NET PERCEPTIONS INC, S-1/A, 2000-03-07

NET PERCEPTIONS INC
S-1/A, 2000-03-07
PREPACKAGED SOFTWARE

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<PAGE> 1

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 6, 2000

[NET PERCEPTIONS LOGO]

2,850,000 SHARES

COMMON STOCK

Net Perceptions is offering 2,000,000 shares of common stock and the
selling stockholders are selling an additional 850,000 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 3, 2000 was $54.19 per share.

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

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

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

<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 the selling stockholders together have granted the underwriters a
30-day option to purchase up to an additional 427,500 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> 2

[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> 3

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>
<CAPTION>
PAGE
----
<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
Underwriting................................................ 70
Legal Matters............................................... 72
Experts..................................................... 72
Where You Can Find Additional Information................... 73
Index to Financial Statements............................... F-1
</TABLE>

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

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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<PAGE> 4

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 1,969,013 shares of our
common stock. These shares were allocated as follows:

- 1,759,013 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 268,914 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.................................... 850,000 shares

Common stock to be outstanding after the
offering........................................ 25,994,729 shares

Over-allotment option granted by us............. 300,000 shares

Over-allotment option granted by selling
stockholders.................................... 127,500 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 1,969,013
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
380,500 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 268,914 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 $139,725
Working capital....................................... 37,372 35,675 137,465
Total assets.......................................... 58,748 180,135 281,925
Long-term liabilities, net of current portion......... 707 1,120 1,120
Total stockholders' equity............................ 48,388 164,364 266,154
</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 $54.19 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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<PAGE> 13

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 December 31, 1999, our
direct sales organization consisted of 64 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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<PAGE> 14

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 December 31, 1999, our indirect
sales organization consisted of nine 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 December 31, 1999, our professional services and customer support
organization consisted of 41 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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<PAGE> 15

Perceptions Japan. As of December 31, 1999, we had 10 employees located in
Europe and 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 11 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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<PAGE> 16

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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<PAGE> 17

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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<PAGE> 18

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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<PAGE> 19

- 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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<PAGE> 20

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 25,994,729 shares of common
stock outstanding. Of these shares, 23,777,104 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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<PAGE> 21

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 $48.47 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 $54.19 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."

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<PAGE> 22

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.

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USE OF PROCEEDS

We estimate that we will receive net proceeds of approximately $101.8
million from the sale of 2,000,000 shares of common stock offered by us, or
$117.2 million if the over-allotment to purchase 300,000 shares granted to the
underwriters by us is exercised in full, based on an assumed public offering
price of $54.19 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 3, 2000)....................... $66.50 $43.00
</TABLE>

On March 3, 2000, the last reported sale price of our common stock on the
Nasdaq National Market was $54.19 per share. As of February 15, 2000, there were
214 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> 24

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 $54.19 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; 23,994,729
shares issued and outstanding pro forma;
25,994,729 shares issued and outstanding pro
forma as adjusted.............................. 2 2 2
Additional paid-in capital....................... 71,231 187,207 288,997
Accumulated other comprehensive loss............. (89) (89) (89)
Accumulated deficit.............................. (22,756) (22,756) (22,756)
-------- -------- --------
Total stockholders' equity.................. 48,388 164,364 266,154
-------- -------- --------
Total capitalization........................ $ 49,095 $165,484 $267,274
======== ======== ========
</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
380,500 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 268,914 shares of our common stock for issuance
upon the exercise of these options, at a weighted average exercise price of
$1.30 per share.

24
<PAGE> 25

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
$46,964,000, 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 23,994,729 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 $54.19 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 $148,754,000, or $5.72 per
share. This represents an immediate increase in pro forma net tangible book
value of $3.76 per share to existing stockholders and an immediate dilution in
pro forma net tangible book value of $48.47 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..................... $ 54.19
Pro forma net tangible book value per share as of December
31, 1999............................................... $ 1.96
Increase per share attributable to new investors.......... 3.76
------
Pro forma net tangible book value per share after this
offering.................................................. 5.72
-------
Pro forma net tangible book value dilution per share to new
investors................................................. $ 48.47
=======
</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 380,500 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 268,914 shares of our common stock for issuance upon the exercise of
these options, at a weighted average exercise price of $1.30 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> 26

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 17,274
======= ======= ======= ======== =========
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 20,723
======== =========
</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> 27

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> 28

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
1,969,013 shares of our common stock. In addition, options of KD One were
converted into options to purchase approximately 268,914 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> 29

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> 30

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> 31

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

31
<PAGE> 32

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.

32
<PAGE> 33

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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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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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 December 31, 1999, our professional
services staff consisted of 41 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

44
<PAGE> 45

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> 46

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

46
<PAGE> 47

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 December 31, 1999, we had licensed products to more than 160
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 December 31, 1999.

