UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

[X]		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003
OR

For the transition period from            to           

Commission File Number 000-25781

NET PERCEPTIONS, INC.

(952) 842-5000
(Registrant’s telephone number, including area code)

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

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

Common Stock, par value $.0001 per share
(Title of class)

Preferred Stock Purchase Rights
(Title of class)

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [  ] No [X]

The aggregate market value of voting and non-voting stock held by non-affiliates of the registrant, based upon the last sale price of the registrant’s Common Stock, par value $0.0001 per share, reported on the Nasdaq National Market on June 30, 2003 was $40,976,733.

As of March 31, 2004, there were outstanding 28,270,918 shares of the registrant’s Common Stock, $0.0001 par value.

NET PERCEPTIONS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2003

TABLE OF CONTENTS

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     This Annual Report on Form 10-K (including exhibits and information incorporated by reference herein) contains forward-looking statements that involve risks, uncertainties and assumptions. The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding our expectations, beliefs, intentions or strategies for the future. All forward-looking statements included in this Annual Report on Form 10-K (including exhibits and information incorporated by reference herein) are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Events and actual results could differ materially from those described in our forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below in Item 7 of this report (“Management’s Discussion and Analysis of Financial Condition and Results of Operations”) under the heading “CERTAIN RISK FACTORS” and those described in our previous filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date that they were made. We undertake no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Annual Report on Form 10-K or to reflect the occurrence of unanticipated events.

     References in this Annual Report on Form 10-K to “Net Perceptions,” the “Company,” “we,” “our” and “us” refer to Net Perceptions, Inc. and, if so indicated or the context so requires, includes our wholly owned subsidiary Knowledge Discovery One, Inc. (which we refer to in this report as “KD1”), prior to its merger with and into the Company on September 9, 2003.

PART I

ITEM 1. BUSINESS

Summary

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

     We have sustained losses on a quarterly and annual basis since inception. As of December 31, 2003, we had an accumulated deficit of $222 million. Our net loss was $5.3 million for the twelve months ended December 31, 2003, compared to a net loss of $16.7 million in the same period of the prior year. These losses resulted from costs incurred in the development and marketing of our products and services, significant costs incurred related to restructuring activities, significant costs for outside professional services related to the exploration of various strategic alternatives for the Company and responding to an unsolicited exchange offer by Obsidian Enterprises, Inc. which has since been withdrawn, as well as a decline in our revenues since the third quarter of 2000.

     On October 21, 2003, the Company announced that our board of directors had unanimously approved a Plan of Complete Liquidation and Dissolution, referred to as the plan of liquidation. The plan of liquidation was submitted to the Company’s stockholders for approval and adoption at a special meeting of stockholders originally scheduled for March 12, 2004, which was adjourned and was reconvened on March 23, 2004. At the reconvened special meeting, the proposal to approve and adopt the plan of liquidation did not receive the affirmative vote of a majority of the total number of shares of common stock outstanding as of the record date for the special meeting required to approve the proposal.

     We have now substantially curtailed our operations. We anticipate that our board of directors will continue to review and consider possible actions or transactions which might be available to resolve the Company’s future in the near term in the best interest of all stockholders. These could include, among other actions or transactions, further sales or licenses of assets, an acquisition of or investment in the Company or other extraordinary transaction, adopting a new plan of complete liquidation and dissolution and seeking stockholder approval therefor, and/or changes in the composition of our board of directors.

Background

     We developed and marketed software solutions designed to enable our customers to interact more intelligently with their customers. Our solutions integrated and analyzed information about customers, products and transaction activity to generate specific actions our customers could take to improve their marketing, selling, and merchandising effectiveness. We combined our software products with industry expertise and professional services to create industry-specific solutions that were designed to integrate with and add value to existing custom or purchased systems, including customer relationship management, or CRM, systems and processes.

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

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     We sold and marketed our solutions primarily through a direct sales force. We licensed our products under various pricing plans, such as per user, per CPU, per site and per enterprise. We generally granted licenses on a perpetual basis. License fees for our products ranged from $50,000 to in excess of $1.0 million. We provided product maintenance pursuant to service agreements, the pricing of which was typically based on a percentage of the related product license fee and was generally paid in advance. Professional service fees for business consulting, implementation support, data processing and educational services were generally priced on a time and materials basis.

