 64 1,366 1,286
------- ------- ------- -------- ---------
Net loss............................................. $(1,027) $(4,722) $(4,968) $(12,039) $ (50,223)
======= ======= ======= ======== =========
Basic and diluted net loss per common share.......... $ (3.40) $ (3.01) $ (1.40) $ (0.78) $ (2.91)
======= ======= ======= ======== =========
Shares used in computing basic and diluted net loss
per share(1)....................................... 302 1,569 3,546 15,402 17,275
======= ======= ======= ======== =========
Pro forma basic and diluted net loss per share....... $ (0.64) $ (2.42)
======== =========
Shares used in computing pro forma basic and diluted
net loss per share(1).............................. 18,851 20,724
======== =========
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1999
----------------------
1996 1997 1998 ACTUAL PRO FORMA
------ ------ ------ ------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $3,821 $4,846 $ 972 $36,854 $ 37,935
Working capital............................................. 3,554 4,442 468 37,372 35,675
Total assets................................................ 4,099 5,575 5,637 58,748 180,135
Long-term liabilities, net of current portion............... 87 345 538 707 1,120
Total stockholders' equity.................................. 2,950 3,879 421 48,388 164,364
</TABLE>

- -------------------------
(1) See Note 2 of the notes to Net Perceptions' financial statements for an
explanation of the methods used to determine the number of shares used in
computing net loss per share data.

26
<PAGE> 28

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with "Selected Consolidated
Financial Data" and our financial statements, pro forma combined financial
information and notes thereto appearing elsewhere in this prospectus. This
discussion and analysis contains forward-looking statements that involve risks,
uncertainties and assumptions. Our actual results may differ substantially from
those anticipated in these forward-looking statements as a result of certain
factors including, but not limited to, those set forth under "Risk Factors" and
elsewhere in this prospectus.

OVERVIEW

Through December 31, 1999, we focused on providing solutions to electronic
commerce retailers, and most of our product revenues through December 31, 1999
were attributable to our Net Perceptions for E-commerce product. In 1999, we
expanded our product suite by introducing new applications for Internet sales
channels and other markets, including Net Perceptions for Marketing Campaigns,
Net Perceptions for Call Centers and Net Perceptions for Knowledge Management.
In addition, in 1999, we introduced the Net Perceptions Recommendation Engine,
which is a product designed for original equipment manufacturers.

We incorporated in Delaware in July 1996 and shipped our initial product in
January 1997. In the period from our inception through 1999, we expanded our
organization by hiring personnel in key areas, particularly marketing, sales and
research and development. We grew from 34 employees at December 31, 1997, to 70
employees at December 31, 1998 and to 213 employees at December 31, 1999.

Prior to the third quarter of 1999, substantially all of our product
revenues were attributable to Net Perceptions for E-commerce and the Net
Perceptions Recommendation Engine and their predecessor products. In the third
quarter of 1999, we recognized initial product revenues from our Net Perceptions
for Call Centers and Net Perceptions for Knowledge Management products. In 2000,
we expect to recognize initial product revenues from Net Perceptions for
Marketing Campaigns, although we anticipate Net Perceptions for E-commerce to
continue to account for a substantial portion of our revenues in this period.

We sell our products and services worldwide through a direct sales force,
original equipment manufacturers and resellers. Sales derived through indirect
channels accounted for approximately 12% of our total revenues in 1999 and 8% in
1998. We are seeking to increase sales derived through indirect channels as a
percentage of total revenues. Sales through indirect channels have lower average
selling prices and gross margins than direct sales. As a result, we expect that
our gross margins on product sales will decline if sales through indirect
channels increase.

We license our products under various pricing plans, such as per stored
profile, per user, per e-mail, per CPU, per site and per enterprise. We grant
licenses on both a term and perpetual basis. License fees for our products range
from $50,000 to several hundred thousand dollars. The price of our annual
maintenance contracts is based on a percentage of the related product license
price and is generally paid in advance. Professional service fees for
implementation and training are generally priced on a per hour or per class
basis.

27
<PAGE> 29

We recognize revenues in accordance with the Statement of Position 97-2,
"Software Revenue Recognition," as amended by Statement of Position 98-4,
"Deferral of the Effective Date of a Provision of Statement of Position 97-2."
We derive revenues from software licenses, software maintenance and professional
services. Maintenance includes telephone and Web-based technical support, bug
fixes and rights to unspecified upgrades on a when-and-if available basis.
Professional services include implementation, training and consulting. In
software arrangements that include rights to multiple software products,
specified upgrades, maintenance or services, we allocate the total arrangement
fee among each deliverable based on the relative fair value of each of the
deliverables determined based on vendor-specific objective evidence. In software
arrangements in which we do not have vendor-specific objective evidence, we
defer revenue until the earlier of when vendor-specific objective evidence is
determined for all elements or when all elements have been delivered. We
recognize revenues from license fees when persuasive evidence of an agreement
exists, delivery of the product has occurred, no significant company obligations
with regard to implementation remain, the fee is fixed or determinable and
collection is probable. If the fee due from the customer is not fixed or
determinable, we recognize revenues as payments become due from the customer. If
we do not consider collection to be probable, then we recognize revenues when
the fee is collected. We recognize revenues allocable to maintenance on a
straight-line basis over the periods in which it is provided. We evaluate
arrangements that include professional services to determine whether those
services are essential to the functionality of other elements of the
arrangement. When professional services are considered essential, we recognize
revenues from the arrangement using contract accounting, generally on a
percentage of completion basis. When we do not consider the professional
services to be essential, we recognize the revenues allocable to the services as
they are performed.

We have sustained losses on a quarterly and an annual basis since
inception. As of December 31, 1999, we had an accumulated deficit of $22.8
million. Our net loss was $12.0 million in 1999, $5.0 million in 1998 and $4.7
million in 1997. These losses resulted from significant costs incurred in the
development and sale of our products and services. We expect to experience
significant increases in our operating expenses for the foreseeable future,
particularly research and development and sales and marketing expenses.
Accordingly, we anticipate that our operating expenses, as well as planned
capital expenditures, will constitute a material use of our cash resources. We
also expect to incur additional losses and continued negative cash flow from
operations for the foreseeable future, and these losses may increase
significantly from current levels. We do not expect to achieve profitability in
2000 or 2001.

Our limited operating history makes the prediction of future operating
results very difficult. We believe that period-to-period comparisons of our
operating results should not be relied upon as predictive of future performance.
Our prospects must be considered in light of the risks, expenses and
difficulties encountered by companies at an early stage of development,
particularly companies in new and rapidly evolving markets. We may not be
successful in addressing these risks and difficulties. We have experienced
significant percentage growth in revenues in recent periods; however, we do not
believe that prior growth rates are sustainable or indicative of future growth
rates.

THE KD ONE ACQUISITION

We acquired Knowledge Discovery One, Inc. in February 2000, as a result of
which KD One is now our wholly owned subsidiary. In connection with the
transaction, we acquired all of the outstanding shares of KD One in exchange for
1,969,630 shares of our common stock. In addition, options of KD One were
converted into options to purchase approximately 268,297 shares of our common
stock.

KD One was incorporated in Delaware in December 1996 and was in development
stage from inception through December 1997. KD One shipped its first products in
May 1998. KD One had total revenues of $3.5 million in 1999 and $3.2 million in
1998. KD One's cost of revenues increased

28
<PAGE> 30

to $2.8 million in 1999 from $2.0 million in 1998, and its operating expenses
increased to $8.8 million in 1999 from $5.7 million in 1998. As of December 31,
1999, KD One had accumulated net losses, excluding accretion on redeemable
convertible preferred stock, of $16.2 million since inception. KD One grew to 51
employees as of December 31, 1999 from 38 employees as of December 31, 1998.

We expect to incur additional expenses across all departments to build and
integrate our direct sales force and our professional service organization,
increase our indirect sales activities, increase our investment in the
development of technology and expand general and administrative infrastructure.
We expect that these investments will cause all operating expense categories to
increase in absolute dollars and could result in an increase in expense
categories as a percentage of revenues. In addition, this expansion will place
significant demands on our management and operational resources.

We will account for the KD One acquisition using the purchase method of
accounting. Under the purchase method, the purchase price of KD One will be
allocated to the assets and liabilities that we acquired from KD One. As a
result, we will record non-cash charges against our future operating results,
which will adversely affect our reported financial results. If we had completed
the acquisition on December 31, 1999, we would have recorded approximately
$117.4 million in goodwill and other intangible assets in connection with the
acquisition. We would have recorded an amortization expense of $26.2 million in
2000, $30.0 million in 2001, $30.0 million in 2002, $30.0 million in 2003 and
$1.2 million in the first quarter of 2004. The actual amount of goodwill and
other intangible assets will be higher due to KD One's net losses between
December 31, 1999 and the closing of the acquisition on February 14, 2000.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
1997 1998 1999
------ ---- ----
<S> <C> <C> <C>
Revenues:
Product................................................... 90% 88% 75%
Service and maintenance................................... 10 12 25
------ ---- ---
Total revenues......................................... 100 100 100
Cost of revenues:
Product................................................... 4 1 2
Service and maintenance................................... 10 8 18
------ ---- ---
Total cost of revenues................................. 14 9 20
------ ---- ---
Gross margin................................................ 86 91 80
Operating expenses:
Sales and marketing....................................... 966 111 80
Research and development.................................. 433 52 54
General and administrative................................ 185 32 25
Stock compensation expense................................ -- 8 10
------ ---- ---
Total operating expenses............................... 1,584 203 169
------ ---- ---
Loss from operations........................................ (1,498) (112) (89)
Other income, net........................................... 8 1 9
------ ---- ---
Net loss.................................................... (1,490)% (111)% (80)%
====== ==== ===
</TABLE>

29
<PAGE> 31

RESULTS OF OPERATIONS FOR 1999, 1998 AND 1997

REVENUES

Our revenues increased 238% to $15.1 million in 1999, from $4.5 million in
1998. During 1997, our software products were in the early stages of development
and total revenues were $317,000, consisting principally of product revenues.
The increase in total revenues is primarily the result of increased sales of our
cornerstone product, Net Perceptions for E-commerce. Revenues from our Net
Perceptions Recommendation Engine and the introduction in 1999 of two new
products, Net Perceptions for Call Centers and Net Perceptions for Knowledge
Management, also contributed to the increase in total revenues.

Revenues from United States sales were $12.7 million in 1999, $3.9 million
in 1998 and $232,000 in 1997, or 84% of total revenues in 1999, 87% in 1998 and
73% in 1997. Revenues from international sales were $2.4 million in 1999,
$600,000 in 1998 and $85,000 in 1997, representing 16% of total revenues in
1999, 13% in 1998 and 27% in 1997. The majority of international sales to date
were made in Europe and Asia by our direct sales force located in the United
States and the United Kingdom. International sales are generally denominated in
United States dollars. Purchases by one customer represented 11% of our revenues
in 1999. During 1998, no single customer accounted for 10% or more of total
revenues. During 1997, two customers accounted for approximately 22% and 19% of
total revenues. We do not expect any single customer to account for 10% or more
of total revenues in 2000.

Product revenues. Product revenues increased 188% to $11.4 million in 1999
from $4.0 million in 1998. We currently derive the majority of our product
revenues from our Net Perceptions for E-commerce product. The growth of revenues
in absolute dollars is attributable to an increase in the average size of
license transactions recognized during the year, increased sales and marketing
efforts, specifically the expansion of our direct sales force, and increased
sales of our products. Product revenues from United States sales increased 178%
to $9.6 million in 1999 from $3.4 million in 1998, representing 84% of total
product revenues in 1999 and 87% in 1998. Product revenues from international
sales increased to $1.8 million in 1999, from $507,000 in 1998, or 16% of total
product revenues in 1999 and 13% in 1998. We anticipate that revenues from
product licenses will continue to represent a majority of our revenues in the
foreseeable future. In addition, we expect that prior percentage growth rates of
our product revenues will not be sustainable in the future.

Service and maintenance revenues. Service and maintenance revenues consist
primarily of professional and maintenance services. Our professional service
revenues include business consulting, implementation support and educational
services and are generally offered on a time and material basis. Maintenance
revenues are generally derived from annual service agreements and are recognized
ratably over the period of the agreement. Total service and maintenance revenues
increased 613% to $3.7 million in 1999 from $522,000 in 1998. Service and
maintenance revenues were 25% of total revenues in 1999 and 12% in 1998. During
1997, our company was in the early stages of development and our service and
maintenance revenues were $33,000.

Professional service revenues increased 750% to $2.3 million in 1999 from
$274,000 in 1998. Professional service revenues were nominal in 1997.
Professional service revenues were 63% of total service and maintenance revenues
in 1999, 52% in 1998 and 27% in 1997. The increase in professional service
revenues in 1999 is a result of higher business volumes and additional personnel
in our professional services group. Our professional service revenues as a
percentage of total revenues may decline to the extent our strategy of
developing alliances with systems integrators continues to expand.

Maintenance revenues increased 461% to $1.4 million in 1999 from $248,000
in 1998. Maintenance revenues were nominal in 1997. Maintenance revenues were
37% of total service and maintenance revenues in 1999, 48% in 1998 and 73% in
1997. The increase in maintenance revenues

30
<PAGE> 32

is a result of expanded software sales and corresponding maintenance fees
relating to a larger installed base of software licenses. We expect our
maintenance revenues to increase as a percentage of total revenues in 1999 to
the extent our installed license base grows. Our maintenance revenues as a
percentage of total revenues may continue to increase as the installed license
base increases.

COST OF REVENUES

Cost of product revenues. Cost of product revenues consists primarily of
the cost of royalties paid to third-party vendors, product media and
duplication, manuals, packaging materials and shipping expenses. Cost of product
revenues increased 450% to $286,000 in 1999 from $52,000 for 1998, representing
3% and 1% of the related product revenues. Cost of product revenues was $14,000
in 1997. The increase in cost of product revenues as a percentage of total
product revenues from 1998 to 1999 is attributable to increased royalties
payable to vendors. The increase in absolute dollar amount of cost of product
revenues was due to higher volumes of product shipped. Because all development
costs incurred in the research and development of new software products and
enhancements to existing software products have been expensed as incurred, cost
of product revenues includes no amortization of capitalized software development
costs. We believe that the cost of product revenues will increase in dollar
amounts and as a percentage of product revenues in the future.

Cost of service and maintenance revenues. Cost of service and maintenance
revenues consists primarily of personnel-related costs incurred in providing
telephone and Web-based support, professional and educational services to
customers. Cost of service and maintenance revenues increased 633% to $2.7
million in 1999, from $373,000 in 1998, representing 74% and 71% of the related
services and maintenance revenues. Cost of service and maintenance revenues was
$30,000 in 1997. The increase in cost of services and maintenance revenues in
absolute dollars and as a percentage of revenues is due primarily to recruiting
and training costs associated with increased personnel in our service
organization, as well as to increased costs for third-party contractors used to
staff consulting engagements. We believe that the cost of service and
maintenance revenues will increase in dollar amounts in the future as we expand
our service capacity to meet anticipated demand. In addition, cost of service
and maintenance revenues may vary significantly from quarter to quarter
depending upon the mix of services that we provide and the utilization rate of
our service personnel.

OPERATING EXPENSES

Sales and marketing. Sales and marketing expenses consist primarily of
salaries, other employee related costs, commissions and other incentive
compensation, travel and entertainment and expenditures for marketing programs
such as collateral materials, trade shows, public relations and creative
services. Sales and marketing expenses were $12.1 million in 1999, $5.0 million
in 1998 and $3.1 million in 1997. Sales and marketing expenses increased 143%
from 1998 to 1999, and 63% from 1997 to 1998. Sales and marketing expenses were
80% of total revenues in 1999, 111% in 1998 and 966% in 1997. The overall
increase in sales and marketing expenses in absolute dollar amounts reflects the
cost of hiring additional sales and marketing personnel, developing and
expanding our sales and distribution channels, deploying new products and
expanding promotional activities. We believe that sales and marketing expenses
will continue to increase in absolute dollar amounts in the future as we
continue to expand our direct sales and marketing efforts for all of our product
lines.

Research and development. Research and development expenses consist
primarily of salaries, other employee related costs and consulting fees relating
to the development of our products. Research and development expenses were $8.2
million in 1999, $2.3 million in 1998 and $1.4 million in 1997. Research and
development expenses increased 254% from 1998 to 1999 and 69% from 1997 to 1998.
Research and development expenses were 54% of total revenues in 1999, 52% in
1998 and

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433% in 1997. The increase in research and development expenses in absolute
dollars is primarily due to the cost of hiring additional research and
development personnel for the enhancement of existing products and the
development of new products. We believe that continued investment in research
and development is critical to attaining our strategic objectives and, as a
result, expect research and development expenses to increase in absolute dollars
in future periods.

General and administrative. General and administrative expenses consist
primarily of salaries, other employee related costs and professional service
fees. General and administrative expenses were $3.7 million in 1999, $1.4
million in 1998 and $585,000 in 1997. General and administrative expenses
increased 162% from 1998 to 1999, and 143% from 1997 to 1998. General and
administrative expenses were 25% of total revenues in 1999, 32% in 1998 and 185%
in 1997. The overall increase in general and administrative expenses in absolute
dollar amounts reflects the cost of hiring additional general and administrative
personnel, increased professional fees, additional provision for doubtful
accounts and additional infrastructure to support our expanded operations. We
expect to continue to add administrative staff to support broadened operations.
As a result, general and administrative expenses will increase in absolute
dollar amounts in the future.

Stock compensation. Compensation charges related to granted stock options
were $1.5 million in 1999 and $366,000 in 1998. There were no compensation
charges related to stock options granted in 1997. These amounts represent the
difference between the exercise price of certain stock option grants and the
deemed fair value of the common stock at the time of the grants. Stock
compensation expense is recognized over the vesting period of the options, which
is generally four years. As a result, the recognition of stock compensation will
impact our reported results of operations through early 2003.

Other income, net. Other income, net consists of interest income, interest
expense, equity losses of a joint venture and other expense and was $1.4 million
in 1999, $64,000 in 1998 and $25,000 in 1997. Other income, net increased
substantially in 1999 due to interest income on the proceeds from our initial
public offering in April 1999.

PROVISION FOR INCOME TAXES

As of December 31, 1999, we had net operating loss carryforwards of
approximately $18.1 million available to reduce future taxable income expiring
at various dates beginning in 2011. In addition, as of December 31, 1999, we had
$140,000 of tax credit carryforwards expiring at various dates beginning in
2011. Under the provisions of the Internal Revenue Code, certain substantial
changes in our ownership may limit in the future the amount of net operating
loss and tax credit carryforwards that could be utilized annually to offset
future taxable income.

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

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SELECTED CONSOLIDATED QUARTERLY OPERATING RESULTS

The following table sets forth our unaudited statement of operations data
for the eight quarters ended December 31, 1999, as well as the percentage of our
total revenues represented by each item. This information has been derived from
our unaudited financial statements. The unaudited financial statements have been
prepared on the same basis as the audited financial statements contained in this
prospectus and include all adjustments, consisting only of normal recurring
accruals, that we consider necessary for a fair presentation of such information
when read in conjunction with our annual audited financial statements and notes
thereto appearing elsewhere in this prospectus. You should not draw any
conclusions from the operating results for any quarter.

<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
--------- -------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS AND AS A PERCENTAGE OF REVENUES)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Product............................ $ 617 $ 889 $ 993 $ 1,456 $ 1,561 $ 2,104 $ 3,035 $ 4,708
Service and maintenance............ 53 100 163 206 334 710 1,079 1,598
------ ------- ------- ------- ------- ------- ------- -------
Total revenues................... 670 989 1,156 1,662 1,895 2,814 4,114 6,306
Cost of revenues:
Product............................ 6 9 10 27 36 59 32 159
Service and maintenance............ 35 65 106 167 313 491 782 1,149
------ ------- ------- ------- ------- ------- ------- -------
Total cost of revenues........... 41 74 116 194 349 550 814 1,308
------ ------- ------- ------- ------- ------- ------- -------
Gross margin......................... 629 915 1,040 1,468 1,546 2,264 3,300 4,998
Operating expenses:
Sales and marketing................ 933 1,106 1,145 1,795 1,737 2,558 3,275 4,529
Research and development........... 367 507 607 834 1,536 2,033 2,270 2,355
General and administrative......... 226 293 383 522 574 813 1,169 1,169
Stock compensation expense......... 7 59 112 188 503 364 339 289
------ ------- ------- ------- ------- ------- ------- -------
Total operating expenses......... 1,533 1,965 2,247 3,339 4,350 5,768 7,053 8,342
------ ------- ------- ------- ------- ------- ------- -------
Loss from operations................. (904) (1,050) (1,207) (1,871) (2,804) (3,504) (3,753) (3,344)
Other income, net.................... 28 38 24 (26) (72) 381 735 322
------ ------- ------- ------- ------- ------- ------- -------
Net loss............................. $ (876) $(1,012) $(1,183) $(1,897) $(2,876) $(3,123) $(3,018) $(3,022)
====== ======= ======= ======= ======= ======= ======= =======
PERCENTAGE OF TOTAL REVENUES:
Revenues:
Product............................ 92% 90% 86% 88% 82% 75% 74% 75%
Service and maintenance............ 8 10 14 12 18 25 26 25
------ ------- ------- ------- ------- ------- ------- -------
Total revenues................... 100 100 100 100 100 100 100 100
Cost of revenues:
Product............................ 1 1 1 2 2 2 1 3
Service and maintenance............ 5 7 9 10 16 18 19 18
------ ------- ------- ------- ------- ------- ------- -------
Total cost of revenues........... 6 8 10 12 18 20 20 21
------ ------- ------- ------- ------- ------- ------- -------
Gross margin......................... 94 92 90 88 82 80 80 79
Operating expenses:
Sales and marketing................ 139 112 99 108 92 91 80 72
Research and development........... 55 51 53 50 81 72 55 37
General and administrative......... 34 30 33 32 30 29 28 18
Stock compensation expense......... 1 6 10 11 27 13 8 5
------ ------- ------- ------- ------- ------- ------- -------
Total operating expenses......... 229 199 195 201 230 205 171 132
------ ------- ------- ------- ------- ------- ------- -------
Loss from operations................. (135) (107) (105) (113) (148) (125) (91) (53)
Other income, net.................... 4 4 2 (2) (4) 14 18 5
------ ------- ------- ------- ------- ------- ------- -------
Net loss............................. (131)% (103)% (103)% (115)% (152)% (111)% (73)% (48)%
====== ======= ======= ======= ======= ======= ======= =======
</TABLE>

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We expect to experience significant fluctuations in our quarterly operating
results in the future and therefore, we will continue to have difficulty
providing an accurate forecast of our quarterly revenues and operating results.
We believe that period-to-period comparisons of our operating results may not be
meaningful, and you should not rely upon them as any indication of future
performance. It is likely that the our operating results in one or more future
quarters may be below the expectations of securities analysts and investors. In
that event, the trading price of our common stock would almost certainly
decline.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have financed our operations primarily through the sale
of equity securities, and to a lesser extent, loans and capital equipment
leases. At December 31, 1999, we had $36.9 million of cash, cash equivalents and
short-term investments, compared to $972,000 at December 31, 1998. Cash used in
operations was $10.2 million in 1999, $4.4 million in 1998 and $4.6 million in
1997. Cash used in operations resulted primarily from net losses and increases
in our accounts receivable, offset in part by the growth in accrued liabilities,
deferred revenues and non-cash expenses, including depreciation and stock
compensation.

We used $30.8 million net cash in investing activities in 1999 and $1.7
million in 1997. In 1998, net cash provided by investing activities was $3.0
million. Our investing activities consisted primarily of purchases and sales of
marketable securities and property and equipment. To date, we have not invested
in financial instruments that involve a high level of complexity or risk. We
expect that, in the future, cash in excess of current requirements will be
invested in investment grade, interest bearing securities.

Net cash provided by financing activities was $57.5 million in 1999, $1.0
million in 1998 and $5.6 million in 1997. Financing activities consisted
primarily of the sale of our common and preferred stock. On April 28, 1999, we
completed an initial public offering, selling 3,650,000 shares of common stock
at a price of $14 per share, raising a total of $46.1 million in net proceeds
after payment of underwriting discounts and commissions and offering expenses.
In May 1999, the underwriters of our initial public offering exercised their
right to purchase additional shares of common stock to cover over-allotments.
Accordingly, we sold 547,500 additional shares of common stock, generating an
additional $7.1 million in net proceeds after payment of underwriting discounts
and commissions and estimated offering expenses. Including the over-allotment
shares, we sold a total of 4,197,500 shares of common stock in our initial
public offering, raising a total of $53.2 million net of underwriting discounts
and commissions and estimated offering expenses.

Capital expenditures were $4.6 million in 1999, $914,000 in 1998 and
$414,000 in 1997. Our capital expenditures consisted of leasehold improvements
and purchases of property and equipment, primarily computer equipment and
software, for our growing employee base. From inception through 1998, we
generally funded the purchase of property and equipment with capital leases.
During 1999, we purchased property and equipment with cash balances. We expect
that the rate of purchases of property and equipment will continue to increase
in the future as our employee base grows.

We have also used loans and leases to partially finance our operations. At
December 31, 1999, we had $853,000 in current and noncurrent loans, including
current and noncurrent lease obligations. Included in the amounts above are
installment loans with a third-party financing source that are secured by the
equipment financed by the third party. The loans bear interest at rates between
15.9% and 16.8% and mature between November 2000 and July 2002. The total amount
outstanding under these loans as of December 31, 1999 was approximately
$534,000. At December 31, 1999, we also had noncancellable operating leases for
office space of approximately $5.8 million which are payable through 2010.

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Although we have no material long-term commitments for capital
expenditures, we anticipate a substantial increase in our capital expenditures
and lease commitments consistent with anticipated growth in operations,
infrastructure and personnel. We intend to fund the intended increase in
expenses and capital expenditures through the proceeds of this offering,
together with existing cash, cash equivalents and short-term investments, and
believe that these funds will be sufficient to meet our working capital needs
for at least the next 12 months. However, we may need to raise additional funds
in order to support more rapid expansion of our sales force, develop new or
enhanced products or services, respond to competitive pressures, acquire
complementary businesses or technologies or respond to unanticipated
requirements. If we seek to raise additional funds, we may not be able to obtain
funds on terms which are favorable or otherwise acceptable to us. If we raise
additional funds through the issuance of equity securities, the percentage
ownership of our stockholders would be reduced.

YEAR 2000 ISSUES

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

We designed our current products to be year 2000 compliant when configured
and used in accordance with the related documentation, provided that the
underlying operating system of the host machine and any other software used with
or in the host machine or our products are year 2000 compliant. We have sought
assurances from our vendors that the hardware and software we have obtained from
third parties is year 2000 compliant. In addition, we have assessed our material
internal information technology systems and non-information technology systems
for year 2000 compliance. Based upon these assurances and assessments, we do not
expect to incur material costs related to year 2000-related issues. To date, we
have not experienced any problems or failures with our products or internal
systems associated with year 2000-related issues. However, we may experience
significant unanticipated problems and costs caused by undetected year 2000
problems, or problems with KD One's products or internal systems.

MARKET RISK

Through December 31, 1999, substantially all of our recognized revenues
were denominated in United States dollars and primarily from customers in the
United States, and our exposure to foreign currency exchange rate changes has
been immaterial. We expect, however, that future product license and service
revenues may also be derived from international markets and may be denominated
in the currency of the applicable market. As a result, our operating results may
become subject to significant fluctuations based upon changes in the exchange
rates of certain currencies in relation to the United States dollar.
Furthermore, to the extent that we engage in international sales denominated in
United States dollars, an increase in the value of the United States dollar
relative to foreign currencies could make our products less competitive in
international markets. Although we will continue to monitor our exposure to
currency fluctuations, and, when appropriate, may use financial hedging
techniques in the future to minimize the effect of these fluctuations, exchange
rate fluctuations may adversely affect our financial results in the future.

Our exposure to market risk is otherwise limited to interest income
sensitivity, which is affected by changes in the general level of United States
interest rates, particularly because the majority of our investments are in
short-term debt securities issued by corporations. We place our investments with
high-quality issuers and limit the amount of credit exposure to any one issuer.
Due to the nature

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of our short-term investments, we believe that we are not subject to any
material market risk exposure. We do not have any derivative financial
instruments.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued Financial
Accounting Standards Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities." Financial Accounting Standards Statement No. 133
establishes accounting and reporting standards for derivative financial
instruments and hedging activities related to those instruments, as well as
other hedging activities. We will be required to adopt Financial Accounting
Standards Statement No. 133 for our year ending December 31, 2001. However,
because we do not utilize derivative financial instruments, we do not believe
the impact of Financial Accounting Standards Statement No. 133 will be material
to our consolidated financial position or results of operations.

In January 1999, the American Institute of Certified Public Accountants
issued Statement of Position 98-9, "Modification of Statement of Position 97-2,
Software Revenue Recognition, With Respect to Certain Transactions." Statement
of Position 98-9 requires use of the residual method for recognition of revenue
when vendor-specific objective evidence exists for undelivered elements but does
not exist for delivered elements of a software arrangement. We will be required
to comply with the provisions of Statement of Position 98-9 for transactions
entered into beginning January 1, 2000. The adoption of Statement of Position
98-9 is not expected to have a material impact on our financial position or
operating results.

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BUSINESS

INTRODUCTION

We design our solutions to benefit retailers by converting browsers into
buyers, increasing cross-sell and up-sell success rates and enhancing overall
customer satisfaction and customer loyalty. In addition, we help retailers
reduce customer acquisition and retention costs, improve advertising
effectiveness, optimize in-store and on-line retail floor space and improve
customer service. Our customers currently include major Internet and
multi-channel retailers such as Art.com, Bertelsmann, CDNow, Egghead.com,
eToys.com, Fingerhut, Hudson's Bay Company, J.C. Penney, Procter & Gamble, Tower
Records and Walgreens.

INDUSTRY BACKGROUND

Internet impact on retail marketing

The Internet has had a significant effect on retail marketing. By shopping
on-line, or even just browsing websites, consumers now have more control over
where and when they shop, what products are available and at what price, and how
and when items are picked up or delivered. As a result, retailers are seeking
new and better ways to acquire, retain and satisfy customers while continuing to
pursue increased revenues and profits.

We believe that the relationship between a retailer and a customer has a
direct impact on the vitality of a business. In an on-line shopping environment,
a buyer-seller relationship must be developed without any face-to-face
interaction. We believe this relationship can be enhanced by personalization
technologies. Personalization technologies are systems and applications designed
to create an individualized shopping experience for each customer.
Personalization can occur on the Internet each time a customer interacts with a
retailer. The retailer can observe and record customer data on its website and
solicit preference information. These data can be processed using
personalization technologies to generate an understanding of the customer's
interests and recommend appropriate products, services and information.

Real time personalization

Instead of planning sales activities in aggregate across a large market
such as a geographic area or income level, many retailers now seek to
distinguish themselves by satisfying the unique needs of individual customers
through personalized marketing efforts. These personalized marketing techniques
use customer databases, computer technology and interactive communications to
help customers find the products they want to purchase, thereby increasing the
number of products sold and generating

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repeat sales. Personalized marketing enables retailers to manage individual
customers in addition to products, sales channels and marketing programs.

To be effective, personalized marketing solutions must be automated and
deliver customer responses instantaneously, or in "real time," across large
customer populations. Real time personalization enables a retailer to learn a
customer's preferences during each interaction and immediately adjust the
marketing message based on the information received. We believe real time
personalization is essential in any interactive shopping context, including the
Web, call centers, in-store kiosks, point of sale terminals and wireless
devices.

Real time personalization for electronic commerce. The Internet is an
interactive communications and commerce medium through which retailers can
implement personalized marketing across large customer populations. Real time
personalization allows an on-line business to develop an individual connection
with each customer while serving thousands of customers simultaneously. With the
size and tremendous growth of electronic commerce, the opportunity for
personalized marketing on the Internet is potentially large. International Data
Corporation estimates that the amount of Internet commerce spending worldwide
will increase from $111 billion in 1999 to over $1.3 trillion in 2003.

Real time personalization across multiple touch-points. A touch-point is a
point of contact between a retailer and a customer, such as a retail store,
website, call center, in-store kiosk, wireless device or outbound marketing
campaign. Retailers that interact with customers through multiple touch-points
have the opportunity to apply information obtained from a customer interaction
at one touch-point, such as a call center purchase, to interactions at other
touch-points, such as on-line shopping.

For example, retailers can personalize customer contacts at each
touch-point by knowing a customer's purchasing history, product and style
preferences and other information solicited during interactions. In inbound call
centers, personalization software can prompt the sales agent to recommend
additional products to the customer based on information from other
interactions. In outbound call centers, e-mail campaigns or other outbound
marketing campaigns, personalization software can recommend specific customers
that are likely to be interested in a particular product offering based on
information from other interactions.

We believe those retailers that are the most successful in learning from
all of their touch-point interactions will build the strongest relationships
with their customers. To enable this learning, retailers need an effective means
of sharing customer information across multiple touch-points.

Precision marketing

Retailers can also use customer data to more effectively advertise,
merchandise, price and market their products. Traditionally, retailers have
collected customer data through the use of various sales, support and financial
enterprise software systems. Analysis of these data could help retailers to
better understand customer purchasing patterns, thereby enabling them to market
more effectively to individual customers and customer segments. However, the
technologies historically available to analyze this tremendous volume of
information were highly complex and required very specialized skills to deploy.
As a result, retailers have experienced difficulty in managing large amounts of
customer data obtained from multiple sources and using the data effectively.

The opportunity

Traditional marketing techniques have not been able to maximize the full
potential of real time personalization and precision marketing. These techniques
have been unable to automatically learn from customers or to deliver
recommendations in real time. Traditional marketing techniques also

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have failed to effectively collect, analyze and report on large amounts of
customer data collected from multiple sources. A real time personalization and
precision marketing solution must enable retailers to leverage the information
received from all customer interactions to serve each individual customer in a
consistent and improved manner regardless of the touch-points the customer
chooses to employ.

Realizing the potential of real time personalization and precision
marketing requires new solutions that:

- deliver recommendations in real time;

- span multiple customer touch-points;

- provide a measurable economic return to retailers;

- integrate easily with existing software systems; and

- satisfy the volume requirements of the largest Internet and multi-channel
retailers.

THE NET PERCEPTIONS SOLUTION

Net Perceptions is a leading provider of real time personalization and
precision marketing software solutions for Internet and multi-channel retailers.
We believe that retailers who implement our solutions can achieve the following
results:

- More customers. Because retailers are able to present the products that
customers are most likely to purchase, more customers may make purchases.

- More products per order. Retailers are able to increase sales per order
by offering each customer complementary products, known as cross-selling,
and higher-margin products, known as up-selling, that are attractive to
that particular customer.

- Stronger customer relationships. By creating compelling, personalized
experiences for each customer using our solutions, a retailer can make
customers feel as if they are known personally by the retailer. We
believe that if a customer feels that he or she receives personalized
service, he or she is more likely to come back to that retailer for
future purchases.

- More effective advertising. Retailers can analyze customer preferences
and consumer buying patterns to produce the most effective layout
location and price for each item in accurate recommendations for
newspaper advertising circulars.

- Optimized physical and electronic real estate. Retailers can use our
technology to analyze data to improve website layout and product mix. Our
solutions can also predict optimum product mixes on a store-by-store
basis, maximizing shelf and floor space dedicated to items most likely to
sell while limiting store space dedicated to lower profit and lower
volume items.

Our solutions enable effective real time personalization and precision
marketing by analyzing past and current customer behavior, including purchase
history, stated preferences, demographic information and Internet browsing
behavior. Our solutions use proprietary technology to predict the merchandise or
information a customer would be most interested in purchasing or viewing.

Our solutions:

- Deliver recommendations in real time. We design our solutions to meet the
real time requirements of large websites, call centers and retail stores
by delivering personalized recommendations during customer interactions
in less than a second. We believe that the

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response time for producing recommendations must be virtually
unnoticeable to customers for optimal impact on customer transactions.

- Span multiple customer touch-points. We design our solutions to allow
multi-channel retailers to collect and centralize customer data on
software systems that support all their points of customer contact. This
enables retailers to identify a customer at each touch-point and deliver
a highly personalized experience. Currently, our GreenLight RDS, Net
Perceptions Recommendation Engine and Knowledge Refinery products can be
used across multiple touch-points. In addition, retailers can use our
E-commerce and Call Center solutions to share information from call
center and website interactions. We intend to release products in the
future that are readily applicable to multiple touch-points.

- Provide a measurable economic return to retailers. We design our
solutions to generate increased revenues and optimize marketing and
merchandising investments. Some of our solutions currently include
reporting capabilities that enable retailers to accurately measure the
effectiveness of our solutions.

- Integrate easily with existing software systems. We design our solutions
with a distributed architecture that is flexible enough to integrate with
new or existing industry platforms and applications as they evolve. In
addition, we have an engineering team dedicated to developing and
supporting the integration of our products with leading industry
platforms for e-commerce, call centers, campaign management systems and
retail systems.

- Satisfy the volume requirements of the largest Internet and multi-channel
retailers. Our real time personalization solutions are designed to
operate on the busiest and largest e-commerce websites and call centers.
Our precision marketing solutions are designed to process detailed
customer data from the largest retailers.

STRATEGY

Our objective is to extend our leadership position in providing real time
personalization and precision marketing solutions to Internet and multi-channel
retailers. Key elements of our strategy to achieve this objective include the
following:

Maintain and extend our technology leadership

We intend to maintain and extend our technological leadership in real time
personalization and precision marketing through continued investment in the
development of our proprietary recommendation engine and other analytical
technologies. We believe that we are currently the technology leader in real
time personalization because of the accuracy, real time functionality,
scalability and ease of integration of our products. We intend to maintain an
open architecture so that our products will continue to integrate with major
platforms and technologies as they evolve.

Expand our application service provider offerings

In addition to licensing our software directly to end-users, we offer some
of our solutions on a hosted basis, operated on our own servers over the
Internet for a fee. We intend to increase the number of solutions offered in
this fashion and to offer these solutions through third-party Internet-based
application service providers. We believe that the application service provider
option will be attractive to some of our existing customers and to new customers
that choose not to devote resources to hosting our solutions themselves.

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Broaden distribution channels

We intend to expand our indirect distribution channels by recruiting
additional resellers, systems integrators and original equipment manufacturers.
Over time, we expect that our indirect sales will increase as a percentage of
our total sales. We believe that designing our products to interface with the
products of leading vendors of website, call center, marketing campaign
management and point of sale software will make our products more attractive to
resellers, systems integrators and original equipment manufacturers.

Leverage technology investments into new applications

We have leveraged our investment in our proprietary recommendation and
analytic engines into additional industry specific software solutions. For
example, during 1999, we began shipping our knowledge management and marketing
campaign solutions, which were developed from our core real time personalization
technology, and our GreenLight Ad and GreenLight Go! products, which were
developed from our core Knowledge Refinery technology. We intend to continue to
leverage our technology into complementary and new applications.

Expand service offerings

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

Continue to build our international presence

We intend to expand our international presence to address the global
adoption of the Internet and international demand for real time personalization
and precision marketing software solutions. We believe that international
markets present an attractive growth opportunity and that an expanded presence
in international markets will enhance our long-term competitive position in
these regions. We intend to increase our international sales capabilities by
developing a larger direct sales and support presence in selected European and
Asian markets, adding more international distributors and developing localized
versions of certain products.

PRODUCTS

We offer three principal product lines: commerce solutions; knowledge
management solutions; and products for original equipment manufacturers.

Commerce solutions

Our commerce solutions products are designed to solve specific business
problems for Internet and multi-channel retailers. Each of these products
incorporates our core technologies and has been designed to extract data from
other software systems. Our commerce solutions include the following products:

Net Perceptions for E-commerce. Net Perceptions for E-commerce allows
on-line retailers to create a personalized shopping experience for their
customers. Net Perceptions for E-commerce can be used to dynamically predict
which products to recommend to each customer browsing an

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electronic commerce site, based on past and current customer behavior, including
purchase history, stated preferences and Internet browsing behavior.

