##### Table of Contents









UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-K


FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d)


OF THE SECURITIES EXCHANGE ACT OF 1934


|                                                |  |                                                                                                 
|----------------------------------------------- |  | ------------------------------------------------------------------------------------------------
|(Mark One)                                     
|                                               
|x                                               |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES
    EXCHANGE ACT OF 1934    
|                                               
|For the fiscal year ended March 31, 2005       
|                                               
|OR                                             
|                                               
|                                                |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES
    EXCHANGE ACT OF 1934
|                                               
|For the transition period
    from           to

Commission file number: 0-29637


SELECTICA, INC.


(Exact name of registrant as specified in its charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Delaware                                                           |  | 77-0432030                              
|(State or other jurisdiction
    of incorporation or organization) |  | (I.R.S. Employer
    Identification No.)
|                                                                  
|3 West Plumeria Drive, San Jose, California                        |  | 95134-2111                              
|(Address of principal executive offices)                           |  | (Zip Code)                              

Registrants telephone number, including area code:
(408) 570-9700


Securities registered pursuant to Section 12(b) of the
Act: None


Securities registered pursuant to Section 12(g) of the
Act: Common Stock, $0.0001 par value


x o


x


x o






Documents Incorporated by Reference












---










SELECTICA, INC.


FORM 10-K ANNUAL REPORT


FOR THE FISCAL YEAR ENDED


MARCH 31, 2005


TABLE OF CONTENTS


|              |  |                                                                                                                         |  |  |    | 
|------------- |  | ----------------------------------------------------------------------------------------------------------------------- |  |  | -- | 
|PART I        |  |                                                                                                                         |  |  |    | 
|Item 1.       |  | Business                                                                                                                |  |  | 2  | 
|Item 2.       |  | Properties                                                                                                              |  |  | 15 | 
|Item 3.       |  | Legal Proceedings                                                                                                       |  |  | 15 | 
|Item 4.       |  | Submission of Matters to a Vote of Security
    Holders                                                                 |  |  | 17 | 
|             
|PART II       |  |                                                                                                                         |  |  |    | 
|Item 5.       |  | Market for Registrants Common Equity,
    Related Stockholder Matters, and Issuers Purchases of
    Equity Securities |  |  | 31 | 
|Item 6.       |  | Selected Consolidated Financial Data                                                                                    |  |  | 34 | 
|Item 7.       |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                               |  |  | 35 | 
|Item 7A.      |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                          |  |  | 50 | 
|Item 8.       |  | Consolidated Financial Statements and
    Supplementary Data                                                            |  |  | 52 | 
|Item 9.       |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure                                |  |  | 54 | 
|Item 9A.      |  | Controls and Procedures                                                                                                 |  |  | 54 | 
|Item 9B.      |  | Other Information                                                                                                       |  |  | 59 | 
|             
|PART III      |  |                                                                                                                         |  |  |    | 
|Item 10.      |  | Directors and Executive Officers of the
    Registrant                                                                  |  |  | 59 | 
|Item 11.      |  | Executive Compensation                                                                                                  |  |  | 59 | 
|Item 12.      |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters                      |  |  | 60 | 
|Item 13.      |  | Certain Relationships and Related
    Transactions                                                                      |  |  | 60 | 
|Item 14.      |  | Principal Accountant Fees and Services                                                                                  |  |  | 60 | 
|             
|PART IV       |  |                                                                                                                         |  |  |    | 
|Item 15       |  | Exhibits, Consolidated Financial Statement
    Schedules, and Reports on Form 8-K                                       |  |  | 60 | 
|Signatures    |  |                                                                                                                         |  | 
|EXHIBIT 10.20
|EXHIBIT 10.21
|EXHIBIT 10.22
|EXHIBIT 10.23
|EXHIBIT 10.24
|EXHIBIT 23.1 
|EXHIBIT 31.1 
|EXHIBIT 31.2 
|EXHIBIT 32.1 
|EXHIBIT 32.2 



1



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##### Table of Contents



The words Selectica, we,
our, ours, us, and the
Company refer to Selectica, Inc. In addition to
historical information, this Annual Report on Form 10-K
contains forward-looking statements that involve risks and
uncertainties that could cause actual results to differ
materially from those projected. Factors that might cause or
contribute to such differences include, but are not limited to,
those discussed in the section entitled Managements
Discussion and Analysis of Consolidated Financial Condition and
Results of Operations and Risk Factors. You
should carefully review the risks described in other documents
the Company files from time to time with the Securities and
Exchange Commission, including the quarterly reports on
Form 10-Q to be filed by the Company in 2005. Readers are
cautioned not to place undue reliance on the forward-looking
statements, including statements regarding the Companys
expectations, beliefs, intentions or strategies regarding the
future, which speak only as of the date of this annual report on
Form 10-K. The Company undertakes no obligation to release
publicly any updates to the forward-looking statements included
herein after the date of this document.





PART I







|        |         
|------- | --------
|Item 1. | Business

BUSINESS OVERVIEW




Industry Background




| |                                      
| | -------------------------------------
| | The Internet as a Technology Platform



2



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| |                                  
| | ---------------------------------
| | Complexity in Electronic Commerce







| |                             
| | ----------------------------
| | The Opportunity to Order Gap





| |                                  
| | ---------------------------------
| | Limitations of Existing Solutions



3



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| |   |                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | have not been engineered for the Internet platform and, as a
    result, are not easily deployed across a broad range of
    Internet-enabled channels and/or devices;
|
| |  | require significant custom programming for deployment and
    maintenance;                                                                                            
|
| |  | provide a limited interactive experience; or                                                                                                                          
|
| |  | employ application architectures that limit their scalability
    and reliability.                                                                                    



Selectica Solutions










| |                                                      
| | -----------------------------------------------------
| | Enables Selling Process to Support Key Business Goals





| |                      
| | ---------------------
| | Shortens Sales Cycles



4



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| |   |                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | providing comprehensive product information to the customer or
    sales person at the point of sale without requiring interaction
    with product experts; and                  
|
| |  | automating the pricing and configuration of complex products and
    services, thereby providing sales professionals and their
    customers with accurate, real-time information.



| |                           
| | --------------------------
| | Ensures Accuracy of Quotes





| |                                
| | -------------------------------
| | Provides Comprehensive Solution





| |                                
| | -------------------------------
| | Opportunity for Increased Sales





| |                                             
| | --------------------------------------------
| | Opportunity for Greater Revenue per Customer





| |                                                  
| | -------------------------------------------------
| | Improves Efficiency of the Indirect Sales Channel





| |                            
| | ---------------------------
| | Enhances Customer Relations



5



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| |                           
| | --------------------------
| | Reduced Costs of Ownership



Selectica Products










| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Selectica Configurator is a procedural based configuration based
    engine. Development tools allow for modeling pricing and other
    rules on product and service offerings and the engine manages
    the execution of these stored rules.                                                                                                                                                                                                                                                                                                 
|
| |  | Selectica Pricer engine is used to automate pricing and quoting
    processes. Price management tools enable definition of complex
    pricing rules and allow modeling of pricing scenarios. The
    pricing engine executes the pricing rules to determine the price
    dynamically based on the supplied rule factors.                                                                                                                                                                                                                     
|
| |  | Selectica Solutions Advisor is an application built on the core
    Selectica Configurator engine and is used by businesses to guide
    their customers to find the right product online. Selectica
    Solutions Advisor comes with a user friendly data management
    module to capture the sales rules associated with
    guiding users to the right products based on their needs and a
    front-end interactive selling application that captures users
    needs and guides them to a ranked list of applicable product
    offers.
|
| |  | Our EPS-M Application platform that uses some of the core SCMS
    engines is a vertical specific application for the manufacturing
    industry.                                                                                                                                                                                                                                                                                                                                                                                              