     In February 2000, we completed our acquisition of Knowledge Discovery One, Inc., or KD1, an Austin, Texas-based private company which supplied advanced data analysis solutions for retailers, pursuant to a stock-for-stock merger whereby KD1 became our wholly owned subsidiary. On September 9, 2003, KD1 was merged with and into the Company and its separate existence ceased.

     Following our acquisition of KD1, we experienced two quarters of increasing revenue and thus continued to expand our sales force and other personnel. However, commencing in the third quarter of 2000, the market for our products deteriorated precipitously as Internet retailers, our principal customers, substantially reduced their spending for our products. Accordingly, we experienced declining revenues and increased net losses.

     We began 2001 with approximately 315 employees. In 2001, we instituted two separate restructuring plans to better align our cost structure with our business outlook and general economic conditions and, in particular, the continuing deterioration in the financial condition of Internet retailers. During 2001, we reduced our workforce by 169 positions, and recorded total charges of $15.6 million to reorganize the Company and exit certain facilities in various United States and international locations. However, our revenues continued to erode as the market for our products continued to decline due to the continued weakness of the technology industry and Internet-based companies generally, and as the software market began to consolidate, with customers increasingly purchasing software solutions from fewer independent vendors. In April 2001, we retained J.P. Morgan Securities, Inc. as our financial advisor to explore strategic alternatives and solicit proposals from parties with an interest in pursuing a business combination with us. This activity did not result in a strategic transaction on acceptable terms. In June 2001, Steven Snyder resigned as president and chief executive officer and Donald Peterson became our president and chief executive officer.

     In the first quarter of 2002, in light of our continued declining revenues and net losses, the continued weakness of the technology industry and Internet-based companies and our deteriorating prospects as a small public company as industry consolidation continued, we further reduced our workforce by 15 positions, and recorded $367,000 in related employee termination costs. In June 2002, we reduced our workforce by an additional 18 positions, and recorded an additional $401,000 charge. As of December 31, 2002, we had 52 employees.

     In January 2003, we closed satellite offices in San Francisco, California, London, England and Austin, Texas, and reduced headcount by 22 positions. In August 2003, we reduced headcount by an additional 12 positions, including Donald Peterson, then our president and chief executive officer. At December 31, 2003, we had nine full-time employees, and had, and currently have, only limited business operations. As of April 13, 2004, we have two employees, both of whom are executive officers.

     While we expect to continue to service our existing customers, principally through external contractors, and may continue to derive a declining level of revenues from software licenses and royalties, software maintenance and professional services relating to existing customers, we are no longer actively marketing our products and have not retained any employees to do so. We expect that the size of our customer base will decline and we do not expect that future product or service revenues, if any, will be significant. We anticipate that our operating expenses will continue to decline in 2004, but will continue to constitute a material use of our cash resources. We expect to incur additional losses and continued negative cash flow for the foreseeable future. We do not expect to generate an operating profit for 2004 or the foreseeable future.

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Developments Relating to Possible Strategic Transactions and the Plan of Liquidation

     In February 2003, in response to continued uncertainties in the marketplace and the difficulties we were likely to continue facing as a relatively small public company, we engaged U.S. Bancorp Piper Jaffray, Inc., or Piper Jaffray, to act as our financial advisor in connection with the potential sale of the Company. From March 2003 through October 2003, the Company pursued discussions with a number of companies regarding possible transactions and compared potential transactions to each other as well as to an orderly liquidation of the Company.

     In August 2003, our board of directors determined that, in light of the Company’s extensive, but unsuccessful, efforts to achieve for stockholders a transaction with a third party that would provide certainty of closing and the maximum value reasonably available in the near term, and the fact that the downsizing and limited operations of the Company meant that the Company would not require a significant portion of its current cash and short-term investments to continue to operate, it was appropriate and in the best interests of the Company’s stockholders to provide immediate value and liquidity to the Company’s stockholders through a cash distribution. Accordingly, the board (i) authorized and directed management to effect a reduction in the Company’s workforce to approximately 10 employees, which was determined to be the minimum number necessary at that time to serve customers, preserve the value of our intellectual property and administer our limited ongoing business affairs; (ii) determined that in the near term management should continue to operate the Company’s business on this scaled-back basis, and that it should seek to settle or otherwise resolve, as soon and to the extent reasonably practicable, its existing obligations and liabilities, while continuing to explore asset sale transactions or the sale of the Company in its entirety, with a view to resolving the Company’s future and providing maximum additional value to our stockholders; and (iii) declared a cash distribution of $1.50 per share, or an aggregate of approximately $42.2 million. This cash distribution was made on September 2, 2003 to stockholders of record as of August 18, 2003.