In the fourth quarter of 1999, we began shipping Version 5.0 of Net
Perceptions for E-commerce, which includes the following enhanced features:

- Net Perceptions Personal Shopper. Net Perceptions Personal Shopper
provides a set of capabilities used to dynamically tailor recommendations
based on the shopping patterns of a customer at a given point in time.

- Net Perceptions Smart Merchant. Net Perceptions Smart Merchant allows
merchants to control the delivery of personalized recommendations to
better accomplish business objectives such as clearing overstock
situations, allocating selling opportunities to specific product
categories, or delivering unique buying opportunities to top customers.

- Net Perceptions Decision Support. Net Perceptions Decision Support is a
reporting and analysis module that allows retailers to evaluate the
effectiveness of their marketing strategies and adjust those strategies
as needed.

Net Perceptions for Call Centers. Net Perceptions for Call Centers allows
retailers that use call centers to recommend products to customers using real
time personalization. Net Perceptions for Call Centers can be used to create
product recommendations that take into account the context of the current call
while building on customers' past interactions with the call center, including
past purchases, customer inquiries and solicited preference information. We
believe that Net Perceptions for Call Centers is more powerful than a
traditional cross-sell table, because the recommendations are tailored to each
individual customer in real time.

Net Perceptions for Call Centers can be integrated with other call center
systems including:

- the inventory database, so only products with sufficient inventory levels
are recommended;

- the product database, so recommendations can be delivered with additional
information about the products; and

- the pricing database, so only products with certain margins or prices are
recommended.

In the fourth quarter of 1999, we introduced Net Perceptions for Call
Centers Version 2.0, which contains the Sales Coach feature. Sales Coach is
designed to improve a customer service representative's ability to effectively
cross-sell and up-sell by presenting product recommendations in a graphical
interface, complete with an image of the item being sold and a sample selling
script.

Net Perceptions for Marketing Campaigns. Net Perceptions for Marketing
Campaigns is designed to manage and personalize outbound promotional electronic
mail campaigns. It analyzes past customer responses to direct marketing
campaigns and purchase data to select a personalized set of products to target
to each set of customers, or to select a set of customers to target for a
particular product. The set of products can then be recommended to the customers
through promotional e-mail. Net Perceptions for Marketing Campaigns includes a
graphical user interface that allows a marketer to construct and manage
personalized e-mail campaigns. It includes reporting features that show the
effectiveness of each campaign. We believe that the ability of the
recommendation engine to better tailor message content to the recipient on a
one-to-one basis will yield higher response rates per mailing than other methods
currently employed.

GreenLight Ad. GreenLight Ad uses sophisticated analytical techniques to
help retailers maximize the return they receive from newspaper circular
advertising. Many retailers spend tens or even hundreds of millions of dollars
on this form of mass advertising. GreenLight Ad is designed to increase
advertising effectiveness by recommending which items should be advertised, how
much space should be allocated to each item, where each item should be placed
and at what price each
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<PAGE> 44

item should be offered. By analyzing the resulting item-level sales data across
the retail chain and contrasting it to a baseline reference point, GreenLight Ad
provides retailers with the empirical data they need to make better ad item
selection decisions and substantially improve the return on their advertising
investment.

GreenLight Go! GreenLight Go! provides on-line retailers with a detailed
assessment of how customers are shopping on their websites. It identifies
different buying patterns among visitors to a site, which products influence
which buyers, which products drive the most profitable visits, which items
create the greatest change in rate of sales and which external sites refer the
most profitable customers. We offer GreenLight Go! as an application service
provider so that our customers can gain access to this information with a
minimum of effort and at a lower price than purchasing software with equivalent
capabilities.

GreenLight RDS. GreenLight Retail Discovery Suite is a strategic reporting
and analysis solution that helps retailers understand customer purchase behavior
across all customer touch-points. GreenLight RDS is based on a scalable data
collection and analysis platform that is capable of performing powerful data
analysis in a timely fashion for the largest retail operations. Retailers use
the results provided by GreenLight RDS to understand the relationship between
their products, customers and promotional tactics at a variety of levels.
Examples of such relationships include: which products are purchased most often
by the most profitable customers, which products drive the most related item
sales and which promotions yield the most long-term customers.

Knowledge management solutions

Our current knowledge management offering is Net Perceptions for Knowledge
Management, which applies our real time personalization capabilities to
corporate intranets. Net Perceptions for Knowledge Management integrates with
existing information management systems -- such as search engines, document
management systems, Lotus Notes and the Web -- to track the everyday user
interactions on these systems. Using this interaction information, Net
Perceptions for Knowledge Management can automatically locate documents
containing relevant information for each user. It also enables employees to
locate other people with knowledge and interest in areas of specific interest.
Net Perceptions for Knowledge Management is designed to improve employee
productivity by reducing time spent searching for information, recreating
research already performed by others within the firm as well as creating better
cross-functional sharing of information driven by employees linking up with
others in different parts of the organization that possess relevant expertise.

Products for original equipment manufacturers

Net Perceptions Recommendation Engine. The Net Perceptions Recommendation
Engine is offered to companies interested in adding our real time
personalization capabilities to their existing applications. It offers real time
personalization capabilities similar to those that underlie our Net Perceptions
for E-commerce, Call Centers, Marketing Campaigns and Knowledge Management
offerings. We license the Net Perceptions Recommendation Engine separately to
original equipment manufacturers who may already have applications that overlap
with some of the capabilities in our offerings or who will apply the
functionality of the recommendation engine in markets for which we do not have
specific solutions. For example, customers have incorporated the Net Perceptions
Recommendation Engine into content-based applications, for helping customers
find the news and information in which they are most interested.

Knowledge Refinery. The Knowledge Refinery is the scalable data processing
and analysis engine that underlies our GreenLight family of products. It is
capable of collecting and transforming

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<PAGE> 45

large amounts of information into a format suitable for analysis. It also
contains a suite of analytical modules that create models to identify the
following information:

- frequent and significant customer purchase patterns;

- print advertising return on investment;

- customer value over time; and

- customer segments with similar spending patterns, item purchase patterns
and demographic or lifestyle characteristics.

SERVICES

Our professional services organization provides consulting services,
education and training and customer support. We believe that providing a high
level of customer service and technical support is critical to the satisfaction
of our customers and our own success. As of March 15, 2000, our professional
services staff consisted of 64 employees, including employees of KD One.

Professional services

We offer a variety of professional services that are delivered either by
our specialists or through one of our partners trained in the use and
implementation of our products. These services include project management,
in-depth application design and implementation. Fees for professional services
are typically charged separately from our software license fees. We believe
consulting services are strategically valuable to our customers because they
provide customers with a source of technical and personalization expertise to
support the timely and efficient implementation of our products.

Education and training

We offer several education and training programs to our customers. Training
classes are offered at our offices in Minneapolis, Minnesota; San Francisco,
California; New York, New York; Austin, Texas and Berkshire, United Kingdom. We
also provide training at our customers' facilities upon their request. Fees for
education and training services are typically charged separately from our
software license fees.

Customer support

We provide our customers with an array of support services, including
telephone support, Web-based support and updates to our products and
documentation. Our Web-based support is available 24 hours a day and provides
answers to frequently asked questions, technical advice and an area for
downloading product and documentation updates. We enter into maintenance and
support contracts separate from our product license agreements. Generally, fees
are approximately 15% of the license fees for the associated software product.
These contracts are renewable for an annual fee typically equivalent to 15% of
the current list price of the software licensed by the customer.

TECHNOLOGY

Real time recommendation engine

Our real time recommendation engine is the foundation of our real time
personalization solutions. Our platform is designed to integrate easily and
effectively with external systems, such as website, call center, marketing
campaign management retail and customer management software. Our

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<PAGE> 46

platform is designed to provide accurate customer recommendations and to exploit
the performance and scalability advantages of modern, multiple-processor, shared
memory computers.

The platform contains the recommendation engine, a database of customer
preferences and an application programmer's interface. The customer preference
database is a specially structured database in a commercial database management
system, such as the Microsoft SQL server, IBM DB2 or Oracle databases. Vertical
applications are built on the platform to leverage the technology investment.

The customer preference database stores customer preference data used by
the recommendation engine to produce recommendations. These data may include
customer purchasing behavior, statements of preference made by the customer and
demographic information about the customer. The preference database may also
contain information supplied by a marketer, such as groups of products the
marketer explicitly wants to be recommended together or products that are
substitutes for one another. The recommendation engine applies a series of
predictive algorithms to this data to produce recommendations in real time.

An application programmer's interface provides the link between the
recommendation engine and other applications and allows applications such as Web
servers and call center systems to "ask questions" of the recommendation engine,
which provides answers to enhance the interaction with customers.

The core predictive technology for our real time personalization is
collaborative filtering. Collaborative filtering compares selected attributes of
a customer's preferences, opinions and behavior to the attributes of large
customer populations. Groups of customers exhibiting attributes similar to the
specific customer are analyzed to determine the likely preferences of the
customer. The following figure illustrates the process of producing product
recommendations using collaborative filtering.

[Four part graphic depicting the process of producing product
recommendations using collaborative filtering. The first part is a photo of a
man's face with a caption underneath that reads "Information about the customer
is gathered." A large arrow points from the photo to part two, a photo of
numerous faces, with three of the faces separated from the group by an
encircling line. Underneath part two, the caption reads, "A "neighborhood" of
similar customers is identified." A large arrow points to part three. Part three
is a photo of the encircled three faces from part two, but without the
background of additional faces. The caption under part three reads, "The
"neighborhood" is analyzed." A large arrow leads from part three to part four, a
fuzzy photo of the three faces without the encircling line, with the text
"Recommendations", "A", "B" and "C" printed over the faces. The caption under
part four reads, "Recommendations based on the analysis of the neighborhood are
made."]

Collaborative filtering is driven by information about customer
preferences. This customer preference information is used to identify a group or
"neighborhood" of other customers who share preferences with the customer in
question. The collective preferences of the neighborhood are used to predict
unknown preferences of the customer in question, such as which products the
customer is most likely to purchase.

The Knowledge Refinery analytic engine

The Knowledge Refinery is an integrated application framework that provides
a foundation for advanced decision support capability for the retail
environment, and is the basis of our GreenLight family of products.

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<PAGE> 47

The Knowledge Refinery combines and integrates technology from the
following areas:

- machine learning and artificial intelligence;

- pattern detection and analysis;

- statistical and information theoretical analysis;

- relational on-line analytical processing;

- data modeling and simulation; and

- data warehousing.

The Knowledge Refinery is designed to be:

- scalable -- it can be applied to a wide range of data volumes, on
hardware and database platforms with varied capacity;

- platform-neutral -- it can be deployed on a wide variety of platforms
independent of processor characteristics, database characteristics or
distribution characteristics; and

- highly flexible -- it incorporates a metadata component that contains an
extensible logical application data model, definitions of process and
workflow, business rules and application logic.

The Knowledge Refinery is based on a data-flow, pattern-oriented
architecture. The "data-flow" model allows for straight-forward parallel and
distributed operation of the Knowledge Refinery. The pattern-oriented model
provides a high degree of modularity, flexibility and configurability. The
Knowledge Refinery components are based on neural networks, pattern detection
algorithms and supporting modeling techniques.

STRATEGIC ALLIANCES

We are pursuing marketing, implementation and indirect sales channel
alliances with electronic commerce software vendors, call center software
vendors, point-of-sale system software vendors, outbound e-mail service
providers, systems integrators, professional services organizations and
application service providers. These alliances are intended to increase our
geographic sales coverage worldwide and address new markets. In addition, these
alliances allow us to provide our customers with access to additional resources
to design, install and customize our solutions. As of December 31, 1999, most of
these alliances were in an early phase of development. Since inception through
December 31, 1999, sales to resellers, systems integrators and original
equipment manufacturers accounted for approximately 10% of our total revenues.

As part of our strategy, we have formed marketing and distribution
alliances with certain Internet software vendors. For example, we have entered
into an original equipment manufacturer relationship with Vignette Corporation.
Vignette is a provider of Internet relationship management software products and
services. In addition, we have entered into reseller agreements with, among
others, IBM, Broadvision and Commercialware. These relationships enable us to
broaden the distribution of our products and provide complementary functionality
to our applications. In July 1999, we entered into a joint venture with Trans
Cosmos, NTT Software and Toyo Information Systems to form Net Perceptions Japan.
Net Perceptions Japan will serve as our exclusive distribution channel for our
Japanese language product offerings in the Japanese marketplace.

We have also entered into joint marketing relationships with, among others,
Oracle, net.Genesis and Verbind. Under these joint marketing arrangements, each
party agrees to provide the other with reasonable marketing and sales
assistance. In some cases, these agreements also provide for

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<PAGE> 48

compensation for lead referrals. Our marketing and distribution alliances are
not exclusive and some of our partners provide similar products and services to
other companies. In addition, we have entered into interface agreements with
various software vendors in markets we currently serve and in markets where we
do not have a current application. Under these interface agreements, the parties
agree to develop and support the integration of our software offerings into our
partners' software offering.

During 1999, we also entered into an agreement with IBM to port certain of
our products to AIX and DB2 and we recently entered into an agreement with
Hewlett Packard to port the Net Perceptions Recommendation Engine to HP UX. We
also intend to expand the professional services offered to our customers by
enhancing existing, and developing new, relationships with systems integrators
and professional service organizations.

CUSTOMERS

As of March 15, 2000, we had licensed products to more than 170 customers,
including customers of KD One. These customers are in various stages of
deployment of our products. The following is a representative list of our
customers that accounted for at least $100,000 in revenues to us during the
period from our inception to March 15, 2000.

<TABLE>
<S> <C> <C>
BOOKS/MOVIES/MUSIC GENERAL RETAIL SPECIALTY RETAIL
BarnesandNoble.com Eckerd
Bertelsmann Fingerhut Art.com
BMG Online Great Universal Stores Ashford.com
CDNOW Hudson's Bay Company eToys.com
Christian Book Distributors imall.com Furniture.com
ClickRadio J.C. Penney Garden.com
DVD Express LetsBuyIt.com KBkids.com
Follett Higher Education Netmarket Group Lowe's
Group Rite Aid Mattel
HMV Media Group Skymall OurHouse
Launch Media Value America SelfCare
Musician's Friend Walgreens The Children's Place
Tower Records tpuppy.com
Trans World Entertainment GROCERIES/FOOD ZoneNetwork.com
Virgin Online Megastore
AllRecipes.com OTHER
COMPUTERS/ELECTRONICS Dean & Deluca
HomeGrocer ACS Systems
800.com Kraft Foods Bid.com
Egghead.com Pink Dot Carlson Companies
Electronic Boutique Wine.com Libro AG
Micron Electronics miClub.com
Programmer's Paradise.com MPC Limited
ShopNow.com National Computer Board
ZoneTrader.com Procter & Gamble
Publisher's Clearing House
Thompson Direct
</TABLE>

SALES AND MARKETING

We market our software and services through our direct sales organization
and through indirect distribution channels, including resellers, systems
integrators and original equipment manufacturers.

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<PAGE> 49

We have sales offices in Minneapolis, Minnesota; San Francisco, California; New
York, New York; Austin, Texas and Berkshire, United Kingdom.

As of March 15, 2000, our direct sales organization, including KD One
employees, had 63 sales representatives, managers, pre-sales engineers,
telemarketing and support personnel. We intend to increase our North American
sales force as demand requires by opening additional field sales offices. We
recently established a sales force dedicated to the development of the indirect
sales channel for our products. As of March 15, 2000, our indirect sales
organization consisted of ten employees. Additionally, we intend to expand our
presence in international markets by continuing to build our international sales
force. We believe that this will be necessary in order to grow our revenues. We
have started to localize some of our products for sale into the Japanese market
and we may need to localize our products in other markets. However, we have
limited experience in developing localized versions of our products and
marketing and distributing our products internationally. We may not be
successful in international markets.

Our sales organization is complemented by distribution partners, including
resellers, systems integrators and original equipment manufacturers. These
partners license our products at a discount for re-licensing and may provide
training, support and customer service to end users. In 1999, our distribution
partners were responsible for 12% of our product revenues. We anticipate that
the percentage of our total revenues derived from indirect sales will increase
in the future. We expect that a significant increase in our indirect sales as a
percentage of revenues will adversely affect our average selling prices and
gross margins due to the lower unit prices that we receive when selling through
indirect channels. In addition, we expect that indirect sales will generate less
services revenues than direct sales because our partners generally provide
support services to their customers.

As of March 15, 2000, our marketing organization consisted of 20 employees,
including KD One employees, primarily engaged in marketing research, producing
marketing materials, product planning and management, managing press coverage
and other public relations, identifying potential customers, attending and
exhibiting at trade shows, seminars and conferences, creating presentations and
sales tools, establishing and maintaining close relationships with industry
analysts and maintaining our website. In addition, we rely on various outside
consultants to supplement our marketing organization for various public
relations and market research requirements.

RESEARCH AND DEVELOPMENT

Our research and development organization is responsible for product
architecture, core technology, product testing and quality assurance, writing
product documentation and expanding the ability of our products to operate with
the leading hardware platforms, operating systems, database management systems
and industry platforms. In addition, this organization supports some pre-sale
and customer support activities. Our research and development organization is
divided into teams consisting of development engineers, quality assurance
engineers and technical writers.

As of March 15, 2000, our research and development staff consisted of 116
employees, including KD One employees. Our total expenses for research and
development, not including those of KD One, were $1.4 million in 1997, $2.3
million in 1998 and $8.2 million in 1999. We believe that research and
development expenses will continue to increase in the future. To date, our
development efforts have not resulted in any capitalized software development
costs.

We believe that our future performance will depend in large part on our
ability to maintain and enhance our current product line; develop new products
that achieve market acceptance; maintain technological competitiveness; and meet
an expanding range of customer requirements.

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COMPETITION

In the marketing of Net Perceptions for Marketing Campaigns, we primarily
encounter competition from Exchange Applications, Annuncio Software, Prime
Response and Rubric, which was recently acquired by Broadbase. We expect that if
we are successful in our strategy to leverage our technology into new vertical
markets, we will encounter many additional, market-specific competitors. For
example, RightPoint Software, recently acquired by E.piphany, is an established
firm serving call centers that we expect to increasingly encounter in the
marketing of Net Perceptions for Call Centers. In addition, because there are
relatively low barriers to entry in the software market, we expect additional
competition from other established and emerging companies as the Internet
software market continues to develop and expand. We also expect increasing
competition from network-based providers of personalization technology such as
TriVida, which was recently acquired by Be Free, and Cogit.

In the marketing of our GreenLight RDS product, we primarily encounter
competition from Brio, Seagate, Comshare, IBM and SAS.

In the marketing of our Knowledge Management product, we primarily
encounter competition from Orbital Software and Tacit Knowledge Systems.

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

INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS

We are a technology company. Our success depends in large part on
protecting our intellectual property, which is our most important asset. We rely
on a combination of trademark, copyright, patent and trade secret laws to
protect our rights in our technology. We license our software and

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<PAGE> 51

require our customers to enter into license agreements, which impose
restrictions on our customers' ability to utilize the software. In addition, we
seek to avoid disclosure of our trade secrets, including but not limited to
requiring those persons with access to our proprietary information to execute
confidentiality agreements with us and restricting access to the source code for
our software.

As of March 15, 2000, we had 13 pending United States patent applications.
We also have license rights to two issued United States patents and one allowed
United States patent application from the University of Minnesota. We have four
pending foreign patent applications, but we have no issued foreign patents. It
is possible that no patents will issue from the currently pending patent
applications. It is also possible that our current patents or potential future
patents may be found invalid or unenforceable, or otherwise be successfully
challenged. It is also possible that any patent issued to us may not provide us
with any competitive advantages. Moreover, we may not develop future proprietary
products or technologies that are patentable, and the patents of others may
seriously limit our ability to conduct our business. In this regard, we have not
performed any comprehensive analysis of patents of others that may limit our
ability to conduct our business.

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

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

EMPLOYEES

As of March 15, 2000, including KD One employees, we had a total of 328
employees, including 99 in sales and marketing, 116 in research and development,
64 in customer support and 49 in administration. All of these employees were
located in North America, with the exception of 12 employees, 11 of whom were
located in Europe and one of whom was located in Asia. None of our employees is
represented by a collective bargaining agreement, nor have we experienced any
work stoppage. We consider our relations with our employees to be good.

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FACILITIES

The following table sets forth certain information about our principal
executive offices, as well as our other facilities. We lease all of our existing
facilities. We believe that our existing facilities are adequate for our current
needs and that suitable additional or alternative space will be available in the
future on commercially reasonable terms. We are in the process of negotiating a
new lease for 110,000 square feet to replace our existing facilities in
Minneapolis, which we currently expect to begin in July 2000.

<TABLE>
<CAPTION>
LOCATION SQUARE FOOTAGE LEASE EXPIRATION DATE
-------- -------------- ---------------------
<S> <C> <C>
Minneapolis, Minnesota
Principal office............................. 28,000 December 2003
Administrative facility...................... 9,000 September 2001
Austin, Texas.................................. 14,000 January 2004
Richardson, Texas.............................. 2,000 February 2001
New York, New York............................. 6,500 September 2006
San Francisco, California...................... 5,000 August 2004
Berkshire, United Kingdom...................... 8,000 March 2010
</TABLE>

LEGAL PROCEEDINGS

We are not currently a party to any material legal proceedings.

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MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth our executive officers and directors, and
their ages as of March 15, 2000:

<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Steven J. Snyder..................... 45 President, Chief Executive Officer and Director
Nanci Anderson....................... 43 Vice President of Customer Solutions
Paul Bieganski....................... 36 Chief Technical Officer
Thomas M. Donnelly................... 36 Senior Vice President of Finance and Administration,
Chief Financial Officer and Secretary
P. Stephen Larsen.................... 49 Senior Vice President of Marketing and Business
Development
Bradley N. Miller.................... 35 Vice President of Product Development
George E. Moser...................... 44 Senior Vice President of Worldwide Sales
John T. Riedl........................ 38 Director and Chief Scientist
Douglas J. Burgum.................... 43 Director
Ann L. Winblad....................... 49 Director
William Lansing...................... 41 Director
</TABLE>

Steven J. Snyder co-founded Net Perceptions in July 1996 and since that
time has served as our President and Chief Executive Officer and as a director.
From January 1996 to July 1996, Dr. Snyder served as an independent consultant.
From July 1993 to December 1995, Dr. Snyder served as Vice President of Software
Development at Personnel Decisions International, Inc., a human resources
consulting firm. Dr. Snyder pursued his doctorate in psychology from 1988 to
1994. From 1983 to 1988, Dr. Snyder was employed by Microsoft Corporation, a
software company, where he held several posts including IBM Account Manager and
General Manager of the Language Business Unit. Dr. Snyder holds a B.S. in
mathematics from Drexel University, an M.B.A. from Harvard University and an
M.A. and a Ph.D. in psychology from the University of Minnesota.

Nanci Anderson joined Net Perceptions in September 1998 as our General
Manager of Customer Solutions, and in March 1999 was promoted to Vice President
of Customer Solutions. From February 1998 to September 1998, Ms. Anderson was
Technology Services Practice Director for Oracle Corporation, a software
company. From December 1996 to February 1998, Ms. Anderson was Chief Operating
Officer for KeyTech, LLC, a software development firm specializing in
object-oriented and Internet application development services. From April 1995
to December 1996, Ms. Anderson was Area Services Director for Lawson Software
Corporation, a software company.

Paul Bieganski joined Net Perceptions in August 1997 as our Director of
Algorithm Development, and in November 1998 became our Chief Technical Officer.
From September 1995 to August 1997, Dr. Bieganski was the Vice President of
Research and Development at Signum Systems, a manufacturer of embedded systems
software and hardware development tools. Dr. Bieganski holds a B.S., an M.S. and
a Ph.D. in computer science from the University of Minnesota.

Thomas M. Donnelly joined Net Perceptions in March 1997 as our Corporate
Controller, and in March 1998 became our Chief Financial Officer. In February
1999, Mr. Donnelly was appointed Secretary. In July 1999, Mr. Donnelly also
became Senior Vice President of Finance and Administration. From March 1995 to
March 1997, Mr. Donnelly served as a financial and management consultant in the
capacity of chief financial officer or corporate controller for various public
and private companies and partnerships, including Net Perceptions from September
1996 to March 1997. Mr. Donnelly holds a B.A. in economics from St. Olaf
College.

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<PAGE> 54

P. Stephen Larsen joined Net Perceptions in June 1997 as our Vice President
of Marketing and Business Development. In July 1999, Mr. Larsen became Senior
Vice President of Marketing. From August 1996 to June 1997, Mr. Larsen served as
Vice President of Business Development for CitySearch, Inc., a community-based
information service. From July 1995 to August 1996, Mr. Larsen was President and
Managing Partner of Digital Dynamics, a consulting company. Mr. Larsen holds an
A.A. from Rochester State College.

Bradley N. Miller co-founded Net Perceptions in July 1996 and since that
time has served as our Vice President of Product Development. From September
1992 to July 1996, Mr. Miller was a Ph.D. candidate in Computer Science at the
University of Minnesota. Mr. Miller holds a B.A. in physics and computer science
from Luther College and an M.S. in computer science from the University of
Minnesota.

George E. Moser joined Net Perceptions in January 1997 as our Regional
Director of Sales, East Region. In September 1997, Mr. Moser was appointed Vice
President of Worldwide Sales and in July 1999, Mr. Moser became Senior Vice
President of Worldwide Sales. From March 1993 to December 1996, Mr. Moser was
the Director, East Region for Autodesk, Inc., a software company. Mr. Moser
holds a B.S. in management and an M.B.A. from the University of Hartford.

John T. Riedl co-founded Net Perceptions in July 1996 and since such time
has served as a director. In November 1998, Dr. Riedl became our Chief
Scientist. Since September 1998, Dr. Riedl has worked with us on a part-time
basis. From July 1996 until November 1998, Dr. Riedl served as our Chief
Technical Officer. Dr. Riedl has been a professor in the computer science
department at the University of Minnesota since March 1990. Dr. Riedl holds a
B.S. in mathematics from the University of Notre Dame and an M.S. and a Ph.D. in
computer science from Purdue University.

Douglas J. Burgum became a director of Net Perceptions in January 1999. Mr.
Burgum has served as President of Great Plains Software, Inc., a software
company, since March 1984, Chief Executive Officer since September 1991 and
Chairman of the Board since January 1996. Mr. Burgum holds a B.U.S. from North
Dakota State University and an M.B.A. from Stanford University.

Ann L. Winblad became a director of Net Perceptions in August 1996. Ms.
Winblad has been a General Partner of Hummer Winblad Venture Partners, a venture
capital investment firm, since 1989. Ms. Winblad is also a director of The Knot,
Inc. and Liquid Audio, Inc. Ms. Winblad holds a B.A. in mathematics and business
administration from the College of Saint Catherine and an M.A. in education with
an economics focus from the University of St. Thomas.

William Lansing became a director of Net Perceptions in May 1999. Mr.
Lansing was hired as President of Fingerhut Companies, Inc. in May 1998 and
became Chief Executive Officer in May 1999. From November 1996 to May 1998, Mr.
Lansing served as a Vice President for Business Development of General Electric
Corp. From January 1996 to October 1996, he served as Chief Operating Officer of
Prodigy. Mr. Lansing also serves as a director of Digital River, Inc., Select
Comfort Corp., FreeShop.com, Inc. and BigStar Entertainment, Inc. Mr. Lansing
holds a B.A. in English from Wesleyan University and a J.D. from Georgetown
University. Mr. Lansing has announced that he will resign from Fingerhut
effective April 1, 2000.

We currently have five directors. Each director holds office until the next
annual meeting of stockholders or until a successor is duly elected and
qualified. The officers serve at the discretion of the board of directors. There
are no family relationships among our directors and officers.

BOARD COMMITTEES

The audit committee consists of Messrs. Burgum and Lansing and Ms. Winblad.
The audit committee makes recommendations to the board of directors regarding
the selection of independent

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accountants, reviews the results and scope of audit and other services provided
by our independent accountants and reviews and evaluates our audit and control
functions.

The compensation committee consists of Messrs. Lansing and Burgum and Ms.
Winblad. The compensation committee makes recommendations regarding our stock
plans and makes decisions concerning salaries and incentive compensation for our
employees.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

None of the members of the compensation committee is currently or has been,
at any time since our formation, one of our officers or employees. No member of
our compensation committee serves as a member of the board of directors or
compensation committee of any entity that has one or more executive officers
serving as a member of our board of directors or compensation committee.

DIRECTOR COMPENSATION

We do not currently provide our directors with cash compensation for their
services as members of the board of directors, although members are reimbursed
for some expenses in connection with attendance at board and committee meetings.
Directors who are also our employees are eligible to participate in our 1999
Equity Incentive Plan. Non-employee directors are eligible for periodic option
grants under our 1999 Non-Employee Director Option Plan.

In January 1999, Mr. Burgum received an option to purchase 30,000 shares of
common stock at an exercise price of $5.50 per share. This option is immediately
exercisable. The shares purchasable thereunder are subject to repurchase by us
at the original exercise price paid per share upon the optionee's cessation of
service prior to vesting in such shares. The repurchase right lapses as to the
option shares in a series of 24 equal monthly installments from the grant date,
but will become fully vested if the board deems it desirable to avoid adverse
accounting treatment with respect to the option. In May 1999, Mr. Lansing
received an option to purchase 20,000 shares of common stock at an exercise
price of $17.00 per share. This option vests in equal installments over a 24
month period from the grant date, but vesting will accelerate to the extent the
board deems it necessary to avoid adverse accounting treatment for those
options.

54
<PAGE> 56

EXECUTIVE COMPENSATION

Summary compensation table

The following table sets forth information with respect to compensation we
paid in 1998 and 1999 for services to us by our chief executive officer and our
four other highest-paid executive officers whose total salary and bonus for 1999
exceeded $100,000. We refer to these officers as our named executive officers in
other parts of this prospectus.

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
NUMBER OF
ANNUAL SHARES OF
COMPENSATION COMMON STOCK
-------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS COMPENSATION($)
--------------------------- ---- --------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Steven J. Snyder.................................... 1999 150,000 40,000 -- --
President and Chief Executive Officer 1998 130,000 10,000 --
P. Stephen Larsen................................... 1999 175,000 25,000 -- --
Senior Vice President of Marketing 1998 175,000 23,500 140,000
Nanci Andersen...................................... 1999 130,000 21,850 30,000 --
Vice President of Customer Solutions 1998 36,500 -- 40,000
Thomas M. Donnelly.................................. 1999 125,000 40,000 40,000 --
Senior Vice President of Finance and 1998 94,833 10,000 96,000
Administration and Chief Financial Officer
George E. Moser..................................... 1999 125,000 133,600(1) 10,000 --
Senior Vice President of Worldwide Sales 1998 122,500 82,500(2) 140,000 50,000(3)
</TABLE>

- -------------------------
(1) Includes commissions of $113,600.

(2) Includes commissions of $72,500.

(3) Represents relocation expenses.

55
<PAGE> 57

Option grants in last year

The following table sets forth each grant of stock options in 1999 to each
of the named executive officers. We did not grant any stock appreciation rights
during 1999. The exercise price of each option is equal to the fair market value
of our common stock on the date that the grant was approved by the compensation
committee of our board of directors.

The potential realizable values are net of the exercise prices and before
taxes associated with the exercise, and are based on the assumption that our
common stock appreciates at the annual rate shown from the date of the grant
until the expiration of the ten-year option term. These numbers are calculated
based on the rules of the Securities and Exchange Commission and do not
represent our estimate or projection of future common stock prices. The amounts
reflected in the table may not necessarily be achieved. The actual amount the
executive officer may realize will depend upon the extent to which the stock
price exceeds the exercise price of the options on the date the option is
exercised.

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------
PERCENT OF POTENTIAL REALIZABLE VALUE
NUMBER OF TOTAL AT ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION --------------------------
NAME GRANTED(#/SH)(1) 1999(%)(2) SHARE($) DATE 5%($) 10%($)
---- ---------------- ------------ --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Steven J. Snyder...... -- -- -- -- -- --
P. Stephen Larsen..... -- -- -- -- -- --
Nanci Andersen........ 10,000 0.66 5.50 1/26/09 34,589 87,656
20,000 1.33 14.00 4/21/09 176,091 446,248
Thomas M. Donnelly.... 20,000 1.33 5.50 1/26/09 69,178 175,312
16,306 1.08 15.94 7/30/09 163,435 414,177
3,694 0.25 15.94 7/30/09 37,025 93,829
George E. Moser....... 10,000 0.66 15.94 7/30/09 100,230 254,003
</TABLE>

- -------------------------
(1) Options granted under our 1996 Stock Plan are immediately exercisable for
all the option shares, but any shares purchased under those options will be
subject to repurchase by us at the original exercise price paid per share,
upon the optionee's cessation of service, prior to the vesting in those
shares. Options granted under our 1999 Equity Incentive Plan may be
exercised only when, and to the extent, vested. Each of the options has a 10
year term, subject to earlier termination in the event of the optionee's
cessation of service.

(2) Based on an aggregate of 897,936 options granted to our employees under the
1996 Stock Plan and 607,050 options granted to our employees under the 1999
Equity Incentive Plan during the year ended December 31, 1999.

56
<PAGE> 58

Fiscal year-end option values

The following table provides information concerning the number and value of
the shares of common stock underlying unexercised options held by each of the
named executive officers as of December 31, 1999. None of the named executive
officers exercised any options in 1999.

<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1999(#)(1) DECEMBER 31, 1999($)(2)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Steven J. Snyder........................ -- -- -- --
P. Stephen Larsen....................... 50,416 89,584 2,095,389 3,714,611
Nanci Andersen.......................... 18,124 51,876 689,758 1,876,242
Thomas M. Donnelly...................... 43,457 92,543 1,747,679 3,481,471
George E. Moser......................... 81,873 118,127 3,401,711 4,787,664
</TABLE>

(2) The value of unexercised in-the-money options held at December 31, 1999
represents the total gain which would be realized if all of the in-the-money
options held at December 31, 1999 were exercised, and is determined by
multiplying the number of shares of common stock underlying the options by
the difference between $42.00, which was the closing price per share of our
common stock on the Nasdaq National Market on December 31, 1999, and the
applicable per share option exercise price. An option is in-the-money if the
fair market value of the underlying shares exceeds the exercise price of the
option.

CHANGE OF CONTROL ARRANGEMENTS/EMPLOYMENT AGREEMENTS

The compensation committee of the board of directors, as administrator of
the 1999 Equity Incentive Plan, can provide for accelerated vesting of the
shares of common stock subject to outstanding options held by any of our
employees or directors in connection with certain changes in control of Net
Perceptions. The accelerated vesting may be conditioned on the termination of
the individual's employment following the change in control event.

Some of our officers and employees, including all of our executive
officers, are eligible to participate in our Change in Control Severance Plan.
Under the Change in Control Severance Plan, if an officer's employment is
involuntarily terminated within 18 months after a change in control or the
officer declines a position with the acquirer in a change in control, we will
pay the officer severance benefits equal to six months of base salary.

1999 EQUITY INCENTIVE PLAN

The 1999 Equity Incentive Plan was adopted by the board of directors on
February 4, 1999 and our stockholders approved the adoption of the plan. We
initially reserved 800,000 shares of common stock for issuance under the 1999
Equity Incentive Plan, subject to automatic adjustment as described below. Upon
the closing of our initial public offering in April 1999, the 1999 Equity
Incentive Plan replaced our 1996 Stock Plan. Any shares that were not issued at
that time under our 1996 Stock Plan are available for grant under the 1999
Equity Incentive Plan, but no additional shares or options will be issued under
our 1996 Stock Plan. As of January 1 of each year,
57
<PAGE> 59

commencing with the year 2000 and ending with the year 2002, the number of
shares reserved for issuance under the 1999 Equity Incentive Plan will be
increased automatically by 5% of the total number of shares of common stock then
outstanding or, if less, by 1,500,000 shares. Employees, non-employee members of
the board of directors and consultants are eligible for awards under the 1999
Equity Incentive Plan. The types of awards that may be made under the 1999
Equity Incentive Plan are options to purchase shares of common stock, stock
appreciation rights, restricted shares and stock units. Options may be incentive
stock options that qualify for favorable tax treatment for the optionee under
Section 422 of the Internal Revenue Code of 1986 or nonstatutory stock options
not designed to qualify for such favorable tax treatment. With limited
restrictions, if shares awarded under the 1999 Equity Incentive Plan or the 1996
Stock Plan are forfeited, then those shares will again become available for new
awards under the 1999 Equity Incentive Plan.

Outstanding options under the 1996 Stock Plan were incorporated into the
1999 Equity Incentive Plan at the time of our initial public offering. The
incorporated options continue to be governed by their existing terms, unless the
committee elects to extend one or more features of the 1999 Equity Incentive
Plan to those options or to other outstanding shares. The committee has elected
to extend the change in control acceleration feature of the 1999 Equity
Incentive Plan to all outstanding options and unvested shares. Previously,
options granted under the 1996 Stock Plan provided that the shares would
accelerate upon an acquisition only if not assumed by the acquiring entity. The
outstanding options under the 1996 Stock Plan contain substantially the same
terms and conditions as specified below for options granted under the 1999
Equity Incentive Plan.

The compensation committee of our board of directors administers the 1999
Equity Incentive Plan. The committee has complete discretion to make all
decisions relating to the interpretation and operation of the 1999 Equity
Incentive Plan, including the discretion to determine which eligible individuals
are to receive any award, and to determine the type, number, vesting
requirements and other features and conditions of each award.

The exercise price for incentive stock options granted under the 1999
Equity Incentive Plan may not be less than 100% of the fair market value of the
common stock on the option grant date. The exercise price for non-qualified
options granted under the 1999 Equity Incentive Plan may not be less than 85% of
the fair market value of the common stock on the option grant date. The exercise
price may be paid in cash or in outstanding shares of common stock that have
been held for more than six months or purchased on the open market. The exercise
price may also be paid by using a cashless exercise method with a securities
broker, a pledge of shares to a securities broker or a full-recourse promissory
note. The purchase price for newly issued restricted shares awarded under the
1999 Equity Incentive Plan may be paid in cash, by promissory note or by the
rendering of past or future services.

The committee may reprice options and may modify, extend or assume
outstanding options and stock appreciation rights. The committee may accept the
cancellation of outstanding options or stock appreciation rights in return for
the grant of new options or stock appreciation rights. The new option or right
may have the same or a different number of shares and the same or a different
exercise price.

Upon certain defined events causing a change in control of Net Perceptions,
an option or other award under the 1999 Equity Incentive Plan will become fully
exercisable or fully vested if the option or award is not assumed by the
surviving corporation or its parent or if the surviving corporation or its
parent does not substitute another award on substantially the same terms. 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
change in control. A change in control includes:

- a merger or consolidation after which our then current stockholders own
less than 50% of the surviving corporation;

- a sale of all or substantially all of our assets;

58
<PAGE> 60

- a proxy contest that results in replacement of more than one-third of the
directors over a 24-month period; or

- an acquisition of 50% or more of our outstanding stock by a person other
than by a person related to us, such as a corporation owned by our
stockholders.

In the event of a merger or other reorganization, the agreement of merger
or reorganization may provide that outstanding options and other awards under
the 1999 Equity Incentive Plan shall be assumed by the surviving corporation or
its parent, shall be continued by us if we are a surviving corporation, shall
have accelerated vesting and then expire early or shall be cancelled for a cash
payment.

The board of directors may amend or terminate the 1999 Equity Incentive
Plan at any time. If the board of directors amends the plan, stockholder
approval of the amendment will be sought only if required by an applicable law.
The 1999 Equity Incentive Plan will continue in effect indefinitely unless the
board of directors decides to terminate the plan.