6



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|                                            |  |                                                                                                                                           |  |                                                                                                                                                                                         
|------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Product                                     |  | Features                                                                                                                                  |  | Benefits                                                                                                                                                                                
|                                            |  |                                                                                                                                           |  |                                                                                                                                                                                         
|1. Selectica Configurator                   |  | Configuration engine                                                                                                                      |  | Enables representation of product and service data and rules
    associated with them                                                                                                   
|                                            |  | Multiple deployment modes                                                                                                                 |  | Enables deployment through Selectica server and native EJB                                                                                                                              
|                                            |  | Highly scalable Internet-architecture                                                                                                     |  | Designed to support millions of simultaneous users by installing
    more servers                                                                                                       
|                                            |  | Supports open standard integration interfaces                                                                                             |  | Integrates with other web-based applications and legacy systems
    through web services                                                                                                
|                                            |  | Dynamic information update                                                                                                                |  | Ability to update product information without stopping selling
    process                                                                                                              
|                                            |  | Supports devices with limited processing power                                                                                            |  | Ability to be deployed on a broad range of devices                                                                                                                                      
|                                            |  | HTML-based client                                                                                                                         |  | Designed to run on any device with a standard web browser                                                                                                                               
|2. Selectica Pricer                         |  | Rules-based pricing                                                                                                                       |  | Designed to eliminate SKU proliferation through bundling and
    intelligent pricing rules                                                                                              
|                                            |  | Multiple deployment modes                                                                                                                 |  | Enables deployment through Selectica server and native EJB                                                                                                                              
|                                            |  | Dynamic information update                                                                                                                |  | Updates pricing information without stopping selling process                                                                                                                            
|                                            |  | Allows users to manage sophisticated pricing logic across the
    enterprise                                                              |  | Accelerates the introduction of new pricing schemes                                                                                                                                     
|3. Selectica Mobile                         |  | Complete stand-alone selling system that runs on laptop computers                                                                         |  | Enables mobile users to access our solution with the same user
    interface as a connected system                                                                                      
|                                            |  | Automatically synchronizes KnowledgeBases and quotes                                                                                      |  | Enables updated product and pricing information and orders                                                                                                                              
|                                            |  | Provides comprehensive functionality on mobile platforms using
    the same performance and reliability as the Selectica
    Configurator |  | Reduces time and inconsistency                                                                                                                                                          
|4. Selectica Application Data Manager (ADM) |  | Enables rapid updates of product, pricing and service data;
    anytime (24x7 accessibility), anywhere                                    |  | Improved responsiveness to changing market conditions                                                                                                                                   
|                                            |  | Easy-to-use interface provides a consolidated view of corporate
    data repositories                                                     |  | Enables users to maintain and manage product and service
    information with the ability to add, modify and delete product,
    pricing and service information without IT intervention

7



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|                                                            |  |                                                                                                                                                                                                                             |  |                                                                                                                                                                                                                                                                                                                                                            
|----------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Product                                                     |  | Features                                                                                                                                                                                                                    |  | Benefits                                                                                                                                                                                                                                                                                                                                                   
|                                                            |  |                                                                                                                                                                                                                             |  |                                                                                                                                                                                                                                                                                                                                                            
|5. Selectica Quoter                                         |  | Central server and storage facility for customer orders,
    configurations and pricing information                                                                                                                         |  | Enables users to generate, save and revise quotes online.                                                                                                                                                                                                                                                                                                  
|                                                            |  | Provides easy access from remote devices to quote archives                                                                                                                                                                  |  | Enables accurate quotes and orders                                                                                                                                                                                                                                                                                                                         
|6. Selectica Studio                                         |  | Models, tests and debugs applications using a single tool                                                                                                                                                                   |  | Simplifies development process                                                                                                                                                                                                                                                                                                                             
|                                                            |  | Graphical KnowledgeBase and user interface development tools                                                                                                                                                                |  | Enables application deployment and maintenance by non-technical
    personnel                                                                                                                                                                                                                                                                              
|                                                            |  | Create and maintain automated KnowledgeBases through a
    Knowledgebase Development Environment (KDE)                                                                                                                      |  | Maintain the consistency of KnowledgeBases; fully automated
    environment via a command line interface will eliminate need for
    user interface.                                                                                                                                                                                                       
|7. Selectica Repository                                     |  | Database that stores KnowledgeBase in readable, format which can
    be easily queried.                                                                                                                                     |  | Provides distributed team development of KnowledgeBases for easy
    development and maintenance.                                                                                                                                                                                                                                                          
|8. Selectica Contract Management                            |  | Enterprise and hosted ASP for buy-side and sell-side contract
    management and compliance                                                                                                                                 |  | Provides enterprises with state-of-the- art tools to effectively
    manage costs, performance and compliance of critical customer
    and vendor contractual relationships.                                                                                                                                                                               
|9. Selectica Solution Advisor                               |  | Packaged guided selling solution. Intuitive web-based
    development environment.                                                                                                                                          |  | Enables enterprises to rapidly create applications that help
    customers find the products that best fit their needs.
    Out-of-box functionality without customization.                                                                                                                                                                                
|10. Enterprise Productivity Suite for Manufacturing (EPS-M) |  | Next generation end-to-end packaged application based on our
    industry configuration and pricing engines coupled with best
    practice implementation methodology derived from numerous
    industry-first deployments. |  | Out-of-box packaged application that enables companies to manage
    their complex product and service offering data, rules and
    pricing information to power multi-channel e-business quoting
    and sales. Employs non-programmatic, business-user friendly
    methods to manage product, service and pricing data through a
    unified data model.





8



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Selecticas Technology






| |   |                                    
| | - | -----------------------------------
| |  | declarative constraint engine;     
|
| |  | integrated modeling environment;   
|
| |  | multi-threaded server; and         
|
| |  | scalable, thin-client architecture.



| |                              
| | -----------------------------
| | Declarative Constraint Engine







| |                                
| | -------------------------------
| | Integrated Modeling Environment





| |   |                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------
| |  | easily create and update KnowledgeBases containing product
    attributes;                              
|
| |  | create HTML-based graphical user interface (GUI) applications;                                          
|
| |  | test the application interactively as the application is being
    built and conduct batch order checks;
|
| |  | verify the semantics of the KnowledgeBase; and                                                          
|
| |  | create flexible models from individual models.                                                          



| |                      
| | ---------------------
| | Multi-threaded Server



9



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| |                                  
| | ---------------------------------
| | Scalable Thin-client Architecture





| |                 
| | ----------------
| | EPS-M Technology







Service Business






| |                    
| | -------------------
| | Consulting Services



10



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| |                                 
| | --------------------------------
| | Customer Support and Maintenance



Competition












| |   |                                                                  
| | - | -----------------------------------------------------------------
| |  | vertical domain expertise;                                       
|
| |  | product functionality and features;                              
|
| |  | product architecture and technology;                             
|
| |  | incumbency of vendors;                                           
|
| |  | availability of global support;                                  
|
| |  | relationship with system integrators;                            
|
| |  | coverage of direct sales force;                                  
|
| |  | ease and speed of product implementation;                        
|
| |  | vendor and product reputation;                                   
|
| |  | financial condition of similar vendors;                          
|
| |  | ability of products to support large numbers of concurrent users;
|
| |  | price of the solution;                                           

11



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| |   |                                                                            
| | - | ---------------------------------------------------------------------------
| |  | flexibility in delivering the solution (premise, hosted and
    on-demand);
|
| |  | hosted and on-demand solutions;                                            
|
| |  | customer referenceability;                                                 
|
| |  | measurable value (top and bottom line) to the customer; and                
|
| |  | implementation complexity and time requirement.                            







| |   |                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a longer operating history;                                                                                                                                                                                         
|
| |  | a preferred vendor status with our customers;                                                                                                                                                                       
|
| |  | more extensive name recognition and marketing power;                                                                                                                                                                
|
| |  | significantly greater financial, technical, marketing and other
    resources, giving them the ability to respond more quickly to
    new or changing opportunities, technologies and customer
    requirements; and
|
| |  | in the case where we attempt to bridge gaps between CRM and ERP
    solutions, an existing relationship with our target customers.                                                                                  



OPERATIONS


Sales and Marketing








12



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Professional Services




| |                    
| | -------------------
| | Consulting Services





| |                 
| | ----------------
| | Customer Support



Research and Development






International Operations




Intellectual Property and Other Proprietary Rights




13



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| |   |                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | cease selling, incorporating or using products or services that
    incorporate the challenged intellectual property;                                                                           
|
| |  | obtain from the holder of the infringed intellectual property
    right a license to sell or use the relevant intellectual
    property, which license may not be available on reasonable terms;
|
| |  | redesign those products or services that incorporate such
    intellectual property; or                                                                                                         
|
| |  | pay money damages to the holder of the infringed intellectual
    property right.                                                                                                               





Employees




Acquisitions




14



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AVAILABLE INFORMATION









|        |           
|------- | ----------
|Item 2. | Properties

Facilities


United States.