     In September 2003, we announced that we had settled our remaining obligations under our leases for our office facilities in Edina, Minnesota, Roseland, New Jersey and Austin, Texas for an aggregate cash payment of approximately $5.4 million, which cancelled approximately $21.7 million of the gross obligation, and approximately $9.6 million of the obligations net of anticipated sublease income, under such leases when measured from June 30, 2003.

     In October 2003, the board of directors met to consider the Company’s alternatives, including adopting a plan of liquidation. It was determined that none of the available strategic transaction proposals appeared to be more favorable than liquidation, and thus on October 21, 2003 the board unanimously adopted the plan of liquidation and resolved to submit it to stockholders for approval and recommend that stockholders vote in favor of the plan of liquidation.

     Following adoption by the board of directors of the plan of liquidation, the Company continued to receive, and the board of directors reviewed and carefully considered, various proposals to acquire the Company. On December 30, 2003, we entered into a patent purchase agreement with Thalveg Data Flow LLC, or Thalveg, to sell to Thalveg our patent portfolio for $1.8 million in cash. The agreement included a royalty-free license back to the Company under the transferred patents, patent licenses and pending patent applications, and provided that the closing thereunder was subject to stockholder approval thereof as part of the plan of liquidation or otherwise. We also granted to a software company a non-exclusive source code license to a portion of our intellectual property for cash payments of $325,000. Under the license agreement, we will also provide certain consulting services to the licensee for additional cash payments of $75,000. On December 30, 2003, the board of directors also determined that, in the absence of a definitive agreement to acquire the Company on terms which the board believed would provide substantial transaction certainty and higher realizable value to stockholders than liquidation and dissolution in accordance with the plan of liquidation, we should proceed with the plan of liquidation. Accordingly, the board reaffirmed the plan of liquidation and its recommendation that stockholders vote in favor of the plan.

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     In light of the continuing interest expressed by various parties in a possible acquisition of the Company, on January 9, 2004, we publicly announced procedures for the submission of best and final acquisition proposals. Our board of directors carefully considered and reviewed various proposals that were submitted in response to this announcement and determined that implementation of the plan of liquidation, rather than pursuing and entering into any of such transactions, was the course most likely to obtain the highest value reasonably available to stockholders. Accordingly, the board authorized the Company to continue to proceed expeditiously to seek stockholder approval of, and implement, the plan of liquidation.

Recent Events

     At a special meeting of the Company’s stockholders held on March 12, 2004, which was reconvened on March 23, 2004, the proposal to approve and adopt the plan of liquidation did not receive the affirmative vote of a majority of the total number of shares of common stock outstanding as of the record date for the special meeting required to approve the proposal.

     As noted above, by the terms of the patent purchase agreement with Thalveg, the closing thereunder was conditioned on stockholder approval thereof, as part of the plan of liquidation or otherwise, and thus the failure of the plan of liquidation to obtain stockholder approval resulted in this closing condition remaining unsatisfied. Accordingly, following the vote at the reconvened special meeting on March 23, 2004, we and Thalveg entered into discussions regarding amending the patent purchase agreement to remove this closing condition and completing the transaction. In the course of these discussions, Thalveg indicated to us that it was prepared to execute an amendment removing this condition if we agreed to close by March 31, 2004, and that if we would not agree to close by that time, Thalveg would require that the escrow of half of the purchase price be terminated and its deposit returned. At a meeting on March 30, 2004, after considering the value to the Company of the Thalveg transaction and the risks to the Company of losing the benefit of this transaction, the impact of closing the Thalveg transaction on possible actions or transactions the Company might seek to pursue as a result of the plan of liquidation not receiving the required stockholder approval, and other relevant factors, the board concluded that it was in the best interest of our stockholders to execute the amendment to the Thalveg agreement and promptly close the transaction. On March 31, 2004, we and Thalveg executed the amendment to the Thalveg agreement and completed the sale of the patent portfolio to Thalveg for $1.8 million. Under the agreement, we received a royalty-free license back under the transferred patents, patent licenses and pending patent applications. This license is transferable, subject to certain restrictions applicable to the transferee relating to revenues which can be generated by products covered by the license. This transaction did not involve any of our other intellectual property rights or assets, including our proprietary software products. In addition, on March 31, 2004, we announced that we had granted to a software company a non-exclusive source code license to a portion of our intellectual property and sold certain technology related to a product discontinued in 2002. The aggregate consideration for this sale and license was $325,000.