As of December 31, 1999, options to purchase 2,528,766 shares of common
stock, at a weighted average exercise price of $7.97 per share, were outstanding
under our 1996 Stock Plan and 1999 Equity Incentive Plan.

THE KD ONE 1996 STOCK OPTION/STOCK ISSUANCE PLAN

In connection with our acquisition of KD One, we assumed all outstanding
options granted under the KD One 1996 Stock Option/Stock Issuance Plan. The KD
One 1996 Stock Option/Stock Issuance Plan provided for the grant of incentive
stock options and non-statutory stock options to employees, consultants and
non-employee directors of KD One. We have reserved 268,297 shares of common
stock for issuance upon the exercise of these assumed options. The KD One 1996
Stock Option/Stock Issuance Plan contains provisions that provide for
accelerated vesting of options in certain circumstances. These acceleration
provisions will continue to govern the options that we assumed in the KD One
acquisition. We will not grant any additional options under the KD One 1996
Stock Option/Stock Issuance Plan.

EMPLOYEE STOCK PURCHASE PLAN

The board of directors adopted our Employee Stock Purchase Plan on February
4, 1999, and our stockholders have approved the adoption of the plan. We
initially reserved 1,000,000 shares of common stock for issuance under the
Employee Stock Purchase Plan. As of January 1 each year, the number of shares
reserved for issuance under the Employee Stock Purchase Plan will be increased
automatically by 2% of the total number of shares of common stock outstanding
or, if less, 600,000 shares. The Employee Stock Purchase Plan is intended to
qualify under Section 423 of the Internal Revenue Code. Two offering periods,
each with a duration of six months, will commence on May 1 and November 1 each
calendar year. However, the first offering period commenced on April 22, 1999,
the effective date of the registration statement filed in connection with our
initial public offering, and ended on October 31, 1999. Purchases of common
stock will occur on April 30 and October 31 each calendar year. The Employee
Stock Purchase Plan is administered by the compensation committee of the board
of directors. Each of our employees is eligible to participate if he or she is
employed by us for at least 20 hours per week and for more than five months per
year.

The Employee Stock Purchase Plan permits each eligible employee to purchase
common stock through payroll deductions. Each employee's payroll deductions may
not exceed 15% of the employee's cash compensation. No more than 4,000 shares
may be purchased on any purchase date. The price of each share of common stock
purchased under the Employee Stock Purchase Plan will be 85% of the lower of the
fair market value per share of common stock on the date immediately

59
<PAGE> 61

before the first date of the applicable offering period or the fair market value
per share of common stock on the purchase date. In the case of the first
offering period, the price per share under the plan was $14.00, which was the
per share public offering price for the common stock in our initial public
offering. Employees may end their participation in the Employee Stock Purchase
Plan at any time. Participation ends automatically upon termination of
employment with us.

In the event of a change in control of Net Perceptions, the Employee Stock
Purchase Plan will end and shares will be purchased with the payroll deductions
accumulated to date by participating employees. The board of directors may amend
or terminate the Employee Stock Purchase Plan at any time. If the board of
directors increases the number of shares of common stock reserved for issuance
under the Employee Stock Purchase Plan, it must seek the approval of our
stockholders.

1999 NON-EMPLOYEE DIRECTOR OPTION PLAN

Our 1999 Non-Employee Director Option Plan was adopted by the board of
directors on February 4, 1999, and our stockholders approved the adoption of the
plan. Under the 1999 Non-Employee Director Option Plan, non-employee members of
the board of directors are eligible for automatic option grants. A maximum of
500,000 shares of common stock has been authorized for issuance under the 1999
Non-Employee Director Option Plan.

The compensation committee of the board of directors makes any
administrative determinations under the 1999 Non-Employee Director Option Plan.

The exercise price for options granted under the 1999 Non-Employee Director
Option Plan may be paid in cash or in outstanding shares of common stock that
have been held for more than six months or purchased on the open market. Options
may also be exercised using a cashless exercise method with a securities broker.

We will grant each individual who first joins the board of directors as a
non-employee director an option for 20,000 shares of common stock under the 1999
Non-Employee Director Option Plan. Each 20,000-share option will vest over 24
months from the grant date, but vesting will accelerate to the extent the board
deems it necessary to avoid adverse accounting treatment for these options. At
each annual stockholders meeting, beginning in 2000, each non-employee director
will automatically be granted at that meeting, whether or not he or she is
standing for re-election at that particular meeting, a stock option to purchase
10,000 shares of common stock. Each 10,000-share option will become exercisable
for 100% of the shares at grant. Each option will have an exercise price equal
to the fair market value of the common stock on the automatic grant date. Each
option will have a maximum term of 10 years, but will terminate earlier if the
optionee ceases to be a member of the board of directors. Each option will fully
vest automatically upon a change in control.

The board of directors may amend or modify the 1999 Non-Employee Director
Option Plan at any time. The 1999 Non-Employee Director Option Plan will
terminate on February 3, 2009, unless the board of directors decides to
terminate the plan sooner.

As of December 31, 1999, options to purchase 20,000 shares of common stock,
at an exercise price of $17.00 per share, were outstanding under our 1999
Non-Employee Director Option Plan.

60
<PAGE> 62

CERTAIN TRANSACTIONS

Since January 1, 1997, we have issued and sold preferred stock to the
following persons or entities that are our principal stockholders or directors.

<TABLE>
<CAPTION>
SHARES OF
SERIES C
STOCKHOLDER PREFERRED STOCK
----------- ---------------
<S> <C>
Entities affiliated with Hummer Winblad Venture Partners.... 407,168
London Pacific Life & Annuity Company....................... 2,605,864
</TABLE>

Shares held by all affiliated persons and entities have been aggregated.
For more detail on the shares held by each of these purchasers, please refer to
the information in this prospectus under the heading "Principal and Selling
Stockholders." The per share purchase price for the Series C preferred stock was
$1.535. Ann L. Winblad, one of our directors, is an affiliate of each of the
entities affiliated with Hummer Winblad Venture Partners.

We also have granted options to some of our directors and executive
officers. Please refer to the information under the headings
"Management -- Option grants in last year" and "Principal and Selling
Stockholders."

In addition, William Lansing, one of our directors, is the President, Chief
Executive Officer and a director of Fingerhut Companies, Inc., which is one of
our customers. Revenues attributable to sales to Fingerhut between January 1,
1997 and December 31, 1999 totaled approximately $1.4 million.

We have entered into an indemnification agreement with each of our officers
and directors.

We believe that we have executed all of the transactions set forth above on
terms no less favorable to us than could have been obtained from unaffiliated
third parties. It is our intention to ensure that all future transactions,
including loans, between us and our officers, directors, principal stockholders
and their affiliates, are approved by a majority of the board of directors,
including a majority of the independent and disinterested outside directors on
the board of directors, and are on terms no less favorable to us than those that
we could obtain from unaffiliated third parties.

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<PAGE> 63

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth information regarding the beneficial
ownership of our common stock as of March 15, 2000, and as adjusted to reflect
the sale of shares in this offering by:

- each person who is known by us to beneficially own more than five percent
of the outstanding shares of our common stock;

- each of our directors and each named executive officer;

- all of our current directors and executive officers as a group; and

- all stockholders who are selling shares of our common stock in this
offering.

This information is based upon information received from or on behalf of
the individuals named herein.

Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. Except as indicated in the footnotes to this
table, we believe that each person or entity named in the table has sole voting
and investment power with respect to all shares of common stock shown as
beneficially owned by them, subject to applicable community property laws. The
percentage of beneficial ownership set forth below is based upon 24,090,513
shares of common stock outstanding as of March 15, 2000 and 26,090,513 shares of
common stock outstanding after the completion of this offering, assuming no
exercise of the underwriters' over-allotment option. In computing the number of
shares of common stock beneficially owned by a person and the percentage
ownership of that person, shares of common stock that are subject to options
held by that person that are currently exercisable or exercisable within 60 days
of March 15, 2000, are deemed outstanding. These shares are not, however, deemed
outstanding for the purpose of computing the percentage ownership of any other
person.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO THE OFFERING AFTER OFFERING
------------------------------------ ------------------------------------
NUMBER OF NUMBER OF NUMBER OF
NUMBER OF SHARES SUBJECT SHARES BEING NUMBER OF SHARES SUBJECT
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES TO OPTIONS(1) PERCENT OFFERED SHARES TO OPTIONS(1) PERCENT
- ------------------------------------ --------- -------------- ------- ------------ --------- -------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
London Pacific Life & Annuity
Company(2)......................... 2,605,864 -- 10.8% -- 2,605,864 -- 10.0%
3109 Poplarwood Court
Suite 108
Raleigh, North Carolina 27604
Norwest Bank Minnesota, N.A.(3)...... 2,490,378 -- 10.3 -- 2,490,378 -- 9.5
Norwest Center
Sixth and Marquette
Minneapolis, MN 55479
Steven J. Snyder..................... 1,902,944 -- 7.9 190,294 1,712,650 -- 6.6
7901 Flying Cloud Drive
Minneapolis, Minnesota 55344
Bradley N. Miller.................... 1,390,348 1,249 5.8 139,118 1,251,230 1,249 4.8
7901 Flying Cloud Drive
Minneapolis, Minnesota 55344
John T. Riedl........................ 1,000,974 -- 4.2 100,170 900,804 -- 3.5
P. Stephen Larsen.................... 251,509 140,624 1.6 10,000 251,509 130,624 1.5
George E. Moser...................... 92,614 193,124 1.2 28,511 64,103 193,124 *
Thomas M. Donnelly................... 64,000 120,998 * 18,417 45,583 120,998 *
Nanci Anderson....................... 2,254 70,000 * 7,225 2,254 62,775 *
Ann L. Winblad(4).................... 309,913 -- 1.3 -- 309,913 -- 1.2
Douglas J. Burgum.................... 7,143 30,000 * -- 7,143 30,000 *
William Lansing...................... 10,000 9,166 * -- 10,000 8,333 *
All directors and executive officers
as a group (9 persons)............. 5,060,399 696,960 23.2 509,735 4,567,889 679,735 20.0
Other selling stockholders(5)........ -- 115,736 --
</TABLE>

62
<PAGE> 64

- -------------------------
* Indicates less than 1% of the total number of outstanding shares of common
stock.

(1) Reflects the number of shares issuable upon the exercise of options
exercisable within 60 days of March 15, 2000.

(2) Consists of 1,954,398 shares held by London Pacific Life & Annuity Company
and 651,466 shares held by its affiliate Berkeley International Capital
Limited.

(3) This information is based upon information reported on Wells Fargo &
Company's Schedule 13G filing made with the Securities and Exchange
Commission as of December 31, 1999.

(4) Includes 31,770 shares held by Hummer Winblad Venture Partners III L.P.

(5) The other selling stockholders, all of whom hold less than 1% of the total
number of outstanding shares of common stock, are as follows:

<TABLE>
<S> <C> <C>
Chet Atken Coyne Gibson Frank Triolo
David Boles Karen Heath Steven VanTassel
Joseph Dalton Sue Keller Larry Wikelius
Paul Dehnert Mary McCommon Mark Zuzanek
Ronald Dovich George Nader Phillips-Smith Specialty Retail Group III
Craig Foley Pamela Saegert RHO Management Trust I
Kent Fuka Terrance Rock
</TABLE>

All of these stockholders, with the exception of Phillips-Smith Specialty
Retail Group III and RHO Management Trust I, are present or former employees
of us or our affiliates.

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<PAGE> 65

DESCRIPTION OF CAPITAL STOCK

GENERAL

Our authorized capital stock consists of 50,000,000 shares of common stock,
$.0001 par value, and 5,000,000 shares of preferred stock, $.0001 par value. We
expect to increase our authorized common stock to 100,000,000 shares and our
authorized preferred stock to 10,000,000 shares at our 2000 Annual Meeting of
Stockholders, which is currently scheduled to be held in May 2000.

COMMON STOCK

As of December 31, 1999, there were 22,025,716 shares of common stock
outstanding that were held of record by approximately 156 stockholders,
excluding 1,969,630 shares issued to former KD One stockholders on February 14,
2000 in connection with our acquisition of KD One. There will be 25,995,346
shares of common stock outstanding after giving effect to the sale of shares
offered to the public by this prospectus, assuming no exercise of the
underwriters' over-allotment option and no exercise after December 31, 1999 of
outstanding options.

The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the board of directors out of funds legally available therefor. In
the event of our liquidation, dissolution or winding up, the holders of our
common stock are entitled to share ratably in all assets remaining after payment
of liabilities, subject to prior distribution rights of preferred stock, if any,
then outstanding. The common stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are fully
paid and nonassessable, and the shares of common stock to be issued upon
completion of this offering will be fully paid and nonassessable.

PREFERRED STOCK

Our amended and restated certificate of incorporation authorizes 5,000,000
shares of preferred stock. The board of directors has the authority to issue the
preferred stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting any series or the
designation of such series, without further vote or action by the stockholders.
The issuance of preferred stock may have the effect of delaying, deferring or
preventing a change in control of Net Perceptions without further action by the
stockholders. For example, the board of directors could issue preferred stock
that has the power to prevent a change of control transaction. The issuance of
preferred stock with voting and conversion rights may adversely affect the
voting power of the holders of common stock, including the loss of voting
control to others. We currently have no plans to issue any of the preferred
stock.

ANTITAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW

Our amended and restated certificate of incorporation and bylaws contain
provisions that could discourage, delay or prevent a tender offer or takeover
attempt at a price which many stockholders may find attractive. The existence of
these provisions could limit the price that investors might otherwise pay in the
future for shares of common stock.

64
<PAGE> 66

Certificate of incorporation and bylaws

Blank check preferred stock. As noted above, our board of directors,
without stockholder approval, has the authority under our certificate of
incorporation to issue preferred stock with rights superior to the rights of the
holders of common stock. As a result, preferred stock could be issued quickly
and easily, could impair the rights of holders of common stock and could be
issued with terms calculated to delay or prevent a change of control or make
removal of management more difficult.

Stockholder action. Our certificate of incorporation provides that all
stockholder actions must be effected at a duly called meeting and not by a
consent in writing. This provision could discourage potential acquisition
proposals and could delay or prevent a change of control of Net Perceptions
because a potential acquisition of Net Perceptions could not be approved by the
stockholders without a duly called meeting.

Requirements for advance notification of stockholder nominations and
proposals. Our bylaws provide that a stockholder seeking to bring business
before an annual meeting of stockholders, or to nominate candidates for election
as directors at an annual meeting of stockholders, must provide timely notice of
this intention in writing. To be timely, a stockholder's notice must be
delivered to or mailed and received at our principal executive offices at least
120 days prior to the anniversary date of the proxy statement released to
stockholders in connection with the previous year's annual meeting of
stockholders. The bylaws also include requirement of advance notice for making
nominations at special meetings. These provisions could delay stockholder
actions that are favored by the holders of a majority of our outstanding stock
until the next stockholders' meeting.

Delaware anti-takeover statute

We are subject to section 203 of the Delaware General Corporation Law,
which restricts some types of transactions and business combinations between a
corporation and a 15% stockholder. A 15% stockholder is generally considered
under this provision to be a person owning 15% or more of the corporation's
outstanding voting stock. Delaware law restricts these transactions for a period
of three years from the date the stockholder acquired 15% or more of the
corporation's outstanding voting stock. With some exceptions, unless the
transaction is approved by the board of directors and the holders of at least
two-thirds of the outstanding voting stock, Delaware law prohibits significant
business transactions such as:

- a merger with, disposition of significant assets to or receipt of
disproportionate financial benefits by the 15% stockholder; or

- any other transaction that would increase the 15% stockholder's
proportionate ownership of any class or series of capital stock.

The shares held by the 15% stockholder are not counted as outstanding when
calculating the two-thirds of the outstanding voting stock needed for approval.

The prohibition against these transactions does not apply if:

- prior to the time that any stockholder became a 15% stockholder, the
board of directors approved either the business combination or the
transaction in which such stockholder acquired 15% or more of the
outstanding voting stock; or

- the 15% stockholder owns at least 85% of the outstanding voting stock of
the corporation as a result of the transaction in which such stockholder
acquired 15% or more of the outstanding voting stock.

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<PAGE> 67

Shares held by persons who are both directors and officers or by some types
of employee stock plans are not counted as outstanding when making this
calculation.

LIMITATION OF LIABILITY AND INDEMNIFICATION

Our amended and restated certificate of incorporation and amended and
restated bylaws provide that we shall indemnify our directors and officers to
the full extent permitted by Delaware law. Delaware law permits a corporation to
indemnify any director, officer, employee or agent made or threatened to be made
a party to any threatened, pending or completed proceeding if the person acted
in good faith and in a manner such person reasonably believed to be in the best
interests of the corporation, and, with respect to any criminal proceeding, had
no reasonable cause to believe that his or her conduct was unlawful. In addition
to the indemnification provided for in our certificate of incorporation and
bylaws, we also have entered into agreements to indemnify each of our officers
and directors.

Our certificate of incorporation limits the liability of our directors to
the maximum extent permitted by Delaware law. Delaware law provides that
directors will not be personally liable for monetary damages for breach of their
fiduciary duties as directors, except liability for:

- any breach of their duty of loyalty to the corporation or its
stockholders;

- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;

- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or

- any transaction from which the director derived an improper personal
benefit.

This provision has no effect on any non-monetary remedies that may be available
to us or our stockholders, nor does it relieve us or our officers or directors
from compliance with federal or state securities laws.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling us pursuant to
the foregoing provisions or otherwise, we have been informed that in the opinion
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the Securities Act and is therefore unenforceable.

At the present time, there is no pending litigation or proceeding involving
any director, officer, employee or agent of Net Perceptions in which
indemnification would be required or permitted. We are not aware of any
threatened litigation or proceeding which may result in a claim for
indemnification.

REGISTRATION RIGHTS

The holders of 1,759,630 shares of common stock are entitled to the
following rights with respect to the registration of their shares under the
Securities Act. Approximately 107,111 of those shares are being registered in
this offering and those shares will cease to have registration rights.

The holders of registration rights include investors that purchased shares
of our Series A, Series B and Series C preferred stock, the holder of shares of
common stock issued upon the conversion of a convertible promissory note and
some of our present and former officers and founders. In addition, in connection
with our acquisition of KD One, we granted registration rights to the former KD
One stockholders.

Under the terms of the agreements between us and the holders of these
registrable securities, if we propose to register any of our securities under
the Securities Act, either for our own account or

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<PAGE> 68

for the account of other security holders exercising registration rights, the
holders with registration rights are entitled to notice of the registration and
are entitled to include shares of their common stock in the registration. Some
of the stockholders benefitting from these rights also may require us to file a
registration statement under the Securities Act at our expense with respect to
their shares of common stock, and we are required to use our diligent reasonable
efforts to effect such registration. Further, some holders may require us to
file additional registration statements on Form S-3 at our expense. These rights
are subject to conditions and limitations, among them the right of the
underwriters of an offering to limit the number of shares included in a
registration in certain circumstances.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the common stock is Norwest Bank
Minnesota, N.A.

LISTING

Our common stock is currently quoted on the Nasdaq National Market under
the trading symbol "NETP."

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<PAGE> 69

SHARES ELIGIBLE FOR FUTURE SALE

SALE OF RESTRICTED SHARES

Future sales of substantial amounts of our common stock in the public
market, or the possibility of these sales occurring, could adversely affect
prevailing market prices of our common stock or our future ability to raise
capital through an offering of equity securities.

Upon completion of this offering, we will have 25,995,346 shares of common
stock outstanding, based on shares outstanding as of December 31, 1999 and
giving effect to the KD One acquisition. All of these shares are freely
tradeable without restriction, with the following exceptions:

- 2,069,609 shares that were issued in private transactions currently
constitute "restricted securities" within the meaning of Rule 144 under
the Securities Act of 1933. All but 458,404 of these shares may be resold
publicly at any time, subject to the volume and other restrictions of
Rule 144. A total of 290,911 shares may be resold publicly, subject to
the volume and other restrictions of Rule 144, beginning on April 23,
2000. The remaining 1,652,519 shares may be resold publicly, subject to
the volume and other restrictions of Rule 144, beginning on February 14,
2001.

- shares acquired in the open market but held by our "affiliates," as that
term is defined in Rule 144, are subject to the volume and other
restrictions of Rule 144.

- shares held by our officers and directors, as well as some of our other
stockholders, are subject to "lock-up" agreements that prohibit the
public resale of those shares until 90 days after the effective date of
this prospectus. These prohibitions are described in greater detail under
"-- Lock-up agreements" below.

LOCK-UP AGREEMENTS

We, our officers and directors, and some of our stockholders, including our
selling stockholders, have agreed not to offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase, or otherwise transfer or
dispose of, directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock, or enter into
any swap or similar agreement that transfers, in whole or in part, the economic
risk of ownership of the common stock, for a period of 90 days after the date of
this prospectus, without the prior written consent of FleetBoston Robertson
Stephens Inc., subject to limited exceptions.

RULE 144

In general, under Rule 144, as currently in effect, a person who has
beneficially owned shares of our common stock for at least one year is entitled
to sell within any three-month period a number of shares that does not exceed
the greater of:

- 1% of the number of shares of common stock then outstanding, which is
expected to be approximately 259,953 shares immediately after this
offering; or

- the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice of the sale on Form 144 with the Securities and Exchange
Commission.

Sales under Rule 144 are also subject to manner of sale provisions, notice
requirements and the availability of current public information about us.

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<PAGE> 70

Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the three months preceding a sale and who has
beneficially owned shares proposed to be sold for at least two years is entitled
to sell such shares under Rule 144(k) without regard to the volume limitations,
manner of sale provisions, public information requirements or notice
requirements.

RULE 701

In general, under Rule 701 of the Securities Act, any of our employees,
consultants or advisors who purchased shares from us under a stock option plan
or other written agreement prior to our initial public offering can resell those
shares excluding the effect of the "lock-up" agreements described above, in
reliance on Rule 144, but without complying with some of the restrictions,
including the holding period, contained in Rule 144. Approximately 458,404
shares of our outstanding common stock are eligible for resale under resale
under Rule 701. Some of these shares are subject to the "lock-up" agreement with
FleetBoston Robertson Stephens Inc. described above.

REGISTRATION RIGHTS

Upon completion of this offering, the holders of approximately 1,652,519
shares of our common stock will be entitled to rights to registration of their
shares under the Securities Act. After registration, these shares will become
freely tradable without restrictions under the Securities Act. Any sales of
securities by these shareholders could decrease the trading price of our common
stock. A more detailed discussion of these registration rights is included in
this prospectus under the heading "Description of Capital Stock -- Registration
rights."

STOCK OPTIONS

We have filed registration statements on Form S-8 to register approximately
6,970,657 shares of common stock reserved for issuance under our stock option
plans and our Employee Stock Purchase Plan. Each year as the number of shares
reserved for issuance under our 1999 Equity Incentive Plan and 1999 Employee
Stock Purchase plan automatically increases, we intend to file amendments to the
registration statements covering the additional shares. As of December 31, 1999,
options to purchase 2,548,766 shares of common stock were issued and outstanding
under our stock option plans and 1,035,578 shares were reserved for issuance
pursuant to future grants of stock options. In addition, as of December 31,
1999, 957,616 shares were reserved for issuance under our 1999 Employee Stock
Purchase Plan. Shares registered under these registration statements will, upon
the optionee's exercise and subject to vesting and lock-up provisions and Rule
144 volume limitations applicable to our affiliates, be available for sale in
the open market. We also intend to file a registration statement on Form S-8 to
register approximately 268,297 shares of our common stock reserved for issuance
under KD One's 1996 Stock Option Plan, which we assumed in connection with our
acquisition of KD One.

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<PAGE> 71

MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES

TO NON-U.S. HOLDERS

The following is a general discussion of the material U.S. federal income
tax consequences of the purchase, ownership and disposition of our common stock
to a non-U.S. Holder. For the purpose of this discussion, a non-U.S. Holder is
any holder that for U.S. federal income tax purposes is not a U.S. person.

For purposes of this discussion, the term U.S. person means:

- a citizen or resident of the U.S.;

- a partnership and a corporation or other entity taxable as a corporation
created or organized in the U.S. or under the laws of the U.S. or any
political subdivision thereof;

- an estate whose income is included in gross income for U.S. federal
income tax purposes regardless of its source; or

- a trust, if its administration is subject to the primary supervision of a
U.S. court and one or more U.S. persons have the authority to control all
substantial decisions of the trust or the trust has a valid election in
effect under applicable Treasury Regulations to be treated as a U.S.
person.

Additionally, this discussion does not address U.S. federal income tax
consequences to non-U.S. Holders subject to special treatment under U.S. federal
income tax law, such as:

- U.S. expatriates;

- financial institutions;

- dealers in securities;

- insurance companies;

- tax-exempt entities;

- holders who acquire our common stock pursuant to the exercise of an
employee stock option or right or otherwise as compensation;

- holders who hold our common stock as qualified small business stock for
purposes of Section 1202 of the Internal Revenue Code of 1986, as
amended;

- holders who do not hold our common stock as a capital asset (generally,
an asset held for investment purposes); or

- holders who hold our common stock as part of a hedge, straddle,
conversion or other risk reduction transaction.

Nor does this discussion address any tax consequences arising under the
laws of any state, local or non-U.S. taxing jurisdiction.

Furthermore, the following discussion is based on current provisions of the
Internal Revenue Code, the Treasury Regulations promulgated thereunder, and
administrative and judicial interpretations thereof, all as in effect on the
date hereof, and all of which are subject to change, possibly with retroactive
effect. We have not requested a ruling from the Internal Revenue Service ("IRS")
or an opinion of counsel with respect to the U.S. federal income tax
consequences of the purchase, ownership and disposition of our common stock to a
non-U.S. Holder under the Internal Revenue Code.

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<PAGE> 72

ACCORDINGLY, EACH NON-U.S. HOLDER SHOULD CONSULT A TAX ADVISOR REGARDING
THE U.S. FEDERAL, STATE, LOCAL AND NON-U.S. INCOME AND OTHER TAX CONSEQUENCES OF
ACQUIRING, HOLDING AND DISPOSING OF SHARES OF OUR COMMON STOCK.

DIVIDENDS

We have never paid dividends on our common stock and do not expect to pay
any cash dividends on our common stock for the foreseeable future. In the event,
however, that we do pay dividends on our common stock, any dividend paid to a
non-U.S. Holder of common stock generally will be subject to U.S. withholding
tax either at a rate of 30% of the gross amount of the dividend or such lower
rate as may be specified by an applicable tax treaty. Dividends received by a
non-U.S. Holder that are effectively connected with a U.S. trade or business
conducted by the non-U.S. Holder are exempt from such withholding tax. However,
those effectively connected dividends, net of certain deductions and credits,
are taxed at the same graduated rates applicable to U.S. persons. In addition to
the graduated tax described above, dividends received by a corporate non-U.S.
Holder that are effectively connected with a U.S. trade or business of the
corporate non-U.S. Holder may also be subject to a branch profits tax at a rate
of 30% or such lower rate as may be specified by an applicable tax treaty.

A non-U.S. holder may be required to satisfy certain certification
requirements in order to claim treaty benefits or otherwise claim a reduction
of, or exemption from, the withholding described above.

GAIN ON DISPOSITION OF COMMON STOCK

A non-U.S. Holder generally will not be subject to U.S. federal income tax
on any gain realized upon the sale or other disposition of our common stock
unless:

- the gain is effectively connected with a U.S. trade or business of the
non-U.S. Holder (which gain, in the case of a corporate non-U.S. Holder,
must also be taken into account for branch profits tax purposes);

- the non-U.S. Holder is an individual who holds his or her common stock as
a capital asset and who is present in the U.S. for a period or periods
aggregating 183 days or more during the calendar year in which the sale
or disposition occurs and certain other conditions are met; or

- we are or have been a "United States real property holding corporation"
for U.S. federal income tax purposes at any time within the shorter of
the five-year period preceding the disposition or the holder's holding
period for our common stock.

We have determined that we are not and do not believe that we will become a
"United States real property holding corporation" for U.S. federal income tax
purposes.

BACKUP WITHHOLDING AND INFORMATION REPORTING

Generally, we must report annually to the IRS the amount of dividends paid,
the name and address of the recipients, and the amount, if any, of tax withheld.
A similar report is sent to the holder. Pursuant to tax treaties or other
agreements, the IRS may make its reports available to tax authorities in the
recipient's country of residence.

Dividends paid to a non-U.S. Holder at an address within the U.S. may be
subject to backup withholding at a rate of 31% if the non-U.S. Holder fails to
establish that it is entitled to an exemption or to provide a correct taxpayer
identification number and other information to the payer. Backup withholding
generally will not apply to dividends paid to non-U.S. Holders at an address
outside the U.S. on or prior to December 31, 2000 unless the payer has knowledge
that the payee is a

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<PAGE> 73

U.S. person. Under recently finalized Treasury Regulations regarding withholding
and information reporting, payment of dividends to non-U.S. Holders at an
address outside the U.S. after December 31, 2000 may be subject to backup
withholding at a rate of 31% unless such non-U.S. Holder satisfies various
certification requirements.

Under current Treasury Regulations, the payment of the proceeds of the
disposition of common stock to or through the U.S. office of a broker is subject
to information reporting and backup withholding at a rate of 31% unless the
holder certifies its non-U.S. status under penalties of perjury or otherwise
establishes an exemption. Generally, the payment of the proceeds of the
disposition by a non-U.S. Holder of common stock outside the U.S. to or through
a foreign office of a broker will not be subject to backup withholding but will
be subject to information reporting requirements if the broker is:

- a U.S. person;

- a "controlled foreign corporation" for U.S. federal income tax purposes;
or

- a foreign person 50% or more of whose gross income for certain periods is
from the conduct of a U.S. trade or business unless the broker has
documentary evidence in its files of the holder's non-U.S. status and
certain other conditions are met, or the holder otherwise establishes an
exemption. Neither backup withholding nor information reporting generally
will apply to a payment of the proceeds of a disposition of common stock
by or through a foreign office of a foreign broker not subject to the
preceding sentence.

In general, the recently promulgated final Treasury Regulations, described
above, do not significantly alter the substantive withholding and information
reporting requirements but would alter the procedures for claiming benefits of
an income tax treaty and change the certifications procedures relating to the
receipt by intermediaries of payments on behalf of the beneficial owner of
shares of common stock. Non-U.S. Holders should consult their tax advisors
regarding the effect, if any, of those final Treasury Regulations on an
investment in our common stock. Those final Treasury Regulations generally are
effective for payments made after December 31, 2000.

Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the IRS.

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<PAGE> 74

UNDERWRITING

The underwriters named below, acting through their representatives,
FleetBoston Robertson Stephens Inc., Chase Securities Inc., U.S. Bancorp Piper
Jaffray Inc., Dain Rauscher Incorporated and Adams, Harkness & Hill, Inc. have
severally agreed with us and the selling stockholders, subject to the terms and
conditions of the underwriting agreement, to purchase from us and the selling
stockholders the number of shares of common stock set forth below opposite their
respective names. The underwriters are committed to purchase and pay for all
shares if any are purchased.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ----------
<S> <C>
FleetBoston Robertson Stephens Inc..........................
Chase Securities Inc........................................
U.S. Bancorp Piper Jaffray Inc..............................
Dain Rauscher Incorporated..................................
Adams, Harkness & Hill, Inc.................................
----------
Total.....................................................
==========
</TABLE>

The representatives have advised us and the selling stockholders that the
underwriters propose to offer the shares of common stock to the public at the
public offering price set forth on the cover page of this prospectus and to
certain dealers at that price less a concession of not in excess of $ per
share, of which $ may be reallowed to other dealers. After this offering,
the public offering price, concession and reallowance to dealers may be reduced
by the representatives. No such reduction shall change the amount of proceeds to
be received by us or the selling stockholders as set forth on the cover page of
this prospectus. The common stock is offered by the underwriters as stated
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part.

The underwriters have advised us that they do not expect sales to
discretionary accounts to exceed 5% of the total number of shares offered.

Over-allotment option

We have granted to the underwriters an option, exercisable during the
30-day period after the date of this prospectus, to purchase up to 318,863
additional shares of common stock and the selling stockholders have granted the
underwriters an option to purchase 74,957 additional shares of common stock at
the same price per share as we and the selling stockholders will receive for the
2,625,471 shares that the underwriters have agreed to purchase. To the extent
that the underwriters exercise their over-allotment option, the underwriters
have severally agreed, subject to certain conditions, to purchase approximately
the same percentage thereof as the number of shares to be purchased by each of
them bears to the total number of shares of common stock offered in this
offering. If purchased, these additional shares will be sold by the underwriters
on the same terms as those on which the shares offered hereby are being sold. We
and the selling stockholders who have granted the over-allotment option will be
obligated, pursuant to the over-allotment option, to sell shares to the
underwriters to the extent the over-allotment option is exercised. The
underwriters may exercise the over-allotment option only to cover
over-allotments made in connection with the sale of the shares of common stock
offered in this offering.

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<PAGE> 75

The following table summarizes the total compensation to be paid to the
underwriters by us and the selling stockholders who have granted us this option:

<TABLE>
<CAPTION>
WITHOUT WITH
PER OVER- OVER-
SHARE ALLOTMENT ALLOTMENT
----- --------- ---------
<S> <C> <C> <C>
Underwriting discounts and commissions payable by us...... $ $ $
Underwriting discounts and commissions payable by certain
selling stockholders.................................... $ $ $
</TABLE>

We estimate expenses payable by us in connection with this offering, other
than the underwriting discounts and commissions referred to above, will be
approximately $900,000.

Indemnity

The underwriting agreement contains covenants of indemnity among the
underwriters, us and the selling stockholders against various civil liabilities,
including liabilities under the Securities Act and liabilities arising from
breaches of representations and warranties contained in the underwriting
agreement.

Lock-up agreements

Each executive officer and director and certain other holders of our common
stock have agreed, during the period of 90 days after the effective date of this
prospectus, subject to specified exceptions, not to offer to sell, contract to
sell, or otherwise sell, dispose of, loan, pledge or grant any rights with
respect to any shares of common stock or any options or warrants to purchase any
shares of common stock, or any securities convertible into or exchangeable for
shares of common stock owned as of the date of this prospectus or thereafter
acquired directly by these holders or with respect to which they have the power
of disposition, without the prior written consent of FleetBoston Robertson
Stephens Inc. However, FleetBoston Robertson Stephens Inc. may, in its sole
discretion, at any time or from time to time, without notice, release all or any
portion of securities subject to the lock-up agreements. There are no existing
agreements between the representatives and any of our stockholders who have
executed a lock-up agreement providing consent to the sale of shares prior to
the expiration of the lock-up period.

In addition, we have agreed that during the lock-up period we will not,
without the prior written consent of FleetBoston Robertson Stephens Inc.,
subject to various exceptions, consent to the disposition of any shares held by
stockholders subject to lock-up agreements prior to the expiration of the
lock-up period, or issue, sell, contract to sell, or otherwise dispose of, any
shares of common stock, any options to purchase any shares of common stock or
any securities convertible into, exercisable for or exchangeable for shares of
common stock other than our sale of shares in this offering, the issuance of our
common stock upon the exercise of outstanding options and the issuance of
options under existing stock option and incentive plans provided that those
options do not vest prior to the expiration of the lock-up period. See "Shares
Eligible for Future Sale."

Listing

The common stock is currently quoted on the Nasdaq National Market under
the trading symbol "NETP."

Stabilization

The representatives have advised us that, pursuant to Regulation M under
the Securities Act of 1933, some persons participating in this offering may
engage in transactions, including stabilizing bids,

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<PAGE> 76

syndicate covering transactions or the imposition of penalty bids, that may have
the effect of stabilizing or maintaining the market price of the shares of
common stock at a level above that which might otherwise prevail in the open
market. A "stabilizing bid" is a bid for or the purchase of shares of common
stock on behalf of the underwriters for the purpose of fixing or maintaining the
price of the common stock. A "syndicate covering transaction" is the bid for or
purchase of common stock on behalf of the underwriters to reduce a short
position incurred by the underwriters in connection with the offering. A
"penalty bid" is an arrangement permitting the representatives to reclaim the
selling concession otherwise accruing to an underwriter or syndicate member in
connection with the offering if the common stock originally sold by such
underwriter or syndicate member is purchased by the representatives in a
syndicate covering transaction and has therefore not been effectively placed by
such underwriter or syndicate member. The representatives have advised us that
such transactions may be effected on the Nasdaq National Market or otherwise
and, if commenced, may be discontinued at any time.

Other compensation

In connection with the KD One acquisition, FleetBoston Robertson Stephens
Inc. was paid a commission of $1.2 million in cash for advisory services
provided to us.

LEGAL MATTERS

The validity of the issuance of the shares of common stock we are offering
will be passed upon for us by Skadden, Arps, Slate, Meagher & Flom LLP, Boston,
Massachusetts. Legal matters in connection with this offering will be passed
upon for the underwriters by Cooley Godward LLP, San Francisco, California.

EXPERTS

The financial statements of Net Perceptions, Inc. and Knowledge Discovery
One, Inc. as of December 31, 1998 and 1999 and for each of the three years in
the period ended December 31, 1999 included in this prospectus have been so
included in reliance on the reports of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.

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<PAGE> 77

WHERE YOU CAN FIND ADDITIONAL INFORMATION

We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, a registration statement on Form S-1 under the Securities Act of 1933
with respect to the common stock we propose to sell in this offering. This
prospectus, which constitutes a part of the registration statement, does not
contain all of the information set forth in the registration statement and the
exhibits and schedules to the registration statement. For further information
about us and the common stock we propose to sell in this offering, we refer you
to the registration statement and the exhibits and schedules filed as a part of
the registration statement. Statements contained in this prospectus concerning
the contents of any contract or any other document filed as an exhibit to the
registration statement are not necessarily complete. If a contract or document
has been filed as an exhibit to the registration statement, we refer you to the
copy of the contract or document that has been filed.

The registration statement, including exhibits and schedules thereto, may
be inspected without charge at the principal office of the Securities and
Exchange Commission in Washington, D.C., and copies of all or any part of the
registration statement may be inspected and copied at the public reference
facilities maintained by the Securities and Exchange Commission at 450 Fifth
Street, N.W., Judiciary Plaza, Room 1024, Washington, D.C. 20549, and at the
Commission's regional offices located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade Center, Suite
1300, New York, New York 10048. Copies of this material can also be obtained at
prescribed rates by mail from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain more information
about the Public Reference Room by calling the Securities and Exchange
Commission at 1-800-SEC-0330. In addition, the Securities and Exchange
Commission maintains a website (http://www.sec.gov) that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the Securities and Exchange Commission.

We are subject to the information and periodic reporting requirements of
the Securities Exchange Act of 1934, and, in accordance with the requirements of
the Securities Exchange Act of 1934, file periodic reports, proxy statements and
other information with the Securities and Exchange Commission. These periodic
reports, proxy statements and other information will be available for inspection
and copying at the regional offices, public reference facilities and website of
the Securities and Exchange Commission referred to above.

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<PAGE> 78

NET PERCEPTIONS, INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
NET PERCEPTIONS, INC.:

Report of Independent Accountants......................... F-2
Consolidated Balance Sheets as of December 31, 1998 and
1999................................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1998 and 1999....................... F-4
Consolidated Statement of Stockholders' Equity and
Comprehensive Loss for the Years Ended December 31,
1997, 1998 and 1999.................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999....................... F-6
Notes to Consolidated Financial Statements................ F-7

KNOWLEDGE DISCOVERY ONE, INC.:

Report of Independent Accountants......................... F-19
Balance Sheets as of December 31, 1998 and 1999........... F-20
Statements of Operations for the Years Ended December 31,
1997, 1998 and 1999.................................... F-21
Statement of Stockholders' Deficit for the Years Ended
December 31, 1997, 1998 and 1999....................... F-22
Statements of Cash Flows for the Years Ended December 31,
1997, 1998 and 1999.................................... F-23
Notes to Financial Statements............................. F-24

PRO FORMA COMBINED FINANCIAL INFORMATION (UNAUDITED):

Introduction to Pro Forma Combined Financial
Information............................................ F-33
Pro Forma Combined Balance Sheet as of December 31, 1999
(unaudited)............................................ F-34
Pro Forma Combined Statement of Operations for the Year
Ended December 31, 1999 (unaudited).................... F-35
Notes to the Pro Forma Combined Financial Information
(unaudited)............................................ F-36
</TABLE>

F-1
<PAGE> 79

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors
and Stockholders of
Net Perceptions, Inc.