India.


United Kingdom.









|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

Patent Infringement






15



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Class Action












16



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Other









|        |                                                    
|------- | ---------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security Holders



RISK FACTORS


Set forth below and elsewhere in this annual report and in
the other documents we file with the SEC are risks and
uncertainties that could cause actual results to differ
materially from the results contemplated by the forward-looking
statements contained in this annual report. Prospective and
existing investors are strongly urged to carefully consider the
various cautionary statements and risks set forth in this annual
report and our other public filings.


We have a history of losses and expect to continue to incur
net losses in the near-term.




Our quarterly revenues and operating results are inherently
unpredictable and subject to fluctuations, and as a result, we
may fail to meet the expectations of security analysts and
investors, which could cause volatility or adversely affect the
trading price of our common stock.






17



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If our bookings do not improve, our results of operations
could be significantly harmed.




The loss of any of our key personnel or the failure of our
new management team to integrate with our current team would
harm our competitiveness because of the time and effort that we
would have to expend to replace such personnel.






18



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Any mergers, acquisitions or joint ventures that we may make
could disrupt our business and harm our operating results.








| |   |                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | potential adverse effects on our operating results, including
    unanticipated costs and liabilities, unforeseen accounting
    charges or fluctuations from failure to accurately forecast the
    financial impact of an acquisition.
|
| |  | use of cash;                                                                                                                                                                                                                            
|
| |  | issuance of stock that would dilute our current
    stockholders percentage ownership;                                                                                                                                                 
|
| |  | incurring debt;                                                                                                                                                                                                                         
|
| |  | assumption of liabilities;                                                                                                                                                                                                              
|
| |  | amortization expenses related to other intangible assets;                                                                                                                                                                               
|
| |  | incurring large and immediate write-offs; or                                                                                                                                                                                            
|
| |  | incurring legal and professional fees.                                                                                                                                                                                                  





| |   |                                                                                         
| | - | ----------------------------------------------------------------------------------------
| |  | problems combining the purchased operations, technologies or
    products with ours;    
|
| |  | unanticipated costs;                                                                    
|
| |  | diversion of managements attention from our core business;                             
|
| |  | adverse effects on existing business relationships with
    suppliers and customers; and
|
| |  | potential loss of key employees, particularly those of the
    acquired organizations.  



Any unsolicited proposals for the purchase of our Company
could disrupt business and harm our operating results.




19



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If our new product marketing strategy is unsuccessful, it
could significantly harm our business and operating results.




We have relied and expect to continue to rely on a limited
number of customers for a substantial portion of our revenues,
and the loss of any of these customers would significantly harm
our business and operating results.




|                                 |            |  |  |     | 
|-------------------------------- | ---------- |  |  | --- | 
|Fiscal Year ended March 31, 2005 |            |  |  |    
|                                 | Customer A |  |  | 23% | 
|                                 | Customer B |  |  | 14% | 
|                                 | Customer C |  |  | 12% | 
|                                 | Customer D |  |  | 11% | 
|Fiscal Year ended March 31, 2004 |            |  |  |    
|                                 | Customer A |  |  | 39% | 
|                                 | Customer B |  |  | 20% | 
|Fiscal Year ended March 31, 2003 |            |  |  |    
|                                 | Customer B |  |  | 25% | 
|                                 | Customer E |  |  | 14% | 



20



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Our lengthy sales cycle makes it difficult for us to forecast
revenue and exacerbates the variability of quarterly
fluctuations, which could cause our stock price to decline.




We are currently subject to intellectual property litigation,
and could be subject to additional such litigation in the
future, in connection with which we may incur substantial costs,
which would harm our operating results.












| |   |                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------
| |  | cease selling, incorporating or using products or services that
    incorporate the challenged intellectual property;

21



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| |   |                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | obtain from the holder of the infringed intellectual property
    right a license to sublicense or use the relevant intellectual
    property, which license may not be available on reasonable terms;
|
| |  | redesign those products or services that incorporate such
    intellectual property; and/or                                                                                                           
|
| |  | pay money damages to the holder of the infringed intellectual
    property right.                                                                                                                     



Any reduction in expenses will place a significant strain on
our management systems and resources if we fail to manage these
changes, our business will be harmed.






Developments in the market for configuration, pricing
management and quoting solutions may harm our operating results,
which could cause a decline in the price of our common stock.






We face intense competition, which could reduce our sales,
prevent us from achieving or maintaining profitability and
inhibit our future growth.




22



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| |   |                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a longer operating history;                                                                                                                                                                                      
|
| |  | preferred vendor status with our customers;                                                                                                                                                                      
|
| |  | more extensive name recognition and marketing power; and                                                                                                                                                         
|
| |  | significantly greater financial, technical, marketing and other
    resources, giving them the ability to respond more quickly to
    new or changing opportunities, technologies, and customer
    requirements.



A decline in general economic conditions or a decrease in
information technology spending could harm our results of
operations.




If we do not keep pace with technological change, including
maintaining interoperability of our products with the software
and hardware platforms predominantly used by our customers, our
products may be rendered obsolete, and our business may fail.




Our failure to meet customer expectations on deployment of
our products could result in negative publicity and reduced
sales, both of which would significantly harm our business and
operating results.




23



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If we are unable to maintain our direct sales force, sales of
our products and services may not meet our expectations, and our
business and operating results will be significantly harmed.




If we are unable to manage our professional services
organization, we will be unable to provide our customers with
technical support for our products, which could significantly
harm our business and operating results.






|             |          |             |  |    |      |  |  |      |   |  |  |    |  
|------------ | -------- | ----------- |  | -- | ---- |  |  | ---- | - |  |  | -- | -
|             |          | Years Ended | 
|             |          | March 31,   | 
|             |          |             | 
|             |          | 2005        |  |    | 2004 |  |  | 2003 |  
|             |          |             |  |    |      |  |  |      |  
|Gross Margin |          |             |  |    |      |  |  |      |   |  |  |   
|             | License  |             |  | 91 | %    |  |  | 92   | % |  |  | 88 | %
|             | Services |             |  | 43 | %    |  |  | 27   | % |  |  | 27 | %



24



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If new versions and releases of our products contain errors
or defects, we could suffer losses and negative publicity, which
would adversely affect our business and operating results.




A substantial portion of our operations are conducted by
India-based personnel, and any change in the political and
economic conditions of India or in immigration policies that
adversely affects our ability to conduct our operations in India
could significantly harm our business.






Demand for our products and services will decline
significantly if our software cannot support and manage a
substantial number of users.




We may not be able to recruit or retain personnel, which
could impact the development or sales of our products.




If we become subject to product liability litigation, it
could be costly and time consuming to defend and could distract
us from focusing on our business and operations.




25



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Our future success depends on our proprietary intellectual
property, and if we are unable to protect our intellectual
property from potential competitors, our business may be
significantly harmed.




Our results of operations will be reduced by charges
associated with stock-based compensation, accelerated vesting
associated with stock options issued to employees, charges
associated with other securities issued by us, and charges
related to variable accounting.






26



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Failure to improve and maintain relationships with systems
integrators and consulting firms, which assist us with the sale
and installation of our products, would impede the acceptance of
our products and the growth of our revenues.




We are the target of several securities class action and
patent infringement complaints, which could result in
substantial costs and divert management attention and
resources.




| |                    
| | -------------------
| | Patent Infringement











| |   |                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | cease selling, incorporating or using products or services that
    incorporate the challenged intellectual property;                                                                                 
|
| |  | obtain from the holder of the infringed intellectual property
    right a license to sublicense or use the relevant intellectual
    property, which license may not be available on reasonable terms;
|
| |  | redesign those products or services that incorporate such
    intellectual property; and/or                                                                                                           
|
| |  | pay money damages to the holder of the infringed intellectual
    property right.                                                                                                                     



27



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| |             
| | ------------
| | Class Action









28



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Anti-takeover defenses that we have in place could prevent or
frustrate attempts by stockholders to change our board of
directors or the direction of the company.






| |   |                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | providing for a classified board of directors with staggered
    three-year terms;                                                                                                                
|
| |  | restricting the ability of stockholders to call special meetings
    of stockholders;                                                                                                             
|
| |  | prohibiting stockholder action by written consent;                                                                                                                                                
|
| |  | establishing advance notice requirements for nominations for
    election to the board of directors or for proposing matters that
    can be acted on by stockholders at stockholder meetings; and
|
| |  | granting our board of directors the ability to designate the
    terms of and issue new series of preferred stock without
    stockholder approval.                                               



If we are unable to successfully address the material
weaknesses in our disclosure controls and procedures, including
our internal control over financial reporting, our ability to
report our financial results on a timely and accurate basis may
be adversely affected.