     On April 1, 2004, we entered into an agreement with Tornago, Inc., or Tornago, a corporation formed by three non-officer former employees, to fulfill existing prepaid customer support obligations in exchange for future cash payments of approximately $60,000. This amount represents approximately 60% of the remaining prepaid deferred maintenance revenue amounts under the existing end user contracts when measured from April 1, 2004. Under the terms of the agreement, Tornago received a non-transferable license to relevant intellectual property solely to provide support and consulting services to end users of our products. Under the agreement, we will receive a 15% royalty on any follow-on services sold by Tornago through April 1, 2006.

     In connection with the agreement with Tornago, we terminated the employment of the remaining members of our engineering staff, effective March 31, 2004, and will pay severance to these employees in accordance with existing agreements.

     We anticipate that our board of directors will continue to review and consider possible actions or transactions which might be available to resolve the Company’s future in the near term in the best interest of all stockholders. These could include, among other actions or transactions, further sales or licenses of assets, an acquisition of or investment in the Company or other extraordinary transaction, adopting a new plan of complete liquidation and dissolution and seeking stockholder approval therefor and/or changes in the composition of our board of directors.

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Products

     We have one principal product, NetP™ 7, which is comprised of two principal components, Intelligence Manager™, the analytical hub, and Channel Injectors™, which deliver the analytical results of Intelligence Manager into multiple operational systems that our customers use. NetP 7 enables multi-channel retailers, distributors and manufacturers to harness the power of predictive analytics to convert customer, product and transaction data into actionable insight companies can use to generate higher sales, increased revenues and improved customer loyalty. The following figure is a graphical representation of our NetP 7 product suite.

     Intelligence Manager, the core of NetP 7, includes sophisticated analytics to aggregate and analyze data about customers, products and transactions to generate actionable sales and marketing intelligence, while Channel Injectors automatically inject that intelligence in real time at various points of customer interaction. Intelligence Manager allows companies to create and manage highly personalized campaigns in in-bound, interactive selling situations, such as Web sites and inbound customer contact centers, as well as outbound selling situations, such as email and outbound telemarketing. Intelligence Manager integrates with a company’s existing infrastructure to deliver these campaigns in real time. Companies can use Intelligence Manager to increase the likelihood that the products they market to customers will be products the customer will value. Intelligence Manager utilizes advanced one-to-one recommendation technology combined with business rules to produce product offerings targeted directly to individual customers. It provides marketers with the ability to create unique marketing strategies for different groups of customers, interact with those customers on an individualized basis, and closely track the impact that different strategies are having on sales and profit by customer segment, product group and promotional effort. Intelligence Manager makes it possible for marketers to rapidly modify their marketing strategy and deploy new marketing campaigns.

     NetP 7‘s Channel Injectors automatically deliver the output of Intelligence Manager, such as real time product recommendations, targeted customer lists, and other forms of sales intelligence, directly into the selling process. Channel Injectors can be utilized at many customer touch points - inbound and outbound telesales, field sales, Internet, e-mail and direct mail channels as represented by the following channel specific modules:

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	•		NetP 7 Telesales Channel Injector™ allows catalogers, manufacturers and distributors to inject sales intelligence into inbound and outbound call centers, enabling call center representatives to deliver highly targeted, personalized product recommendations in real time.
	•		NetP 7 Field Sales Channel Injector™ provides inside and outside direct field sales representatives with a Sales Playbook™ for building sales with each of their customers. The Sales Playbook identifies the products that customers are likely using but purchasing from competitors, revealing previously hidden sales opportunities. The Sales Playbook also identifies products that customers purchase on a periodic basis and when they will likely repurchase them.
	•		NetP 7 E-Commerce Channel Injector™ interacts with customers on a company’s Web site much like a best sales representative. Working one-to-one in real time via the Web, E-Commerce Channel Injector delivers highly targeted, personalized product recommendations.
	•		NetP 7 Direct Marketing Channel Injector™ enables companies to provide product recommendations and content for outbound catalogs, direct mail, fax and e-mail marketing campaigns. Direct Marketing Channel Injector improves the selection process for direct marketing campaigns by choosing the right products for the right customer or the right customers for a targeted group of products.