In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity and
comprehensive loss and of cash flows present fairly, in all material respects,
the financial position of Net Perceptions, Inc. and its subsidiary at December
31, 1998 and 1999, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.

PricewaterhouseCoopers LLP
Minneapolis, Minnesota
January 27, 2000, except as to Note 12, which is
as of February 14, 2000

F-2
<PAGE> 80

NET PERCEPTIONS, INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1999
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 972 $ 17,457
Short-term investments.................................... -- 19,397
Accounts receivable, net.................................. 3,169 7,663
Royalties receivable, net................................. 213 1,135
Prepaid expenses and other current assets................. 142 1,373
-------- --------
Total current assets.............................. 4,496 47,025
Marketable securities....................................... -- 6,317
Investment in joint venture................................. -- 197
Property and equipment, net................................. 1,019 4,749
Other assets................................................ 122 460
-------- --------
Total assets...................................... $ 5,637 $ 58,748
======== ========
LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 256 $ 2,550
Accrued expenses.......................................... 1,410 3,296
Deferred revenue.......................................... 2,107 3,336
Current portion of long-term liabilities.................. 255 471
-------- --------
Total current liabilities......................... 4,028 9,653
Long-term liabilities, net of current portion............... 538 707
-------- --------
Total liabilities................................. 4,566 10,360
-------- --------
Commitments and contingencies (Notes 7 and 9)
Series A Convertible Redeemable Preferred Stock, at
redemption value; $.0001 par value; 2,170,000 shares
authorized; 2,168,130 shares issued and outstanding at
December 31, 1998......................................... 650 --
-------- --------
Stockholders' equity:
Series B Convertible Preferred Stock; $.0001 par value;
4,000,000 shares authorized; 3,864,736 shares issued
and outstanding at December 31, 1998................... -- --
Series C Convertible Preferred Stock; $.0001 par value;
4,800,000 shares authorized; 4,635,834 shares issued
and outstanding at December 31, 1998................... -- --
Preferred stock; $.0001 par value; 5,000,000 shares
authorized; no shares issued or outstanding............ -- --
Common stock; $.0001 par value; 50,000,000 shares
authorized; 6,633,308 and 22,025,716 shares issued and
outstanding at December 31, 1998 and 1999,
respectively........................................... 1 2
Additional paid-in capital................................ 11,137 71,231
Accumulated other comprehensive loss...................... -- (89)
Accumulated deficit....................................... (10,717) (22,756)
-------- --------
Total stockholders' equity........................ 421 48,388
-------- --------
Total liabilities, convertible redeemable
preferred stock and stockholders' equity........ $ 5,637 $ 58,748
======== ========
</TABLE>

See accompanying notes to the financial statements.

F-3
<PAGE> 81

NET PERCEPTIONS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
---------- ---------- -----------
<S> <C> <C> <C>
Revenues:
Product........................................ $ 284 $ 3,955 $ 11,408
Service and maintenance........................ 33 522 3,721
---------- ---------- -----------
Total revenues......................... 317 4,477 15,129
---------- ---------- -----------
Cost of revenues:
Product........................................ 14 52 286
Service and maintenance........................ 30 373 2,735
---------- ---------- -----------
Total cost of revenues................. 44 425 3,021
---------- ---------- -----------
Gross margin..................................... 273 4,052 12,108
---------- ---------- -----------
Operating expenses:
Sales and marketing............................ 3,063 4,980 12,099
Research and development....................... 1,372 2,314 8,194
General and administrative..................... 585 1,424 3,725
Stock compensation expense (see Note 7)........ -- 366 1,495
---------- ---------- -----------
Total operating expenses............... 5,020 9,084 25,513
---------- ---------- -----------
Loss from operations............................. (4,747) (5,032) (13,405)
---------- ---------- -----------
Other income (expense):
Interest income................................ 87 197 1,841
Interest expense............................... (56) (89) (212)
Other expense.................................. (6) (44) (263)
---------- ---------- -----------
Total other income..................... 25 64 1,366
---------- ---------- -----------
Net loss......................................... $ (4,722) $ (4,968) $ (12,039)
========== ========== ===========
Basic and diluted net loss per share............. $ (3.01) $ (1.40) $ (0.78)
========== ========== ===========
Shares used in computing basic and diluted net
loss per share................................. 1,569,244 3,545,516 15,402,419
========== ========== ===========
Unaudited pro forma basic and diluted net loss
per share...................................... $ (0.64)
===========
Shares used in computing unaudited pro forma
basic and diluted net loss per share........... 18,851,478
===========
</TABLE>

See accompanying notes to the financial statements.

F-4
<PAGE> 82

NET PERCEPTIONS, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SERIES B SERIES C
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------- ------------------- --------------- ------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- ------ ---------- ------ ------ ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996..... 3,864,736 $-- -- $-- -- $-- 6,153,142 $ 1 $ 3,976
Repurchase of unvested common
stock......................... -- -- -- -- -- -- (182,000) -- (5)
Exercise of stock options...... -- -- -- -- -- -- 306,250 -- 31
Sale of Series C Preferred
Stock, net of $391 of issuance
costs......................... -- -- 3,919,224 -- -- -- -- -- 5,625
Net loss....................... -- -- -- -- -- -- -- -- --
---------- --- ---------- --- -- --- ---------- ---- -------
Balance, December 31, 1997..... 3,864,736 -- 3,919,224 -- -- -- 6,277,392 1 9,627
Exercise of stock options...... -- -- -- -- -- -- 355,916 -- 54
Compensation relating to stock
options....................... -- -- -- -- -- -- -- -- 366
Sale of Series C Preferred
Stock, net of $9 of issuance
costs......................... -- -- 716,610 -- -- -- -- -- 1,090
Net loss....................... -- -- -- -- -- -- -- -- --
---------- --- ---------- --- -- --- ---------- ---- -------
Balance, December 31, 1998..... 3,864,736 -- 4,635,834 -- -- -- 6,633,308 1 11,137
Conversion of preferred stock
to common stock............... (3,864,736) -- (4,635,834) -- -- -- 10,668,700 1 650
Proceeds from initial public
offering, net of $5,543 of
offering costs................ -- -- -- -- -- -- 4,197,500 -- 53,213
Conversion of note payable to
common stock.................. -- -- -- -- -- -- 290,911 -- 4,073
Exercise of common stock
warrant....................... -- -- -- -- -- -- 10,565 -- 16
Issuance of common stock under
employee stock purchase
plan.......................... -- -- -- -- -- -- 42,384 -- 505
Exercise of stock options...... -- -- -- -- -- -- 287,984 -- 169
Repurchase of unvested common
stock......................... -- -- -- -- -- -- (105,636) -- (27)
Compensation relating to stock
options....................... -- -- -- -- -- -- -- -- 1,495
Unrealized loss on
available-for-sale
investments................... -- -- -- -- -- -- -- -- --
Foreign currency translation
adjustments................... -- -- -- -- -- -- -- -- --
Net loss....................... -- -- -- -- -- -- -- -- --
---------- --- ---------- --- -- --- ---------- ---- -------
Balance, December 31, 1999..... -- $-- -- $-- -- $-- 22,025,716 $ 2 $71,231
========== === ========== === == === ========== ==== =======

ACCUMULATED
OTHER TOTAL
COMPREHENSIVE ACCUMULATED STOCKHOLDERS' COMPREHENSIVE
LOSS DEFICIT EQUITY LOSS
------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1996..... $ -- $ (1,027) $ 2,950
Repurchase of unvested common
stock......................... -- -- (5)
Exercise of stock options...... -- -- 31
Sale of Series C Preferred
Stock, net of $391 of issuance
costs......................... -- -- 5,625
Net loss....................... -- (4,722) (4,722) $ (4,722)
---- -------- -------- --------
Balance, December 31, 1997..... -- (5,749) 3,879 $ (4,722)
========
Exercise of stock options...... -- -- 54
Compensation relating to stock
options....................... -- -- 366
Sale of Series C Preferred
Stock, net of $9 of issuance
costs......................... -- -- 1,090
Net loss....................... -- (4,968) (4,968) $ (4,968)
---- -------- -------- --------
Balance, December 31, 1998..... -- (10,717) 421 $ (4,968)
========
Conversion of preferred stock
to common stock............... -- -- 651
Proceeds from initial public
offering, net of $5,543 of
offering costs................ -- -- 53,213
Conversion of note payable to
common stock.................. -- -- 4,073
Exercise of common stock
warrant....................... -- -- 16
Issuance of common stock under
employee stock purchase
plan.......................... -- -- 505
Exercise of stock options...... -- -- 169
Repurchase of unvested common
stock......................... -- -- (27)
Compensation relating to stock
options....................... -- -- 1,495
Unrealized loss on
available-for-sale
investments................... (89) -- (89) $ (89)
Foreign currency translation
adjustments................... -- -- -- --
Net loss....................... -- (12,039) (12,039) (12,039)
---- -------- -------- --------
Balance, December 31, 1999..... $(89) $(22,756) $ 48,388 $(12,128)
==== ======== ======== ========
</TABLE>

See accompanying notes to the financial statements.

F-5
<PAGE> 83

NET PERCEPTIONS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(4,722) $(4,968) $(12,039)
Reconciliation of net loss to net cash used by operating
activities:
Depreciation and amortization........................... 140 284 826
Provision for doubtful accounts......................... 28 294 534
Compensation related to stock options................... -- 366 1,495
Equity in losses of joint venture....................... -- -- 197
Changes in assets and liabilities:
Accounts receivable.................................. (187) (3,299) (5,028)
Royalties receivable................................. -- (213) (922)
Prepaid expenses and other current assets............ 6 (9) (781)
Other assets......................................... (25) (79) (338)
Accounts payable..................................... 48 (24) 2,294
Accrued expenses..................................... 68 1,188 1,959
Deferred revenue..................................... 81 2,026 1,229
Other long-term liabilities.......................... -- -- 325
------- ------- --------
Net cash used by operating activities.............. (4,563) (4,434) (10,249)
------- ------- --------
Cash flows from investing activities:
Purchases of short-term investments and marketable
securities.............................................. (3,439) -- (26,803)
Sales and maturities of short-term investments............ 1,757 3,439 1,000
Investment in joint venture............................... -- -- (394)
Purchases of property and equipment....................... -- (442) (4,556)
------- ------- --------
Net cash (used) provided by investing activities... (1,682) 2,997 (30,753)
------- ------- --------
Cash flows from financing activities:
Proceeds from initial public offering, net of $5,543 of
offering costs.......................................... -- -- 53,213
Proceeds from borrowings under notes payable.............. -- -- 4,000
Proceeds from sale of preferred stock..................... 5,625 1,090 --
Proceeds from issuance of stock under employee stock
purchase plan........................................... -- -- 505
Proceeds from exercise of stock options and warrants, net
of stock repurchases.................................... 26 54 159
Principal payments under capital lease obligations and
notes payable........................................... (63) (142) (390)
------- ------- --------
Net cash provided by financing activities.......... 5,588 1,002 57,487
------- ------- --------
Net (decrease) increase in cash and cash equivalents........ (657) (435) 16,485
Cash and cash equivalents at beginning of year.............. 2,064 1,407 972
------- ------- --------
Cash and cash equivalents at end of year.................... $ 1,407 $ 972 $ 17,457
======= ======= ========
Supplemental schedule of non-cash investing and financing
activities:
Conversions of preferred stock to common stock............ $ -- $ -- $ 651
Conversion of note payable to common stock................ -- -- 4,073
Capital lease obligations incurred........................ 414 472 --
Insurance policy financed with note payable............... -- -- 450
Supplemental schedule of cash activity:
Interest paid............................................. 52 91 123
</TABLE>

See accompanying notes to the financial statements.

F-6
<PAGE> 84

NET PERCEPTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

1. ORGANIZATION

Net Perceptions, Inc. (the "Company" or "Net Perceptions") was incorporated
under the laws of the state of Delaware on July 3, 1996. Net Perceptions
develops, markets and supports real time personalization and precision marketing
software solutions. The Company's core technology, the real time recommendation
engine, enables these capabilities to be embedded in a variety of applications
offered over the web and in other environments. Sales to customers located
outside of the United States totaled 27%, 13% and 16% of total revenues in 1997,
1998 and 1999, respectively. International sales to one customer in Japan
totaled 22% of total revenues in 1997. International sales to customers in any
one individual foreign country did not exceed 10% of total revenues in 1998 or
1999.

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The consolidated financial statements include accounts of the Company and
its wholly owned subsidiary operating in the United Kingdom. All significant
intercompany accounts and transactions have been eliminated. The Company's
foreign subsidiary was formed in late 1999. Revenues and identifiable assets
attributable to the Company's foreign subsidiary was less than 10% of their
respective totals. The equity method of accounting is used to account for the
Company's equity investment in a Japanese joint venture (see Note 8).

Use of estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.

Revenue recognition

Net Perceptions recognizes revenues in accordance with the American
Institute of Certified Public Accountants ("AICPA") Statement of Position
("SOP") 97-2, "Software Revenue Recognition," as amended by SOP 98-4, "Deferral
of the Effective Date of a Provision of Statement of Position 97-2." The Company
derives revenues from software licenses, software maintenance and professional
services. Maintenance includes telephone and Web-based technical support, bug
fixes and rights to unspecified upgrades on a when-and-if available basis.
Professional services include implementation, training and consulting.

In software arrangements that include rights to multiple software products,
specified upgrades, maintenance or services, the Company allocates the total
arrangement fee among each deliverable based on the relative fair value of each
of the deliverables determined based on vendor-specific

F-7
<PAGE> 85
NET PERCEPTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

objective evidence. In software arrangements in which the Company does not have
vendor-specific objective evidence, revenue is deferred until the earlier of
when vendor-specific objective evidence is determined for all elements or when
all elements have been delivered. Revenues from license fees are recognized when
persuasive evidence of an agreement exists, delivery of the product has
occurred, no significant Company obligations with regard to implementation
remain, the fee is fixed or determinable and collection is probable. If the fee
due from the customer is not fixed or determinable, revenues are recognized as
payments become due from the customer. If the Company does not consider
collection to be probable, then revenues are recognized when the fee is
collected. Revenues allocable to maintenance are recognized on a straight-line
basis over the periods in which it is provided. The Company evaluates
arrangements that include professional services to determine whether those
services are essential to the functionality of other elements of the
arrangement. When professional services are considered essential, revenues from
the arrangement are recognized using contract accounting, generally on a
percentage of completion basis. When the Company does not consider the
professional services to be essential, revenues allocable to the services are
recognized as they are performed.

The allowance for doubtful accounts was $28, $300 and $672 at December 31,
1997, 1998 and 1999, respectively.

Concentrations of credit risk and significant customers

Financial instruments that potentially subject Net Perceptions to credit
risk consist primarily of accounts receivable. To minimize this risk, ongoing
credit evaluations of customers' condition are performed. Net Perceptions grants
credit to customers in the ordinary course of business. Two customers accounted
for approximately 22% and 19% of total revenues during 1997. There were no
customers in 1998 that exceeded 10% of total revenues or 10% of total
receivables at December 31, 1998. One customer accounted for approximately 11%
of total revenues during 1999. Accounts receivable from one customer represented
approximately 22% of total receivables at December 31, 1999. Royalties
receivable are from the same customer at both December 31, 1998 and 1999.

Cash equivalents, short-term investments and marketable securities

Cash equivalents, short-term investments and marketable securities consist
principally of commercial paper, government agency notes and money market funds.
The Company classifies as cash equivalents, investments with original maturities
of 90 days or less and which are readily convertible to cash. The Company
determines the appropriate classification of short-term investments and
marketable securities at the time of purchase and reevaluates such designation
as of each balance sheet date. Currently, all of the Company's short-term
investments and marketable securities are classified as available-for-sale.
Available-for-sale securities are stated at fair market value with unrealized
holding gains or losses recorded as separate component of stockholders' equity.

Fair value of financial instruments

The carrying amounts of the Company's financial instruments, which include
cash equivalents, short-term investments, marketable securities, accounts
receivable, accounts payable, accrued expenses and capital lease obligations,
approximate their fair values at December 31, 1998 and 1999.

F-8
<PAGE> 86
NET PERCEPTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

Property and equipment

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

Other assets

Other assets consist primarily of capital and operating lease deposits.

Research and development

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

Income taxes

Net Perceptions 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 be settled or realized. Deferred tax assets are reduced by a
valuation allowance to the extent that utilization is not considered more likely
than not.

Advertising expense

Net Perceptions recognizes advertising expense as incurred. Advertising
expense has been insignificant since inception.

Net loss per share

Net loss per share is computed under SFAS No. 128, "Earnings Per Share."
Basic net loss per share is computed using the weighted-average number of shares
of common stock outstanding, excluding shares of common stock subject to
repurchase. Such shares of common stock subject to repurchase, which consisted
primarily of founders' shares, aggregated 3,675,232, 2,270,370 and 818,681 at
December 31, 1997, 1998 and 1999, respectively (see Note 7). Diluted net loss
per share does not differ from basic net loss per share since potential shares
of common stock from conversion of preferred stock, stock options and warrants
and outstanding shares of common stock subject to repurchase are anti-dilutive
for all periods presented. Unaudited pro forma basic and diluted net loss

F-9
<PAGE> 87
NET PERCEPTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

per share have been calculated assuming the conversion of all outstanding shares
of preferred stock into shares of common stock, as if the shares had converted
immediately upon their issuance.

Foreign currency translation

All assets and liabilities of the Company's foreign subsidiary and
affiliate are translated from local currencies to United States dollars at
period end rates of exchange, while revenues and expenses are translated at the
average exchange rates during the period. The functional currency for each of
the Company's foreign subsidiary and affiliate is the respective local currency.
Translation adjustments arising from the translation of net assets located
outside of the United States into United States dollars are recorded as a
separate component of stockholders' equity. Gains or losses resulting from
foreign currency transactions (transactions denominated in a currency other than
the entity's local currency) are included in the consolidated statement of
operations and are not significant.

Comprehensive income

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

Stock-based compensation

The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and complies with the
disclosures provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation."

Recently issued accounting pronouncements

In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." The new
statement establishes accounting and reporting standards for derivative
financial instruments and hedging activities related to those instruments, as
well as other hedging activities. SFAS No. 133, as amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133," is effective for the Company
beginning January 1, 2001. Net Perceptions does not expect SFAS No. 133 to
materially affect its financial position or results of operations.

In January 1999, the AICPA issued SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions." This SOP
requires use of the residual method for recognition of revenue when
vendor-specific objective evidence exists for undelivered elements but does not
exist for delivered elements of software arrangements. SOP 98-9 is effective for
the Company for transactions entered into beginning January 1, 2000. Net
Perceptions does not expect SOP 98-9 to materially affect its financial position
or results of operations.

F-10
<PAGE> 88
NET PERCEPTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

3. FINANCIAL STATEMENT COMPONENTS

Property and equipment consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1999
------ -------
<S> <C> <C>
Computer hardware........................................... $ 710 $ 2,561
Leasehold improvements...................................... 233 1,223
Purchased computer software................................. 230 908
Furniture, fixtures and equipment........................... 218 1,255
------ -------
1,391 5,947
Less: Accumulated depreciation and amortization............. (372) (1,198)
------ -------
$1,019 $ 4,749
====== =======
</TABLE>

Property and equipment include assets under capital leases of $1,001 at
both December 31, 1998 and 1999.

Accrued expenses consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1999
------ ------
<S> <C> <C>
Accrued wages and benefits.................................. $ 626 $1,650
Accrued equipment and leasehold improvements................ 225 226
Other accrued expenses...................................... 559 1,420
------ ------
$1,410 $3,296
====== ======
</TABLE>

4. INCOME TAXES

For income tax purposes, Net Perceptions has available net operating loss
carryforwards of approximately $18,100 and research and development credit
carryforwards of $140 at December 31, 1999. The net operating loss and research
and development credit carryforwards expire in 2011 through 2019 if not
previously utilized. The utilization of these carryforwards may be subject to
limitations based on future changes in ownership of Net Perceptions pursuant to
Internal Revenue Code Section 382. Future tax benefits have not been recognized
in the financial statements as their utilization is not considered more likely
than not based on the weight of available information.

F-11
<PAGE> 89
NET PERCEPTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

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
Net Perceptions' deferred tax assets (liabilities) are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1999
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................ $ 3,574 $ 6,156
Research and development credit carryforwards........... 88 140
Accrued vacation and other current liabilities.......... 407 664
Accounts receivable allowance........................... 98 262
------- -------
Total deferred tax assets............................ 4,167 7,222
Valuation allowance....................................... (4,167) (7,222)
------- -------
Total net deferred income taxes...................... $ -- $ --
======= =======
</TABLE>

5. TECHNOLOGY LICENSE

Effective July 31, 1996, Net Perceptions entered into a license agreement
with the University of Minnesota. Under the terms of the agreement, Net
Perceptions received a worldwide license to use and sell certain information and
intellectual property rights relating to an information filtering technique
developed by the University of Minnesota. Net Perceptions has further developed
this technology. The license agreement ends upon the expiration of the legal
life of the patents underlying the technology or invalidation of the licensed
technology by other third-party patents. The license may also be terminated by
Net Perceptions with a sixty-day notice and by the University of Minnesota if
Net Perceptions has a material breach or default of the terms of the agreement.

On October 13, 1997, Net Perceptions entered into an amendment to the July
31, 1996 license agreement whereby Net Perceptions obtained all rights and
licenses relating to improvements resulting from continued research by the
University of Minnesota relating to the information filtering technology.
Research and development fees payable to the University of Minnesota under the
amendment equal $20 for each of three planned academic research years
(1998-2000). In October 1997, 1998 and 1999, Net Perceptions paid the University
of Minnesota $20 in each year under the terms of the amendment. For the years
ended December 31, 1997, 1998 and 1999, $5, $20 and $20, respectively, were
recognized as research and development expenses under this agreement. Under the
amendment, Net Perceptions may be required to issue up to 36,000 stock options
for each of the three academic research years based on improvements to the
information technology that are patentable. Any stock options granted would have
an exercise price based on the fair market value of Net Perceptions' common
stock on the date of grant and would be accounted for in the financial
statements based on the fair value of the options. To date no such options have
been granted.

F-12
<PAGE> 90
NET PERCEPTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

6. LONG-TERM LIABILITIES

Long-term liabilities consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1998 1999
----- ------
<S> <C> <C>
Capital leases.............................................. $ 793 $ 534
Note payable................................................ -- 319
Deferred rent............................................... -- 325
----- ------
793 1,178
Less: Current portion....................................... (255) (471)
----- ------
$ 538 $ 707
===== ======
</TABLE>

Capital leases

Net Perceptions maintained a lease line of credit with a leasing company
for the acquisition of property and equipment under capital lease arrangements.
The lease line of credit expired on December 31, 1999. The initial term of any
loan under the agreement is 42 months from the borrowing date and has an
effective interest rate of 14%. Monthly payments are equal to 2.8% of the
original amount borrowed. Existing borrowings bear interest at 15.9% to 16.8%
and are due in varying monthly installments through July 2002. As of December
31, 1998 and 1999, $1,001 had been drawn on the lease line of credit, exclusive
of any repayments. Future minimum payments are as follows:

<TABLE>
<S> <C>
YEAR ENDING DECEMBER 31,
2000.................................................. $ 315
2001.................................................. 220
2002.................................................. 101
-----
Total minimum lease payments.......................... 636
Less: Amount representing interest.................... (102)
-----
Present value of net minimum lease payments........... 534
Less: Current portion................................. (246)
-----
$ 288
=====
</TABLE>

Note payable

In June 1999, the Company financed a multi-year directors' and officers'
insurance policy with a $450 note payable. The note bears interest at 6.0% and
is due in 24 monthly installments of $20, including interest. Principal payments
on the note payable are $225 in 2000 and $94 in 2001.

7. STOCKHOLDERS' EQUITY

Net Perceptions is authorized to issue two classes of stock designated as
common and preferred. As of December 31, 1999, the total number of shares that
Net Perceptions was authorized to issue was 55,000,000 shares, of which
50,000,000 were common stock and 5,000,000 were preferred stock.

F-13
<PAGE> 91
NET PERCEPTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

Series A, Series B and Series C Preferred stock

At December 31, 1998, shares of the Company's preferred stock were
convertible, at the option of the holder, into common stock on a share for share
basis, had voting rights and provided for certain preferential dividend,
liquidation, redemption and other rights. All shares of the Company's preferred
stock outstanding at December 31, 1998 (10,668,700 shares) were converted to
common stock in connection with Net Perceptions' April 1999 initial public
offering ("IPO"). There was no preferred stock outstanding at December 31, 1999.

Redemption of the Series A Preferred Stock was mandatory, at the holder's
election, at $.30 per share plus any declared but unpaid dividends in three
annual installments commencing August 1, 2002, if not previously converted or
otherwise redeemed. The Series A Preferred Stock was reflected at redemption
value at December 31, 1998. Shares of the Series B and Series C Preferred Stock
were not redeemable. No dividends have been declared.

Stock warrant

On October 28, 1997, Net Perceptions issued a warrant to purchase Series C
Preferred Stock to a bank pursuant to a business loan agreement that expired in
1998. The warrant was for shares of Series C Preferred Stock at $1.535 per
share, but converted to a warrant for shares of common stock upon the closing of
the IPO in April 1999. The warrant had a nominal value on the date of issuance
and was exercised in August 1999.

Common stock

Total shares of common stock outstanding at December 31, 1999 were
22,025,716, of which 818,681 are subject to a repurchase option, which is at Net
Perceptions' discretion, at the original sale price in the event the employee
holding the shares leaves Net Perceptions. In general, Net Perceptions'
repurchase option expires to the extent of 25% of the applicable shares after
the first year of service and then in equal amounts over the next 36 months. The
remaining repurchase option on shares of common stock, including common stock
underlying unexercised stock options may be accelerated in the event of a change
in control.

Loan converted to common stock

On February 4, 1999, a foreign corporate investor loaned $4,000 to Net
Perceptions at an interest rate of 8%. The note and accrued interest were
converted into 290,911 shares of unregistered common stock in April 1999 in
connection with Net Perceptions' IPO. The note and accrued interest converted to
common stock at the IPO offering price of $14 per share.

Stock option plans

Net Perceptions' 1996 stock option plan (the "1996 Plan") provides for the
issuance of both incentive and nonqualified stock options to employees. The
incentive options allow the holder to purchase shares of Net Perceptions' common
stock at fair market value on the date of the grant, subject to certain
repurchase rights held by Net Perceptions. 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.
A total of 1,932,216 shares of common stock are

F-14
<PAGE> 92
NET PERCEPTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

reserved for issuance under the 1996 Plan. Stock options are immediately
exercisable but are subject to certain discretionary repurchase rights by Net
Perceptions, and generally expire ten years from the date of grant. In general,
common stock underlying options are subject to repurchase by Net Perceptions at
the original exercise price. The repurchase feature generally expires for 25% of
the shares after the first year of service and then expires ratably over the
next 36 months.

In February 1999, Net Perceptions' board of directors adopted the 1999
Equity Incentive Plan (the "1999 Plan"), which provides for the issuance of both
incentive and nonqualified stock options. The options allow the holder to
purchase shares of Net Perceptions' common stock at fair market value on the
date of the grant, subject to certain repurchase rights held by Net Perceptions.
The total number of options available for future grant under the 1999 Plan is
555,578. The 1999 Plan replaced the 1996 Plan upon the closing of the IPO in
April 1999. On January 1, 2000, 2001 and 2002, the number of options available
for future grant under the 1999 Plan will be increased automatically by 5% of
the total number of shares of common stock then outstanding or, if less, by
1,500,000 shares. Stock options typically vest over four years and generally
expire ten years from the date of grant.

In February 1999, the board of directors adopted the 1999 Non-Employee
Director Option Plan (the "1999 Non-Employee Plan") under which incentive and
nonqualified stock options are granted to non-employee directors of the Company.
During the year ended December 31, 1999, 20,000 options were granted under the
plan. A total of 480,000 options are available for future grant under the 1999
Non-Employee Plan. Stock options typically become exercisable over a two year
period after issuance and expire ten years from the date of grant.

Net Perceptions records compensation related to stock options using the
intrinsic value method of APB No. 25. Compensation related to stock options
granted in 1998 and 1999 below fair market value was $3,146. Such compensation
is considered deferred compensation and amortized over the four-year repurchase
period of the common stock underlying the related options. Stock compensation
expense of $366 and $1,495 was recognized during the years ended December 31,
1998 and 1999, respectively. No stock compensation expense was recognized in
1997. With respect to options granted through December 31, 1999, stock
compensation expense of $704, $377, $138 and $66 will be recognized in the years
ending December 31, 2000, 2001, 2002 and 2003, respectively.

If stock compensation expense for the years ended December 31, 1998 and
1999 had been allocated across all relevant functional expense categories within
operating expenses, it would be allocated as follows:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
1998 1999
---- ------
<S> <C> <C>
Sales and marketing......................................... $258 $ 784
Research and development.................................... 58 431
General and administrative.................................. 50 280
---- ------
$366 $1,495
==== ======
</TABLE>

F-15
<PAGE> 93
NET PERCEPTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

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

<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Outstanding, December 31, 1996...................... -- --
Granted........................................... 1,212,000 $ 0.11
Exercised......................................... (306,250) $ 0.10
Forfeited......................................... (275,750) $ 0.10
---------
Outstanding, December 31, 1997...................... 630,000 $ 0.12
Granted........................................... 1,204,564 $ 0.61
Exercised......................................... (355,916) $ 0.16
Forfeited......................................... (62,084) $ 0.16
---------
Outstanding, December 31, 1998...................... 1,416,564 $ 0.52
Granted........................................... 1,524,986 $13.67
Exercised......................................... (287,984) $ 0.62
Forfeited......................................... (104,800) $ 8.84
---------
Outstanding, December 31, 1999...................... 2,548,766 $ 8.04
=========
</TABLE>

The following table summarizes information about fixed-price stock options
outstanding at December 31, 1999:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED-AVERAGE ------------------------------
RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.10 - $0.25 621,806 8.08 $ 0.20 621,806 $ 0.20
$0.50 - $0.98 373,200 8.17 $ 0.85 373,200 $ 0.85
$1.13 - $5.50 384,626 9.02 $ 4.24 384,626 $ 4.24
$7.50 - $14.00 552,584 9.26 $12.27 552,584 $12.27
$15.75 - $16.75 373,300 9.76 $16.01 4,934 $15.91
$17.00 - $25.00 193,250 9.52 $20.05 7,833 $17.29
$35.88 50,000 9.92 $35.88 -- --
--------- ---------
2,548,766 8.88 $ 8.04 1,944,983 $ 4.66
========= =========
</TABLE>

At December 31, 1999, 1,827,255 outstanding options are subject to certain
repurchase rights by the Company.

F-16
<PAGE> 94
NET PERCEPTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

For the purposes of the SFAS No. 123 pro forma disclosures below, the
estimated fair value of the options is amortized to expense over the four year
repurchase period of the common stock underlying the related options. Had
compensation cost for Net Perceptions' stock plan been determined based on the
minimum value at the grant date for awards during 1997, 1998 and 1999 consistent
with the provisions of SFAS No. 123, Net Perceptions' net loss and basic and
diluted net loss per share for the years ended December 31, 1997, 1998 and 1999
would have been the pro forma amounts indicated below:

<TABLE>
<CAPTION>
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Net loss:
As reported............................................ $(4,722) $(4,968) $(12,039)
Pro forma.............................................. (4,734) (4,979) (12,202)
Basic and diluted net loss per share:
As reported............................................ $ (3.01) $ (1.40) $ (0.78)
Pro forma.............................................. (3.02) (1.40) (0.79)
</TABLE>

The minimum 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 1997, 1998 and 1999, respectively; dividend yield
of 0% for all years; risk-free interest rates of 6.1%, 5.4% and 5.8%; expected
lives of 5 years, and a volatility factor of 66% for 1999 grants after the IPO
in April 1999. Volatility factors were not used for periods prior to the IPO as
this factor is not applicable to non-public companies for these fair value
calculations. The weighted-average fair value of options granted during 1997,
1998 and 1999 using the Black-Scholes option-pricing model was $0.03, $1.56 and
$8.24 per share, respectively.

Employee Stock Purchase Plan

In February 1999, Net Perceptions' board of directors adopted the Employee
Stock Purchase Plan (the "Purchase Plan"). The number of shares of common stock
reserved for issuance under the Purchase Plan is 1,000,000. During 1999, 42,384
shares were issued under the Purchase Plan.

Stock split

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

8. JOINT VENTURE

In July 1999, Net Perceptions entered into a joint venture agreement under
which the Company and three other companies formed Net Perceptions Japan
("NPJ"), for the purpose of distributing Net Perceptions' and other
non-competing software products in Japan. Under the agreement, Net Perceptions
contributed capital of $394 for a 45% interest in the joint venture. Net
Perceptions accounts for this joint venture investment using the equity method
of accounting, recording its share of income or loss in the income statement and
correspondingly adjusting the carrying value of the investment. In 1999, Net
Perceptions, recorded its 45% share of losses in NPJ, which were $197.

F-17
<PAGE> 95
NET PERCEPTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

9. OPERATING LEASES

Net Perceptions has entered into operating lease commitments for its office
space. Minimum future lease payments due under the agreements are as follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
2000.................................................. $1,206
2001.................................................. 1,121
2002.................................................. 991
2003.................................................. 1,001
2004.................................................. 405
2005 and after........................................ 1,027
------
$5,751
======
</TABLE>

Rent expense totaled $145, $214 and $847 for the years ended December 31,
1997, 1998 and 1999, respectively.

10. 401(k) PLAN

Net Perceptions has adopted a 401(k) employee retirement plan under which
eligible employees may contribute up to 25% of their annual compensation,
subject to certain limitations. Employees vest immediately in their
contributions and earnings thereon. The plan allows for, but does not require,
Net Perceptions matching contributions. Net Perceptions has not made any such
matching contributions.

11. SEGMENT DATA

Segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the Company's
chief operating decision maker, or decision making group, in deciding how to
allocate resources and in assessing performance. Net Perceptions operates in one
segment, selling software products and related services. Substantially all
product and service revenues through December 31, 1999 have been attributable to
the Net Perceptions for E-commerce and Net Perceptions Recommendation Engine
software products. Service revenues through December 31, 1999 have been derived
principally from implementation and support of the Company's software products.
The Company's chief operating decision maker evaluates revenue and profitability
performance on an enterprise-wide basis to make operating and strategic
decisions. 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.

12. SUBSEQUENT EVENT

On February 14, 2000, Net Perceptions completed the acquisition of
Knowledge Discovery One, Inc. ("KD One"). KD One is a leading supplier of
advanced data analysis solutions for multi-channel retailers. In this
transaction, the Company acquired all of the outstanding securities of KD One in
exchange for 1,969,630 shares of common stock. As part of the acquisition, the
Company also assumed all outstanding options to purchase KD One common stock.
The Company has reserved 268,297 shares of its common stock for issuance upon
the exercise of these options. The transaction will be accounted for under the
purchase method of accounting. The total purchase price was approximately $118.2
million.

F-18
<PAGE> 96

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Knowledge Discovery One, Inc.

In our opinion, the accompanying balance sheets and the related statements
of operations, stockholders' deficit and cash flows present fairly, in all
material respects, the financial position of Knowledge Discovery One, Inc. at
December 31, 1998 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999 in conformity
with accounting principles generally accepted in the United States. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.

PricewaterhouseCoopers LLP
Austin, Texas
February 25, 2000

F-19
<PAGE> 97

KNOWLEDGE DISCOVERY ONE, INC.

BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 1,444 $ 1,081
Accounts receivable, net allowance for doubtful accounts
of $0 and $25, respectively............................ 1,235 1,708
Prepaid expenses and other current assets................. 452 266
Restricted cash........................................... -- 246
------- --------
Total current assets.............................. 3,131 3,301
Property and equipment, net................................. 806 665
Restricted cash............................................. 246 --
Deposits and other assets................................... 22 21
------- --------
Total assets...................................... $ 4,205 $ 3,987
======= ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Borrowings under line of credit........................... $ 250 $ 600
Current maturities of long-term obligations............... 141 241
Accounts payable.......................................... 531 683
Accrued liabilities....................................... 384 722
Deferred revenue.......................................... 114 867
------- --------
Total current liabilities......................... 1,420 3,113
Long-term obligations, net of current maturities............ 690 413
Commitments (Note 6)
Redeemable convertible preferred stock, $.001 par value,
8,000,000 and 10,650,000 shares authorized, respectively;
7,570,810 and 10,490,192 shares issued and outstanding,
respectively; liquidation value $10,178 and $16,016,
respectively.............................................. 10,607 73,431
Stockholders' deficit:
Common stock, $.001 par value, 12,000,000, and 15,000,000
shares authorized, respectively; 209,811 and 2,038,093
shares issued and outstanding, respectively............ -- 2
Additional paid-in capital................................ -- --
Deferred stock-based compensation......................... -- (1,962)
Accumulated deficit....................................... (8,512) (71,004)
Treasury stock at cost (0 and 41,208 shares,
respectively).......................................... -- (6)
------- --------
Total stockholders' deficit....................... (8,512) (72,970)
------- --------
Total liabilities, redeemable convertible
preferred stock and stockholders' deficit...... $ 4,205 $ 3,987
======= ========
</TABLE>

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

F-20
<PAGE> 98

KNOWLEDGE DISCOVERY ONE, INC.

STATEMENTS OF OPERATIONS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Revenue:
License................................................... $ -- $ 1,301 $ 918
Maintenance and services.................................. 647 1,864 2,597
------- ------- --------
Total revenue..................................... 647 3,165 3,515
Cost of revenue:
License................................................... -- 428 649
Maintenance and services.................................. 768 1,554 2,179
------- ------- --------
Total cost of revenue............................. 768 1,982 2,828
Gross profit (loss)......................................... (121) 1,183 687
Operating expenses:
Sales and marketing....................................... 914 1,558 3,322
Research and development.................................. 1,387 2,473 2,980
General and administrative................................ 706 1,631 2,162
Amortization of stock-based compensation (see Note 8)..... -- -- 310
------- ------- --------
Total operating expenses.......................... 3,007 5,662 8,774
------- ------- --------
Operating loss.............................................. (3,128) (4,479) (8,087)
Other income (expense):
Interest income........................................... 95 80 68
Interest expense.......................................... (13) (64) (143)
Loss on disposal of equipment............................. -- (141) (5)
------- ------- --------
Net loss.................................................... (3,046) (4,604) (8,167)
Accretion on redeemable convertible preferred stock......... (133) (351) (57,018)
------- ------- --------
Net loss attributable to common stock....................... $(3,179) $(4,955) $(65,185)
======= ======= ========
</TABLE>

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

F-21
<PAGE> 99

KNOWLEDGE DISCOVERY ONE, INC.