29



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Compliance with new regulations dealing with corporate
governance and public disclosure may result in additional
expenses and require significant management attention.






Restrictions on export of encrypted technology could cause us
to incur delays in international product sales, which would
adversely impact the expansion and growth of our business.




Unauthorized break-ins or other assaults on our computer
systems could harm our business.




Changes to accounting standards and financial reporting
requirements, may affect our financial results.




30



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If use of the Internet does not continue to develop and
reliably support the demands placed on it by electronic
commerce, the market for our products and services may be
adversely affected, and we may not achieve anticipated sales
growth.






| |   |                                                                              
| | - | -----------------------------------------------------------------------------
| |  | inadequate reliability of the network infrastructure;                        
|
| |  | slow development of enabling technologies and complementary
    products; and
|
| |  | limited accessibility and ability to deliver quality service.                



Increasing government regulation of the Internet could limit
the market for our products and services, or impose greater tax
burdens on us or liability for transmission of protected
data.









PART II







|        |                                                                                                                           
|------- | --------------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for the Registrants Common Equity, Related
    Stockholder Matters and Issuers Purchases of Equity
    Securities



31



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|            |                |      |   |      |     |  |   |      | 
|----------- | -------------- | ---- | - | ---- | --- |  | - | ---- | 
|            |                | High |   |      | Low | 
|            |                |      |   |      |     | 
|Fiscal 2004 |                |      |   |      |     |  |   |     
|            | First Quarter  |      | $ | 3.34 |     |  | $ | 2.69 | 
|            | Second Quarter |      | $ | 4.75 |     |  | $ | 3.09 | 
|            | Third Quarter  |      | $ | 5.44 |     |  | $ | 4.05 | 
|            | Fourth Quarter |      | $ | 5.55 |     |  | $ | 4.29 | 
|Fiscal 2005 |                |      |   |      |     |  |   |     
|            | First Quarter  |      | $ | 5.60 |     |  | $ | 4.05 | 
|            | Second Quarter |      | $ | 4.53 |     |  | $ | 3.59 | 
|            | Third Quarter  |      | $ | 4.03 |     |  | $ | 3.16 | 
|            | Fourth Quarter |      | $ | 3.54 |     |  | $ | 3.17 | 





Dividend Policy




Equity Compensation Plan Information




|                                                           |  |                         |       |  |                   |                      |      |                           |  |  |       |       
|---------------------------------------------------------- |  | ----------------------- | ----- |  | ----------------- | -------------------- | ---- | ------------------------- |  |  | ----- | ------
|                                                           |  | A                       |       |  | B                 |                      |      | C                         | 
|                                                           |  |                         |       |  |                   |                      |      |                           | 
|                                                           |  |                         |       |  |                   | Number of securities |     
|                                                           |  | Number of securities    |       |  | Weighted-average  |                      |      | remaining available for   | 
|                                                           |  | to be issued upon       |       |  | exercise price of |                      |      | future issuance under     | 
|                                                           |  | exercise of outstanding |       |  | outstanding       |                      |      | equity compensation plans | 
|                                                           |  | options, warrants and   |       |  | options, warrants |                      |      | (excluding securities     | 
|Plan category                                              |  | rights                  |       |  | and rights        |                      |      | reflected in Column A)    | 
|                                                           |  |                         |       |  |                   |                      |      |                           | 
|Equity compensation plans approved by security holders     |  |                         | 5,937 |  |                   | $                    | 4.37 |                           |  |  | 7,017 | (1)(2)
|Equity compensation plans not approved by security holders |  |                         | 2,503 |  |                   | $                    | 3.71 |                           |  |  | 377   |       
|                                                           |  |                         |       |  |                   |                      |      |                           | 
|Total                                                      |  |                         | 8,440 |  |                   | $                    | 4.17 |                           |  |  | 7,394 |       
|                                                           |  |                         |       |  |                   |                      |      |                           | 






|    |                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | These plans permit the grant of options, stock appreciation
    rights, shares of restricted stock and stock units.                                                                                                   
|   
|(2) | On each January 1, starting in 2001, the number of shares
    reserved for issuance under our 1999 Equity Incentive Plan will
    be automatically increased by the lesser of 5% of the then
    outstanding shares of

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| |                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | common stock or 1.8 million shares. On each May 1,
    starting in 2001, the number of shares reserved for issuance
    under our 1999 Employee Stock Purchase Plan will be
    automatically increased by the lesser of 2% of the then
    outstanding shares of common stock or 1.0 million shares.



| |                                                                     
| | --------------------------------------------------------------------
| | Stock Option Plans  Not Required to be Approved by
    Stockholders



| |                         
| | ------------------------
| | Officer Option Agreement





| |                       
| | ----------------------
| | 2001 Supplemental Plan





33



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|        |                                     
|------- | ------------------------------------
|Item 6. | Selected Consolidated Financial Data

|                                                              |                            |                                       |         |        |        |   |         |        |        |   |         |        |        |      |         |        |        |   |         |        |        | 
|------------------------------------------------------------- | -------------------------- | ------------------------------------- | ------- | ------ | ------ | - | ------- | ------ | ------ | - | ------- | ------ | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                                              |                            | Years Ended March 31,                 |        
|                                                              |                            |                                       |        
|                                                              |                            | 2005                                  |         |        | 2004   |   |         | 2003   |        |   | 2002    |        |        | 2001 |        
|                                                              |                            |                                       |         |        |        |   |         |        |        |   |         |        |        |      |        
|                                                              |                            | (in thousands, except per share data) |        
|Consolidated Statement of Operations Data:                    |                            |                                       |         |        |        |   |         |        |        |   |         |        |        |      |         |        |        |   |         |       
|Revenues:                                                     |                            |                                       |         |        |        |   |         |        |        |   |         |        |        |      |         |        |        |   |         |       
|                                                              | License                    |                                       | $       | 9,133  |        |   | $       | 16,935 |        |   | $       | 10,218 |        |      | $       | 16,683 |        |   | $       | 23,933 |       
|                                                              | Services                   |                                       |         | 21,987 |        |   |         | 23,089 |        |   |         | 25,350 |        |      |         | 30,511 |        |   |         | 31,367 |       
|                                                              |                            |                                       |         |        |        |   |         |        |        |   |         |        |        |      |        
|                                                              |                            | Total revenues                        |         |        | 31,120 |   |         |        | 40,024 |   |         |        | 35,568 |      |         |        | 47,194 |   |         |        | 55,300 | 
|Cost of revenues:                                             |                            |                                       |         |        |        |   |         |        |        |   |         |        |        |      |         |        |        |   |         |       
|                                                              | License                    |                                       |         | 819    |        |   |         | 1,410  |        |   |         | 1,185  |        |      |         | 1,023  |        |   |         | 1,457  |       
|                                                              | Services                   |                                       |         | 12,428 |        |   |         | 16,827 |        |   |         | 18,518 |        |      |         | 28,660 |        |   |         | 28,678 |       
|                                                              |                            |                                       |         |        |        |   |         |        |        |   |         |        |        |      |        
|                                                              |                            | Total cost of revenues                |         |        | 13,247 |   |         |        | 18,237 |   |         |        | 19,703 |      |         |        | 29,683 |   |         |        | 30,135 | 
|                                                              |                            |                                       |         |        |        |   |         |        |        |   |         |        |        |      |        
|Gross profit                                                  |                            |                                       | 17,873  |        |        |   | 21,787  |        |        |   | 15,865  |        |        |      | 17,511  |        |        |   | 25,165  |       
|Operating expenses:                                           |                            |                                       |         |        |        |   |         |        |        |   |         |        |        |      |         |        |        |   |         |       
|                                                              | Research and development   |                                       |         | 12,359 |        |   |         | 13,474 |        |   |         | 13,202 |        |      |         | 15,343 |        |   |         | 21,849 |       
|                                                              | Sales and marketing        |                                       |         | 11,861 |        |   |         | 14,491 |        |   |         | 19,368 |        |      |         | 25,215 |        |   |         | 50,686 |       
|                                                              | General and administrative |                                       |         | 10,396 |        |   |         | 5,385  |        |   |         | 6,068  |        |      |         | 8,922  |        |   |         | 14,876 |       
|                                                              |                            |                                       |         |        |        |   |         |        |        |   |         |        |        |      |        
|                                                              |                            | Total operating expenses              |         |        | 34,616 |   |         |        | 33,350 |   |         |        | 38,638 |      |         |        | 49,480 |   |         |        | 87,411 | 
|                                                              |                            |                                       |         |        |        |   |         |        |        |   |         |        |        |      |        
|Loss from operations                                          |                            |                                       | (16,743 | )      |        |   | (11,563 | )      |        |   | (22,773 | )      |        |      | (31,969 | )      |        |   | (62,246 | )     
|Other income, net                                             |                            |                                       |        |        |        |   | 1,092   |        |        |   |        |        |        |      |        |        |        |   |        |       
|Interest income                                               |                            |                                       | 1,973   |        |        |   | 1,625   |        |        |   | 2,999   |        |        |      | 5,896   |        |        |   | 12,654  |       
|                                                              |                            |                                       |         |        |        |   |         |        |        |   |         |        |        |      |        
|Net loss before taxes                                         |                            |                                       | (14,770 | )      |        |   | (8,846  | )      |        |   | (19,774 | )      |        |      | (26,073 | )      |        |   | (49,592 | )     
|Provision for income taxes                                    |                            |                                       | (117    | )      |        |   |        |        |        |   |        |        |        |      | 304     |        |        |   | 275     |       
|                                                              |                            |                                       |         |        |        |   |         |        |        |   |         |        |        |      |        
|Net loss before cumulative effect of an accounting change     |                            |                                       | (14,653 | )      |        |   | (8,846  | )      |        |   | (19,774 | )      |        |      | (26,377 | )      |        |   | (49,867 | )     
|Cumulative effect of an accounting change to adopt FAS 142    |                            |                                       |        |        |        |   |        |        |        |   | (9,974  | )      |        |      |        |        |        |   |        |       
|                                                              |                            |                                       |         |        |        |   |         |        |        |   |         |        |        |      |        
|Net loss                                                      |                            | $                                     | (14,653 | )      |        | $ | (8,846  | )      |        | $ | (29,748 | )      |        | $    | (26,377 | )      |        | $ | (49,867 | )     
|                                                              |                            |                                       |         |        |        |   |         |        |        |   |         |        |        |      |        
|Basic and diluted net loss per share                          |                            | $                                     | (0.45   | )      |        | $ | (0.28   | )      |        | $ | (0.92   | )      |        | $    | (0.75   | )      |        | $ | (1.44   | )     
|Shares used in computing basic and diluted net loss per share |                            |                                       | 32,665  |        |        |   | 31,165  |        |        |   | 32,219  |        |        |      | 35,090  |        |        |   | 34,580  |       