     NetP 7 is an installed software solution that is the culmination of our history of product recommendation systems for assisted marketing. Predecessor products include Personalization Manager, Insight Manager, Distribution Analyst, Net Perceptions for E-Commerce, Net Perceptions for Call Centers, Net Perceptions for Marketing Campaigns, and the Net Perceptions Recommendation Engine. NetP 7 (or its predecessor products) has accounted for a substantial majority of all historical company revenue since inception.

Intellectual Property and Other Proprietary Rights

     We rely on a combination of trademark, copyright, patent and trade secret laws to protect our rights in our technology. We have licensed our software and required 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, 2003, we had four pending United States patent applications and four issued United States patents, as well as exclusive license rights to three issued United States patents from the University of Minnesota. These patents have expiration dates from 2016 through 2019. As described above, on March 31, 2004, we sold our patent portfolio of pending and issued patents to Thalveg for $1.8 million in cash. The patent purchase agreement includes a royalty-free, non-exclusive license back to us of the transferred patents, patent licenses and pending patent applications.

     We own a number of trademarks. These include “Net Perceptions” and “NetP.” The “Net Perceptions” mark is federally registered for a term of ten years.

Employees

     As of December 31, 2003, we had nine full-time employees. As described above under “Recent Events”, on April 1, 2004, we entered into an agreement with Tornago to fulfill existing prepaid customer obligations. In connection with this agreement, we terminated the employment of the remaining members of our engineering staff, effective March 31, 2004, and will pay severance to these employees in accordance with existing agreements. As of April 13, 2004, we have two employees, both of whom are executive officers. None of our employees is represented by a collective bargaining agreement, nor have we experienced any work stoppage.

Financial Information About Geographic Areas

     For certain geographic financial information, see Note 13 to the Consolidated Financial Statements.

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ITEM 2. PROPERTIES

     On September 12, 2003, we announced that we had entered into lease termination agreements for our office facilities located in Edina, Minnesota, Roseland, New Jersey and Austin, Texas. Net Perceptions’ current activities are conducted in 1,500 square feet of leased space in Edina, Minnesota pursuant to a month-to-month lease. The Company remains obligated under one office lease for its vacated San Francisco, California location which expires in August 2004. The majority of this space is sublet and the Company is seeking to sublease the remaining vacant portion. The Company believes that its current facilities are suitable and adequate for its present and anticipated near-term needs.

ITEM 3. LEGAL PROCEEDINGS

     Initial and Follow-On Public Offering Securities Litigation

     On November 2, 2001, Timothy J. Fox filed a purported class action lawsuit against us, FleetBoston Robertson Stephens, Inc., the lead underwriter of our April 1999 initial public offering, several other underwriters who participated in our initial public offering, Steven J. Snyder, our then president and chief executive officer, and Thomas M. Donnelly, our then chief financial officer. The lawsuit was filed in the United States District Court for the Southern District of New York and has been assigned to the judge who is also the pretrial coordinating judge for substantially similar lawsuits involving more than 300 other issuers. An amended class action complaint, captioned In re Net Perceptions, Inc. Initial Public Offering Securities Litigation, 01 Civ. 9675 (SAS), was filed on April 22, 2002, expanding the basis for the action to include allegations relating to our March 2000 follow-on public offering in addition to those relating to our initial public offering.

     The amended complaint generally alleges that the defendants violated federal securities laws by not disclosing certain actions taken by the underwriter defendants in connection with our initial public offering and our follow-on public offering. The amended complaint alleges specifically that the underwriter defendants, with our direct participation and agreement and without disclosure thereof, conspired to and did raise and increase their underwriters’ compensation and the market prices of our common stock following our initial public offering and in our follow-on public offering by requiring their customers, in exchange for receiving allocations of shares of our common stock sold in our initial public offering, to pay excessive commissions on transactions in other securities, to purchase additional shares of our common stock in the initial public offering aftermarket at pre-determined prices above the initial public offering price, and to purchase shares of our common stock in our follow-on public offering. The amended complaint seeks unspecified monetary damages and certification of a plaintiff class consisting of all persons who acquired our common stock between April 22, 1999 and December 6, 2000. The plaintiffs have since agreed to dismiss the claims against Mr. Snyder and Mr. Donnelly without prejudice, in return for their agreement to toll any statute of limitations applicable to those claims; and those claims have been dismissed without prejudice. On July 15, 2002, all of the issuer defendants filed a joint motion to dismiss the plaintiffs’ claims in all of the related cases. On February 19, 2003, the Court ruled against the Company on this motion.