STATEMENT OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL DEFERRED TOTAL
------------------ PAID-IN STOCK-BASED ACCUMULATED TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT STOCK DEFICIT
--------- ------ ---------- ------------ ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997........ 62,000 $-- $ 13 $ -- $ (402) $-- $ (389)
Issuance of common stock to vendor
for services.................... 1,000 -- -- -- -- -- --
Issuance of common stock upon
exercise of employee stock
options......................... 40,000 -- -- -- -- -- --
Accretion on redeemable
convertible preferred stock..... -- -- (13) -- (120) -- (133)
Net loss.......................... -- -- -- -- (3,046) -- (3,046)
--------- --- ------- ------- -------- --- --------
Balance at December 31, 1997...... 103,000 -- -- -- (3,568) -- (3,568)
Issuance of common stock upon
exercise of employee stock
options......................... 106,811 -- 11 -- -- -- 11
Accretion on redeemable
convertible preferred stock..... -- -- (11) -- (340) -- (351)
Net loss.......................... -- -- -- -- (4,604) -- (4,604)
--------- --- ------- ------- -------- --- --------
Balance at December 31, 1998...... 209,811 -- -- -- (8,512) -- (8,512)
Issuance of common stock upon
exercise of employee stock
options......................... 1,828,282 2 284 -- -- -- 286
Stock options issued to vendor.... -- -- 21 -- -- -- 21
Purchase of treasury stock........ -- -- -- -- -- (6) (6)
Stock-based compensation.......... -- -- 2,388 (1,962) -- -- 426
Accretion on redeemable
convertible preferred stock..... -- -- (2,693) -- (54,325) -- (57,018)
Net loss.......................... -- -- -- -- (8,167) -- (8,167)
--------- --- ------- ------- -------- --- --------
Balance at December 31, 1999...... 2,038,093 $ 2 $ -- $(1,962) $(71,004) $(6) $(72,970)
========= === ======= ======= ======== === ========
</TABLE>

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

F-22
<PAGE> 100

KNOWLEDGE DISCOVERY ONE, INC.

STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(3,046) $(4,604) $(8,167)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 100 314 378
Non-cash stock based compensation...................... -- -- 447
Loss on disposal of equipment.......................... -- 141 2
Provision for doubtful accounts........................ -- -- 25
Changes in assets and liabilities:
Accounts receivable.................................. (160) (998) (498)
Prepaid expenses and other current assets............ (27) (425) 186
Restricted cash...................................... -- (246) --
Deposits and other assets............................ (15) (6) 1
Accounts payable..................................... 289 162 152
Deferred revenue..................................... -- 114 753
Accrued liabilities.................................. (67) 346 338
------- ------- -------
Net cash used in operating activities............. (2,926) (5,202) (6,383)
------- ------- -------
Cash flows from investing activities:
Purchases of property and equipment....................... (716) (630) (249)
Proceeds from the sale of property and equipment.......... -- -- 10
------- ------- -------
Net cash used in investing activities............. (716) (630) (239)
------- ------- -------
Cash flows from financing activities:
Borrowings under line of credit........................... -- 250 350
Proceeds from notes payable............................... 268 604 --
Repayments of notes payable............................... -- (327) (118)
Proceeds from sale leaseback transaction.................. -- 310 --
Repayments of capital lease obligations................... -- (23) (59)
Repayment of note payable to related party................ (70) -- --
Proceeds from issuance of redeemable convertible preferred
stock.................................................. 3,770 6,178 5,839
Offering costs of issuing redeemable convertible preferred
stock.................................................. (35) (20) (33)
Proceeds from issuance of common stock.................... -- 5 286
Purchase of treasury stock................................ -- -- (6)
Proceeds from common stock purchased but unissued......... 6 -- --
------- ------- -------
Net cash provided by financing activities......... 3,939 6,977 6,259
------- ------- -------
Net increase in cash and cash equivalents................... 297 1,145 (363)
Cash and cash equivalents at beginning of year.............. 2 299 1,444
------- ------- -------
Cash and cash equivalents at end of year.................... $ 299 $ 1,444 $ 1,081
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid for interest.................................... $ 13 $ 64 $ 140
Supplemental disclosure of non-cash investing and financing
activities:
Conversion of bridge loan into Series A redeemable
convertible preferred stock............................ 230 -- --
Issuance of previously unissued common stock.............. -- 6 --
Accretion on redeemable convertible preferred stock....... 133 351 57,018
</TABLE>

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

F-23
<PAGE> 101

KNOWLEDGE DISCOVERY ONE, INC.

NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

1. ORGANIZATION

Knowledge Discovery One, Inc. (the "Company"), formerly known as J.L.
Supercomputing Resource, Inc., was founded as a Texas corporation on February
22, 1995 for the purpose of developing, marketing and supporting decision
support products for retail applications. The Company has developed a retail
software suite that allows customers to accurately forecast demand, measure
promotion effectiveness, optimize inventory and allocations, and predict
customer loyalty. The Company currently sells its product and provides
consulting and data processing services to customers throughout North America.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.

Cash and cash equivalents

Cash and cash equivalents consist of cash on hand and on deposit at banks.
The Company considers highly liquid investments with original maturities of
three months or less to be cash equivalents. Cash equivalents consist of
deposits in money market funds at December 31, 1998 and 1999.

Fair value of financial instruments

The carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, restricted cash and accrued liabilities,
approximated fair value as of December 31, 1998 and 1999 due to the relatively
short maturity of these instruments. The carrying amounts of the Company's
borrowings under variable rate short-term and long-term debt instruments
approximated their fair value at December 31, 1998 and 1999 due to their
variable nature.

Property and equipment

Property and equipment are recorded at cost. Depreciation is provided for
using the straight-line method over the estimated useful lives of the respective
assets or the term of the lease for capital leases and leasehold improvements.
The useful lives are generally three to five years. Expenditures that increase
the value or extend the life of the asset are capitalized, while the cost of
maintenance and repairs are expensed as incurred. Upon disposal or retirement of
assets, the cost and related accumulated depreciation are removed from the
accounts, and the related gains or losses are reflected in operations.

Revenue recognition

The Company's revenues are derived from product licensing revenues and fees
for consulting, data processing and maintenance services.

Product licensing revenues are recognized after shipment of the product,
provided persuasive evidence of an arrangement exists, collection of the
resulting receivable is probable and the fee for

F-24
<PAGE> 102
KNOWLEDGE DISCOVERY ONE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

the arrangement is fixed or determinable. Consulting and data processing
revenues are recognized over the period in which the services are rendered.
Maintenance revenue consists of maintenance and renewal fees for providing
unspecified product updates on an if and when available basis and technical
support for the Company's software products. Maintenance revenue is recognized
ratably over the related service period, generally twelve months.

Advertising expenses

Advertising expenses consist primarily of costs incurred promoting the
Company's products and services, including public relations, trade shows,
marketing collateral, etc. The Company expenses all advertising costs as
incurred. The Company had $193, $119 and $433 in advertising expenses for the
years ended December 31, 1997, 1998 and 1999, respectively.

Research and development

Research and development costs are charged to operations as incurred. The
Company capitalizes certain software development costs subsequent to the
establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon completion of
a working model. Costs incurred by the Company between the completion of a
working model and the point at which the product is ready for general release
have been insignificant.

Impairment of long-lived assets

The Company evaluates its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying value of an asset may not
be recoverable.

Federal income taxes

The Company accounts for income taxes in accordance with the liability
method. This method requires that deferred taxes be computed annually utilizing
the effective tax rates in effect when the temporary difference are expected to
reverse and adjusted when new tax laws or rates are enacted. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amounts expected to be realized.

Risks and uncertainties

The Company's products are concentrated in the software industry which is
highly competitive and subject to rapid technological change. The Company's
operating results are significantly dependent on the Company's ability to market
and develop its products. The inability of the Company to successfully market
its products as a result of competition or other factors would have a material
adverse effect on the Company's business financial condition and results of
operations.

F-25
<PAGE> 103
KNOWLEDGE DISCOVERY ONE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

3. PROPERTY AND EQUIPMENT

Property and equipment is comprised of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1999
------ ------
<S> <C> <C>
Computer equipment.......................................... $ 804 $ 978
Equipment under capital lease............................... 310 310
Furniture and fixtures...................................... 30 69
Leasehold improvements...................................... 22 33
------ ------
1,166 1,390
Less: accumulated depreciation and amortization............. (360) (725)
------ ------
$ 806 $ 665
====== ======
</TABLE>

Amortization of equipment under capital leases is included in depreciation
expense.

4. LINE OF CREDIT

On August 1998, the Company entered into a revolving credit agreement with
a commercial bank that provides up to $2,000 in borrowings based on a formula
using eligible assets. The line is collateralized by substantially all of the
Company's assets. The maturity date of the line of credit is February 28, 2000.
There is no commitment fee on the unused line of credit. The line of credit
bears interest at the prime rate, which was 8.5% at December 31, 1999. At
December 31, 1999, $600 was outstanding under this line of credit.

5. LONG-TERM OBLIGATIONS

Long-term obligations are comprised of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1998 1999
----- -----
<S> <C> <C>
Note payable................................................ $ 544 $ 431
Capital lease obligations................................... 287 223
----- -----
831 654
Less: current maturities.................................... (141) (241)
----- -----
$ 690 $ 413
===== =====
</TABLE>

The note payable relates to the purchase of property and equipment and is
due in monthly payments of $18 which includes principle and interest. The note
bears interest at 15% and matures in February 2002. The note is collateralized
by the purchased property. A full recourse, additional interest payment of 20%
of the original borrowing amount is payable at the end of the term of the loan,
but the Company has the option to extend payments for an additional year.
Additionally, the lender received a warrant to purchase 23,121 shares of the
Company's Series B redeemable convertible preferred stock (see Note 7).

The Company's capital lease obligations are collaterialized by the
underlying equipment. The Company is required to maintain a compensating balance
relating to a leasing agreement deposit which is shown on the balance sheet as
restricted cash.

F-26
<PAGE> 104
KNOWLEDGE DISCOVERY ONE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

Maturity of debt including line of credit, excluding capital lease
obligations:

<TABLE>
<CAPTION>
FISCAL YEAR TOTAL
----------- ------
<S> <C>
2000............................................ $ 768
2001............................................ 221
2002............................................ 42
------
$1,031
======
</TABLE>

6. COMMITMENTS

The Company leases its facilities and certain other equipment under
operating lease agreements. Rental expense under operating leases was $108, $380
and $556 for the years ended December 31, 1997, 1998 and 1999, respectively.

As of December 31, 1999, future minimum rental commitments under these
leases are as follows:

<TABLE>
<CAPTION>
FISCAL YEAR CAPITAL OPERATING
----------- ------- ---------
<S> <C> <C>
2000........................................................ $101 $ 604
2001........................................................ 101 456
2002........................................................ 68 300
2003........................................................ -- 315
2004........................................................ -- 26
---- ------
270 $1,701
======
Less amount representing interest on capital lease
obligations............................................... (47)
----
Present value of minimum lease payments..................... 223
Less current portion of capital lease obligations........... (74)
----
$149
====
</TABLE>

7. CONVERTIBLE PREFERRED STOCK

As of December 31, 1999, the Company had authorization for the issuance of
10,650,000 shares of $.001 par value preferred stock and had designated the
following series:

<TABLE>
<CAPTION>
SHARES SHARES LIQUIDATION
DESIGNATED OUTSTANDING PREFERENCE
---------- ----------- -----------
<S> <C> <C> <C>
Series A convertible preferred stock................ 4,000,000 4,000,000 $4,000
Series B convertible preferred stock................ 3,593,931 3,570,810 6,177
Series C convertible preferred stock................ 2,919,382 2,919,382 5,839
</TABLE>

The Series A, B and C preferred stock (the "preferred stock") carry a
liquidation preference of $1.00, $1.73 and $2.00 per share, respectively.

The preferred stock is convertible into common stock at the option of the
holder on a one-for-one basis, subject to certain adjustments. Each series of
preferred stock will automatically convert upon the earliest of (i) the closing
date of an underwritten public offering of the Company's common stock with
aggregate proceeds of more than $15,000 and a per share offering price of at
least $6.50 or (ii) the date of an affirmative election of the holders of a
majority of the outstanding shares of

F-27
<PAGE> 105
KNOWLEDGE DISCOVERY ONE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

preferred stock. The Company has reserved 10,490,192 shares of common stock to
permit conversion of the preferred stock in accordance with its terms.

Holders of the preferred stock are entitled to one vote for each share of
common stock into which such shares may be converted. Each share of preferred
stock entitles the holder to receive dividends, if and when declared by the
board of directors, prior to any dividend paid on the common stock. Dividends,
if any, on preferred stock shall be declared at an annual rate of 10% of the
original price paid per share per annum. Prior to January 1, 2002, such
dividends shall not accumulate. As of December 31, 1999, no dividends have been
declared. In the event of liquidation, the preferred stock has preference over
the common stock in the amount equal to the original issue price plus declared
but unpaid dividends. If at any time after January 13, 2004, the holders of at
least 67% of the outstanding shares of Series A, B and C preferred stock then
outstanding voting together as one class request, the Company will be required
to redeem up to 50% of such holders' shares at the greater of (i) the original
issue price per share plus any accrued but unpaid dividends or (ii) the fair
market value per share as determined by an independent qualified appraiser. At
any time after January 13, 2005, the holders of at least 67% of the outstanding
shares of Series A, B and C preferred stock then outstanding voting together as
one class request, the Company will be required to redeem up to 100% of such
holders' shares at the greater of the original issue price per share plus any
accrued but unpaid dividends and the fair market value per share as determined
by an independent qualified appraiser.

As of December 31, 1999, the value of the preferred stock included $57,502
of accretion relating to the increase in the fair market value of the preferred
stock as it relates to the redemption value as noted above.

A summary of the preferred stock activity for the years ended December 31,
1997, 1998 and 1999 is presented below:

<TABLE>
<CAPTION>
PREFERRED STOCK
---------------------
SHARES AMOUNT
---------- -------
<S> <C> <C>
Balance, January 1, 1997.................................... -- $ --
Issuance of Series A at $1.00 per share, net issuance
costs.................................................. 4,000,000 3,965
Accretion of preferred stock.............................. -- 133
---------- -------
Balance, December 31, 1997.................................. 4,000,000 4,098
Issuance of Series B at $1.73 per share, net issuance
costs.................................................. 3,570,810 6,158
Accretion of preferred stock.............................. -- 351
---------- -------
Balance, December 31, 1998.................................. 7,570,810 10,607
Issuance of Series C at $2.00 per share, net issuance
costs.................................................. 2,919,382 5,806
Accretion of preferred stock.............................. -- 57,018
---------- -------
Balance, December 31, 1999.................................. 10,490,192 $73,431
========== =======
</TABLE>

8. STOCKHOLDERS' DEFICIT

The Company has adopted a 1996 Stock Option/Stock Issuance Plan (the
"Plan"), providing for two separate equity programs: (i) the Option Grant
Program providing for the granting of both incentive and non-statutory stock
options and (ii) the Stock Issuance Program providing for the issuance of common
stock directly, either through the immediate purchase of such shares or as a
bonus for services rendered to the Company.

F-28
<PAGE> 106
KNOWLEDGE DISCOVERY ONE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

The Plan, as amended, provides for a maximum number of common shares to be
issued of 3,709,727. Accordingly, the Company has reserved a sufficient number
of shares of common stock to permit exercise of options or issuance of shares in
accordance with the terms of the Plan. If an option expires or becomes
unexercisable for any reason, options related to the unpurchased shares become
available for grant. Generally, options granted under the Plan have a term of
ten years from the date of grant and vest 25% of the total after the first year
and ratably for the remaining three years of the vesting term. These options can
be immediately exercised on the date of grant. The Company has the right to
repurchase shares purchased through the exercise of options at the original
exercise price. Incentive stock options can not be granted for less than 100% of
the fair market value of the stock and non-statutory stock options can not be
granted for less than 110% of the fair market value of the stock to any
shareholder of the Company with a 10% or greater interest in the common stock of
the Company.

A summary of activity under the Company's Plan for the years ended December
31, 1997, 1998 and 1999 is presented below:

<TABLE>
<CAPTION>
WEIGHTED
AVAILABLE EXERCISE AVERAGE
FOR OUTSTANDING PRICE EXERCISE
GRANT OPTIONS PER SHARE PRICE AMOUNT
----------- ----------- ------------ -------- ------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997.......... 2,801,636 -- -- -- --
Options approved for grant.......... 408,091 -- -- -- --
Options granted..................... (1,927,264) 1,927,264 $0.10 - 0.11 $0.11 $ 204
Options exercised................... -- (40,000) -- 0.00 --
Options forfeited................... 6,000 (6,000) 0.10 0.10 (1)
----------- ---------- -----
Balance at December 31, 1997........ 1,288,463 1,881,264 0.10 - 0.11 0.11 203
Options granted..................... (1,062,935) 1,062,935 0.10 - 0.19 0.13 140
Options exercised................... -- (106,811) 0.10 - 0.17 0.10 (11)
Options forfeited................... 407,345 (407,345) 0.10 - 0.17 0.10 (42)
----------- ---------- -----
Balance at December 31, 1998........ 632,873 2,430,043 0.10 - 0.19 290
Options approved for grant.......... 500,000 --
Options granted..................... (1,404,965) 1,404,965 0.17 - 0.40 0.30 421
Options exercised................... -- (1,828,282) 0.10 - 0.40 0.16 (286)
Options forfeited................... 338,510 (338,510) 0.10 - 0.40 0.18 (61)
Options repurchased................. 41,208 -- -- -- --
----------- ---------- -----
Balance at December 31, 1999........ 107,626 1,668,216 0.10 - 0.40 $ 364
=========== ========== =====
Weighted-average fair value of
options granted:
Year ended December 31, 1997...... $ 0.03
Year ended December 31, 1998...... $ 0.04
Year ended December 31, 1999...... $ 1.75
</TABLE>

The Company has applied Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations, in
accounting for the Plan. Accordingly, no compensation expense has been
recognized for the Plan. Had compensation cost for the Plan been determined
based upon the fair value at the grant date for awards under the Plan consistent
with the methodology prescribed under Statement of Financial Accounting
Standards No. 123, "Accounting

F-29
<PAGE> 107
KNOWLEDGE DISCOVERY ONE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

for Stock-Based Compensation," the Company's net loss would have increased for
the years ended December 31, 1997, 1998 and 1999:

<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Net loss:
As reported..................................... $(3,046) $(4,604) $(8,167)
Pro forma....................................... (3,047) (4,637) (8,189)
</TABLE>

The fair value of each option grant is estimated on the date of grant using
the minimum value method with the following weighted average assumptions used
for grants in 1997, 1998 and 1999: dividend yield of 0%, risk-free interest rate
of 6.5% and expected lives of five years. Volatility of the Company's common
stock underlying the options granted was not considered because the Company's
equity securities are not publicly traded as of December 31, 1999.

The following table summarizes information about fixed stock options
outstanding and exercisable at December 31, 1999:

<TABLE>
<CAPTION>
NUMBER WEIGHTED-AVERAGE
OUTSTANDING REMAINING CONTRACTUAL WEIGHTED-AVERAGE
EXERCISE PRICE AT 12/31/99 LIFE (YEARS) EXERCISE PRICE
-------------- ----------- --------------------- ----------------
<S> <C> <C> <C>
$0.10 - $0.19 1,206,366 7.9 $0.13
$0.40 461,850 9.7 $0.40
---------
1,668,216 8.4 $0.20
=========
</TABLE>

Stock based compensation

In connection with certain stock option grants during the year ended
December 31, 1999, the Company recorded unearned stock-based compensation
totaling $2,272, which is being amortized over the vesting periods of the
related options which is generally four years. Amortization of this stock-based
compensation recognized during the year ended December 31, 1999 totaled $310. No
stock-based compensation was recorded in fiscal years 1997 and 1998. If the
stock-based compensation for the year ended December 31, 1999 had been allocated
across the relevant functional expense categories, it would be allocated as
follows:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
------------
<S> <C>
Cost of revenues............................................ $ 30
Sales and marketing......................................... 102
Research and development.................................... 61
General and administrative.................................. 117
----
$310
====
</TABLE>

Warrants

In connection with an equipment finance line of credit entered into in
1997, the Company issued a warrant to a bank for the purchase of 23,121 shares
of the Company's Series B convertible preferred stock at an exercise price of
$1.73 per share. The warrant is fully exercisable and expires on

F-30
<PAGE> 108
KNOWLEDGE DISCOVERY ONE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

the later of 2008 or five years after an initial public offering. The Company
has reserved 23,121 shares of Series B convertible preferred stock and common
stock for issuance under this warrant. The fair value of the warrant was not
significant.

9. EMPLOYEE BENEFITS

During 1997, the Company established a 401(k) retirement savings plan for
its full time employees. All employees meeting minimum age requirements are
eligible to enroll in the savings plan 90 days after commencement of employment.
As of December 31, 1999, the Company has not provided discretionary matching
contributions to employee accounts.

10. CONCENTRATIONS OF CREDIT RISK

Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of cash and cash equivalents and
accounts receivable. Cash and cash equivalents at times exceed FDIC insurance
coverage limits. The Company maintains its cash and cash equivalents in major,
creditworthy financial institutions and has not experienced any losses on its
deposits. The Company's accounts receivable result primarily from sales to large
consumer retail companies. The Company performs credit evaluations of its
customers and generally does not require collateral. Management does not believe
that significant credit risk for trade receivables exist at December 31, 1998.

Information regarding sales to and accounts receivable from major
customers, to the extent amounts were 10% or greater, is as follows:

<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Sales for the period ended December 31,
Customer A........................................... 60% 33% 28%
Customer B........................................... -- 25 --
Customer C........................................... -- 18 14
Customer D........................................... -- 16 15
Customer G........................................... -- -- 13
Accounts receivable at December 31,
Customer A........................................... -- 14% 14%
Customer B........................................... -- 42 --
Customer C........................................... -- 23 14
Customer D........................................... -- 18 --
Customer E........................................... -- -- 17
Customer F........................................... -- -- 18
</TABLE>

F-31
<PAGE> 109
KNOWLEDGE DISCOVERY ONE, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

11. INCOME TAXES

The components of the net deferred tax assets are as follows at December
31:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1999
------- -------
<S> <C> <C>
Deferred tax asset:
Net operating loss carryforwards.......................... $ 2,873 $ 5,896
Deferred tax liabilities:
Depreciation.............................................. (18) (22)
Accrued expense........................................... 76 24
------- -------
Net deferred tax asset before valuation allowance........... 2,931 5,898
Valuation allowance......................................... (2,931) (5,898)
------- -------
Net deferred tax asset...................................... $ -- $ --
======= =======
</TABLE>

Federal income tax operating loss carryforwards begin to expire in 2010.

Under the Tax Reform Act of 1986, the amount of and the benefit from net
operating losses that can be carried forward may be impaired in certain
circumstances. Events which may cause changes in the Company's tax carryovers
include, but are not limited to, a cumulative ownership change of more than 50%
over a three years period. Certain of the Company's operating losses that can be
utilized in any one taxable year for federal tax purposes may be limited by
future ownership changes.

Following is a reconciliation of the amount of the income tax benefit that
would result from applying the statutory Federal income tax rates to pretax loss
and the reported amount of income tax benefit for the years ended December 31,
1997, 1998 and 1999:

<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Tax benefit at statutory rate of 34%...................... $ 1,036 $ 1,565 $ 2,737
State income tax benefit.................................. 91 138 242
Permanent differences..................................... -- (3) (12)
Net increase in valuation allowance....................... (1,127) (1,700) (2,967)
------- ------- -------
$ -- $ -- $ --
======= ======= =======
</TABLE>

12. RELATED PARTY TRANSACTIONS

On February 10, 1997, the Company paid the balance of $70 on a loan to a
shareholder bearing no interest.

13. SUBSEQUENT EVENT

On February 14, 2000 all of the Company's capital stock was acquired by Net
Perceptions, Inc. for 1,969,630 shares of Net Perceptions, Inc. common stock.
Additionally, all of the Company's outstanding stock options were assumed by Net
Perceptions, Inc.

F-32
<PAGE> 110

NET PERCEPTIONS, INC.

PRO FORMA COMBINED FINANCIAL INFORMATION
(UNAUDITED)

On February 14, 2000, Net Perceptions, Inc. ("Net Perceptions") completed
its acquisition of Knowledge Discovery One, Inc. ("KD One"). The following
unaudited pro forma combined statement of operations for the year ended December
31, 1999 gives effect to the acquisition as if it had occurred on January 1,
1999 using the purchase method of accounting. The pro forma combined statement
of operations is based on historical results of operations of Net Perceptions
and KD One for the year ended December 31, 1999. The unaudited pro forma
combined balance sheet as of December 31, 1999 gives effect to the acquisition
as if it had occurred on that date and is based on the historical financial
position of Net Perceptions and KD One. The pro forma combined statement of
operations and pro forma combined balance sheet and the accompanying notes (the
"Pro Forma Combined Financial Information") should be read in conjunction with
and are qualified by the historical financial statements of Net Perceptions and
KD One and the notes thereto.

The pro forma adjustments are based on estimates and assumptions available
at the time of the filing of this Registration Statement that Net Perceptions
and KD One believe are reasonable under the circumstances. The fair value of the
consideration will be allocated to the assets and liabilities acquired based
upon the fair values of such assets and liabilities at the effective time of the
acquisition. The estimates and assumptions will be adjusted upon issuance of the
final valuation report.

The Pro Forma Combined Financial Information has been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission. The Pro Forma Combined Financial Information is intended for
informational purposes only and is not necessarily indicative of the future
financial position or future results of operations of the consolidated company
after the acquisition, or of the financial position or results of operations of
the consolidated company that would have actually occurred had the acquisition
been effected as of the dates indicated above.

F-33
<PAGE> 111

NET PERCEPTIONS, INC.

PRO FORMA COMBINED BALANCE SHEET
(UNAUDITED)
AS OF DECEMBER 31, 1999
(IN THOUSANDS)

ASSETS

<TABLE>
<CAPTION>
PRO FORMA
NET ADJUSTMENTS PRO FORMA
PERCEPTIONS KD ONE (NOTE 2) COMBINED
----------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.............. $ 17,457 $ 1,081 $ -- $ 18,538
Short-term investments................. 19,397 -- -- 19,397
Accounts receivable, net............... 7,663 1,708 -- 9,371
Royalties receivable, net.............. 1,135 -- -- 1,135
Prepaid expenses and other current
assets.............................. 1,373 512 -- 1,885
-------- -------- -------- --------
Total current assets........... 47,025 3,301 -- 50,326
Marketable securities.................... 6,317 -- -- 6,317
Property and equipment, net.............. 4,749 665 -- 5,414
Intangible assets........................ -- -- 117,400(b) 117,400
Other assets............................. 657 21 -- 678
-------- -------- -------- --------
Total assets................... $ 58,748 $ 3,987 $117,400 $180,135
======== ======== ======== ========

LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
expenses............................ $ 5,846 $ 1,405 $ 2,100(a) $ 9,351
Deferred revenue....................... 3,336 867 (215)(a) 3,988
Borrowings under line of credit........ -- 600 -- 600
Current portion of long-term
liabilities......................... 471 241 -- 712
-------- -------- -------- --------
Total current liabilities...... 9,653 3,113 1,885 14,651
Long-term liabilities, net of current
portion................................ 707 413 -- 1,120
-------- -------- -------- --------
Total liabilities.............. 10,360 3,526 1,885 15,771
-------- -------- -------- --------
Redeemable convertible preferred stock... -- 73,431 (73,431)(c) --
Stockholders' equity:
Common stock........................... 2 2 (2)(d) 2
Treasury stock......................... -- (6) 6(d) --
Additional paid-in capital............. 71,231 -- 115,976(a)(b) 187,207
Accumulated other comprehensive loss... (89) -- -- (89)
Deferred stock-based compensation...... -- (1,962) 1,962(d) --
Accumulated deficit.................... (22,756) (71,004) 71,004(d) (22,756)
-------- -------- -------- --------
Total stockholders' equity..... 48,388 (72,970) 188,946 164,364
-------- -------- -------- --------
Total liabilities, convertible
redeemable preferred stock
and stockholders' equity.... $ 58,748 $ 3,987 $117,400 $180,135
======== ======== ======== ========
</TABLE>

See accompanying notes to pro forma financial information.

F-34
<PAGE> 112

NET PERCEPTIONS, INC.

PRO FORMA COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
PRO FORMA
NET ADJUSTMENTS PRO FORMA
PERCEPTIONS KD ONE (NOTE 2) COMBINED
----------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Product.............................. $ 11,408 $ 918 $ -- $ 12,326
Service and maintenance.............. 3,721 2,597 -- 6,318
-------- -------- -------- ---------
Total revenues............... 15,129 3,515 -- 18,644
-------- -------- -------- ---------
Cost of revenues:
Product.............................. 286 649 -- 935
Service and maintenance.............. 2,735 2,179 -- 4,914
-------- -------- -------- ---------
Total cost of revenues....... 3,021 2,828 -- 5,849
-------- -------- -------- ---------
Gross margin........................... 12,108 687 -- 12,795
-------- -------- -------- ---------
Operating expenses:
Sales and marketing.................. 12,099 3,322 -- 15,421
Research and development............. 8,194 2,980 -- 11,174
General and administrative........... 3,725 2,162 -- 5,887
Stock compensation expense........... 1,495 310 -- 1,805
Amortization of intangibles.......... -- -- 30,017(b) 30,017
-------- -------- -------- ---------
Total operating expenses..... 25,513 8,774 30,017 64,304
-------- -------- -------- ---------
Loss from operations................... (13,405) (8,087) (30,017) (51,509)
Other income (loss), net............... 1,366 (80) -- 1,286
-------- -------- -------- ---------
Net loss............................... (12,039) (8,167) (30,017) (50,223)
Accretion on redeemable convertible
preferred stock...................... -- (57,018) 57,018(c) --
-------- -------- -------- ---------
Net loss attributable to common
stock................................ $(12,039) $(65,185) $ 27,001 $ (50,223)
======== ======== ======== =========
Net loss per share:
Basic and diluted.................... $ (0.78) $ (2.91)(f)
======== =========
Shares used in computing basic and
diluted........................... 15,402 17,275(f)
======== =========
Pro forma basic and diluted.......... $ (0.64)(e) $ (2.42)(f)
======== =========
Shares used in computing pro forma
basic and diluted................. 18,851(e) 20,724(f)
======== =========
</TABLE>

See accompanying notes to pro forma financial information.

F-35
<PAGE> 113

NET PERCEPTIONS, INC.

NOTES TO THE PRO FORMA COMBINED FINANCIAL INFORMATION
(UNAUDITED)

1. GENERAL

Net Perceptions will account for the acquisition of KD One under the
purchase method. The accompanying pro forma combined financial information
reflect an aggregate purchase price of approximately $118.2 million, consisting
of the fair value of common stock issued ($101.5 million), the fair value of
options for common stock assumed ($14.6 million), and transaction costs ($2.1
million), and is for illustrative purposes only. Actual fair values of the
assets and liabilities acquired will be based on financial information as of the
closing date of the acquisition (February 14, 2000) and the final valuation
report. The preliminary purchase price allocation is as follows (in thousands):

<TABLE>
<S> <C>
Acquired technology......................................... $ 4,000
Customer List............................................... 3,000
Workforce................................................... 1,000
Excess of purchase price over fair value of net assets
acquired (goodwill)....................................... 109,400
Fair value of net assets.................................... 769
--------
Total............................................. $118,169
========
</TABLE>

2. PRO FORMA ADJUSTMENTS AND ASSUMPTIONS

(a) Adjustments to record estimated transaction costs and adjust deferred
license revenues to estimated cost in accordance with Accounting Principles
Board Opinion No. 16.

(b) Represents the excess of the purchase consideration over the assigned
values of net assets acquired. Goodwill is being amortized over four years.
Other identified intangibles are being amortized over three years.

(c) The pro forma adjustment reflects the conversion of KD One preferred
stock (including accretion) into KD One common stock, which was exchanged for
Net Perceptions common stock pursuant to the acquisition.

(d) Adjustment reflects the elimination of KD One's historical
stockholders' equity.

(e) See Note 2 of the notes to financial statements for Net Perceptions for
an explanation of the methods used in computing net loss per share data.

(f) Shares used in computing net loss per share have been adjusted to
reflect the shares of Net Perceptions common stock to be issued to the
stockholders of KD One whose shares of KD One common stock are vested, as
consideration in the acquisition. Approximately 97,095 of the shares of Net
Perceptions common stock to be issued to the stockholders of KD One will be
subject to a repurchase option, which is at Net Perceptions' discretion, at the
original sale price in the event the individual holding the shares terminates
his or her employment with Net Perceptions. The total number of shares of Net
Perceptions common stock issued as consideration at the closing of the
acquisition was 1,969,630, of which 210,000 were placed in escrow.

F-36
<PAGE> 114

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The expenses, other than underwriting discounts and commissions, expected
to be incurred by us in connection with the sale of common stock being
registered are estimated to be as follows:

<TABLE>
<S> <C>
SEC Registration fee........................................ $ 42,000
NASD fee.................................................... 17,000
Printing and engraving...................................... 150,000
Legal fees and expenses..................................... 300,000
Accounting fees and expenses................................ 150,000
Transfer agents' fees....................................... 7,750
Miscellaneous............................................... 233,250
--------
Total............................................. $900,000
========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation law authorizes a court to
award or a corporation's board of directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933
(the "Act"). Article VII of our Amended and Restated Bylaws provides for
mandatory indemnification of our directors and officers and permissible
indemnification of employees and other agents to the maximum extent permitted by
the Delaware General Corporation Law. Our Amended and Restated Certificate of
Incorporation provides that, pursuant to Delaware law, a director shall not be
liable for monetary damages for breach of the directors' fiduciary duty as
directors to us and our stockholders. This provision in our Amended and Restated
Certificate of Incorporation does not eliminate the directors' fiduciary duty,
and in appropriate circumstances equitable remedies such as injunctive or other
forms of non-monetary relief will remain available under Delaware law. In
addition, each director will continue to be subject to liability for breach of
the director's duty of loyalty to us for acts or omissions not in good faith or
involving intentional misconduct, for knowing violations of laws, for actions
leading to improper personal benefit to the director, and for payment of
dividends or approval of stock repurchases or redemptions that are unlawful
under Delaware law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws.

We have entered into Indemnification Agreements with our officers and
directors, a form of which is attached as Exhibit 10.1 hereto and incorporated
herein by reference. The Indemnification Agreements provide our officers and
directors with further indemnification to the maximum extent permitted by the
Delaware General Corporation Law. We also maintain liability insurance for our
directors and officers. Reference is also made to the form of underwriting
agreement filed as Exhibit 1.1 hereto, indemnifying our officers and directors
against certain liabilities, and Section 1.10 of the Amended and Restated
Investor Rights Agreement contained in Exhibit 4.1 hereto and Section 1.10 of
the Registration Rights Agreement contained in Exhibit 4.2 hereto, each
indemnifying certain of our stockholders, including controlling stockholders,
against certain liabilities.

II-1
<PAGE> 115

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

(a) In the three years preceding the filing of this registration statement,
we issued and sold the following securities that were not registered under the
Securities Act:

1. We issued and sold 950,150 shares (assuming no exercise of stock
options after December 31, 1999) of our common stock to our employees,
consultants and directors pursuant to exercises of options under our stock
plans for an aggregate consideration of $253,890.

2. We granted options to purchase 3,941,550 shares of common stock, at
a weighted average exercise price of $5.51 per share, to our employees and
consultants under our stock plans, of which 950,150 shares have been
exercised as of December 31, 1999.

3. On October 28, 1997, we issued and sold warrants to purchase
approximately 11,982 shares of Series C preferred stock to Silicon Valley
Bank.

4. On August 17, 1999, we issued 10,565 shares of our common stock to
Silicon Valley Bank pursuant to the net exercise of the warrant described
in 15(a)(3).

5. Between December 18, 1997 and February 20, 1998, we issued and sold
4,635,834 shares of Series C preferred stock for an aggregate purchase
price of $7,116,005.19 to a group of 11 investors.

6. On February 4, 1999, we issued and sold a convertible promissory
note with a principal balance of $4,000,000.00 to Trans Cosmos, Inc.

7. On April 28, 1999, we issued 290,911 shares of our common stock to
Trans Cosmos, Inc. pursuant to the conversion of the promissory note
described in 15(a)(7).

8. On February 14, 2000 we issued and sold 1,969,630 shares of common
stock in connection with our acquisition of Knowledge Discovery One, Inc.

The issuances described in 15(a)(1) and 15(a)(2) were deemed exempt from
registration under the Act in reliance upon Rule 701 promulgated under the Act.
The issuances of the securities described in Items 15(a)(3) through 15(a)(5) and
15(a)(7) and 15(a)(8) were deemed to be exempt from registration under the Act
in reliance on Section 4(2) of the Act as transactions by an issuer not
involving any public offering. The issuance described in Item 15(a)(6) was
deemed exempt from registration under the Act in reliance on Regulation S. In
addition, the recipients of securities in each such transaction represented
their intentions to acquire the securities for investment only and not with a
view to or for sale in connection with any distribution thereof and appropriate
legends were affixed to the share certificates and warrants issued in such
transactions. All recipients had adequate access, through their relationships
with us, to information about us.

II-2
<PAGE> 116

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
1.1 Form of Underwriting Agreement.
2.1*** Agreement and Plan of Merger, dated as of January 15, 2000,
as amended February 3, 2000, by and among Net Perceptions,
Inc., Kentucky Acquisition Corporation and Knowledge
Discovery One, Inc.
3.1** Amended and Restated Certificate of Incorporation.
3.2** Amended and Restated Bylaws.
4.1** Amended and Restated Investor Rights Agreement, dated
December 18, 1997, among Net Perceptions, Inc. and the
investors and founders named therein, as amended.
4.2*** Registration Rights Agreement, dated February 14, 2000, by
and among Net Perceptions, Inc. and the stockholders named
therein.
4.3** Specimen common stock certificate.
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP.
10.1** Form of Indemnification Agreement entered into between Net
Perceptions, Inc. and its directors and officers.
10.2** 1996 Stock Plan.
10.3** 1999 Equity Incentive Plan.
10.4** 1999 Non-Employee Director Option Plan.
10.5** Employee Stock Purchase Plan.
10.6**+ License Agreement between Net Perceptions, Inc. and Regents
of the University of Minnesota, dated July 31, 1996.
10.7**+ Amendment to License Agreement between Net Perceptions, Inc.
and Regents of the University of Minnesota, dated October
13, 1997.
10.8*** Knowledge Discovery One, Inc. 1996 Stock Option/Stock
Issuance Plan.
10.9**+ Orbix Development and Runtime License Agreement between IONA
Technologies PLC and Net Perceptions, Inc., dated July 9,
1998.
10.10**+ Agreement Amendment to Orbix Development and Runtime License
Agreement between IONA Technologies PLC and Net Perceptions,
Inc., dated October 12, 1998.
10.11** Lease between the Protective Group and Net Perceptions,
Inc., dated November 12, 1998.
10.12** Form of Master Purchase Agreement.
10.13** Change in Control Severance Plan and Summary Plan
Description.
10.15** Note Purchase Agreement between Net Perceptions, Inc. and
Trans Cosmos, Inc., dated February 4, 1999.
21*** List of Subsidiaries.
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants.
23.2 Consent of PricewaterhouseCoopers LLP, independent
accountants.
23.3 Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(included in Exhibit 5.1).
24.1*** Power of Attorney
27*** Financial Data Schedule.
</TABLE>

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

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

*** Previously filed.

+ Confidential treatment has been granted for certain portions of this Exhibit
pursuant to Rule 406 under the Securities Act. Confidential portions have
been omitted and filed separately with the Securities and Exchange
Commission.

II-3
<PAGE> 117

(b) FINANCIAL STATEMENT SCHEDULES

No financial statement schedules are required. The information required to
be set forth therein is not applicable or is shown in the financial statements
or notes thereto.

ITEM 17. UNDERTAKINGS

The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement, certificates in the
denominations and registered in the names as required by the underwriters to
permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the Delaware General Corporation Law, the Amended and Restated
Certificate of Incorporation or the Bylaws of the registrant, Indemnification
Agreements entered into between the registrant and its officers and directors,
the Underwriting Agreement, or otherwise, the registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act, and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered hereunder,
the registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question of whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.

The registrant hereby undertakes that:

(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.