34



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|                                 |  |                       |         |  |      |   |         |      |  |   |         |  |  |      |         |  |  |   |         | 
|-------------------------------- |  | --------------------- | ------- |  | ---- | - | ------- | ---- |  | - | ------- |  |  | ---- | ------- |  |  | - | ------- | 
|                                 |  | Years Ended March 31, |        
|                                 |  |                       |        
|                                 |  | 2005                  |         |  | 2004 |   |         | 2003 |  |   | 2002    |  |  | 2001 |        
|                                 |  |                       |         |  |      |   |         |      |  |   |         |  |  |      |        
|                                 |  | (in thousands)        |        
|Consolidated Balance Sheet Data: |  |                       |         |  |      |   |         |      |  |   |         |  |  |      |         |  |  |   |         | 
|Current assets                   |  | $                     | 98,349  |  |      | $ | 100,597 |      |  | $ | 117,853 |  |  | $    | 133,456 |  |  | $ | 167,181 | 
|Non current assets               |  |                       | 9,275   |  |      |   | 25,819  |      |  |   | 19,296  |  |  |      | 36,628  |  |  |   | 42,591  | 
|Current liabilities              |  |                       | 8,470   |  |      |   | 12,896  |      |  |   | 22,731  |  |  |      | 15,509  |  |  |   | 26,265  | 
|Non current liabilities          |  |                       | 1,434   |  |      |   | 1,482   |      |  |   | 1,338   |  |  |      | 1,223   |  |  |   | 969     | 
|Working capital                  |  |                       | 89,879  |  |      |   | 87,701  |      |  |   | 95,122  |  |  |      | 117,947 |  |  |   | 140,916 | 
|Total assets                     |  |                       | 107,624 |  |      |   | 126,416 |      |  |   | 137,149 |  |  |      | 170,084 |  |  |   | 209,772 | 
|Total stockholders equity       |  |                       | 97,720  |  |      |   | 112,038 |      |  |   | 113,080 |  |  |      | 153,352 |  |  |   | 182,538 | 






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations

In addition to historical information, this quarterly report
contains forward-looking statements that involve risks and
uncertainties that could cause actual results to differ
materially from those projected. Factors that might cause or
contribute to such differences include, but are not limited to,
those discussed in the section entitled Managements
Discussion and Analysis and Risks Related to Our
Business. Actual results could differ materially.
Important factors that could cause actual results to differ
materially include, but are not limited to, the level of demand
for Selecticas products and services; the intensity of
competition; Selecticas ability to effectively manage
product transitions and to continue to expand and improve
internal infrastructure; and risks associated with potential
acquisitions. For a more detailed discussion of the risks
relating to Selecticas business, readers should refer to
the section later in this report entitled Risks Related to
Our Business. Readers are cautioned not to place undue
reliance on the forward-looking statements, including statements
regarding the Companys expectations, beliefs, intentions
or strategies regarding the future, which speak only as of the
date of this quarterly report. Selectica assumes no obligation
to update these forward-looking statements.




|                                   |                            |                          |     |    |      |  |     |      |     |  |     |    |     | 
|---------------------------------- | -------------------------- | ------------------------ | --- | -- | ---- |  | --- | ---- | --- |  | --- | -- | --- | 
|                                   |                            | Years Ended              |    
|                                   |                            | March 31,                |    
|                                   |                            |                          |    
|                                   |                            | 2005                     |     |    | 2004 |  |     | 2003 |    
|                                   |                            |                          |     |    |      |  |     |      |    
|As a Percentage of Total Revenues: |                            |                          |     |    |      |  |     |      |     |  |     |   
|Revenues:                          |                            |                          |     |    |      |  |     |      |     |  |     |   
|                                   | License                    |                          |     | 29 | %    |  |     | 42   | %   |  |     | 29 | %  
|                                   | Services                   |                          |     | 71 |      |  |     | 58   |     |  |     | 71 |    
|                                   |                            |                          |     |    |      |  |     |      |    
|                                   |                            | Total revenues           |     |    | 100  |  |     |      | 100 |  |     |    | 100 | 
|Cost of revenues:                  |                            |                          |     |    |      |  |     |      |     |  |     |   
|                                   | License                    |                          |     | 3  |      |  |     | 4    |     |  |     | 3  |    
|                                   | Services                   |                          |     | 40 |      |  |     | 42   |     |  |     | 52 |    
|                                   |                            |                          |     |    |      |  |     |      |    
|                                   |                            | Total cost of revenues   |     |    | 43   |  |     |      | 46  |  |     |    | 55  | 
|                                   |                            |                          |     |    |      |  |     |      |    
|                                   |                            | Gross profit             |     |    | 57   |  |     |      | 54  |  |     |    | 45  | 
|Operating expenses:                |                            |                          |     |    |      |  |     |      |     |  |     |   
|                                   | Research and development   |                          |     | 40 |      |  |     | 34   |     |  |     | 37 |    
|                                   | Sales and marketing        |                          |     | 38 |      |  |     | 36   |     |  |     | 55 |    
|                                   | General and administrative |                          |     | 33 |      |  |     | 13   |     |  |     | 17 |    
|                                   |                            |                          |     |    |      |  |     |      |    
|                                   |                            | Total operating expenses |     |    | 111  |  |     |      | 83  |  |     |    | 109 | 
|                                   |                            |                          |     |    |      |  |     |      |    
|Loss from operations               |                            |                          | (54 | )  |      |  | (29 | )    |     |  | (64 | ) 