     A special committee of our board of directors has authorized the Company to negotiate a settlement of the pending claims substantially consistent with a memorandum of understanding negotiated among class plaintiffs, issuer defendants and their insurers. Any such settlement would be subject to approval by the Court.

     We believe that the allegations against the Company are without merit. However, we are unable to predict the outcome or ultimate effect of this litigation.

     Blakstad Litigation

     On October 29, 2003, a purported class action lawsuit was filed against the Company, its current directors and unnamed defendants in the District Court, Fourth Judicial District, of the State of Minnesota, County of Hennepin captioned Don Blakstad, on Behalf of Himself and All

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others Similarly Situated, vs. Net Perceptions, Inc., John F. Kennedy, Ann L. Winblad, John T. Riedl and Does 1-25, inclusive, File No. 03-17820. The complaint alleged, among other things, that defendants breached their fiduciary duties of loyalty, due care, independence, good faith and fair dealing and sought to enjoin the proposed liquidation of the Company and to recover reasonable attorneys’ and experts’ fees.

     On November 24, 2003, defendants filed a motion to dismiss the lawsuit, and, by order dated March 8, 2004, the court dismissed the plaintiff’s complaint with prejudice. By letter dated March 9, 2004, the plaintiff requested the court’s permission to file a motion to reconsider the decision dismissing the complaint with prejudice. On March 18, 2004, the court denied plaintiff’s request. On April 9, 2004, defendants filed a notice of appeal with the Court of Appeals of the State of Minnesota.

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

     No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

     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.

(1)

See discussion below regarding a $1.50 per share cash distribution paid to stockholders on September 2, 2003, which impacted stock prices in the third and fourth quarters of 2003

     As of March 31, 2004, there were 235 stockholders of record registered with our transfer agent, Wells Fargo Bank Minnesota, N.A. Because many of these shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by the record holders.

     As described in Item 1 under “Developments Relating to Possible Strategic Transactions and the Plan of Liquidation”, on September 2, 2003 we paid a return of capital cash distribution to stockholders of record as of August 18, 2003 in the amount of $1.50 per share, or an aggregate of approximately $42.2 million. Other than this special distribution, we have not declared or paid any cash dividends on our capital stock since our inception. 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. Stockholders should not expect to receive any future dividend payments.

     On October 15, 2003, the Nasdaq Stock Market notified us by letter that we had failed to maintain the $1.00 minimum bid price requirement for continued listing on the Nasdaq National Market and that, if compliance with this requirement could not be demonstrated by April 12, 2004, we would be notified that our common stock would be delisted from the Nasdaq National Market. Nasdaq subsequently informed us that any such delisting notification will be deferred until after Nasdaq completes its review of our application to transfer to the Nasdaq SmallCap Market referred to below. Since September 2, 2003, the payment date for the special cash distribution to our stockholders of $1.50 per share, our common stock has not closed at a price exceeding $0.54 per share, and we do not expect to be able to meet the $1.00 minimum bid price requirement for continued inclusion on the Nasdaq National Market. We may also be delisted if we fail to meet Nasdaq National Market’s other quantitative listing requirements or its qualitative standards. On April 5, 2004, we submitted an application to the Nasdaq Stock Market to transfer to the Nasdaq SmallCap Market. If our common stock is accepted for listing on the Nasdaq SmallCap Market, we will have until approximately October 10, 2004 to demonstrate compliance with the $1.00 minimum bid price requirement.

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

     In the tables below we provide you with selected historical financial data of Net Perceptions, which should be read in conjunction with the financial statements and the notes to the financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are included elsewhere in this report. The statement of operations data for each of the years in the periods ended December 31, 2003, 2002, and 2001, and the balance sheet data at December 31, 2003 and 2002, are derived from, and are qualified by reference to, the audited financial statements included elsewhere in this report. The statement of operations data for the years ended December 31, 2000 and 1999 and the balance sheet data at December 31, 2001, 2000, and 1999 are derived from audited financial statements not included in this report, and have been reclassified to conform with current period presentation relating to reimbursable expenses that were previously recorded net to cost of revenue.