<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> 48

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

As of December 31, 1999, our direct sales organization, including KD One
employees, had 64 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 December 31, 1999, our indirect sales
organization consisted of nine 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 December 31, 1999, our marketing organization consisted of 23
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 December 31, 1999, our research and development staff consisted of 95
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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<PAGE> 49

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

49
<PAGE> 50

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 December 31, 1999, we had 11 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 December 31, 1999, including KD One employees, we had a total of 264
employees, including 87 in sales and marketing, 95 in research and development,
41 in customer support and 41 in administration. All of these employees were
located in North America, with the exception of 10 employees who were located in
Europe. None of our employees is represented by a collective bargaining
agreement, nor have we experienced any work stoppage. We consider our relations
with our employees to be good.

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<PAGE> 51

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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<PAGE> 52

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth our executive offices and directors, and
their ages as of December 31, 1999:

<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....................... 35 Chief Technical Officer
Thomas M. Donnelly................... 35 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> 53

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. Mr. Lansing also serves as a
director of Fingerhut Companies, Inc. 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.

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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<PAGE> 54

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.

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<PAGE> 55

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.

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<PAGE> 56

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> 57

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> 58

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> 59

- 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 268,914 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> 60

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.

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<PAGE> 61

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> 62

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth information regarding the beneficial
ownership of our common stock as of February 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 23,994,729
shares of common stock outstanding as of February 15, 2000 and 25,994,729 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 February 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 -- 10.9% -- 2,605,864 -- 10.0%
3109 Poplarwood Court
Suite 108
Raleigh, North Carolina 27604
Norwest Bank Minnesota, N.A.(3)...... 2,490,378 -- 10.4 -- 2,490,378 -- 9.6
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.................... 1,390,348 832 5.8 139,118 1,251,230 832 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.................... 251,509 140,416 1.6 39,193 212,316 140,416 1.4
George E. Moser...................... 92,614 192,499 1.2 28,511 64,103 192,499 *
Thomas M. Donnelly................... 64,000 120,165 * 18,417 64,000 101,748 *
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 *
</TABLE>

62
<PAGE> 63

- -------------------------
* 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 February 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) Consists of shares held by Hummer Winblad Venture Partners III L.P.

63
<PAGE> 64

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 1,969,013 shares issued to former KD One stockholders on February 14,
2000 in connection with our acquisition of KD One. There will be 25,994,729
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> 65

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.

65
<PAGE> 66

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 1,759,013 shares of common stock are entitled to the
following rights with respect to the registration of their shares under the
Securities Act. Approximately 290,703 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

66
<PAGE> 67

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."

67
<PAGE> 68

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 25,994,729 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:

- 2,068,992 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 1,319,677 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 259,947 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.

68
<PAGE> 69

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 1,319,677
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 268,914 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.

69
<PAGE> 70

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 300,000
additional shares of common stock and the selling stockholders have granted the
underwriters an option to purchase 127,500 additional shares of common stock at
the same price per share as we and the selling stockholders will receive for the
2,850,000 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 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.

70
<PAGE> 71

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 the
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,

71
<PAGE> 72

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.

72
<PAGE> 73

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.

73
<PAGE> 74

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> 75

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> 76

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> 77

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> 78

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> 79

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 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> 80

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> 81
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> 82
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 per
share have been calculated assuming the conversion of all outstanding shares of

F-9
<PAGE> 83
NET PERCEPTIONS, INC.

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

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> 84
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> 85
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> 86
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> 87
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> 88
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> 89
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> 90
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> 91
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 1,969,013 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 268,914 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> 92

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> 93

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> 94

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> 95

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> 96

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> 97

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> 98
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> 99
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> 100
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> 101
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> 102
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> 103
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> 104
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> 105
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 1,969,013 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> 106

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> 107

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> 108

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 17,274(f)
======== =========
Pro forma basic and diluted.......... $ (0.64)(e) $ (2.42)(f)
======== =========
Shares used in computing pro forma
basic and diluted................. 18,851(e) 20,723(f)
======== =========
</TABLE>

See accompanying notes to pro forma financial information.

F-35
<PAGE> 109

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 1,969,013, of which 210,000 were placed in escrow.

F-36
<PAGE> 110

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> 111

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 1,969,013 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> 112

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>

- -------------------------
* To be filed by amendment.

** 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> 113

(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> 114

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 1 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 6th 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. 1 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 6, 2000
- ------------------------------------------ Director (Principal Executive Officer)
Steven J. Snyder

* Chief Financial Officer and Secretary March 6, 2000
- ------------------------------------------ (Principal Financial and Accounting
Thomas M. Donnelly Officer)

* Director March 6, 2000
- ------------------------------------------
John T. Riedl

* Director March 6, 2000
- ------------------------------------------
Ann L. Winblad

* Director March 6, 2000
- ------------------------------------------
Douglas J. Burgum

* Director March 6, 2000
- ------------------------------------------
William Lansing

*By: /s/ STEVEN J. SNYDER March 6, 2000
- ------------------------------------------
Steven J. Snyder
Attorney-in-Fact
</TABLE>

II-5
<PAGE> 115

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>

- -------------------------
* To be filed by amendment.

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

*** Previously filed.

<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 3, 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
Austin, Texas
March 6, 2000