II-4
<PAGE> 118

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 3 to the Registration Statement to
be signed on its behalf by the undersigned, hereunto duly authorized, in the
City of Minneapolis, State of Minnesota, on this 23rd day of March, 2000.

NET PERCEPTIONS, INC.

By: /s/ STEVEN J. SNYDER
------------------------------------
Steven J. Snyder
President and Chief Executive
Officer

Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 3 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated:

/s/ STEVEN J. SNYDER President, Chief Executive Officer and March 23, 2000
- ------------------------------------------ Director (Principal Executive Officer)
Steven J. Snyder

* Chief Financial Officer and Secretary March 23, 2000
- ------------------------------------------ (Principal Financial and Accounting
Thomas M. Donnelly Officer)

* Director March 23, 2000
- ------------------------------------------
John T. Riedl

* Director March 23, 2000
- ------------------------------------------
Ann L. Winblad

* Director March 23, 2000
- ------------------------------------------
Douglas J. Burgum

* Director March 23, 2000
- ------------------------------------------
William Lansing

*By: /s/ STEVEN J. SNYDER March 23, 2000
- ------------------------------------------
Steven J. Snyder
Attorney-in-Fact
</TABLE>

II-5
<PAGE> 119

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<S> <C> <C>
1.1 Form of Underwriting Agreement.
2.1*** Agreement and Plan of Merger, dated as of January 15, 2000,
as amended February 3, 2000, by and among Net Perceptions,
Inc., Kentucky Acquisition Corporation and Knowledge
Discovery One, Inc.
3.1** Amended and Restated Certificate of Incorporation.
3.2** Amended and Restated Bylaws.
4.1** Amended and Restated Investor Rights Agreement, dated
December 18, 1997, among Net Perceptions, Inc. and the
investors and founders named therein, as amended.
4.2*** Registration Rights Agreement dated February 14, 2000, by
and among Net Perceptions, Inc. and the stockholders named
therein.
4.3** Specimen common stock certificate.
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP.
10.1** Form of Indemnification Agreement entered into between Net
Perceptions, Inc. and its directors and officers.
10.2** 1996 Stock Plan.
10.3** 1999 Equity Incentive Plan.
10.4** 1999 Non-Employee Director Option Plan.
10.5** Employee Stock Purchase Plan.
10.6**+ License Agreement between Net Perceptions, Inc. and Regents
of the University of Minnesota, dated July 31, 1996.
10.7**+ Amendment to License Agreement between Net Perceptions, Inc.
and Regents of the University of Minnesota, dated October
13, 1997.
10.8*** Knowledge Discovery One, Inc. 1996 Stock Option/Stock
Issuance Plan.
10.9**+ Orbix Development and Runtime License Agreement between IONA
Technologies PLC and Net Perceptions, Inc., dated July 9,
1998.
10.10**+ Agreement Amendment to Orbix Development and Runtime License
Agreement between IONA Technologies PLC and Net Perceptions,
Inc., dated October 12, 1998.
10.11** Lease between the Protective Group and Net Perceptions,
Inc., dated November 12, 1998.
10.12** Form of Master Purchase Agreement.
10.13** Change in Control Severance Plan and Summary Plan
Description.
10.15** Note Purchase Agreement between Net Perceptions, Inc. and
Trans Cosmos, Inc., dated February 4, 1999.
21*** List of Subsidiaries.
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants.
23.2 Consent of PricewaterhouseCoopers LLP, independent
accountants.
23.3 Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(included in Exhibit 5.1).
24.1*** Power of Attorney.
27*** Financial Data Schedule.
</TABLE>

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

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

*** Previously filed.

<PAGE> 1
EXHIBIT 1.1

UNDERWRITING AGREEMENT

March 23, 2000

FleetBoston Robertson Stephens Inc.
Chase Securities Inc.
U.S. Bancorp Piper Jaffray Inc.
Dain Rauscher Incorporated
Adams, Harkness & Hill, Inc.
As Representatives of the several Underwriters
c/o FleetBoston Robertson Stephens Inc.
555 California Street, Suite 2600
San Francisco, CA 94104

Ladies and Gentlemen:

INTRODUCTORY. Net Perceptions, Inc., a Delaware corporation (the
"Company"), proposes to issue and sell to the several underwriters named in
Schedule A (the "Underwriters") an aggregate of 2,000,000 shares of its Common
Stock, par value $0.0001 per share (the "Common Shares"); and the stockholders
of the Company named in Schedule B (collectively, the "Selling Stockholders")
severally propose to sell to the Underwriters an aggregate of 625,471 Common
Shares. The 2,000,000 Common Shares to be sold by the Company and the 625,471
shares of Common Shares to be sold by the Selling Stockholders are collectively
called the "Firm Shares." In addition, the Company has granted to the
Underwriters an option to purchase up to an additional 318,863 Common Shares and
certain Selling Stockholders have severally granted to the Underwriters an
option to purchase up to an additional 74,957 Common Shares, each Selling
Stockholder selling up to the amount set forth opposite such Selling
Stockholder's name in Schedule B, all as provided in Section 2. The additional
318,863 Common Shares to be sold by the Company and the additional 74,957 Common
Shares to be sold by certain Selling Stockholders pursuant to such option are
collectively called the "Option Shares." The Firm Shares and, if and to the
extent such option is exercised, the Option Shares are collectively called the
"Shares." FleetBoston Robertson Stephens Inc. ("Robertson Stephens"), Chase
Securities Inc., U.S. Bancorp Piper Jaffray Inc., Dain Rauscher Incorporated and
Adams, Harkness & Hill, Inc. have agreed to act as representatives of the
several Underwriters (in such capacity, the "Representatives") in connection
with the offering and sale of the Common Shares.

The Company has prepared and filed with the Securities and Exchange Commission
(the "Commission") a registration statement on Form S-1 (File No. 333-31230),
which contains a form of prospectus, subject to completion, to be used in
connection with the public offering and sale of the Shares. Each such
prospectus, subject to completion, used in connection with such public offering
is called a "preliminary prospectus." Such registration statement, as amended,
including the financial statements, exhibits and schedules thereto, in the form
in which it was declared effective by the Commission under the Securities Act of
1933 and the rules and regulations promulgated thereunder (collectively, the
"Securities Act"), including any information deemed to be a part thereof at the
time of effectiveness pursuant to Rule 430A under the Securities Act, is called
the "Registration Statement." Any registration statement filed by the

1.
<PAGE> 2
Company pursuant to Rule 462(b) under the Securities Act is called the "Rule
462(b) Registration Statement," and from and after the date and time of filing
of the Rule 462(b) Registration Statement the term "Registration Statement"
shall include the Rule 462(b) Registration Statement. Such prospectus, in the
form first used by the Underwriters to confirm sales of the Shares, is called
the "Prospectus." All references in this Agreement to the Registration
Statement, the Rule 462(b) Registration Statement, a preliminary prospectus, the
Prospectus or any amendments or supplements to any of the foregoing, shall
include any copy thereof filed with the Commission pursuant to its Electronic
Data Gathering, Analysis and Retrieval System ("EDGAR").

The Company and each of the Selling Stockholders hereby confirm their
respective agreements with the Underwriters as follows:

SECTION 1. Representations and Warranties.

A. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents, warrants and covenants to each Underwriter as follows:

(a) Compliance with Registration Requirements. The
Registration Statement and any Rule 462(b) Registration Statement have been
declared effective by the Commission under the Securities Act. The Company has
complied to the Commission's satisfaction with all requests of the Commission
for additional or supplemental information. No stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b) Registration
Statement is in effect and no proceedings for such purpose have been instituted
or are pending or, to the best knowledge of the Company, are contemplated or
threatened by the Commission.

Each preliminary prospectus and the Prospectus when filed with the
Commission complied in all material respects with the Securities Act. Each of
the Registration Statement, any Rule 462(b) Registration Statement and any
post-effective amendment thereto, at the time it became effective and up to and
on the Closing Date and on any later date on which the Option Shares are
purchased, complied and will comply in all material respects with the Securities
Act and did not and will not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading. Each preliminary prospectus, as of its
date, and the Prospectus, as amended or supplemented, as of its date and at all
subsequent times through the 30th day after the date hereof, did not and will
not contain any untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The representations
and warranties set forth in the two immediately preceding sentences do not apply
to statements in or omissions from the Registration Statement, any Rule 462(b)
Registration Statement, or any post-effective amendment thereto, or the
Prospectus, or any amendments or supplements thereto, made in reliance upon and
in conformity with information furnished to the Company in writing by the
Representatives expressly for use therein. There are no contracts or other
documents required to be described in the Prospectus or to be filed as exhibits
to the Registration Statement which have not been described or filed as
required.

(b) Offering Materials Furnished to Underwriters. The
Company has delivered to each of the Representatives one complete conformed copy
of the Registration Statement and of each consent and certificate of experts
filed as a part thereof, and conformed copies of the Registration Statement
(without exhibits) and preliminary prospectuses and the

2.
<PAGE> 3
Prospectus, as amended or supplemented, in such quantities and at such places as
the Representatives have reasonably requested for each of the Underwriters.

(c) Distribution of Offering Material By the Company.
The Company has not distributed and will not distribute, prior to the later of
the Second Closing Date (as defined below) and the completion of the
Underwriters' distribution of the Shares, any offering material in connection
with the offering and sale of the Shares other than a preliminary prospectus,
the Prospectus or the Registration Statement.

(d) The Underwriting Agreement. This Agreement has
been duly authorized, executed and delivered by, and is a valid and binding
agreement of, the Company, enforceable in accordance with its terms, except as
rights to indemnification hereunder may be limited by applicable law and except
as the enforcement hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting the
rights and remedies of creditors or by general equitable principles.

(e) Authorization of the Shares To Be Sold by the
Company. The Shares to be purchased by the Underwriters from the Company have
been duly authorized for issuance and sale pursuant to this Agreement and, when
issued and delivered by the Company pursuant to this Agreement, will be validly
issued, fully paid and nonassessable.

(f) Authorization of the Shares To Be Sold by the
Selling Stockholders. The Common Shares to be purchased by the Underwriters from
the Selling Stockholders, when issued, were validly issued, fully paid and
nonassessable.

(g) No Applicable Registration or Other Similar
Rights. There are no persons with registration or other similar rights to have
any equity or debt securities registered for sale under the Registration
Statement or included in the offering contemplated by this Agreement, other than
the Selling Stockholders with respect to the Shares included in the Registration
Statement, except for such rights as have been duly waived.

(h) No Material Adverse Change. Subsequent to the
respective dates as of which information is given in the Prospectus: (i) there
has been no material adverse change, or any development that could reasonably be
expected to result in a material adverse change, in the condition, financial or
otherwise, or in the earnings, business, operations or prospects, whether or not
arising from transactions in the ordinary course of business, of the Company and
its subsidiaries, considered as one entity (any such change or effect, where the
context so requires, is called a "Material Adverse Change"); (ii) the Company
and its subsidiaries, considered as one entity, have not incurred any material
liability or obligation, indirect, direct or contingent, not in the ordinary
course of business nor entered into any material transaction or agreement not in
the ordinary course of business; and (iii) there has been no dividend or
distribution of any kind declared, paid or made by the Company or, except for
dividends paid to the Company or other subsidiaries, any of its subsidiaries on
any class of capital stock or repurchase or redemption by the Company or any of
its subsidiaries of any class of capital stock.

(i) Independent Accountants. PricewaterhouseCoopers
LLP, have expressed their opinion with respect to the financial statements
(which term as used in this Agreement includes the related notes thereto) and
supporting schedules filed with the Commission as a part of the Registration
Statement and included in the Prospectus, are

3.
<PAGE> 4
independent public or certified public accountants as required by the Securities
Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act").

(j) Preparation of the Financial Statements.

(1) The financial statements of the Company
filed with the Commission as a part of the Registration Statement and included
in the Prospectus present fairly the financial position of the Company as of and
at the dates indicated and the results of its operations and cash flows for the
periods specified. The supporting schedules included in the Registration
Statement present fairly the information required to be stated therein. Such
financial statements and supporting schedules have been prepared in conformity
with generally accepted accounting principles applied on a consistent basis
throughout the periods involved, except as may be expressly stated in the
related notes thereto. No other financial statements or supporting schedules are
required to be included in the Registration Statement. The financial data set
forth in the Prospectus under the captions "Summary--Summary Financial Data,"
"Selected Financial Data" and "Capitalization" fairly present the information
set forth therein on a basis consistent with that of the audited financial
statements contained in the Registration Statement.

(2) The financial statements of Knowledge
Discovery One, Inc. ("KD One") filed with the Commission as part of the
Registration Statement present fairly the financial position of KD One as if and
for the dates indicated and the results of its operations and cash flows for the
periods specified. The supporting schedules included in the Registration
Statement present fairly the information required to be stated therein. Such
financial statements and supporting schedules have been prepared in conformity
with generally accepted accounting principles applied on a consistent basis
throughout the periods involved, except as may be expressly stated in the
related notes thereto. No other financial statements or supporting schedules
relating to KD One are required to be included in the Registration Statement.

(3) The pro forma financial statements of
the Company and its subsidiaries and the related notes thereto included under
the caption "Summary - Summary Consolidated Financial Data," "Pro Forma
Consolidated Selected Financial Data" and elsewhere in the Prospectus and in the
Registration Statement present fairly the information contained therein, have
been prepared in accordance with the Commission's rules and guidelines with
respect to pro forma financial statements and have been properly presented on
the bases described therein, and the assumptions used in the preparation thereof
are reasonable and the adjustments used therein are appropriate to give effect
to the transactions and circumstances referred to therein. No other pro forma
financial information is required to be included in the Registration Statement.

(k) Company's Accounting System. The Company and each
of its subsidiaries maintain a system of accounting controls sufficient to
provide reasonable assurances that (i) transactions are executed in accordance
with management's general or specific authorization; (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain
accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.

4.
<PAGE> 5
(l) Subsidiaries of the Company. The Company does not
own or control, directly or indirectly, any corporation, association or other
entity other than those listed in Exhibit 21 to the Registration Statement.

(m) Incorporation and Good Standing of the Company
and its Subsidiaries. Each of the Company and its subsidiaries has been duly
organized and is validly existing as a corporation in good standing under the
laws of the jurisdiction in which it is organized with full corporate power and
authority to own its properties and conduct its business as described in the
prospectus, and is duly qualified to do business as a foreign corporation and is
in good standing under the laws of each jurisdiction which requires such
qualification, except where a failure to be so qualified or in good standing
would not result in a Material Adverse Change.

(n) Capitalization of the Subsidiaries. All the
outstanding shares of capital stock of each subsidiary have been duly and
validly authorized and issued and are fully paid and nonassessable, and, except
as otherwise set forth in the Prospectus, all outstanding shares of capital
stock of the subsidiaries are owned by the Company either directly or through
wholly owned subsidiaries free and clear of any security interests, claims,
liens or encumbrances.

(o) No Prohibition on Subsidiaries from Paying
Dividends or Making Other Distributions. No subsidiary of the Company is
currently prohibited, directly or indirectly, from paying any dividends to the
Company, from making any other distribution on such subsidiary's capital stock,
from repaying to the Company any loans or advances to such subsidiary from the
Company or from transferring any of such subsidiary's property or assets to the
Company or any other subsidiary of the Company, except as described in or
contemplated by the Prospectus.

(p) Capitalization and Other Capital Stock Matters.
The authorized, issued and outstanding capital stock of the Company is as set
forth in the Prospectus under the caption "Capitalization" (other than
subsequent issuances, if any, pursuant to employee benefit plans described in
the Prospectus or upon exercise of outstanding options described in the
Prospectus). The Common Shares (including the Shares) conform in all material
respects to the description thereof contained in the Prospectus. All of the
issued and outstanding Common Shares have been duly authorized and validly
issued, are fully paid and nonassessable and have been issued in compliance with
federal and state securities laws. None of the outstanding Common Shares was
issued in violation of any preemptive rights, rights of first refusal or other
similar rights to subscribe for or purchase securities of the Company. There are
no authorized or outstanding options, warrants, preemptive rights, rights of
first refusal or other rights to purchase, or equity or debt securities
convertible into or exchangeable or exercisable for, any capital stock of the
Company or any of its subsidiaries other than those described in the Prospectus.
The description of the Company's stock option, stock bonus and other stock plans
or arrangements, and the options or other rights granted thereunder, set forth
in the Prospectus accurately and fairly presents the information required to be
shown with respect to such plans, arrangements, options and rights.

(q) Stock Exchange Listing. The Shares are registered
pursuant to Section 12(g) of the Exchange Act and are listed on the Nasdaq
National Market and the Company has taken no action designed to, or likely to
have the effect of, terminating the registration of the Common Shares under the
Exchange Act or delisting the Common Shares from the Nasdaq National Market, nor
has the Company received any notification that the

5.
<PAGE> 6
Commission or the National Association of Securities Dealers, Inc. (the "NASD")
is contemplating terminating such registration or listing.

(r) No Consents, Approvals or Authorizations
Required. No consent, approval, authorization, filing with or order of any court
or governmental agency or regulatory body is required in connection with the
transactions contemplated herein, except such as have been obtained or made
under the Securities Act and such as may be required (i) under the blue sky laws
of any jurisdiction in connection with the purchase and distribution of the
Shares by the Underwriters in the manner contemplated here and in the
Prospectus, (ii) by the National Association of Securities Dealers, Inc. and
(iii) by the federal and provincial laws of Canada.

(s) Non-Contravention of Existing Instruments and
Agreements. Neither the issuance and sale of the Shares nor the consummation of
any other transactions herein contemplated nor the fulfillment of the terms
hereof will conflict with, result in a breach or violation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company or any of
its subsidiaries pursuant to, (i) the charter or by-laws of the Company or any
of its subsidiaries, (ii) the terms of any indenture, contract, lease, mortgage,
deed of trust, note agreement, loan agreement or other agreement, obligation,
condition, covenant or instrument to which the Company or any of its
subsidiaries is a party or bound or to which its or their property is subject or
(iii) any statute, law, rule, regulation, judgment, order or decree applicable
to the Company or any of its subsidiaries of any court, regulatory body,
administrative agency, governmental body, arbitrator or other authority having
jurisdiction over the Company or any of its subsidiaries or any of its or their
properties, except, in the cases of (ii) and (iii) only, for breaches,
violations, liens, charges or encumbrances that would not result in a Material
Adverse Change.

(t) No Defaults or Violations. Neither the Company
nor any subsidiary is in violation or default of (i) any provision of its
charter or by-laws, (ii) the terms of any indenture, contract, lease, mortgage,
deed of trust, note agreement, loan agreement or other agreement, obligation,
condition, covenant or instrument to which it is a party or bound or to which
its property is subject or (iii) any statute, law, rule, regulation, judgment,
order or decree of any court, regulatory body, administrative agency,
governmental body, arbitrator or other authority having jurisdiction over the
Company or such subsidiary or any of its properties, as applicable, except any
such violation or default which would not, singly or in the aggregate, result in
a Material Adverse Change except as otherwise disclosed in the Prospectus.

(u) No Actions, Suits or Proceedings. No action, suit
or proceeding by or before any court or governmental agency, authority or body
or any arbitrator involving the Company or any of its subsidiaries or its or
their property is pending or, to the best knowledge of the Company, threatened
that (i) could reasonably be expected to have a material adverse effect on the
performance of this Agreement or the consummation of any of the transactions
contemplated hereby or (ii) could reasonably be expected to result in a Material
Adverse Change.

(v) All Necessary Permits, Etc. The Company and its
subsidiaries possess such valid and current certificates, authorizations or
permits issued by the appropriate state, federal or foreign regulatory agencies
or bodies necessary to conduct their respective businesses, and neither the
Company nor any subsidiary has received any notice of proceedings relating to
the revocation or modification of, or non-compliance with, any such certificate,
authorization or permit which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, could result in a Material Adverse
Change.

6.
<PAGE> 7
(w) Title to Properties. The Company and each of its
subsidiaries has good and marketable title to all the properties and assets
reflected as owned in the financial statements referred to in Section 1(A)(j)
above, in each case free and clear of any security interests, mortgages, liens,
encumbrances, equities, claims and other defects, except such as do not
materially and adversely affect the value of such property and do not materially
interfere with the use made or proposed to be made of such property by the
Company or such subsidiary. The real property, improvements, equipment and
personal property held under lease by the Company or any subsidiary are held
under valid and enforceable leases, with such exceptions as are not material and
do not materially interfere with the use made or proposed to be made of such
real property, improvements, equipment or personal property by the Company or
such subsidiary.

(x) Tax Law Compliance. The Company and its
subsidiaries have filed all necessary federal, state and foreign income and
franchise tax returns or have properly requested extensions thereof and have
paid all taxes required to be paid by any of them and, if due and payable, any
related or similar assessment, fine or penalty levied against any of them. The
Company has made adequate charges, accruals and reserves in the applicable
financial statements referred to in Section 1(A)(j) above in respect of all
federal, state and foreign income and franchise taxes for all periods as to
which the tax liability of the Company or any of its subsidiaries has not been
finally determined. The Company is not aware of any tax deficiency that has been
or might be asserted or threatened against the Company that could result in a
Material Adverse Change.

(y) Intellectual Property Rights. Each of the Company
and its subsidiaries owns or possesses adequate rights to use all patents,
patent rights or licenses, inventions, collaborative research agreements, trade
secrets, know-how, trademarks, service marks, trade names and copyrights that
are necessary to conduct its businesses as described in the Registration
Statement and Prospectus, except where failure to own or possess such rights
would not result in a Material Adverse Change; the expiration of any patents,
patent rights, trade secrets, trademarks, service marks, trade names or
copyrights would not result in a Material Adverse Change that is not otherwise
disclosed in the Prospectus; the Company has not received any notice of, and has
no knowledge of, any infringement of or conflict with asserted rights of the
Company by others with respect to any patent, patent rights, inventions, trade
secrets, know-how, trademarks, service marks, trade names or copyrights; and the
Company has not received any notice of, and has no knowledge of, any
infringement of or conflict with asserted rights of others with respect to any
patent, patent rights, inventions, trade secrets, know-how, trademarks, service
marks, trade names or copyrights which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, might result in a
Material Adverse Change. There is no claim pending or, to the Company's
knowledge, threatened against the Company regarding patents, patent rights or
licenses, inventions, collaborative research, trade secrets, know-how,
trademarks, service marks, trade names or copyrights. The Company and its
subsidiaries do not in the conduct of their business as now or proposed to be
conducted as described in the Prospectus infringe or conflict with any right or
patent of any third party, or any discovery, invention, product or process which
is the subject of a patent application filed by any third party, known to the
Company or any of its subsidiaries, which such infringement or conflict is
reasonably likely to result in a Material Adverse Change.

(z) Y2K. There are no Y2K issues related to the
Company, or any of its subsidiaries, that (i) are of a character required to be
described or referred to in the Registration Statement or Prospectus by the
Securities Act or by the Exchange Act or the rules and regulations of the
Commission thereunder that have not been accurately described in the

7.
<PAGE> 8
Registration Statement or Prospectus or (ii) might reasonably be expected to
result in any Material Adverse Change.

(aa) No Transfer Taxes or Other Fees. There are no
transfer taxes or other similar fees or charges under federal law or the laws of
any state, or any political subdivision thereof, required to be paid in
connection with the execution and delivery of this Agreement or the issuance and
sale by the Company of the shares.

(bb) Company Not an "Investment Company." The Company
has been advised of the rules and requirements under the Investment Company Act
of 1940, as amended (the "Investment Company Act"). The Company is not, and
after receipt of payment for the Shares will not be, an "investment company" or
an entity "controlled" by an "investment company" within the meaning of the
Investment Company Act and will conduct its business in a manner so that it will
not become subject to the Investment Company Act.

(cc) Insurance. Each of the Company and its
subsidiaries are insured by institutions that are, to the Company's knowledge,
financially sound and reputable, with policies in such amounts and with such
deductibles and covering such risks as are generally deemed adequate and
customary for their businesses including, but not limited to, policies covering
real and personal property owned or leased by the Company and its subsidiaries
against theft, damage, destruction, acts of vandalism and earthquakes, general
liability and directors and officers liability. The Company has no reason to
believe that it or any subsidiary will not be able (i) to renew its existing
insurance coverage as and when such policies expire or (ii) to obtain comparable
coverage from similar institutions as may be necessary or appropriate to conduct
its business as now conducted and at a cost that would not result in a Material
Adverse Change. Neither of the Company nor any subsidiary has been denied any
insurance coverage which it has sought or for which it has applied.

(dd) Labor Matters. To the best of Company's
knowledge, no labor disturbance by the employees of the Company or any of its
subsidiaries exists or is imminent; and the Company is not aware of any existing
or imminent labor disturbance by the employees of any of its principal
suppliers, value added resellers or original equipment manufacturers that could
reasonably be expected to result in a Material Adverse Change.

(ee) No Price Stabilization or Manipulation. The
Company has not taken and will not take, directly or indirectly, any action
designed to or that might be reasonably expected to cause or result in
stabilization or manipulation of the price of the Common Stock to facilitate the
sale or resale of the Shares.

(ff) Lock-Up Agreements. Each officer and director of
the company, each Selling Stockholder and the beneficial owners of an additional
______ shares of Common Stock of the Company has agreed to sign an agreement
substantially in the form attached hereto as Exhibit A (the "Lock-up
Agreements"). The Company has provided to counsel for the Underwriters a
complete and accurate list of all securityholders of the Company and the number
and type of securities held by each securityholder. The Company has provided to
counsel for the Underwriters true, accurate and complete copies of all of the
Lock-up Agreements presently in effect or effected hereby. The Company hereby
represents and warrants that it will not release any of its officers, directors
or other stockholders from any Lock-up Agreements currently existing or
hereafter effected without the prior written consent of Robertson Stephens.

8.
<PAGE> 9
(gg) Related Party Transactions. There are no
business relationships or related-party transactions involving the Company or
any subsidiary or any other person required to be described in the Prospectus
which have not been described as required.

Any certificate signed by an officer of the Company and delivered to the
Representatives or to counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to each Underwriter as to the matters
set forth therein.

(hh) No Unlawful Contributions or Other Payments.
Neither the Company nor any of its subsidiaries nor, to the best of the
Company's knowledge, any employee or agent of the Company or any subsidiary, has
made any contribution or other payment to any official of, or candidate for, any
federal, state or foreign office in violation of any law or of the character
required to be disclosed in the Prospectus.

(ii) Environmental Laws. (i) the Company is in
compliance with all rules, laws and regulations relating to the use, treatment,
storage and disposal of toxic substances and protection of health or the
environment ("Environmental Laws") that are applicable to its business, except
where the failure to comply would not result in a Material Adverse Change, (ii)
the Company has received no notice from any governmental authority or third
party of an asserted claim under Environmental Laws, which claim is required to
be disclosed in the Registration Statement and the Prospectus, (iii) the Company
is not currently aware that it will be required to make future material capital
expenditures to comply with Environmental Laws and (iv) no property which is
owned, leased or occupied by the Company has been designated as a Superfund site
pursuant to the Comprehensive Response, Compensation, and Liability Act of 1980,
as amended (42 U.S.C. Section 9601, et seq.), or otherwise designated as a
contaminated site under applicable state or local law.

(jj) Periodic Review of Costs of Environmental
Compliance. In the ordinary course of its business, the Company conducts a
periodic review of the effect of Environmental Laws on the business, operations
and properties of the Company and its subsidiaries, in the course of which it
identifies and evaluates associated costs and liabilities (including, without
limitation, any capital or operating expenditures required for clean-up, closure
of properties or compliance with Environmental Laws or any permit, license or
approval, any related constraints on operating activities and any potential
liabilities to third parties). On the basis of such review and the amount of its
established reserves, the Company has reasonably concluded that such associated
costs and liabilities would not, individually or in the aggregate, result in a
Material Adverse Change.

(kk) ERISA Compliance. The Company and its
subsidiaries and any "employee benefit plan" (as defined under the Employee
Retirement Income Security Act of 1974, as amended, and the regulations and
published interpretations thereunder (collectively, "ERISA")) established or
maintained by the Company, its subsidiaries or their "ERISA Affiliates" (as
defined below) are in compliance in all material respects with ERISA. "ERISA
Affiliate" means, with respect to the Company or a subsidiary, any member of any
group of organizations described in Sections 414(b),(c),(m) or (o) of the
Internal Revenue Code of 1986, as amended, and the regulations and published
interpretations thereunder (the "Code") of which the Company or such subsidiary
is a member. No "reportable event" (as defined under ERISA) has occurred or is
reasonably expected to occur with respect to any "employee benefit plan"
established or maintained by the Company, its subsidiaries or any of their ERISA
Affiliates. No "employee benefit plan" established or maintained by the Company,
its subsidiaries or any of their ERISA Affiliates, if such "employee benefit
plan" were terminated, would have any "amount

9.
<PAGE> 10
of unfounded benefit liabilities" (as defined under ERISA). Neither the Company,
its subsidiaries nor any of their ERISA Affiliates has incurred or reasonably
expects to incur any liability under (i) Title IV of ERISA with respect to
termination of, or withdrawal from, any "employee benefit plan" or (ii) Sections
412, 4971, 4975 or 4980B of the Code. Each "employee benefit plan" established
or maintained by the Company, its subsidiaries or any of their ERISA Affiliates
that is intended to be qualified under Section 401(a) of the Code is so
qualified and nothing has occurred, whether by action or failure to act, which
would cause the loss of such qualification.

B. REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDERS.
Each Selling Stockholder, severally and not jointly. represents, warrants and
covenants to each Underwriter as follows:

(a) The Underwriting Agreement. This Agreement has
been duly authorized, executed and delivered by or on behalf of such Selling
Stockholder and is a valid and binding agreement of such Selling Stockholder,
enforceable in accordance with its terms, except as rights to indemnification
hereunder may be limited by applicable law and except as the enforcement hereof
may be limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting the rights and remedies of creditors or by
general equitable principles.

(b) The Custody Agreement and Power of Attorney. Each
of the (i) Custody Agreement signed by such Selling Stockholder and Norwest Bank
Minnesota, N.A., as custodian (the "Custodian"), relating to the deposit of the
Shares to be sold by such Selling Stockholder (the "Custody Agreement") and (ii)
Power of Attorney appointing certain individuals named therein as such Selling
Stockholder's attorneys-in-fact (each, an "Attorney-in-Fact") to the extent set
forth therein relating to the transactions contemplated hereby and by the
Prospectus (the "Power of Attorney"), of such Selling Stockholder has been duly
authorized, executed and delivered by such Selling Stockholder and is a valid
and binding agreement of such Selling Stockholder, enforceable in accordance
with its terms, except as rights to indemnification thereunder may be limited by
applicable law and except as the enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting the rights and remedies of creditors or by general
equitable principles. Each Selling Stockholder agrees that the Shares to be sold
by such Selling Stockholder on deposit with the Custodian are subject to the
interests of the Underwriters, that the arrangements made for such custody are
to that extent irrevocable, and that the obligations of such Selling Stockholder
hereunder shall not be terminated, except as provided in this Agreement or in
the Custody Agreement, by any act of the Selling Stockholder, by operation of
law, by death or incapacity of such Selling Stockholder or by the occurrence of
any other event. If such Selling Stockholder should die or become incapacitated,
or if any other event should occur, before the delivery of the Shares to be sold
by such Selling Stockholder hereunder, the documents evidencing the Shares to be
sold by such Selling Stockholder then on deposit with the Custodian shall be
delivered by the Custodian in accordance with the terms and conditions of this
Agreement as if such death, incapacity or other event had not occurred,
regardless of whether or not the Custodian shall have received notice thereof.

(c) Title to Shares to be Sold. Such Selling
Stockholder is the lawful owner of the Shares to be sold by such Selling
Stockholder hereunder and upon sale and delivery of, and payment for, such
Shares, as provided herein, such Selling Stockholder will convey good and
marketable title to such Shares, free and clear of all liens, encumbrances,
equities and claims whatsoever.

10.
<PAGE> 11
(d) All Authorizations Obtained. Such Selling
Stockholder has, and on the First Closing Date and the Second Closing Date (as
defined below) will have, good and valid title to all of the Company Shares
which may be sold by such Selling Stockholder pursuant to this Agreement on such
date and the legal right and power, and all authorizations and approvals
required by law and, if applicable, under its charter or other organizational
documents to enter into this Agreement and its Custody Agreement and Power of
Attorney, to sell, transfer and deliver all of the Shares which may be sold by
such Selling Stockholder pursuant to this Agreement and to comply with its other
obligations hereunder and thereunder.

(e) No Further Consents, Authorization or Approvals.
No consent, approval, authorization or order of any court or governmental agency
or body is required for the consummation by such Selling Stockholder of the
transactions contemplated herein, except such as may have been obtained under
the Securities Act and such as may be required under the federal and provincial
securities laws of Canada or the blue sky laws or any jurisdiction in connection
with the purchase and distribution of the Shares by the Underwriters and such
other approvals as have been obtained.

(f) Non-Contravention. Neither the sale of the
Securities being sold by such Selling Stockholder nor the consummation of any
other of the transactions herein contemplated by such Selling Stockholder or the
fulfillment of the terms hereof by such Selling Stockholder will conflict with,
result in a breach or violation of, or constitute a default under any law or the
terms of any indenture or other agreement or instrument to which such Selling
Stockholder is party or bound, any judgment, order or decree applicable to such
Selling Stockholder or any court or regulatory body, administrative agency,
governmental body or arbitrator having jurisdiction over such Selling
Stockholder.

(g) No Registration or Other Similar Rights. Such
Selling Stockholder does not have any registration or other similar rights to
have any equity or debt securities registered for sale by the Company under the
Registration Statement or included in the offering contemplated by this
Agreement, except for such rights as are described in the Prospectus under
"Shares Eligible for Future Sale."

(h) No Preemptive, Co-sale or other Rights. Such
Selling Stockholder does not have, or has waived prior to the date hereof, any
preemptive right, co-sale right or right of first refusal or other similar right
to purchase any of the Shares that are to be sold by the Company or any of the
other Selling Stockholders to the Underwriters pursuant to this Agreement; and
such Selling Stockholder does not own any warrants, options or similar rights to
acquire, and does not have any right or arrangement to acquire, any capital
stock, right, warrants, options or other securities from the Company required to
be described in the Registration Statement and the Prospectus that is not
described in the Registration Statement and the Prospectus.

(i) Disclosure Made by Such Selling Stockholder in
the Prospectus. All information furnished by or on behalf of such Selling
Stockholder in writing expressly for use in the Registration Statement and
Prospectus is, and on the First Closing Date and the Second Closing Date (as
defined below) will be, true, correct, and complete in all material respects,
and does not, and on the First Closing Date and the Second Closing Date will
not, contain any untrue statement of a material fact or omit to state any
material fact necessary to make such information not misleading. Such Selling
Stockholder confirms as accurate the number of shares of Company Shares set
forth opposite such Selling Stockholder's name in the

11.
<PAGE> 12
Prospectus under the caption "Principal and Selling Stockholders" (both prior to
and after giving effect to the sale of the Shares).

(j) No Price Stabilization or Manipulation. Such
Selling Stockholder has not taken and will not take, directly or indirectly, any
action designed to or that might be reasonably expected to cause or result in
stabilization or manipulation of the price of the Common Stock to facilitate the
sale or resale of the Shares.

(k) No Transfer Taxes or Other Fees. There are no
transfer taxes or other similar fees or charges under Federal law or the laws of
any state, or any political subdivision thereof, required to be paid in
connection with the execution and delivery of this Agreement or the sale by the
Selling Stockholders of the Shares.

(l) Distribution of Offering Materials by the Selling
Stockholders. The Selling Stockholders have not distributed and will not
distribute, prior to the later of the Second Closing Date (as defined below) and
the completion of the Underwriters' distribution of the Shares, any offering
material in connection with the offering and sale of the Shares by such Selling
Stockholder other than a preliminary prospectus, the Prospectus or the
Registration Statement.

(m) Confirmation of Company Representations and
Warranties. Such Selling Stockholder is not prompted to sell the Shares to be
sold by such Selling Stockholder by any material information concerning the
Company that is not set forth in the Registration Statement or the Prospectus.
Such Selling Stockholder, if a director or officer of the Company, is aware of
no fact that causes such Selling Stockholder to believe that the representations
and warranties of the Company contained in Section 1(A) hereof are not true and
correct.

Any certificate signed by or on behalf of any Selling Stockholder and
delivered to the Representatives or to counsel for the Underwriters shall be
deemed to be a representation and warranty by such Selling Stockholder to each
Underwriter as to the matters covered thereby.

SECTION 2. PURCHASE, SALE AND DELIVERY OF THE SHARES.

(a) The Firm Shares. Upon the terms herein set forth,
(i) the Company agrees to issue and sell to the several Underwriters an
aggregate of 2,000,000 Firm Shares and (ii) the Selling Stockholders agree to
sell to the several Underwriters an aggregate of 625,471 Firm Shares, each
Selling Stockholder selling the number of Firm Shares set forth opposite such
Selling Stockholder's name on Schedule B. On the basis of the representations,
warranties and agreements herein contained, and upon the terms but subject to
the conditions herein set forth, the Underwriters agree, severally and not
jointly, to purchase from the Company and the Selling Stockholders the
respective number of Firm Shares set forth opposite their names on Schedule A.
The purchase price per Firm Share to be paid by the several Underwriters to the
Company and the Selling Stockholders shall be $[___] per share.

(b) The First Closing Date. Delivery of the Firm
Shares to be purchased by the Underwriters and payment therefor shall be made by
the Company and the Representatives at 9:00 a.m. Boston time, at the offices of
Skadden Arps Slate Meagher & Flom LLP, One Beacon Street, Boston, Massachusetts
(or at such other place as may be agreed upon among the Representatives and the
Company), (i) on the third full business day following the first day that Shares
are traded, (ii) if this Agreement is executed and delivered after 4:30 P.M.,
Boston time, the fourth full business day following the day that this Agreement
is executed

12.
<PAGE> 13
and delivered or (iii) at such other time and date not later that seven full
business days following the first day that Shares are traded as the
Representatives and the Company may determine (or at such time and date to which
payment and delivery shall have been postponed pursuant to Section 8 hereof),
such time and date of payment and delivery being herein called the "Closing
Date;" provided, however, that if the Company has not made available to the
Representatives copies of the Prospectus within the time provided in Section
2(g) and 3(e) hereof, the Representatives may, in their sole discretion,
postpone the Closing Date until no later that two full business days following
delivery of copies of the Prospectus to the Representatives.

(c) The Option Shares; the Second Closing Date. In
addition, on the basis of the representations, warranties and agreements herein
contained, and upon the terms but subject to the conditions herein set forth,
the Company and certain Selling Stockholders hereby grant an option to the
several Underwriters to purchase, severally and not jointly, up to an aggregate
of 393,820 Option Shares from the Company and the Selling Stockholders at the
purchase price per share to be paid by the Underwriters for the Firm Shares. The
option granted hereunder is for use by the Underwriters solely in covering any
over-allotments in connection with the sale and distribution of the Firm Shares.
The option granted hereunder may be exercised at any time upon notice by the
Representatives to the Company and the Selling Stockholders, which notice may be
given at any time within 30 days from the date of this Agreement. The time and
date of delivery of the Option Shares, if subsequent to the First Closing Date,
is called the "Second Closing Date" and shall be determined by the
Representatives and shall not be earlier than three nor later than five full
business days after delivery of such notice of exercise. If any Option Shares
are to be purchased, (i) each Underwriter agrees, severally and not jointly, to
purchase the number of Option Shares (subject to such adjustments to eliminate
fractional shares as the Representatives may determine) that bears the same
proportion to the total number of Option Shares to be purchased as the number of
Firm Shares set forth on Schedule A opposite the name of such Underwriter bears
to the total number of Firm Shares and (ii) the Company and each Selling
Stockholder agree, severally and not jointly, to sell the number of Option
Shares (subject to such adjustments to eliminate fractional shares as the
Representatives may determine) that bears the same proportion to the total
number of Option Shares to be sold as the number of Option Shares set forth in
Schedule B opposite the name of such Selling Stockholder (or, in the case of the
Company, as the number of Option Shares to be sold by the Company as set forth
in the paragraph "Introductory" of this Agreement) bears to the total number of
Option Shares. The Representatives may cancel the option at any time prior to
its expiration by giving written notice of such cancellation to the Company and
the Selling Stockholders.