FIVE YEAR CONSOLIDATED FINANCIAL DATA⁽¹⁾

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(1)		The selected consolidated financial data for the years ended December 31, 2003, 2002, 2001 and 2000 include the effects of the acquisition of KD1 in February 2000, which was accounted for under the purchase method of accounting. See Note 4 to the Consolidated Financial Statements.
(2)		In 2001, we incurred a restructuring related charge of $15.6 million, consisting of charges relating to facility consolidation and employee terminations, losses and estimated losses on the disposal of assets and other restructuring related charges. In 2002, we incurred a restructuring related charge of $768,000 consisting primarily of charges relating to employee terminations. In 2003, we incurred a restructuring related charge of $2.3 million, consisting of charges relating to facility consolidation, lease terminations and employee terminations. See Note 6 to the Consolidated Financial Statements.
(3)		At March 31, 2001, we performed an impairment assessment of the goodwill and other intangible assets recorded in connection with the acquisition of KD1. As a result of our review, we recorded a $75.3 million impairment charge to reduce goodwill and other intangible assets to their estimated fair values. At December 31, 2002, we performed an additional impairment assessment of the remaining goodwill and other intangible assets recorded in connection with the acquisition of KD1. As a result of our review, we recorded a $6.5 million impairment charge to reduce goodwill and other intangible assets to zero value. See Note 4 to the Consolidated Financial Statements.
(4)		On September 2, 2003, we paid a return of capital cash distribution to stockholders of record as of August 18, 2003 in the amount of $1.50 per share. See Note 9 to the Consolidated Financial Statements.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

     The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this report.

     We were incorporated in Delaware in July 1996, and our initial product was shipped in January 1997. From inception through late 2000, we expanded our organization by hiring personnel in key areas, particularly marketing, sales and research and development. Our total number of employees was 315 on December 31, 2000. During 2001, 2002 and 2003, we instituted certain restructuring plans to align our cost structure with our business outlook and general economic conditions. In connection with our restructuring activities, our total number of employees was reduced to 98 as of December 31, 2001, 52 as of December 31, 2002, and 9 as of December 31, 2003. As of April 13, 2004, the Company has two employees, both of whom are executive officers.

     We have sustained losses on a quarterly and annual basis since inception. As of December 31, 2003, we had an accumulated deficit of $222 million. Our net loss was $5.3 million for the twelve months ended December 31, 2003, compared to a net loss of $16.7 million in the same period of the prior year. These losses resulted from costs incurred in the development and marketing of our products and services, significant costs incurred related to restructuring activities, significant costs for outside professional services related to the exploration of various strategic alternatives for the Company, as well as a decline in our revenues since the third quarter of 2000.

     In February 2003, we engaged Piper Jaffray to act as our financial advisor in connection with the potential sale of the Company. On September 2, 2003, we paid a return of capital cash distribution to stockholders of record as of August 18, 2003 in the amount of $1.50 per share or a total of approximately $42.2 million, which was reflected as a reduction to additional paid-in capital. We also reduced our workforce by 12 positions to 10 full-time employees. In addition, as a result of the cash distribution paid on September 2, 2003, our board of directors

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approved an adjustment to our outstanding options to take effect on the close of business on September 3, 2003. The adjustment was to in no event reduce the exercise price of any options to less than $0.01 per share or increase the number of shares subject to such options to a number exceeding the number of shares of common stock that are registered and available for issuance. In accordance with FIN 44, “Accounting for Certain Transactions Involving Stock Compensation and interpretation of APB No. 25,” there was no accounting consequence due to the changes made to the exercise price or the number of shares other than future potential dilution to stockholders because the aggregate intrinsic value of each award immediately after the change was not greater than the aggregate intrinsic value of the award immediately before the change and the ratio of the exercise price per share to the market value per share was not reduced.

     On October 21, 2003, we announced that our board of directors had unanimously approved a Plan of Complete Liquidation and Dissolution, referred to as the plan of liquidation. The plan of liquidation was submitted to the Company’s stockholders for approval and adoption at a special meeting of stockholders originally scheduled for March 12, 2004, which was adjourned and was reconvened on March 23, 2004. At the reconvened special meeting, the proposal to approve and adopt the plan of liquidation did not receive the affirmative vote of a majority of the 28,145,338 shares of common stock outstanding as of the record date for the special meeting required to approve the proposal. Of the 15,773,134 shares represented in person or by proxy at the reconvened special meeting, 13,810,233 shares voted in favor of the proposal, 1,925,694 shares voted against and 37,207 shares abstained.