35



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|                                                           |  |             |     |    |      |  |     |      |  |  |     |   
|---------------------------------------------------------- |  | ----------- | --- | -- | ---- |  | --- | ---- |  |  | --- | --
|                                                           |  | Years Ended |    
|                                                           |  | March 31,   |    
|                                                           |  |             |    
|                                                           |  | 2005        |     |    | 2004 |  |     | 2003 | 
|                                                           |  |             |     |    |      |  |     |      | 
|Other income, net                                          |  |             |    |    |      |  | 3   |      |  |  |    |   
|Interest income                                            |  |             | 6   |    |      |  | 4   |      |  |  | 8   |   
|                                                           |  |             |    |    |      |  |    |      |  |  |    |   
|                                                           |  |             |     |    |      |  |     |      | 
|Loss before provision for income taxes                     |  |             | (47 | )  |      |  | (22 | )    |  |  | (56 | ) 
|Provision for income taxes                                 |  |             |    |    |      |  |    |      |  |  |    |   
|                                                           |  |             |    |    |      |  |    |      |  |  |    |   
|                                                           |  |             |     |    |      |  |     |      | 
|Loss before cumulative effect of an accounting change      |  |             | (47 | )  |      |  | (22 | )    |  |  | (56 | ) 
|Cumulative effect of an accounting change to adopt FAS 142 |  |             |    |    |      |  |    |      |  |  | (28 | ) 
|                                                           |  |             |     |    |      |  |     |      | 
|Net loss                                                   |  |             | (47 | )% |      |  | (22 | )%   |  |  | (84 | )%
|                                                           |  |             |     |    |      |  |     |      | 

Overview










36



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Summary of Operating Results for 2005




Key Performance Indicators




| |                     
| | --------------------
| | Bookings and Revenue





| |                   
| | ------------------
| | Expense Management





Outlook for 2006




37



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Critical Accounting Policies and Estimates






| |                    
| | -------------------
| | Revenue Recognition





Arrangements consisting of license and maintenance only.


38



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Arrangements consisting of license, maintenance and other
services.
















39



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Arrangements consisting of consulting services.




|                                      |  |                       |     |   |      |  |     |      |  |  |     |  
|------------------------------------- |  | --------------------- | --- | - | ---- |  | --- | ---- |  |  | --- | -
|                                      |  | Years Ended March 31, |    
|                                      |  |                       |    
|                                      |  | 2005                  |     |   | 2004 |  |     | 2003 | 
|                                      |  |                       |     |   |      |  |     |      | 
|As a Percentage of Total Revenues:    |  |                       |     |   |      |  |     |      |  |  |     |  
|Contract Accounting                   |  |                       | 73  | % |      |  | 51  | %    |  |  | 80  | %
|Residual Method                       |  |                       |    |   |      |  | 3   |      |  |  | 2   |  
|Ratable Method (includes Maintenance) |  |                       | 27  |   |      |  | 46  |      |  |  | 18  |  
|                                      |  |                       |     |   |      |  |     |      | 
|Total Revenues                        |  |                       | 100 | % |      |  | 100 | %    |  |  | 100 | %
|                                      |  |                       |     |   |      |  |     |      | 





| |                       
| | ----------------------
| | Short Term Investments





| |                                
| | -------------------------------
| | Allowance for Doubtful Accounts





| |                             
| | ----------------------------
| | Contingencies and Litigation



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| |                                                  
| | -------------------------------------------------
| | Related Party Transaction and Severance Agreement



Factors Affecting Operating Results




|                                 |            |  |  |    |  
|-------------------------------- | ---------- |  |  | -- | -
|Fiscal Year ended March 31, 2005 |            |  |  |   
|                                 | Customer A |  |  | 23 | %
|                                 | Customer B |  |  | 14 | %
|                                 | Customer C |  |  | 12 | %
|                                 | Customer D |  |  | 11 | %
|Fiscal Year ended March 31, 2004 |            |  |  |   
|                                 | Customer A |  |  | 39 | %
|                                 | Customer B |  |  | 20 | %
|Fiscal Year ended March 31, 2003 |            |  |  |   
|                                 | Customer B |  |  | 25 | %
|                                 | Customer E |  |  | 14 | %









41



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Results of Operations


Revenues


|         |                              |                                    |        |        |        |  |     |      |    |   |        |        |   |      |    |    |   |   |        |        |  
|-------- | ---------------------------- | ---------------------------------- | ------ | ------ | ------ |  | --- | ---- | -- | - | ------ | ------ | - | ---- | -- | -- | - | - | ------ | ------ | -
|         |                              | 2005                               |        |        | Change |  |     | 2004 |    |   | Change |        |   | 2003 |   
|         |                              |                                    |        |        |        |  |     |      |    |   |        |        |   |      |   
|         |                              | (in thousands, except percentages) |       
|License  |                              | $                                  | 9,133  |        |        |  | (46 | )%   |    | $ | 16,935 |        |   |      | 66 | %  |   | $ | 10,218 |       
|         | Percentage of total revenues |                                    |        | 29     | %      |  |     |      |    |   |        | 42     | % |      |    |    |   |   |        | 29     | %
|Services |                              | $                                  | 21,987 |        |        |  | (5  | )%   |    | $ | 23,089 |        |   |      | (9 | )% |   | $ | 25,350 |       
|         | Percentage of total revenues |                                    |        | 71     | %      |  |     |      |    |   |        | 58     | % |      |    |    |   |   |        | 71     | %
|         | Total revenues               |                                    | $      | 31,120 |        |  |     | (22  | )% |   | $      | 40,024 |   |      |    | 13 | % |   | $      | 35,568 |  

License.




Services.




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Cost of Revenues


|                          |                                 |                                    |        |    |        |  |     |      |  |   |        |    |   |      |    |    |  |   |        |    |  
|------------------------- | ------------------------------- | ---------------------------------- | ------ | -- | ------ |  | --- | ---- |  | - | ------ | -- | - | ---- | -- | -- |  | - | ------ | -- | -
|                          |                                 | 2005                               |        |    | Change |  |     | 2004 |  |   | Change |    |   | 2003 |   
|                          |                                 |                                    |        |    |        |  |     |      |  |   |        |    |   |      |   
|                          |                                 | (in thousands, except percentages) |       
|Cost of license revenues  |                                 | $                                  | 819    |    |        |  | (42 | )%   |  | $ | 1,410  |    |   |      | 19 | %  |  | $ | 1,185  |   
|                          | Percentage of license revenues  |                                    |        | 9  | %      |  |     |      |  |   |        | 8  | % |      |    |    |  |   |        | 12 | %
|Cost of services revenues |                                 | $                                  | 12,428 |    |        |  | (26 | )%   |  | $ | 16,827 |    |   |      | (9 | )% |  | $ | 18,518 |   
|                          | Percentage of services revenues |                                    |        | 57 | %      |  |     |      |  |   |        | 73 | % |      |    |    |  |   |        | 73 | %

Cost of License Revenues.


Cost of Services Revenues.




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Gross Margin


|                                |  |      |    |   |      |  |    |      |  |  |    |  
|------------------------------- |  | ---- | -- | - | ---- |  | -- | ---- |  |  | -- | -
|                                |  | 2005 |    |   | 2004 |  |    | 2003 | 
|                                |  |      |    |   |      |  |    |      | 
|Gross margin, license revenues  |  |      | 91 | % |      |  | 92 | %    |  |  | 88 | %
|Gross margin, services revenues |  |      | 43 | % |      |  | 27 | %    |  |  | 27 | %
|Gross margin, total revenues    |  |      | 57 | % |      |  | 54 | %    |  |  | 45 | %

Gross Margin  Licenses.




Gross Margin  Services.