(d) Public Offering of the Shares. The
Representatives hereby advises the Company and the Selling Stockholders that the
Underwriters intend to offer for sale to the public, as described in the
Prospectus, their respective portions of the Shares as soon after this Agreement
has been executed and the Registration Statement has been declared effective as
the Representatives, in their sole judgment, has determined is advisable and
practicable.

(e) Payment for the Shares. Payment for the Shares to
be sold by the Company shall be made at the First Closing Date (and, if
applicable, at the Second Closing Date) by wire transfer of immediately
available funds to the order of the Company. Payment for the Shares to be sold
by the Selling Stockholders shall be made at the First Closing Date (and, if
applicable, at the Second Closing Date) by wire transfer of immediately
available funds to the order of the Custodian.

13.
<PAGE> 14
It is understood that the Representatives have been authorized, for
their own account and the accounts of the several Underwriters, to accept
delivery of, and make payment of the purchase price for, the Firm Shares and any
Option Shares the Underwriters have agreed to purchase. Robertson Stephens,
individually and not as a Representative of the Underwriters, may (but shall not
be obligated to) make payment for any Shares to be purchased by any Underwriter
whose funds shall not have been received by the Representatives by the First
Closing Date or the Second Closing Date, as the case may be, for the account of
such Underwriter, but any such payment shall not relieve such Underwriter from
any of its obligations under this Agreement.

Each Selling Stockholder hereby agrees that (i) it will pay all stock
transfer taxes, stamp duties and other similar taxes, if any, payable upon the
sale or delivery of the Shares to be sold by such Selling Stockholder to the
several Underwriters, or otherwise in connection with the performance of such
Selling Stockholder's obligations hereunder and (ii) the Custodian is authorized
to deduct for such payment any such amounts from the proceeds to such Selling
Stockholder hereunder and to hold such amounts for the account of such Selling
Stockholder with the Custodian under the Custody Agreement.

(f) Delivery of the Shares. The Company and the
Selling Stockholders shall deliver, or cause to be delivered a credit
representing the Firm Shares to an account or accounts at The Depository Trust
Company as designated by the Representatives for the accounts of the
Representatives and the several Underwriters at the First Closing Date, against
the irrevocable release of a wire transfer of immediately available funds for
the amount of the purchase price therefor. The Company and the Selling
Stockholders shall also deliver, or cause to be delivered a credit representing
the Option Shares to an account or accounts at The Depository Trust Company as
designated by the Representatives for the accounts of the Representatives and
the several Underwriters, at the First Closing Date or the Second Closing Date,
as the case may be, against the irrevocable release of a wire transfer of
immediately available funds for the amount of the purchase price therefor. Time
shall be of the essence, and delivery at the time and place specified in this
Agreement is a further condition to the obligations of the Underwriters.

(g) Delivery of Prospectus to the Underwriters. Not
later than 3:00 p.m. Boston time on the second business day following the date
the Shares are released by the Underwriters for sale to the public, the Company
shall deliver or cause to be delivered copies of the Prospectus in such
quantities and at such places as the Representatives shall request.

SECTION 3. COVENANTS OF THE COMPANY AND THE SELLING STOCKHOLDERS.

A. COVENANTS OF THE COMPANY. The Company further covenants and
agrees with each Underwriter as follows:

(a) Registration Statement Matters. The Company will
(i) use its best efforts to cause the Registration Statement to become effective
or, if the procedure in Rule 430A of the Securities Act is followed, to prepare
and timely file with the Commission under Rule 424(b) under the Securities Act a
Prospectus in a form approved by the Representatives containing information
previously omitted at the time of effectiveness of the Registration Statement in
reliance on Rule 430A of the Securities Act and (ii) not file any amendment to
the Registration Statement or supplement to the Prospectus of which the
Representatives shall not previously have been advised and furnished with a copy
or to which the Representatives shall

14.
<PAGE> 15
have reasonably objected in writing or that is not in compliance in all material
respects with the Securities Act. If the Company elects to rely on Rule 462(b)
under the Securities Act, the Company shall file a Rule 462(b) Registration
Statement with the Commission in compliance with Rule 462(b) under the
Securities Act prior to the time confirmations are sent or given, as specified
by Rule 462(b)(2) under the Securities Act, and shall pay the applicable fees in
accordance with Rule 111 under the Securities Act.

(b) Securities Act Compliance. The Company will
advise the Representatives promptly (i) when the Registration Statement or any
post-effective amendment thereto shall have become effective, (ii) of receipt of
any comments from the Commission, (iii) of any request of the Commission for
amendment of the Registration Statement or for supplement to the Prospectus or
for any additional information and (iv) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement or the use
of the Prospectus or of the institution of any proceedings for that purpose. The
Company will use its best efforts to prevent the issuance of any such stop order
preventing or suspending the use of the Prospectus and to obtain as soon as
possible the lifting thereof, if issued.

(c) Blue Sky Compliance. The Company will cooperate
with the Representatives and counsel for the Underwriters in endeavoring to
qualify the Shares for sale under the securities laws of such jurisdictions
(both national and foreign) as the Representatives may reasonably have
designated in writing and will make such applications, file such documents, and
furnish such information as may be reasonably required for that purpose,
provided the Company shall not be required to qualify as a foreign corporation
or to file a general consent to service of process in any jurisdiction where it
is not now so qualified or required to file such a consent. The Company will,
from time to time, prepare and file such statements, reports and other
documents, as are or may be required to continue such qualifications in effect
for so long a period as the Representatives may reasonably request for
distribution of the Shares.

(d) Amendments and Supplements to the Prospectus and
Other Securities Act Matters. The Company will comply in all material respects
with the Securities Act and the Exchange Act, and the rules and regulations of
the Commission thereunder, so as to permit the completion of the distribution of
the Shares as contemplated in this Agreement and the Prospectus. If during the
period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, any event shall occur as a result of which, in the
judgment of the Company or in the reasonable opinion of the Representatives or
counsel for the Underwriters, it becomes necessary to amend or supplement the
Prospectus in order to make the statements therein, in the light of the
circumstances existing at the time the Prospectus is delivered to a purchaser,
not misleading, or, if it is necessary at any time to amend or supplement the
Prospectus to comply with any law, the Company promptly will prepare and file
with the Commission, and furnish at its own expense to the Underwriters and to
dealers, an appropriate amendment to the Registration Statement or supplement to
the Prospectus so that the Prospectus as so amended or supplemented will not, in
the light of the circumstances when it is so delivered, be misleading, or so
that the Prospectus will comply with the law.

(e) Copies of any Amendments and Supplements to the
Prospectus. The Company agrees to furnish the Representatives, without charge,
during the period beginning on the date hereof and ending on the later of the
First Closing Date or such date, as in the opinion of counsel for the
Underwriters, the Prospectus is no longer required by law to be delivered in
connection with sales by an Underwriter or dealer (the "Prospectus Delivery

15.
<PAGE> 16
Period"), as many copies of the Prospectus and any amendments and supplements
thereto as the Representatives may reasonably request.

(f) Insurance. The Company shall (i) obtain Directors
and Officers liability insurance in the minimum amount of $10 million which
shall apply to the offering contemplated hereby and (ii) cause Robertson
Stephens to be added to such policy such that up to $500,000 of its expenses
pursuant to section 7(a) shall be paid directly by such insurer.

(g) Notice of Subsequent Events. If at any time
during the 90-day period after the Registration Statement becomes effective, any
rumor, publication or event relating to or affecting the Company shall occur as
a result of which, in your opinion, the market price of the Company Shares has
been or is likely to be materially affected (regardless of whether such rumor,
publication or event necessitates a supplement to or amendment of the
Prospectus), the Company will, after written notice from you advising the
Company to the effect set forth above, forthwith prepare, consult with you
concerning the substance of and disseminate a press release or other public
statement, reasonably satisfactory to you, responding to or commenting on such
rumor, publication or event.

(h) Use of Proceeds. The Company shall apply the net
proceeds from the sale of the Shares sold by it in the manner described under
the caption "Use of Proceeds" in the Prospectus.

(i) Transfer Agent. The Company shall continue to
engage and maintain, at its expense, a registrar and transfer agent for the
Company Shares.

(j) Earnings Statement. As soon as practicable, the
Company will make generally available to its security holders and to the
Representatives an earnings statement (which need not be audited) covering the
12-month period ending June 30, 2001 that satisfies the provisions of Section
11(a) of the Securities Act.

(k) Periodic Reporting Obligations. During the
Prospectus Delivery Period the Company shall file, on a timely basis, with the
Commission and the National Association of Securities Dealers, Inc. all reports
and documents required to be filed under the Exchange Act.

(l) Agreement Not to Offer or Sell Additional
Securities. The Company will not offer, sell or contract to sell, or otherwise
dispose of or enter into any transaction which is designed to, or could be
expected to, result in the disposition (whether by actual disposition or
effective economic disposition due to cash settlement or otherwise by the
Company or any affiliate of the Company or any person in privity with the
Company or any affiliate of the Company) directly or indirectly, or announce the
offering of, any other Common Shares or any securities convertible into, or
exchangeable for, Common Shares; provided, however, that the Company may (i)
grant options to purchase and issue and sell Common Shares pursuant to any
director or employee stock option plan, stock ownership plan or dividend
reinvestment plan of the Company in effect at the date of the Prospectus and
described in the Prospectus so long as none of those shares may be transferred
and the Company shall enter stop transfer instructions with its transfer agent
and registrar against the transfer of any such Common Shares and (ii) issue
Common Shares issuable upon the conversion of securities or the exercise of
options or warrants outstanding at the date of the Prospectus and described in
the Prospectus. These restrictions terminate after the close of

16.
<PAGE> 17
trading of the Shares on the Nasdaq National Market on the 90th day following
the effective date of the Registration Statement (the "Lock-Up Period").

(m) Future Reports to the Representatives. During the
period of three years hereafter the Company will furnish to the Representatives
(i) as soon as practicable after the end of each fiscal year, copies of the
Annual Report of the Company containing the balance sheet of the Company as of
the close of such fiscal year and statements of income, stockholders' equity and
cash flows for the year then ended and the opinion thereon of the Company's
independent public or certified public accountants; (ii) as soon as practicable
after the filing thereof, copies of each proxy statement, Annual Report on Form
10-K, Quarterly Report on Form 10-Q, Current Report on Form 8-K or other report
filed by the Company with the Commission, the National Association of Securities
Dealers, Inc. or any securities exchange; and (iii) as soon as available, copies
of any report or communication of the Company mailed generally to holders of its
capital stock.

(n) Exchange Act Compliance. During the Prospectus
Delivery Period, the Company will file all documents required to be filed with
the Commission pursuant to Section 13, 14 or 15 of the Exchange Act in the
manner and within the time periods required by the Exchange Act.

B. COVENANTS OF THE SELLING STOCKHOLDERS. Each Selling
Stockholder further covenants and agrees with each Underwriter:

(a) Agreement Not to Offer or Sell Additional
Securities. Such Selling Stockholder will not, during the Lock-Up Period, make a
disposition of Securities (as defined in Exhibit A hereto) now owned or
hereafter acquired directly by such person or with respect to which such person
has or hereafter acquires the power of disposition, otherwise than (i) as a bona
fide gift or gifts, provided the donee or donees thereof agree in writing to be
bound by this restriction, (ii) as a distribution to partners or stockholders of
such person, provided that the distributees thereof agree in writing to be bound
by the terms of this restriction, (iii) with respect to dispositions of Common
Shares acquired on the open market or (iv) with the prior written consent of
Robertson Stephens. The foregoing restriction has been expressly agreed to
preclude the holder of the Securities from engaging in any hedging or other
transaction which is designed to or reasonably expected to lead to or result in
a disposition of Securities during the Lock-Up Period, even if such Securities
would be disposed of by someone other than such holder. Such prohibited hedging
or other transactions would include, without limitation, any short sale (whether
or not against the box) or any purchase, sale or grant of any right (including,
without limitation, any put or call option) with respect to any Securities or
with respect to any security (other than a broad-based market basket or index)
that includes, relates to or derives any significant part of its value from
Securities. Furthermore, such person has also agreed and consented to the entry
of stop transfer instructions with the Company's transfer agent against the
transfer of the Securities held by such person except in compliance with this
restriction.

(b) Delivery of Forms W-8 and W-9. To deliver to the
Representatives prior to the First Closing Date a properly completed and
executed United States Treasury Department Form W-8 (if the Selling Stockholder
is a non-United States person) or Form W-9 (if the Selling Stockholder is a
United States Person).

(c) Notification of Untrue Statements, etc. If, at
any time prior to the date on which the distribution of the Common Shares as
contemplated herein and in the Prospectus has been completed, as determined by
the Representatives, such Selling

17.
<PAGE> 18
Stockholder has knowledge of the occurrence of any event as a result of which
the Prospectus or the Registration Statement, in each case as then amended or
supplemented, would include an untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, such Selling
Stockholder will promptly notify the Company and the Representatives.

SECTION 4. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The
obligations of the several Underwriters to purchase and pay for the Shares as
provided herein on the First Closing Date and, with respect to the Option
Shares, the Second Closing Date, shall be subject to the accuracy of the
representations and warranties on the part of the Company and the Selling
Stockholders set forth in Sections 1(A) and 1(B) hereof as of the date hereof
and as of the First Closing Date as though then made and, with respect to the
Option Shares, as of the Second Closing Date as though then made, to the timely
performance by the Company and the Selling Stockholders of their respective
covenants and other obligations hereunder, and to each of the following
additional conditions:

(a) Compliance with Registration Requirements; No
Stop Order; No Objection from the National Association of Securities Dealers,
Inc. The Registration Statement shall have become effective prior to the
execution of this Agreement, or at such later date as shall be consented to in
writing by you; and no stop order suspending the effectiveness thereof shall
have been issued and no proceedings for that purpose shall have been initiated
or, to the knowledge of the Company, any Selling Stockholder or any Underwriter,
threatened by the Commission, and any request of the Commission for additional
information (to be included in the Registration Statement or the Prospectus or
otherwise) shall have been complied with to the satisfaction of Underwriters'
Counsel; and the National Association of Securities Dealers, Inc. shall have
raised no objection to the fairness and reasonableness of the underwriting terms
and arrangements.

(b) Corporate Proceedings. All corporate proceedings
and other legal matters in connection with this Agreement, the form of
Registration Statement and the Prospectus, and the registration, authorization,
issue, sale and delivery of the Shares, shall have been reasonably satisfactory
to Underwriters' Counsel, and such counsel shall have been furnished with such
papers and information as they may reasonably have requested to enable them to
pass upon the matters referred to in this Section.

(c) No Material Adverse Change. Subsequent to the
execution and delivery of this Agreement and prior to the First Closing Date, or
the Second Closing Date, as the case may be, there shall not have been any
Material Adverse Change in the condition (financial or otherwise), earnings,
operations or business of the Company and its subsidiaries considered as one
enterprise from that set forth in the Registration Statement or Prospectus,
that, in your sole judgment, is material and adverse and that makes it, in your
sole judgment, impracticable or inadvisable to proceed with the public offering
of the Shares as contemplated by the Prospectus.

(d) Opinion of Counsel for the Company. You shall
have received on the First Closing Date, or the Second Closing Date, as the case
may be, an opinion of Skadden Arps Slate Meagher & Flom LLP, counsel for the
Company, substantially in the form of Exhibit B attached hereto, dated the First
Closing Date, or the Second Closing Date, addressed to the Underwriters and with
reproduced copies or signed counterparts thereof for each of the Underwriters.

18.
<PAGE> 19
Counsel rendering the opinion contained in Exhibit B may rely as to
questions of law not involving the laws of the United States or the States of
Massachusetts and Delaware upon opinions of local counsel, and as to questions
of fact upon representations or certificates of officers of the Company, the
Selling Stockholders or officers of the Selling Stockholders (when the Selling
Stockholder is not a natural person), and of government officials, in which case
their opinion is to state that they are so relying and that they have no
knowledge of any material misstatement or inaccuracy in any such opinion,
representation or certificate. Copies of any opinion, representation or
certificate so relied upon shall be delivered to you, as Representatives of the
Underwriters, and to Underwriters' Counsel.

(e) Opinion of Counsel for the Underwriters. You
shall have received on the First Closing Date or the Second Closing Date, as the
case may be, an opinion of Cooley Godward LLP, substantially in the form of
Exhibit C hereto. The Company shall have furnished to such counsel such
documents as they may have requested for the purpose of enabling them to pass
upon such matters.

(f) Accountants' Comfort Letter. You shall have
received on the First Closing Date and on the Second Closing Date, as the case
may be, a letter from PricewaterhouseCoopers LLP, addressed to the Underwriters,
dated the First Closing Date or the Second Closing Date, as the case may be,
confirming that they are independent certified public accountants with respect
to the Company within the meaning of the Act and the applicable published Rules
and Regulations and based upon the procedures described in such letter delivered
to you concurrently with the execution of this Agreement (herein called the
"Original Letter"), but carried out to a date not more than four (4) business
days prior to the First Closing Date or the Second Closing Date, as the case may
be, (i) confirming, to the extent true, that the statements and conclusions set
forth in the Original Letter are accurate as of the First Closing Date or the
Second Closing Date, as the case may be, and (ii) setting forth any revisions
and additions to the statements and conclusions set forth in the Original Letter
which are necessary to reflect any changes in the facts described in the
Original Letter since the date of such letter, or to reflect the availability of
more recent financial statements, data or information. The letter shall not
disclose any change in the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its subsidiaries
considered as one enterprise from that set forth in the Registration Statement
or Prospectus, which, in your sole judgment, is material and adverse and that
makes it, in your sole judgment, impracticable or inadvisable to proceed with
the public offering of the Shares as contemplated by the Prospectus. The
Original Letter from PricewaterhouseCoopers LLP shall be addressed to or for the
use of the Underwriters in form and substance satisfactory to the Underwriters
and shall (i) represent, to the extent true, that they are independent certified
public accountants with respect to the Company within the meaning of the Act and
the applicable published Rules and Regulations, (ii) set forth their opinion
with respect to their examination of the balance sheets of the Company and KD
One as of December 31, 1999 and related statements of operations, stockholders'
equity and cash flows for the 12 months ended December 31, 1999, (iii) state
that PricewaterhouseCoopers LLP has performed the procedures set out in
Statement on Auditing Standards No. 71 ("SAS 71") for a review of interim
financial information on the financial statements for each of the quarters in
the eight-quarter period ended December 31, 1999 (the "Quarterly Financial
Statements"), (iv) state that in the course of such review, nothing came to
their attention that leads them to believe that any material modifications need
to be made to any of the Quarterly Financial Statements in order for them to be
in compliance with generally accepted accounting principles consistently applied
across the periods presented, and address other matters agreed upon by
PricewaterhouseCoopers LLP and you. In addition, you shall have received from
PricewaterhouseCoopers LLP a letter addressed to the Company and made

19.
<PAGE> 20
available to you for the use of the Underwriters stating that their review of
the Company's and KD One's systems of internal accounting controls, to the
extent they deemed necessary in establishing the scope of their examination of
the financial statements as of December 31, 1999, did not disclose any
weaknesses in internal controls that they considered to be material weaknesses.

(g) Officers' Certificate. You shall have received on
the First Closing Date and the Second Closing Date, as the case may be, a
certificate of the Company, dated the First Closing Date or the Second Closing
Date, as the case may be, signed by the Chief Executive Officer and Chief
Financial Officer of the Company, to the effect that, and you shall be satisfied
that:

(i) The representations and warranties of
the Company in this Agreement are true and correct, as if made on and as of the
First Closing Date or the Second Closing Date, as the case may be, and the
Company has complied with all the agreements and satisfied all the conditions on
its part to be performed or satisfied at or prior to the First Closing Date or
the Second Closing Date, as the case may be;

(ii) To the Company's knowledge, no stop
order suspending the effectiveness of the Registration Statement has been issued
and no proceedings for that purpose have been instituted or are pending or
threatened under the Act;

(iii) When the Registration Statement became
effective and at all times subsequent thereto up to the delivery of such
certificate, (A) the Registration Statement and the Prospectus, and any
amendments or supplements thereto, contained all material information required
to be included therein by the Securities Act or the Exchange Act and the
applicable rules and regulations of the Commission thereunder, as the case may
be, and in all material respects conformed to the requirements of the Securities
Act or the Exchange Act and the applicable rules and regulations of the
Commission thereunder, as the case may be, and (B) the Registration Statement
and the Prospectus, and any amendments or supplements thereto, did not and does
not include any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading; and, since the effective date of the Registration Statement,
there has occurred no event required to be set forth in an amended or
supplemented Prospectus which has not been so set forth; and

(iv) Subsequent to the respective dates as
of which information is given in the Registration Statement and Prospectus,
there has not been (a) any Material Adverse Change in the condition (financial
or otherwise), earnings, operations, business or business prospects of the
Company and its subsidiaries considered as one enterprise, (b) any transaction
that is material to the Company and its subsidiaries considered as one
enterprise, except transactions entered into in the ordinary course of business,
(c) any obligation, direct or contingent, that is material to the Company and
its subsidiaries considered as one enterprise, incurred by the Company or its
subsidiaries, except obligations incurred in the ordinary course of business,
(d) any change in the capital stock or outstanding indebtedness of the Company
or any of its subsidiaries that is material to the Company and its subsidiaries
considered as one enterprise, (e) any dividend or distribution of any kind
declared, paid or made on the capital stock of the Company or any of its
subsidiaries, or (f) any loss or damage (whether or not insured) to the property
of the Company or any of its subsidiaries which has been sustained or will have
been sustained which has a material adverse effect on the condition

20.
<PAGE> 21
(financial or otherwise), earnings, operations or business of the Company and
its subsidiaries considered as one enterprise.

(h) Lock-up Agreement from Certain Stockholders of
the Company. The Company shall have obtained and delivered to you an agreement
substantially in the form of Exhibit A attached hereto from each person and
entity identified in Section 1.A.(ff) above.

(i) Opinion of Counsel for the Selling Stockholders.
You shall have received on the First Closing Date and the Second Closing Date,
as the case may be, an opinion of Skadden Arps Slate Meagher & Flom LLP, counsel
for the Selling Stockholders, substantially in the form of Exhibit D hereto.

In rendering such opinion, such counsel may rely as to questions of law
not involving the laws of the United States or State of Massachusetts and
Delaware upon opinions of local counsel and as to questions of fact upon
representations or certificates of the Selling Stockholders or officers of the
Selling Stockholders (when the Selling Stockholder is not a natural person), and
of governmental officials, in which case their opinion is to state that they are
so relying and that they have no knowledge of any material misstatement or
inaccuracy of any material misstatement or inaccuracy in any such opinion,
representation or certificate so relied upon shall be delivered to you, as
Representatives of the Underwriters, and to Underwriters' Counsel.

(j) Selling Stockholders' Certificate. On each of the
First Closing Date and the Second Closing Date, as the case may be, the
Representatives shall received a written certificate executed by the
Attorney-in-Fact of each Selling Stockholder, dated as of such Closing Date, to
the effect that:

(i) the representations, warranties and
covenants of such Selling Stockholder set forth in Section 1(B) of this
Agreement are true and correct with the same force and effect as though
expressly made by such Selling Stockholder on and as of such Closing Date; and

(ii) such Selling Stockholder has complied
with all the agreements and satisfied all the conditions on its part to be
performed or satisfied at or prior to such Closing Date.

(k) Selling Stockholders' Documents. At least three
business days prior to the date hereof, the Company and the Selling Stockholders
shall have furnished for review by the Representatives copies of the Powers of
Attorney and Custody Agreements executed by each of the Selling Stockholders and
such further information, certificates and documents as the Representatives may
reasonably request.

(l) Stock Exchange Listing. The Shares shall have
been approved for listing on the Nasdaq National Market, subject only to
official notice of issuance where applicable.

(m) Compliance with Prospectus Delivery Requirements.
The Company shall have complied with the provisions of Sections 2(g) and 3(e)
hereof with respect to the furnishing of Prospectuses.

21.
<PAGE> 22
(n) Additional Documents. On or before each of the
First Closing Date and the Second Closing Date, as the case may be, the
Representatives and counsel for the Underwriters shall have received such
information, documents and opinions as they may reasonably require for the
purposes of enabling them to pass upon the issuance and sale of the Shares as
contemplated herein, or in order to evidence the accuracy of any of the
representations and warranties, or the satisfaction of any of the conditions or
agreements, herein contained.

If any condition specified in this Section 4 is not satisfied when and
as required to be satisfied, this Agreement may be terminated by the
Representatives by notice to the Company and the Selling Stockholders at any
time on or prior to the First Closing Date and, with respect to the Option
Shares, at any time prior to the Second Closing Date, which termination shall be
without liability on the part of any party to any other party, except that
Section 5 (Payment of Expenses), Section 6 (Reimbursement of Underwriters'
Expenses), Section 7 (Indemnification and Contribution) and Section 10
(Representations and Indemnities to Survive Delivery) shall at all times be
effective and shall survive such termination.

SECTION 5. PAYMENT OF EXPENSES. The Company and the Selling
Stockholders, jointly and severally, agree to pay in such proportions as they
may agree upon among themselves all costs, fees and expenses incurred in
connection with the performance of its their obligations hereunder and in
connection with the transactions contemplated hereby, including without
limitation (i) all expenses incident to the issuance and delivery of the Common
Shares (including all printing and engraving costs), (ii) all fees and expenses
of the registrar and transfer agent of the Common Stock, (iii) all necessary
issue, transfer and other stamp taxes in connection with the issuance and sale
of the Shares to the Underwriters, (iv) all fees and expenses of the Company's
counsel, independent public or certified public accountants and other advisors,
(v) all costs and expenses incurred in connection with the preparation,
printing, filing, shipping and distribution of the Registration Statement
(including financial statements, exhibits, schedules, consents and certificates
of experts), each preliminary prospectus and the Prospectus, and all amendments
and supplements thereto, and this Agreement, (vi) all filing fees, attorneys'
fees and expenses incurred by the Company or the Underwriters in connection with
qualifying or registering (or obtaining exemptions from the qualification or
registration of) all or any part of the Shares for offer and sale under the
state securities or blue sky laws or the provincial securities laws of Canada or
any other country, and, if requested by the Representatives, preparing and
printing a "Blue Sky Survey," an "International Blue Sky Survey" or other
memorandum, and any supplements thereto, advising the Underwriters of such
qualifications, registrations and exemptions, (vii) the filing fees incident to,
and the reasonable fees and expenses of counsel for the Underwriters in
connection with, the review and approval of the Underwriters' participation in
the offering and distribution of the Common Shares by the National Association
of Securities Dealers, Inc., (viii) the fees and expenses associated with
listing including the Common Shares on the Nasdaq National Market, (ix) all
costs and expenses incident to the travel and accommodation of the Company's
employees on the "roadshow," and (x) all other fees, costs and expenses referred
to in Item 13 of Part II of the Registration Statement. Except as provided in
this Section 5, Section 6, and Section 7 hereof, the Underwriters shall pay
their own expenses, including the fees and disbursements of their counsel.

The Selling Stockholders further agree with each Underwriter to pay
(directly or by reimbursement) all fees and expenses incident to the performance
of their obligations under this Agreement which are not otherwise specifically
provided for herein, including but not limited to (i) fees and expenses of
counsel and other advisors for such Selling Stockholders, (ii) fees and

22.
<PAGE> 23
expenses of the Custodian and (iii) expenses and taxes incident to the sale and
delivery of the Common Shares to be sold by such Selling Stockholders to the
Underwriters hereunder (which taxes, if any, may be deducted by the Custodian
under the provisions of Section 2 of this Agreement).

This Section 5 shall not affect or modify any separate, valid agreement
relating to the allocation of payment of expenses between the Company, on the
one hand, and the Selling Stockholders, on the other hand.

SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If this Agreement
is terminated by the Representatives pursuant to Section 4, Section 9 or Section
15, or if the sale to the Underwriters of the Shares on the First Closing Date
is not consummated because of any refusal, inability or failure on the part of
the Company or the Selling Stockholders to perform any agreement herein or to
comply with any provision hereof, the Company agrees to reimburse the
Representatives and the other Underwriters (or such Underwriters as have
terminated this Agreement with respect to themselves), severally, upon demand
for all out-of-pocket expenses that shall have been reasonably incurred by the
Representatives and the Underwriters in connection with the proposed purchase
and the offering and sale of the Shares, including but not limited to fees and
disbursements of counsel, printing expenses, travel and accommodation expenses,
postage, facsimile and telephone charges.

SECTION 7. INDEMNIFICATION AND CONTRIBUTION.

(a) Indemnification of the Underwriters.

(i) The Company agrees to indemnify and hold
harmless each Underwriter, its officers and employees, and each person, if any,
who controls any Underwriter within the meaning of the Securities Act and the
Exchange Act against any loss, claim, damage, liability or expense, as incurred,
to which such Underwriter or such controlling person may become subject, under
the Securities Act, the Exchange Act or other federal or state statutory law or
regulation, or at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of the
Company, which consent shall not be unreasonably withheld), insofar as such
loss, claim, damage, liability or expense (or actions in respect thereof as
contemplated below) arises out of or is based (i) upon any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement, or any amendment thereto, including any information deemed to be a
part thereof pursuant to Rule 430A under the Securities Act, or the omission or
alleged omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading; or (ii) upon any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto), or the omission or alleged omission therefrom of a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; or (iii) in whole or
in part upon any inaccuracy in the representations and warranties of the Company
contained herein; or (iv) in whole or in part upon any failure of the Company to
perform its obligations hereunder or under law; or (v) any untrue statement or
alleged untrue statement of any material fact contained in any audio or visual
materials provided by the Company or based upon written information furnished by
or on behalf of the Company including, without limitation, slides, videos, films
or tape recordings, used in connection with the marketing of the Shares,
including without limitation, statements communicated to securities analysts
employed by the Underwriters; or (vi) any act or failure to act or any alleged
act or failure to act by any Underwriter in connection with, or relating in any
manner to, the Shares or the offering

23.
<PAGE> 24
contemplated hereby, and which is included as part of or referred to in any
loss, claim, damage, liability or action arising out of or based upon any matter
covered by clause (i), (ii), (iii), (iv) or (v) above, provided that the Company
shall not be liable under this clause (vi) to the extent that a court of
competent jurisdiction shall have determined by a final judgment that such loss,
claim, damage, liability or action resulted directly from any such acts or
failures to act undertaken or omitted to be taken by such Underwriter through
its bad faith or willful misconduct; and to reimburse each Underwriter and each
such controlling person for any and all expenses (including the fees and
disbursements of counsel chosen by Robertson Stephens) as such expenses are
reasonably incurred by such Underwriter or such controlling person in connection
with investigating, defending, settling, compromising or paying any such loss,
claim, damage, liability, expense or action; provided, however, that the
foregoing indemnity agreement shall not apply to any loss, claim, damage,
liability or expense to the extent, but only to the extent, arising out of or
based upon any untrue statement or alleged untrue statement or omission or
alleged omission made in reliance upon and in conformity with written
information furnished to the Company by the Representatives expressly for use in
the Registration Statement, any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto); and provided, further, that with respect to
any preliminary prospectus, the foregoing indemnity agreement shall not inure to
the benefit of any Underwriter from whom the person asserting any loss, claim,
damage, liability or expense purchased Shares, or any person controlling such
Underwriter, if copies of the Prospectus were timely delivered to the
Underwriter pursuant to Section 2 and a copy of the Prospectus (as then amended
or supplemented if the Company shall have furnished any amendments or
supplements thereto) was not sent or given by or on behalf of such Underwriter
to such person, if required by law so to have been delivered, and if the
Prospectus (as so amended or supplemented) would have cured the defect giving
rise to such loss, claim, damage, liability or expense. The indemnity agreement
set forth in this Section 7(a) shall be in addition to any liabilities that the
Company may otherwise have.

(ii) Subject to Section 7(j) hereof, each of
the Selling Stockholders, severally and not jointly, agrees to indemnify and
hold harmless each Underwriter, its officers and employees, and each person, if
any, who controls any Underwriter within the meaning of the Securities Act and
the Exchange Act against any loss, claim, damage, liability or expense, as
incurred, to which such Underwriter or such controlling person may become
subject, under the Securities Act, the Exchange Act or other federal or state
statutory law or regulation, or at common law or otherwise (including in
settlement of any litigation, if such settlement is effected with the written
consent of the Company, which consent shall not be unreasonably withheld),
insofar as such loss, claim, damage, liability or expense (or actions in respect
thereof as contemplated below) arises out of or is based (i) upon any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement, or any amendment thereto, including any information
deemed to be a part thereof pursuant to Rule 430A under the Securities Act, or
the omission or alleged omission therefrom of a material fact required to be
stated therein or necessary to make the statements therein not misleading; or
(ii) upon any untrue statement or alleged untrue statement of a material fact
contained in any preliminary prospectus or the Prospectus (or any amendment or
supplement thereto), or the omission or alleged omission therefrom of a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, in the case of
subparagraphs (i) and (ii) of this Section 7(a)(2) to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in reliance upon and in conformity with written
information furnished to the Company or such Underwriter by such Selling
Stockholder directly or through such Selling Stockholder's representatives,
specifically for use in the preparation thereof; or (iii) in whole or in part
upon any inaccuracy in the representations and warranties of the Selling
Stockholders

24.
<PAGE> 25
contained herein; or (iv) in whole or in part upon any failure of the Selling
Stockholders to perform their respective obligations hereunder or under law; or
(v) any act or failure to act or any alleged act or failure to act by any
Underwriter in connection with, or relating in any manner to, the Shares or the
offering contemplated hereby, and which is included as part of or referred to in
any loss, claim, damage, liability or action arising out of or based upon any
matter covered by clause (i), (ii), (iii) or (iv) above, provided that the
Selling Stockholders shall not be liable under this clause (v) to the extent
that a court of competent jurisdiction shall have determined by a final judgment
that such loss, claim, damage, liability or action resulted directly from any
such acts or failures to act undertaken or omitted to be taken by such
Underwriter through its bad faith or willful misconduct; and to reimburse each
Underwriter and each such controlling person for any and all expenses (including
the fees and disbursements of counsel chosen by Robertson Stephens) as such
expenses are reasonably incurred by such Underwriter or such controlling person
in connection with investigating, defending, settling, compromising or paying
any such loss, claim, damage, liability, expense or action; provided, however,
that the foregoing indemnity agreement shall not apply to any loss, claim,
damage, liability or expense to the extent, but only to the extent, arising out
of or based upon any untrue statement or alleged untrue statement or omission or
alleged omission made in reliance upon and in conformity with written
information furnished to the Selling Stockholders by the Representatives
expressly for use in the Registration Statement, any preliminary prospectus or
the Prospectus (or any amendment or supplement thereto); and provided, further,
that with respect to any preliminary prospectus, the foregoing indemnity
agreement shall not inure to the benefit of any Underwriter from whom the person
asserting any loss, claim, damage, liability or expense purchased Shares, or any
person controlling such Underwriter, if copies of the Prospectus were timely
delivered to the Underwriter pursuant to Section 2 and a copy of the Prospectus
(as then amended or supplemented if the Company shall have furnished any
amendments or supplements thereto) was not sent or given by or on behalf of such
Underwriter to such person, if required by law so to have been delivered and if
the Prospectus (as so amended or supplemented) would have cured the defect
giving rise to such loss, claim, damage, liability or expense. The indemnity
agreement set forth in this Section 7(a) shall be in addition to any liabilities
that the Selling Stockholders may otherwise have.

(b) Indemnification of the Company, its Directors,
Officers and Selling Stockholders. Each Underwriter agrees, severally and not
jointly, to indemnify and hold harmless the Company, each of its directors, each
of its officers who signed the Registration Statement, the Selling Stockholders
and each person, if any, who controls the Company or any Selling Stockholder
within the meaning of the Securities Act or the Exchange Act, against any loss,
claim, damage, liability or expense, as incurred, to which the Company, or any
such director, officer, Selling Stockholder or controlling person may become
subject, under the Securities Act, the Exchange Act, or other federal or state
statutory law or regulation, or at common law or otherwise (including in
settlement of any litigation, if such settlement is effected with the written
consent of such Underwriter), insofar as such loss, claim, damage, liability or
expense (or actions in respect thereof as contemplated below) arises out of or
is based upon any untrue or alleged untrue statement of a material fact
contained in the Registration Statement, any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto), or arises out of or is
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in the Registration Statement, any preliminary prospectus, the Prospectus (or
any amendment or supplement thereto), in reliance upon and in conformity with
written information furnished to the Company and the Selling Stockholders by the
Representatives expressly for use therein; and to reimburse

25.
<PAGE> 26
the Company, or any such director, officer, Selling Stockholder or controlling
person for any legal and other expense reasonably incurred by the Company, or
any such director, officer, Selling Stockholder or controlling person in
connection with investigating, defending, settling, compromising or paying any
such loss, claim, damage, liability, expense or action. The indemnity agreement
set forth in this Section 7(b) shall be in addition to any liabilities that each
Underwriter may otherwise have.

(c) Information Provided by the Underwriters. Each of
the Company and each of the Selling Stockholders, and each person, if any, who
controls the Company within the meaning of the Securities Act or the Exchange
Act, hereby acknowledges that the only information that the Underwriters have
furnished to the Company expressly for use in the Registration Statement, any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto) are the statements set forth under the caption "Underwriting" in the
Prospectus; and the Underwriters confirm that such statements are correct.

(d) Notifications and Other Indemnification
Procedures. Promptly after receipt by an indemnified party under this Section 7
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party under this
Section 7, notify the indemnifying party in writing of the commencement thereof,
but the omission so to notify the indemnifying party will not relieve it from
any liability that it may have to any indemnified party for contribution or
otherwise than under the indemnity agreement contained in this Section 7 to the
extent it is not prejudiced as a proximate result of such failure. In case any
such action is brought against any indemnified party and such indemnified party
seeks or intends to seek indemnity from an indemnifying party, the indemnifying
party will be entitled to participate in, and, to the extent that it shall
elect, jointly with all other indemnifying parties similarly notified, by
written notice delivered to the indemnified party promptly after receiving the
aforesaid notice from such indemnified party, to assume the defense thereof with
counsel reasonably satisfactory to such indemnified party; provided, however, if
the defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that a conflict may arise between the positions of the indemnifying party and
the indemnified party in conducting the defense of any such action or that there
may be legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of such indemnifying
party's election so to assume the defense of such action and approval by the
indemnified party of counsel, the indemnifying party will not be liable to such
indemnified party under this Section 7 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso to the next preceding sentence (it being understood,
however, that the indemnifying party shall not be liable for the expenses of
more than one separate counsel (together with local counsel), approved by the
indemnifying party (Robertson Stephens in the case of Section 7(b) and Section
8), representing the indemnified parties who are parties to such action), (ii)
the indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable time
after notice of commencement of the action, or (iii) the indemnifying party has
authorized the employment of counsel for the indemnified party at the expense of
the indemnifying party, in each of which cases the fees and expenses of counsel
shall be at the expense of the indemnifying party.