     On March 31, 2004, we and Thalveg executed an amendment to the patent purchase agreement which had been entered into on December 30, 2003, and we completed the sale of our patent portfolio provided for therein for a purchase price of $1.8 million in cash. The patent purchase agreement, as amended, includes a royalty-free, non-exclusive license back to us. The license is transferable, subject to certain restrictions applicable to the transferee relating to revenues that can be generated by products covered by the license. This transaction did not involve any of our other intellectual property rights or assets, including our proprietary software products. In addition, on March 31, 2004 we announced that we had granted to a software company a non-exclusive source code license to a portion of the Company’s had intellectual property and sold certain technology related to a product discontinued in 2002. The aggregate consideration for this sale and license was $325,000.

     On April 1, 2004, we entered into an agreement with Tornago, Inc., or Tornago, a corporation formed by three non-officer former employees, to fulfill existing prepaid customer support obligations in exchange for future cash payments of approximately $60,000. This amount represents approximately 60% of the remaining prepaid deferred maintenance revenue amounts under the existing end user contracts when measured from April 1, 2004. The Company will continue to recognize the deferred revenue as earned and the $60,000 will be reflected as cost of revenue. Under the terms of the agreement, Tornago received a non-transferable license to relevant intellectual property solely to provide support and consulting services to end users of our products. Under the agreement, we will receive a 15% royalty on any follow-on services sold by Tornago through April 1, 2006.

     In connection with the agreement with Tornago, we terminated the employment of the remaining members of our engineering staff, effective March 31, 2004, and will pay severance to these employees in accordance with existing agreements. As of April 13, 2004, the Company has two employees, both of whom are executive officers.

     While we expect to continue to service our existing customers through Tornago and may continue to derive a declining level of revenues from software licenses and royalties, software maintenance and professional services relating to existing customers, we are no longer actively marketing or directly supporting our products and have not retained any employees to do so. We expect that the size of our customer base will decline and we do not expect that future product or service revenues, if any, will be significant. We anticipate that our operating expenses will continue to decline in 2004, but will continue to constitute a material use of our cash resources. We expect to incur additional losses and continued negative cash flow for the foreseeable future. While we expect to report a net profit for the first quarter of 2004 due to the Thalveg transaction, we do not expect to generate an operating profit for 2004 or the foreseeable future.

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     We anticipate that our board of directors will continue to review and consider possible actions or transactions which might be available to resolve the Company’s future in the near term in the best interest of all stockholders. These could include, among other actions or transactions, further sales or licenses of assets, an acquisition of or investment in the Company or other extraordinary transaction, adopting a new plan of complete liquidation and dissolution and seeking shareholder approval therefor, and/or changes in the composition of our board of directors.

     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 foregoing and the risks identified below under the heading “Risks That May Affect Future Results.” We may not be successful in addressing these risks.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

     We believe the following critical accounting policies affect significant judgments and estimates used in the preparation of our consolidated financial statements. Events occurring subsequent to the preparation of the consolidated financial statements, such as those described in the section of this report entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview,” may cause us to re-evaluate these policies.

     Revenue Recognition. Our revenues are recognized in accordance with the American Institute of Certified Public Accountants Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” as amended by SOP 98-4 and SOP 98-9, as well as Technical Practice Aids issued from time to time by the American Institute of Certified Public Accountants and in accordance with the Securities and Exchange Commission Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition in Financial Statements.” We derive revenues from software licenses, software maintenance and professional services. Maintenance includes telephone and Web-based technical support, bug fixes and rights to unspecified upgrades on a when-and-if available basis. Professional services include project planning, implementation and testing, consulting, and ongoing customer support.

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

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

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

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

     Revenue recognition rules for software companies are very complex. We follow specific and detailed guidelines in determining the proper amount of revenue to be recorded; however, certain judgments affect the application of our revenue recognition policy.

     The most significant judgments for revenue recognition typically involve whether there are any significant uncertainties regarding customer acceptance and whether collectibility can be considered probable. In addition, our transactions often consist of multiple element arrangements that must be analyzed to determine the relative fair value of each element, the amount of revenue to be recognized upon shipment, if any, and the period and conditions under which deferred revenue should be recognized.

     Allowance for doubtful accounts. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Actual collection results could differ materially from those estimated and have a significant impact on our consolidated financial statements.

     Litigation. We have not recorded an estimated liability related to the pending class action lawsuit in which we are named. For a discussion of this matter, see the section of this report entitled “Legal Proceedings.” Due to the uncertainties related to both the likelihood and the amount of any potential loss, no estimate was made of the liability that could result from an unfavorable outcome. As additional information becomes available, we will assess the potential liability and make or revise our estimate(s) accordingly, which could materially impact our results of operations and financial position.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

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

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