Expenses


|                           |                              |                                    |        |    |        |  |     |      |  |   |        |    |   |      |     |    |  |   |        |    |  
|-------------------------- | ---------------------------- | ---------------------------------- | ------ | -- | ------ |  | --- | ---- |  | - | ------ | -- | - | ---- | --- | -- |  | - | ------ | -- | -
|                           |                              | 2005                               |        |    | Change |  |     | 2004 |  |   | Change |    |   | 2003 |    
|                           |                              |                                    |        |    |        |  |     |      |  |   |        |    |   |      |    
|                           |                              | (in thousands, except percentages) |       
|Research and development   |                              | $                                  | 12,359 |    |        |  | (8  | )%   |  | $ | 13,474 |    |   |      | 2   | %  |  | $ | 13,202 |   
|                           | Percentage of total revenues |                                    |        | 40 | %      |  |     |      |  |   |        | 34 | % |      |     |    |  |   |        | 37 | %
|Sales and marketing        |                              | $                                  | 11,861 |    |        |  | (18 | )%   |  | $ | 14,491 |    |   |      | (25 | )% |  | $ | 19,368 |   
|                           | Percentage of total revenues |                                    |        | 38 | %      |  |     |      |  |   |        | 36 | % |      |     |    |  |   |        | 55 | %
|General and administrative |                              | $                                  | 10,396 |    |        |  | 93  | %    |  | $ | 5,385  |    |   |      | (11 | )% |  | $ | 6,068  |   
|                           | Percentage of total revenues |                                    |        | 33 | %      |  |     |      |  |   |        | 13 | % |      |     |    |  |   |        | 17 | %

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Research and Development.


Sales and Marketing.






General and Administrative.


45



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Restructuring.








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Other Income, Net




Interest Income


|                |  |                                    |       |  |        |  |    |      |  |   |        |  |  |      |     |    |  |   |       | 
|--------------- |  | ---------------------------------- | ----- |  | ------ |  | -- | ---- |  | - | ------ |  |  | ---- | --- | -- |  | - | ----- | 
|                |  | 2005                               |       |  | Change |  |    | 2004 |  |   | Change |  |  | 2003 |    
|                |  |                                    |       |  |        |  |    |      |  |   |        |  |  |      |    
|                |  | (in thousands, except percentages) |      
|Interest Income |  | $                                  | 1,891 |  |        |  | 16 | %    |  | $ | 1,625  |  |  |      | (46 | )% |  | $ | 2,999 | 





Provision for Income Taxes








Recent Accounting Pronouncements




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Liquidity and Capital Resources


|                                                     |  |                                    |         |   |        |  |      |      |  |   |         |   |  |      |      |    |  |   |         |  
|---------------------------------------------------- |  | ---------------------------------- | ------- | - | ------ |  | ---- | ---- |  | - | ------- | - |  | ---- | ---- | -- |  | - | ------- | -
|                                                     |  | 2005                               |         |   | Change |  |      | 2004 |  |   | Change  |   |  | 2003 |     
|                                                     |  |                                    |         |   |        |  |      |      |  |   |         |   |  |      |     
|                                                     |  | (in thousands, except percentages) |        
|Cash, cash equivalents and short-term investments    |  | $                                  | 93,263  |   |        |  | (4   | )%   |  | $ | 97,303  |   |  |      | (11  | )% |  | $ | 109,217 |  
|Working capital                                      |  | $                                  | 89,879  |   |        |  | 2    | %    |  | $ | 87,701  |   |  |      | (8   | )% |  | $ | 95,122  |  
|Net cash used for operating activities               |  | $                                  | (19,172 | ) |        |  | 89   | %    |  | $ | (10,167 | ) |  |      | 50   | %  |  | $ | (6,784  | )
|Net cash provided by (used for) investing activities |  | $                                  | 19,196  |   |        |  | (188 | )%   |  | $ | (21,919 | ) |  |      | (201 | )% |  | $ | 21,613  |  
|Net cash provided by (used for) financing activities |  | $                                  | 561     |   |        |  | (90  | )%   |  | $ | 5,821   |   |  |      | (146 | )% |  | $ | (12,593 | )















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|                         |  |                        |        |           |        |   |       |       |  |     |       |  |         |       |       |  |  |   |   | 
|------------------------ |  | ---------------------- | ------ | --------- | ------ | - | ----- | ----- |  | --- | ----- |  | ------- | ----- | ----- |  |  | - | - | 
|                         |  | Payments Due By Period
|                         |  |                       
|                         |  |                        |        | Less Than |        |   | 1-3   |       |  | 4-5 |       |  | After 5
|Contractual Obligations: |  | Total                  |        |           | 1 Year |   |       | Years |  |     | Years |  |         | Years
|                         |  |                        |        |           |        |   |       |       |  |     |       |  |         |      
|                         |  | (in thousands)        
|Operating Leases         |  | $                      | 11,858 |           |        | $ | 2,420 |       |  | $   | 4,889 |  |         | $     | 4,549 |  |  | $ |  | 



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|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A: | Quantitative and Qualitative Disclosures About Market
    Risk



Foreign Currency Exchange Rate Risk






Interest Rate Risk








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|                        |  |             |        |   |      |   |       |       |  |   |        |  
|----------------------- |  | ----------- | ------ | - | ---- | - | ----- | ----- |  | - | ------ | -
|                        |  | 2006        |        |   | 2007 |   |       | Total | 
|                        |  |             |        |   |      |   |       |       | 
|                        |  | (thousands) |       
|Auction rate preferreds |  | $           | 7,000  |   |      | $ |      |       |  | $ | 7,000  |  
|Weighted Average yield  |  |             | 2.63   | % |      |   |      |       |  |   | 2.63   | %
|Government agencies     |  |             | 46,159 |   |      |   | 4,461 |       |  |   | 50,620 |  
|Weighted Average yield  |  |             | 2.00   | % |      |   | 2.90  | %     |  |   | 2.08   | %
|Corporate notes & bonds |  |             | 9,178  |   |      |   |      |       |  |   | 9,178  |  
|Weighted Average yield  |  |             | 2.20   | % |      |   |      |       |  |   | 2.20   | %
|Certificate of Deposit  |  |             | 1,566  |   |      |   | 1,145 |       |  |   | 2,711  |  
|Weighted Average yield  |  |             | 5.16   | % |      |   | 5.86  | %     |  |   | 5.46   | %
|                        |  |             |        |   |      |   |       |       | 
|Total investments       |  | $           | 63,903 |   |      | $ | 5,606 |       |  | $ | 69,509 |  
|                        |  |             |        |   |      |   |       |       | 

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|        |                                                             
|------- | ------------------------------------------------------------
|Item 8. | Consolidated Financial Statements and Supplementary
    Data

Annual Financial Statements




Quarterly Results of Operations (Unaudited)