26.
<PAGE> 27
(e) Settlements. The indemnifying party under this
Section 7 shall not be liable for any settlement of any proceeding effected
without its written consent, which consent shall not be unreasonably withheld,
but if settled with such consent or if there be a final judgment for the
plaintiff, the indemnifying party agrees to indemnify the indemnified party
against any loss, claim, damage, liability or expense by reason of such
settlement or judgment. Notwithstanding the foregoing sentence, if at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel as contemplated by Section
7(d) hereof, the indemnifying party agrees that it shall be liable for any
settlement of any proceeding effected without its written consent if (i) such
settlement is entered into more than 60 days after receipt by such indemnifying
party of the aforesaid request and (ii) such indemnifying party shall not have
reimbursed the indemnified party in accordance with such request prior to the
date of such settlement. No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement, compromise or consent
to the entry of judgment in any pending or threatened action, suit or proceeding
in respect of which any indemnified party is or could have been a party and
indemnity was or could have been sought hereunder by such indemnified party,
unless such settlement, compromise or consent includes (i) an unconditional
release of such indemnified party from all liability on claims that are the
subject matter of such action, suit or proceeding and (ii) does not include a
statement as to or an admission of fault, culpability or a failure to act by or
on behalf of any indemnified party.

(f) Contribution. If the indemnification provided for
in this Section 7 is unavailable to or insufficient to hold harmless an
indemnified party under Section 7(a) or (b) above in respect of any losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
then each indemnifying party shall contribute to the aggregate amount paid or
payable by such indemnified party in such proportion as is appropriate to
reflect the relative benefits received by such party on the one hand and the
Underwriters on the other from the offering of the Shares. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law then each indemnifying party shall contribute to such amount paid
or payable by such indemnified party in such proportion as is appropriate to
reflect not only such relative benefits but also the relative fault of the such
party on the one hand and the Underwriters on the other in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities, (or actions or proceedings in respect thereof), as well as any
other relevant equitable considerations. The relative fault shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company and the Selling
Stockholders on the one hand or the Underwriters on the other and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.

The Company each Selling Stockholder and Underwriters agree that it
would not be just and equitable if contributions pursuant to this Section 7(f)
were determined by pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this Section
7(f). The amount paid or payable by an indemnified party as a result of the
losses, claims, damages or liabilities (or actions or proceedings in respect
thereof) referred to above in this Section 7(f) shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (f), (i) no Underwriter shall
be required to contribute any amount in excess of the underwriting discounts and
commissions applicable to the Shares purchased by such Underwriter and (ii) no
person guilty of fraudulent

27.
<PAGE> 28
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this Section 7(f)
to contribute are several in proportion to their respective underwriting
obligations and not joint.

(g) Timing of Any Payments of Indemnification. Any
losses, claims, damages, liabilities or expenses for which an indemnified party
is entitled to indemnification or contribution under this Section 7 shall be
paid by the indemnifying party to the indemnified party as such losses, claims,
damages, liabilities or expenses are incurred, but in all cases, no later than
45 days of invoice to the indemnifying party.

(h) Survival. The indemnity and contribution
agreements contained in this Section 7 shall remain operative and in full force
and effect, regardless of (i) any investigation made by or on behalf of any
Underwriter or any person controlling any Underwriter, the Company, its
directors or officers or any persons controlling the Company, (ii) acceptance of
any Shares and payment therefor hereunder, and (iii) any termination of this
Agreement. A successor to any Underwriter, or to the Company, its directors or
officers, any Selling Stockholder or any person controlling the Company, shall
be entitled to the benefits of the indemnity, contribution and reimbursement
agreements contained in this Section 7.

(i) Acknowledgements of Parties. The parties to this
Agreement hereby acknowledge that they are sophisticated business persons who
were represented by counsel during the negotiations regarding the provisions
hereof including, without limitation, the provisions of this Section 7, and are
fully informed regarding said provisions. They further acknowledge that the
provisions of this Section 7 fairly allocate the risks in light of the ability
of the parties to investigate the Company and its business in order to assure
that adequate disclosure is made in the Registration Statement and Prospectus as
required by the Securities Act and the Exchange Act.

(j) Liability Cap. The liability of each Selling
Stockholder under Section 7(a)(ii) (except in cases of fraud) will be limited to
the gross proceeds (less underwriting discount) received by such Selling
Stockholder from the sale of Shares by such Selling Stockholder hereunder.

SECTION 8. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS. If, on
the First Closing Date or the Second Closing Date, as the case may be, any one
or more of the several Underwriters shall fail or refuse to purchase Shares that
it or they have agreed to purchase hereunder on such date, and the aggregate
number of Common Shares which such defaulting Underwriter or Underwriters agreed
but failed or refused to purchase does not exceed 10% of the aggregate number of
the Shares to be purchased on such date, the other Underwriters shall be
obligated, severally, in the proportions that the number of Firm Common Shares
set forth opposite their respective names on Schedule A bears to the aggregate
number of Firm Shares set forth opposite the names of all such non-defaulting
Underwriters, or in such other proportions as may be specified by the
Representatives with the consent of the non-defaulting Underwriters, to purchase
the Shares which such defaulting Underwriter or Underwriters agreed but failed
or refused to purchase on such date. If, on the First Closing Date or the Second
Closing Date, as the case may be, any one or more of the Underwriters shall fail
or refuse to purchase Shares and the aggregate number of Shares with respect to
which such default occurs exceeds 10% of the aggregate number of Shares to be
purchased on such date, and arrangements satisfactory to the Representatives and
the Company for the purchase of such Shares are not made within 48 hours after
such default, this Agreement shall terminate without

28.
<PAGE> 29
liability of any party to any other party except that the provisions of Section
5, and Section 7 shall at all times be effective and shall survive such
termination. In any such case either the Representatives or the Company shall
have the right to postpone the First Closing Date or the Second Closing Date, as
the case may be, but in no event for longer than seven days in order that the
required changes, if any, to the Registration Statement and the Prospectus or
any other documents or arrangements may be effected.

As used in this Agreement, the term "Underwriter" shall be deemed to
include any person substituted for a defaulting Underwriter under this Section
8. Any action taken under this Section 8 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.

SECTION 9. TERMINATION OF THIS AGREEMENT. This Agreement may be
terminated by the Representatives by notice given to the Company if (a) at any
time after the execution and delivery of this Agreement and prior to the First
Closing Date (i) trading or quotation in any of the Company's securities shall
have been suspended or limited by the Commission or by the Nasdaq Stock Market,
or trading in securities generally on either the Nasdaq Stock Market or the New
York Stock Exchange shall have been suspended or limited, or minimum or maximum
prices shall have been generally established on any of such stock exchanges by
the Commission or the National Association of Securities Dealers, Inc.; (ii) a
general banking moratorium shall have been declared by any of federal, New York
or California authorities; (iii) there shall have occurred any outbreak or
escalation of national or international hostilities or any crisis or calamity,
or any substantial change in the United States or international financial
markets, or any substantial change or development involving a prospective change
in United States' or international political, financial or economic conditions,
as in the judgment of the Representatives is material and adverse and makes it
impracticable or inadvisable to market the Common Shares in the manner and on
the terms contemplated in the Prospectus or to enforce contracts for the sale of
securities; (iv) in the judgment of the Representatives there shall have
occurred any Material Adverse Change; or (v) the Company shall have sustained a
loss by strike, fire, flood, earthquake, accident or other calamity of such
character as in the judgment of the Representatives may interfere materially
with the conduct of the business and operations of the Company regardless of
whether or not such loss shall have been insured or (b) in the case of any of
the events specified 9(a)(i)-(v), such event singly or together with any other
event, makes it, in your judgement, impracticable or inadvisable to market the
Common Shares in the manner and on the terms contemplated in the Prospectus. Any
termination pursuant to this Section 9 shall be without liability on the part of
(x) the Company or the Selling Stockholders to any Underwriter, except that the
Company and the Selling Stockholders shall be obligated to reimburse the
expenses of the Representatives and the Underwriters pursuant to Sections 5 and
6 hereof, (y) any Underwriter to the Company or any person controlling the
Company or the Selling Stockholders, or (z) of any party hereto to any other
party except that the provisions of Section 7 shall at all times be effective
and shall survive such termination.

SECTION 10. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The
respective indemnities, agreements, representations, warranties and other
statements of the Company or any person controlling the company, of its
officers, of the Selling Stockholders and of the several Underwriters set forth
in or made pursuant to this Agreement will remain in full force and effect,
regardless of any investigation made by or on behalf of any Underwriter or the
Company or any of its or their partners, officers or directors or any
controlling person, or the Selling Stockholders, as the case may be, and will
survive delivery of and payment for the Shares sold hereunder and any
termination of this Agreement.

29.
<PAGE> 30
SECTION 11. NOTICES. All communications hereunder shall be in writing
and shall be mailed, hand delivered or telecopied and confirmed to the parties
hereto as follows:

If to the Representatives:

FleetBoston Robertson Stephens Inc.
555 California Street
San Francisco, California 94104
Facsimile: (415) 676-2675
Attention: General Counsel

If to the Company:

Net Perceptions, Inc.
7901 Flying Cloud Drive
Eden Prairie, MN 55344
Facsimile: (612) 903-9424
Attention: Chief Financial Officer

If to the Selling Stockholders:

Thomas Donnelly
c/o Net Perceptions, Inc.
7901 Flying Cloud Drive
Eden Prairie, MN 55344
Facsimile: (612) 903-9424

Any party hereto may change the address for receipt of communications by giving
written notice to the others.

SECTION 12. SUCCESSORS. This Agreement will inure to the benefit of and
be binding upon the parties hereto, including any substitute Underwriters
pursuant to Section 8 hereof, and to the benefit of the employees, officers and
directors and controlling persons referred to in Section 7, and to their
respective successors, and personal representatives, and no other person will
have any right or obligation hereunder. The term "successors" shall not include
any purchaser of the Shares as such from any of the Underwriters merely by
reason of such purchase.

SECTION 13. PARTIAL UNENFORCEABILITY. The invalidity or
unenforceability of any Section, paragraph or provision of this Agreement shall
not affect the validity or enforceability of any other Section, paragraph or
provision hereof. If any Section, paragraph or provision of this Agreement is
for any reason determined to be invalid or unenforceable, there shall be deemed
to be made such minor changes (and only such minor changes) as are necessary to
make it valid and enforceable.

SECTION 14. GOVERNING LAW PROVISIONS.

(a) Governing Law. This agreement shall be governed
by and construed in accordance with the internal laws of the state of New York
applicable to agreements made and to be performed in such state.

30.
<PAGE> 31
(b) Consent to Jurisdiction. Any legal suit, action
or proceeding arising out of or based upon this Agreement or the transactions
contemplated hereby ("Related Proceedings") may be instituted in the federal
courts of the United States of America located in the City and County of San
Francisco or the courts of the State of California in each case located in the
City and County of San Francisco (collectively, the "Specified Courts"), and
each party irrevocably submits to the exclusive jurisdiction (except for
proceedings instituted in regard to the enforcement of a judgment of any such
court (a "Related Judgment"), as to which such jurisdiction is non-exclusive) of
such courts in any such suit, action or proceeding. Service of any process,
summons, notice or document by mail to such party's address set forth above
shall be effective service of process for any suit, action or other proceeding
brought in any such court. The parties irrevocably and unconditionally waive any
objection to the laying of venue of any suit, action or other proceeding in the
Specified Courts and irrevocably and unconditionally waive and agree not to
plead or claim in any such court that any such suit, action or other proceeding
brought in any such court has been brought in an inconvenient forum. Each party
not located in the United States irrevocably appoints CT Corporation System,
which currently maintains a San Francisco office at 49 Stevenson Street, San
Francisco, California 94105, United States of America, as its agent to receive
service of process or other legal summons for purposes of any such suit, action
or proceeding that may be instituted in any state or federal court in the City
and County of San Francisco.

SECTION 15. FAILURE OF ONE OR MORE OF THE SELLING STOCKHOLDERS TO SELL
AND DELIVER COMMON SHARES. If one or more of the Selling Stockholders shall fail
to sell and deliver to the Underwriters the Shares to be sold and delivered by
such Selling Stockholders at the First Closing Date pursuant to this Agreement,
then the Underwriters may at their option, by written notice from the
Representatives to the Company and the Selling Stockholders, either (i)
terminate this Agreement without any liability on the part of any Underwriter
or, except as provided in Sections 5, 6, and 7 hereof, the Company or the
Selling Stockholders, or (ii) purchase the shares which the Company and other
Selling Stockholders have agreed to sell and deliver in accordance with the
terms hereof. If one or more of the Selling Stockholders shall fail to sell and
deliver to the Underwriters the Shares to be sold and delivered by such Selling
Stockholders pursuant to this Agreement at the First Closing Date or the Second
Closing Date, then the Underwriters shall have the right, by written notice from
the Representatives to the Company and the Selling Stockholders, to postpone the
First Closing Date or the Second Closing Date, as the case may be, but in no
event for longer than seven days in order that the required changes, if any, to
the Registration Statement and the Prospectus or any other documents or
arrangements may be effected.

SECTION 16. GENERAL PROVISIONS. This Agreement constitutes the entire
agreement of the parties to this Agreement and supersedes all prior written or
oral and all contemporaneous oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may be executed in two
or more counterparts, each one of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement may not be amended or modified unless in writing by all of the
parties hereto, and no condition herein (express or implied) may be waived
unless waived in writing by each party whom the condition is meant to benefit.
Section headings herein are for the convenience of the parties only and shall
not affect the construction or interpretation of this Agreement.

[The remainder of this page has been intentionally left blank.]

31.
<PAGE> 32
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company and the Custodian the enclosed
copies hereof, whereupon this instrument, along with all counterparts hereof,
shall become a binding agreement in accordance with its terms.

Very truly yours,

NET PERCEPTIONS, INC.

By:
--------------------------------------
Steven J. Snyder
President and Chief Executive Officer

SELLING STOCKHOLDERS

By:
--------------------------------------
Attorney-in-fact for the Selling
Stockholders named in Schedule B
hereto

The foregoing Underwriting Agreement is hereby confirmed and accepted
by the Representatives as of the date first above written.

FLEETBOSTON ROBERTSON STEPHENS INC.
CHASE SECURITIES INC.
U.S. BANCORP PIPER JAFFRAY INC.
DAIN RAUSCHER INCORPORATED
ADAMS, HARKNESS & HILL, INC.

On their behalf and on behalf of each of the several underwriters named in
Schedule A hereto.

By FLEETBOSTON ROBERTSON STEPHENS INC.

By:
----------------------------------------------
G. Mitchell Whiteford
Managing Director

32.
<PAGE> 33

SCHEDULE A

<TABLE>
<CAPTION>
NUMBER OF FIRM COMMON
UNDERWRITERS SHARES TO BE PURCHASED
------------ ----------------------
<S> <C>
FLEETBOSTON ROBERTSON STEPHENS INC..................................... [___]

CHASE SECURITIES INC................................................... [___]

U.S. BANCORP PIPER JAFFRAY INC......................................... [___]

DAIN RAUSCHER INCORPORATED............................................. [___]

ADAMS, HARKNESS & HILL, INC............................................ [___]

Total............................................................. [___]
</TABLE>

S-A
<PAGE> 34
SCHEDULE B

<TABLE>
<CAPTION>
MAXIMUM NUMBER
NUMBER OF FIRM OF OPTION SHARES
SELLING STOCKHOLDER SHARES TO BE SOLD TO BE SOLD
------------------- ----------------- -----------------
<S> <C> <C>
Nanci Anderson
Net Perceptions, Inc.
7901 Flying Cloud Drive
Eden Prairie, MN 55344....................................... 7,225 1,083

Paul Bieganski
Net Perceptions, Inc.
7901 Flying Cloud Drive
Eden Prairie, MN 55344....................................... 16,000 2,400

Thomas Donnelly
Net Perceptions, Inc.
7901 Flying Cloud Drive
Eden Prairie, MN 55344....................................... 18,417 2,762

Stephen Larsen
Net Perceptions, Inc.
7901 Flying Cloud Drive
Eden Prairie, MN 55344....................................... 10,000 0

Bradley Miller
Net Perceptions, Inc.
7901 Flying Cloud Drive
Eden Prairie, MN 55344....................................... 139,118 20,867

George Moser
Net Perceptions, Inc.
7901 Flying Cloud Drive
Eden Prairie, MN 55344....................................... 28,511 4,276

George Nader
Net Perceptions, Inc.
462 Seventh Ave., 21st Floor
New York, NY 10018-7606...................................... 4,500 0

John Riedl
1340 California Avenue West
Falcon Heights, MN 55108..................................... 100,170 15,025

Steven Snyder
Net Perceptions, Inc.
7901 Flying Cloud Drive
Eden Prairie, MN 55344....................................... 190,294 28,544

Steven Van Tassel
Net Perceptions, Inc.
7901 Flying Cloud Drive
Eden Prairie, MN 55344....................................... 4,125 0
</TABLE>

S-B1.

<PAGE> 35
<TABLE>
<CAPTION>
MAXIMUM NUMBER
NUMBER OF FIRM OF OPTION SHARES
SELLING STOCKHOLDER SHARES TO BE SOLD TO BE SOLD
------------------- ----------------- -----------------
<S> <C> <C>
Chet Aitken
100 Kingston Road
New Market, Ontario
L3Y 5W7
Canada........................................................ 300 0

David Boles
7206 Holly Fern Cove
Austin, TX 78750............................................. 800 0

John Dalton
4104 Hidden Canyon
Austin, TX 78746............................................. 25,000 0

Paul Dehnert
3110 Maywood Avenue
Austin, TX 78703............................................. 10,000 0

Ronald Dovich
5721 Standing Rock Road
Austin, TX 78730............................................. 2,400 0

Craig Foley
7 Locust Lane
Bronxville, NY 10708......................................... 235 0

Kent Fuka
6801 N. Capital of Texas Highway
B2, Suite 225
Austin, TX 78731............................................. 1,402 0

Coyne Gibson
5946 Cape Coral Drive
Austin, TX 78746............................................. 7,800 0

Karen Heath
4100 Triple Crown
Austin, TX 78746............................................. 4,490 0

Sue Keller
4814 Timberline Drive
Austin, TX 78746............................................. 406 0

Mary McCommon
2503 Park View Drive
Austin, TX 78757............................................. 350 0
</TABLE>

S-B2.
<PAGE> 36
<TABLE>
<CAPTION>
MAXIMUM NUMBER
NUMBER OF FIRM OF OPTION SHARES
SELLING STOCKHOLDER SHARES TO BE SOLD TO BE SOLD
------------------- ----------------- -----------------
<S> <C> <C>
Pamela Saegert
5803 Highland Hills Terrace
Austin, TX 78731............................................. 301 0

Terrance Rock
1408 E. Jeter Road
Bartonville, TX 76226........................................ 800 0

Frank Triolo
3 River Otter Lane
Savannah, GA 31411........................................... 4,400 0

Larry Wikelius
9307 Creeks Edge Circle
Austin, TX 78753............................................. 3,300 0

Mark Zuzanek
2081 Lakewind Drive
West Bloomfield, MI 48324.................................... 1,000 0

Phillips-Smith Specialty Retail Group III
5080 Spectrum Drive
Suite 805W
Addison, TX 75001............................................ 30,000 0

RHO Management Trust I
152 West 57th Street
New York, NY 10019........................................... 14,127 0

Total:............................................... 625,471 74,957
====== ======
</TABLE>

S-B3.
<PAGE> 37
EXHIBIT A

LOCK-UP AGREEMENT

FleetBoston Robertson Stephens Inc.
Chase Securities Inc.
U.S. Bancorp Piper Jaffray Inc.
Dain Rauscher Incorporated
Adams, Harkness & Hill, Inc.
As Representatives of the Several Underwriters
c/o FleetBoston Robertson Stephens Inc.
555 California Street, Suite 2600
San Francisco, California 94104

RE: Net Perceptions, Inc. (the "Company")

Ladies & Gentlemen:

The undersigned is an owner of record or beneficially of certain shares
of Common Stock of the Company ("Common Stock") or securities convertible into
or exchangeable or exercisable for Common Stock. The Company proposes to carry
out a public offering of Common Stock (the "Offering") for which you will act as
the representatives (the "Representatives") of the underwriters. The undersigned
recognizes that the Offering will be of benefit to the undersigned and will
benefit the Company by, among other things, raising additional capital for its
operations. The undersigned acknowledges that you and the other underwriters are
relying on the representations and agreements of the undersigned contained in
this letter in carrying out the Offering and in entering into underwriting
arrangements with the Company with respect to the Offering.

In consideration of the foregoing, the undersigned hereby agrees that
the undersigned will not offer to sell, contract to sell, or otherwise sell,
dispose of, loan, pledge or grant any rights with respect to (collectively, a
"Disposition") any shares of Common Stock, any options or warrants to purchase
any shares of Common Stock or any securities convertible into or exchangeable
for shares of Common Stock (collectively, "Securities") now owned or hereafter
acquired directly by such person or with respect to which such person has or
hereafter acquires the power of disposition, otherwise than (i) as a bona fide
gift or gifts, provided the donee or donees thereof agree in writing to be bound
by this restriction, (ii) as a distribution to partners or stockholders of such
person, provided that the distributees thereof agree in writing to be bound by
the terms of this restriction, (iii) with respect to sales or purchases of
Common Stock acquired on the open market or (iv) with the prior written consent
of FleetBoston Robertson Stephens Inc. The foregoing restrictions will terminate
after the close of trading of the Common Stock on the Nasdaq National Market on
the 90th day following the effective date of the Company's Registration
Statement on Form S-1 (No. 333-3123) (the "Lock-Up" Period). The foregoing
restriction has been expressly agreed to preclude the holder of the Securities
from engaging in any hedging or other transaction which is designed to or
reasonably expected to lead to or result in a Disposition of Securities during
the Lock-up Period, even if such Securities would be disposed of by someone
other than such holder. Such prohibited hedging or other transactions would
include, without limitation, any short sale (whether or not against the box) or
any purchase, sale or grant of any right (including, without limitation, any put
or call option) with respect to any Securities or with respect to any security
(other than a broad-based market basket or index) that included, relates to or
derives any significant part of its value from

A-1.
<PAGE> 38
Securities. The undersigned also agrees and consents to the entry of stop
transfer instructions with the Company's transfer agent and registrar against
the transfer of shares of Common Stock or Securities held by the undersigned
except in compliance with the foregoing restrictions.

This agreement is irrevocable and will be binding on the undersigned
and the respective successors, heirs, personal representatives, and assigns of
the undersigned. In the event the Offering has not occurred on or before May 31,
2000, this Lock-Up Agreement shall be of no further force or effect.

Dated
-----------------------------------

----------------------------------------
Printed Name of Holder

By:
-----------------------------------
Signature

---------------------------------------
Printed Name of Person Signing
(and indicate capacity of person
signing if signing as custodian,
trustee, or on behalf of an entity)

A-2.
<PAGE> 39
EXHIBIT B

MATTERS TO BE COVERED IN THE OPINION OF COMPANY COUNSEL

(i) Each of the Company and KD One has been duly incorporated, and is
validly existing and in good standing as a corporation under the laws of the
State of Delaware. The Company is qualified to do business and in good standing
as a foreign corporation under the laws of the States of New York, California
and Minnesota. KD One is qualified to do business and in good standing as a
foreign corporation under the laws of the States of Michigan, Minnesota and
Texas.

(ii) Each of the Company and KD One has the corporate power and
corporate authority to own its properties and to conduct its business, in each
case as described in the Prospectus.

(iii) The ______ shares of Common Stock of the Company shown by the
Company's stock records as being issued and outstanding immediately prior to the
issuance of the Shares have been duly authorized and validly issued and are
fully paid and nonassessable.

(iv) The one issued and outstanding share of common stock of KD One has
been duly authorized and validly issued and is fully paid and nonassessable.

(v) The Primary Shares have been duly authorized and, when issued and
delivered to and paid for by the Underwriters in accordance with the terms of
the Underwriting Agreement, such shares will be validly issued, fully paid and
nonassessable, and, to such counsel's knowledge, were not issued in violation
of, or subject to, any preemptive rights arising under the Delaware General
Corporation Law, the Company's Certificate of Incorporation or any Applicable
Contract (as defined in such counsel's opinion).

(vi) The Underwriting Agreement has been duly authorized, executed and
delivered by the Company and, assuming due authorization, execution and delivery
by you, the Underwriting Agreement is a valid and binding agreement of the
Company, enforceable against the Company in accordance with its terms, except
that (A) enforcement thereof may be limited by (i) bankruptcy, insolvency,
reorganization, fraudulent transfer, moratorium or other similar laws now or
hereafter in effect relating to creditors' rights generally and (ii) general
principles of equity (regardless of whether enforceability is considered in a
proceeding at law or in equity) and the discretion of the court before which any
proceeding therefor is brought and (B) rights to indemnification and
contribution contained therein may be limited by state or federal securities
laws or the public policy underlying such laws.

(vii) The execution and delivery by the Company of the Underwriting
Agreement and the issuance and sale of the Primary Shares by the Company
pursuant thereto do not violate, or conflict with, or to such counsel's
knowledge, constitute a material default under (i) the Certificate of
Incorporation or the By-laws; (ii) any Applicable Law; (iii) any Applicable
Contract; or (iv) any Applicable Order. Such counsel need not express any
opinion, however, as to whether such execution, delivery, issuance or sale will
violate, conflict with or contravene or result in a default under any covenant,
restriction or provision with respect to financial ratios or tests or any aspect
of the financial condition or results of operations of the Company or any of its
subsidiaries.

B-1
<PAGE> 40
(viii) The Registration Statement, and the Prospectus, as of their
respective effective or issue dates, appeared on their face to be appropriately
responsive in all material respects to the requirements of the Act and the Rules
and Regulations, except that in each case such counsel need express no opinion
as to the financial statements, financial statements schedules or other
financial and statistical data included therein or excluded therefrom or the
exhibits thereto, and, except to the extent expressly stated in the last
paragraph, such counsel need not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the Registration
Statement or either Prospectus.

(ix) No Governmental Approval (as defined in such counsel's opinion) is
required for the execution and delivery by the Company of the Underwriting
Agreement or the issuance and sale of the Primary Shares by the Company pursuant
to the Underwriting Agreement, except such as have been obtained and except
those which are not required to be obtained, made or taken prior to the date
hereof.

(x) The information in the Prospectus under the caption "Description of
Capital Stock," to the extent that it constitutes a summary of legal matters,
has been reviewed by such counsel and fairly summarizes such legal matters in
all material respects.

(xi) To such counsel's knowledge, there are no agreements, contracts,
leases or documents to which the Company is a party of a character required to
be filed as an exhibit to the Registration Statement that are not filed as
required.

(xii) To such counsel's knowledge, there are no legal or governmental
proceedings pending or threatened against the Company or KD One of a character
required to be disclosed in the Registration Statement or the Prospectus by the
Act or the Exchange Act or the applicable rules and regulations, other than
those described therein.

(xiii) The Company is not required to be registered or regulated as an
"investment company" as such term is defined under the Investment Company Act of
1940, as amended.

(xiv) The Underwriting Agreement has been duly authorized, executed and
delivered by each of the Selling Stockholders and, assuming due authorization,
execution and delivery by the Representatives, is a valid and binding agreement
of each of the Selling Stockholders, enforceable against the Selling
Stockholders in accordance with its terms, except that (A) enforcement thereof
may be limited by (i) bankruptcy, insolvency, reorganization, fraudulent
transfer, moratorium or other similar laws now or hereafter in effect relating
to creditors' rights generally and (ii) general principles of equity (regardless
of whether enforceability is considered in a proceeding at law or in equity) and
the discretion of the court before which any proceeding therefor is brought and
(B) rights to indemnification and contribution contained therein may be limited
by state or federal securities laws or the public policy underlying such laws.

(xv) Such counsel has been orally advised by the Commission that the
Registration Statement was declared effective under the Act at 12:00 p.m.
Eastern Standard time on March 23, 2000 and that no stop order suspending the
effectiveness of the Registration Statement has been issued and, to the best of
such counsel's knowledge, no proceedings for that purpose have been instituted
or are pending or threatened by the Commission.

In addition, such counsel shall state that such counsel has
participated in conferences with officers and other representatives of the
Company, representatives of the independent certified public accountants of the
Company, counsel to the Representatives and

B-2
<PAGE> 41
the Representatives at which the contents of the Registration Statement and the
Prospectus and related matters were discussed and, although such counsel is not
passing upon, and does not assume any responsibility for, the accuracy,
completeness or fairness of the statements contained in the Registration
Statement or the Prospectus and has made no independent check or verification
thereof (except to the extent expressly stated above), on the basis of the
foregoing, no facts have come to the attention of such counsel that have led
such counsel to believe that the Registration Statement, at the time it became
effective, contained an untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading, or that the Prospectus, as of its date and as
of the date hereof, contained or contains an untrue statement of a material fact
or omitted or omits to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading, except that such counsel need not express any opinion or belief
with respect to the financial statements, schedules and other financial and
statistical data included therein or excluded therefrom or the exhibits to the
Registration Statement.

B-3
<PAGE> 42

EXHIBIT C

MATTERS TO BE COVERED IN THE OPINION OF UNDERWRITERS' COUNSEL

(i) The Shares to be issued by the Company have been duly authorized
and, upon issuance and delivery and payment therefor in accordance with the
terms of the Underwriting Agreement, will be validly issued, fully paid and
non-assessable.

(ii) The Registration Statement complied as to form in all material
respects with the requirements of the Act; the Registration Statement has become
effective under the Act and, to such counsel's knowledge, no stop order
proceedings with respect thereto have been instituted or threatened or are
pending under the Securities Act.

(iii) The Shares have been validly registered under the Securities Act
and the applicable rules and regulations of the Commission thereunder;

(iv) The Underwriting Agreement has been duly authorized, executed and
delivered by the Company.

Such counsel shall state that such counsel has reviewed the opinions
addressed to the Representatives from Skadden Arps Slate Meagher & Flom LLP,
each dated the date hereof, and furnished to you in accordance with the
provisions of the Underwriting Agreement. Such opinions appear on their face to
be appropriately responsive to the requirements of the Underwriting Agreement.

In addition, such counsel shall state that such counsel has
participated in conferences with officials and other representatives of the
Company, the Representatives, Underwriters' Counsel and the independent
certified public accountants of the Company, at which such conferences the
contents of the Registration Statement and Prospectus and related matters were
discussed, and although they have not verified the accuracy or completeness of
the statements contained in the Registration Statement or the Prospectus, no
facts have come to the attention of such counsel that lead them to believe that,
at the time the Registration Statement became effective and at all times
subsequent thereto up to and on the First Closing Date or Second Closing Date,
as the case may be, the Registration Statement and any amendment or supplement
thereto (other than the financial statements including supporting schedules and
other financial and statistical information derived therefrom, as to which such
counsel need express no comment) contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or at the First Closing
Date or the Second Closing Date, as the case may be, the Registration Statement,
the Prospectus and any amendment or supplement thereto (except as aforesaid)
contained any untrue statement of a material fact or omitted to state a material
fact necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.

C-1.
<PAGE> 43
EXHIBIT D

MATTERS TO BE COVERED IN THE OPINION OF SELLING STOCKHOLDER COUNSEL

(i) The execution and delivery by each of the Selling Stockholders of,
and the performance by such Selling Stockholder of its obligations under, the
Underwriting Agreement do not violate, or conflict with, to such counsel's
knowledge, constitute a material default under (i) the partnership agreement, if
applicable, of such Selling Stockholder, (ii) any Applicable Law (as defined in
such counsel's opinion); or (iii) any Applicable Order (as defined in such
counsel's opinion). Such counsel need not express any opinion, however, as to
whether such execution, delivery, or performance will violate, conflict, or
contravene or result in a default under any covenant, restriction or provision
with respect to financial ratios or tests or any aspect of the financial
condition or results of operations of any Selling Stockholder or any of its
subsidiaries.

(ii) Each of the Irrevocable Power of Attorney and Custody Agreement
(each as defined in such counsel's opinion) has been duly authorized, executed
and delivered by each Selling Stockholder and is a valid and binding agreement
of each of the Selling Stockholders, enforceable against each of the Selling
Stockholders in accordance with its terms, except that (A) enforcement thereof
may be limited by (i) bankruptcy, insolvency, reorganization, fraudulent
transfer, moratorium or other similar laws now or hereafter in effect relating
to creditors' rights generally and (ii) general principles of equity (regardless
of whether enforceability is considered in a proceeding at law or in equity) and
the discretion of the court before which any proceeding therefor is brought and
(B) rights to indemnification and contribution contained therein may be limited
by state or federal securities laws or the public policy underlying such laws.

(iii) Assuming that neither the Representatives nor any Underwriter has
notice of any adverse claims with respect to certificate number ___ registered
in the name ________ and evidencing ___ shares of Common Stock of the Company
(the "Purchased Shares") then, upon delivery to the Representative of such
certificate indorsed to the Representative or indorsed in blank by an effective
indorsement, the Representatives will acquire such certificate (and the shares
represented thereby) free of any adverse claims under Section 8-303 of the
Uniform Commercial Code as in effect on the date hereof in the State of New York
(the "New York UCC").

D-1.

<PAGE> 1
EXHIBIT 5.1

[Letterhead of Skadden, Arps, Slate, Meagher & Flom LLP]

March 23, 2000

Net Perceptions, Inc.
7901 Flying Cloud Drive
Minneapolis, Minnesota 55344

Re: Net Perceptions, Inc.
Registration Statement on Form S-1

Ladies and Gentlemen:

We have acted as special counsel to Net Perceptions, Inc., a
Delaware corporation (the "Company"), in connection with the public offering by
the Company and certain selling stockholders of the Company (the "Selling
Stockholders") of up to 2,625,471 shares (the "Shares") of the Company's Common
Stock, par value $.0001 per share (the "Common Stock"). Of the Shares, up to
2,317,360 shares of Common Stock (the "Primary Shares") are being sold by the
Company, including up to 317,360 shares of Common Stock subject to an
over-allotment option, and 625,471 shares of Common Stock (the "Secondary
Shares") are being sold by the Selling Stockholders, including 76,460 shares of
Common Stock subject to an over-allotment. A portion of the Secondary shares
which will be issued upon the exercise of options (the "Options") on the closing
date of the public offering (the "Option Shares").

This opinion is being furnished in accordance with the
requirements of Item 601(b)(5) of Regulation S-K under the Securities Act of
1933, as amended (the "Act").

In connection with this opinion, we have examined originals or
copies, certified or otherwise identified to our satisfaction, of (i) the
Company's Registration Statement on Form S-1 (File No. 333-31230) as filed with
the Securities and Exchange Commission (the "Commission") on February 28, 2000
under the Act, Amendment No. 1 thereto, as filed with the Commission on March 7,
2000 under the Act

<PAGE> 2
Net Perceptions, Inc.
March 22, 2000
Page 2

Amendment No. 2 thereto, as filed with the Commission on March 9, 2000 under the
Act and Amendment No. 3 thereto, as filed with the Commission on the date hereof
under the Act (such Registration Statement, as so amended, being hereinafter
referred to as the "Registration Statement"); (ii) the form of the Underwriting
Agreement (the "Underwriting Agreement") proposed to be entered into between the
Company, as issuer, the Selling Stockholders and FleetBoston Robertson Stephens,
Inc., Chase Securities Inc., U.S. Bancorp Piper Jaffray Inc., Dain Rauscher
Incorporated and Adams Harkness & Hill, Inc., as underwriters (the
"Underwriters"), filed as an exhibit to the Registration Statement; (iii) a
specimen certificate representing the Common Stock; (iv) the stock option
agreements executed with respect to the Option Shares; (v) the Amended and
Restated Certificate of Incorporation of the Company, as presently in effect;
(vi) the Bylaws of the Company, as presently in effect; (vii) certain
resolutions of the Board of Directors of the Company relating to the original
issuance of the Secondary Shares and certain stock and other records of the
Company relating thereto; and (viii) certain resolutions of the Board of
Directors of the Company and drafts of certain resolutions (the "Draft
Resolutions") of the Offering Committee of the Board of Directors of the Company
(the "Offering Committee"), in each case relating to the issuance and sale of
the Primary Shares and related matters. We have also examined originals or
copies, certified or otherwise identified to our satisfaction, of such records
of the Company and such agreements, certificates of public officials,
certificates of officers or other representatives of the Company and others, and
such other documents, certificates and records as we have deemed necessary or
appropriate as a basis for the opinions set forth herein.

In our examination, we have assumed the legal capacity of all
natural persons, the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
all documents submitted to us as certified, conformed or photostatic copies and
the authenticity of the originals of such latter documents. In making our
examination of documents executed or to be executed by parties other than the
Company, we have assumed that such parties had or will have the power, corporate
or other, to enter into and perform all obligations thereunder and have also
assumed the due authorization by all requisite action, corporate or other, and
execution and delivery by such parties of such documents and the validity and
binding effect thereof. As to any facts material to the opinions expressed
herein which we have not independently established or verified, we have relied
upon statements and representations of officers and other representatives of the
Company and others.

<PAGE> 3
Net Perceptions, Inc.
March 22, 2000
Page 3

In connection with our opinion set forth in paragraph 2 below,
insofar as it relates to receipt by the Company of full payment upon the
original issuance of the Secondary Shares, we have relied solely on
representations contained in an officer's certificate of the Company. In
connection with an opinion, we have also assumed that the certificates
representing the Secondary Shares were manually signed by one of the authorized
officers of the transfer agent and registrar for the Common Stock and registered
by such transfer agent and registrar and conform to the specimen thereof
examined by us.

Members of our firm are admitted to the bar in the State of
Delaware, and we do not express any opinion as to the laws of any other
jurisdiction.

Based upon and subject to the foregoing, we are of the opinion
that:

1. When (i) the Registration Statement becomes effective; (ii)
the Draft Resolutions have been adopted by the Offering Committee of the Board
of Directors; (iii) the price at which the Primary Shares are to be sold to the
Underwriters pursuant to the Underwriting Agreement and other matters relating
to the issuance and sale of the Primary Shares have been approved by the
Offering Committee of the Board of Directors in accordance with the Draft
Resolutions; (iv) the Underwriting Agreement has been duly executed and
delivered; and (v) certificates representing the Primary Shares in the form of
the specimen certificate examined by us have been manually signed by an
authorized officer of the transfer agent and registrar for the Common Stock and
registered by such transfer agent and registrar, and delivered to and paid for
by the Underwriters at a price per share not less than the per share par value
of the Common Stock as contemplated by the Underwriting Agreement, the issuance
and sale of the Primary Shares will have been duly authorized, and the Primary
Shares will be validly issued, fully paid and nonassessable.

2. The original issuance and sale of the Secondary Shares (other
than the Option Shares, as to which we opine in paragraph 3 below) has been duly
authorized, and such Secondary Shares are validly issued, fully paid and
nonassessable shares of Common Stock.

3. When (i) the Options are exercised in accordance with the
terms of the stock option agreements examined by us; (ii) the Option Shares are
paid for in accordance with the terms of such stock option agreements; and (iii)

<PAGE> 4
Net Perceptions, Inc.
March 22, 2000
Page 4

certificates representing the Option Shares in the form of the specimen
certificate examined by us have been duly executed by an authorized officer of
the transfer agent and registrar for the Common Stock and registered by such
transfer agent and registrar, the Option Shares will have been duly authorized,
and the Option Shares will be validly issued, fully paid and nonassessable.

We hereby consent to the filing of this opinion with the
Commission as an exhibit to the Registration Statement. We also consent to the
reference to our firm under the caption "Legal Matters" in the Registration
Statement. In giving this consent, we do not thereby admit that we are included
in the category of persons whose consent is required under Section 7 of the Act
or the rules and regulations of the Commission.

Very truly yours,

/s/ Skadden, Arps, Slate, Meagher & Flom LLP

<PAGE> 1
EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated January 27, 2000, except as to Note 12, which is as of February 14,
2000, relating to the financial statements of Net Perceptions, Inc., which
appears in such Registration Statement. We also consent to the reference to us
under the heading "Experts" in such Registration Statement.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP
Minneapolis, Minnesota
March 21, 2000

<PAGE> 1
EXHIBIT 23.2

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated February 25, 2000 relating to the financial statements of Knowledge
Discovery One, Inc., which appears in such Registration Statement. We also
consent to the reference to us under the heading "Experts" in such Registration
Statement.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP
Austin, Texas
March 21, 2000