|                                                                                                   |                            |                          |        |       |           |   |        |          |       |   |          |       |       |   |        |       |       | 
|-------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------ | ------ | ----- | --------- | - | ------ | -------- | ----- | - | -------- | ----- | ----- | - | ------ | ----- | ----- | 
|                                                                                                   |                            | Quarters Ended           |       
|                                                                                                   |                            |                          |       
|                                                                                                   |                            | June 30,                 |        |       | Sept. 30, |   |        | Dec. 31, |       |   | Mar. 31, |      
|                                                                                                   |                            | 2004                     |        |       | 2004      |   |        | 2004     |       |   | 2005     |      
|                                                                                                   |                            |                          |        |       |           |   |        |          |       |   |          |      
|                                                                                                   |                            | (in thousands)           |       
|Consolidated Statement of Operations Data:                                                         |                            |                          |        |       |           |   |        |          |       |   |          |       |       |   |        |      
|Revenues:                                                                                          |                            |                          |        |       |           |   |        |          |       |   |          |       |       |   |        |      
|                                                                                                   | License                    |                          | $      | 2,056 |           |   | $      | 2,276    |       |   | $        | 2,301 |       |   | $      | 2,500 |      
|                                                                                                   | Services                   |                          |        | 5,687 |           |   |        | 4,917    |       |   |          | 6,613 |       |   |        | 4,770 |      
|                                                                                                   |                            |                          |        |       |           |   |        |          |       |   |          |      
|                                                                                                   |                            | Total revenues           |        |       | 7,743     |   |        |          | 7,193 |   |          |       | 8,914 |   |        |       | 7,270 | 
|Cost of revenues:                                                                                  |                            |                          |        |       |           |   |        |          |       |   |          |       |       |   |        |      
|                                                                                                   | License                    |                          |        | 199   |           |   |        | 214      |       |   |          | 217   |       |   |        | 189   |      
|                                                                                                   | Services                   |                          |        | 3,152 |           |   |        | 3,067    |       |   |          | 3,088 |       |   |        | 3,121 |      
|                                                                                                   |                            |                          |        |       |           |   |        |          |       |   |          |      
|                                                                                                   |                            | Total cost of revenues   |        |       | 3,351     |   |        |          | 3,281 |   |          |       | 3,305 |   |        |       | 3,310 | 
|                                                                                                   |                            |                          |        |       |           |   |        |          |       |   |          |      
|                                                                                                   |                            | Gross profit             |        |       | 4,392     |   |        |          | 3,912 |   |          |       | 5,609 |   |        |       | 3,960 | 
|                                                                                                   |                            |                          |        |       |           |   |        |          |       |   |          |      
|Operating expenses:                                                                                |                            |                          |        |       |           |   |        |          |       |   |          |       |       |   |        |      
|                                                                                                   | Research and development   |                          |        | 3,255 |           |   |        | 3,201    |       |   |          | 3,049 |       |   |        | 2,854 |      
|                                                                                                   | Sales and marketing        |                          |        | 2,975 |           |   |        | 3,180    |       |   |          | 2,939 |       |   |        | 2,767 |      
|                                                                                                   | General and administrative |                          |        | 1,984 |           |   |        | 2,112    |       |   |          | 1,931 |       |   |        | 4,369 |      
|                                                                                                   |                            |                          |        |       |           |   |        |          |       |   |          |      
|                                                                                                   |                            | Total operating expenses |        |       | 8,214     |   |        |          | 8,493 |   |          |       | 7,919 |   |        |       | 9,990 | 
|                                                                                                   |                            |                          |        |       |           |   |        |          |       |   |          |      
|Loss from operations                                                                               |                            |                          | (3,822 | )     |           |   | (4,581 | )        |       |   | (2,310   | )     |       |   | (6,030 | )    
|Interest income                                                                                    |                            |                          | 223    |       |           |   | 515    |          |       |   | 798      |       |       |   | 437    |      
|                                                                                                   |                            |                          |        |       |           |   |        |          |       |   |          |      
|Net loss before taxes                                                                              |                            |                          | (3,599 | )     |           |   | (4,066 | )        |       |   | (1,512   | )     |       |   | (5,593 | )    
|Provision for income taxes                                                                         |                            |                          |       |       |           |   |       |          |       |   |         |       |       |   | 117    |      
|                                                                                                   |                            |                          |        |       |           |   |        |          |       |   |          |      
|Net loss                                                                                           |                            | $                        | (3,599 | )     |           | $ | (4,066 | )        |       | $ | (1,512   | )     |       | $ | (5,476 | )    
|                                                                                                   |                            |                          |        |       |           |   |        |          |       |   |          |      
|Basic and diluted, net loss per share                                                              |                            | $                        | (0.11  | )     |           | $ | (0.12  | )        |       | $ | (0.05    | )     |       | $ | (0.17  | )    
|                                                                                                   |                            |                          |        |       |           |   |        |          |       |   |          |      
|Weighted-average shares of common stock used in computing basic
    and diluted net loss per share |                            |                          | 32,516 |       |           |   | 32,564 |          |       |   | 32,450   |       |       |   | 32,751 |      
|                                                                                                   |                            |                          |        |       |           |   |        |          |       |   |          |      

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|                                                                                                   |                            |                          |        |       |           |   |        |          |       |   |          |       |       |   |        |       |       | 
|-------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------ | ------ | ----- | --------- | - | ------ | -------- | ----- | - | -------- | ----- | ----- | - | ------ | ----- | ----- | 
|                                                                                                   |                            | Quarters Ended           |       
|                                                                                                   |                            |                          |       
|                                                                                                   |                            | June 30,                 |        |       | Sept. 30, |   |        | Dec. 31, |       |   | Mar. 31, |      
|                                                                                                   |                            | 2003                     |        |       | 2003      |   |        | 2003     |       |   | 2004     |      
|                                                                                                   |                            |                          |        |       |           |   |        |          |       |   |          |      
|                                                                                                   |                            | (in thousands)           |       
|Consolidated Statement of Operations Data:                                                         |                            |                          |        |       |           |   |        |          |       |   |          |       |       |   |        |      
|Revenues:                                                                                          |                            |                          |        |       |           |   |        |          |       |   |          |       |       |   |        |      
|                                                                                                   | License                    |                          | $      | 4,704 |           |   | $      | 4,325    |       |   | $        | 4,796 |       |   | $      | 3,110 |      
|                                                                                                   | Services                   |                          |        | 7,083 |           |   |        | 5,591    |       |   |          | 5,189 |       |   |        | 5,226 |      
|                                                                                                   |                            |                          |        |       |           |   |        |          |       |   |          |      
|                                                                                                   |                            | Total revenues           |        |       | 11,787    |   |        |          | 9,916 |   |          |       | 9,985 |   |        |       | 8,336 | 
|Cost of revenues:                                                                                  |                            |                          |        |       |           |   |        |          |       |   |          |       |       |   |        |      
|                                                                                                   | License                    |                          |        | 264   |           |   |        | 327      |       |   |          | 289   |       |   |        | 530   |      
|                                                                                                   | Services                   |                          |        | 5,354 |           |   |        | 3,932    |       |   |          | 4,109 |       |   |        | 3,432 |      
|                                                                                                   |                            |                          |        |       |           |   |        |          |       |   |          |      
|                                                                                                   |                            | Total cost of revenues   |        |       | 5,618     |   |        |          | 4,259 |   |          |       | 4,398 |   |        |       | 3,962 | 
|                                                                                                   |                            |                          |        |       |           |   |        |          |       |   |          |      
|                                                                                                   |                            | Gross profit             |        |       | 6,169     |   |        |          | 5,657 |   |          |       | 5,587 |   |        |       | 4,374 | 
|                                                                                                   |                            |                          |        |       |           |   |        |          |       |   |          |      
|Operating expenses:                                                                                |                            |                          |        |       |           |   |        |          |       |   |          |       |       |   |        |      
|                                                                                                   | Research and development   |                          |        | 3,223 |           |   |        | 3,573    |       |   |          | 3,149 |       |   |        | 3,529 |      
|                                                                                                   | Sales and marketing        |                          |        | 3,994 |           |   |        | 4,164    |       |   |          | 3,044 |       |   |        | 3,289 |      
|                                                                                                   | General and administrative |                          |        | 1,299 |           |   |        | 1,453    |       |   |          | 1,327 |       |   |        | 1,306 |      
|                                                                                                   |                            |                          |        |       |           |   |        |          |       |   |          |      
|                                                                                                   |                            | Total operating expenses |        |       | 8,516     |   |        |          | 9,190 |   |          |       | 7,520 |   |        |       | 8,124 | 
|                                                                                                   |                            |                          |        |       |           |   |        |          |       |   |          |      
|Loss from operations                                                                               |                            |                          | (2,347 | )     |           |   | (3,533 | )        |       |   | (1,933   | )     |       |   | (3,750 | )    
|Other income, net                                                                                  |                            |                          |       |       |           |   |       |          |       |   | 1,092    |       |       |   |       |      
|Interest income                                                                                    |                            |                          | 499    |       |           |   | 334    |          |       |   | 388      |       |       |   | 404    |      
|                                                                                                   |                            |                          |        |       |           |   |        |          |       |   |          |      
|Net loss                                                                                           |                            | $                        | (1,848 | )     |           | $ | (3,199 | )        |       | $ | (453     | )     |       | $ | (3,346 | )    
|                                                                                                   |                            |                          |        |       |           |   |        |          |       |   |          |      
|Basic and diluted, net loss per share                                                              |                            | $                        | (0.06  | )     |           | $ | (0.10  | )        |       | $ | (0.01    | )     |       | $ | (0.10  | )    
|                                                                                                   |                            |                          |        |       |           |   |        |          |       |   |          |      
|Weighted-average shares of common stock used in computing basic
    and diluted net loss per share |                            |                          | 30,635 |       |           |   | 30,915 |          |       |   | 31,235   |       |       |   | 31,879 |      
|                                                                                                   |                            |                          |        |       |           |   |        |          |       |   |          |      









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|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure








|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures



Report of Management on Internal Control over Financial
Reporting










| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | First, management identified a material weakness for
    insufficient controls over the Quote to Collect process related
    to the review, approval, and accounting for the Allowance for
    Doubtful Accounts. The Company had incorrectly included a
    general reserve provision in the Allowance for Doubtful Accounts
    as of December 31, 2004. Also, the Company had incorrectly
    recorded a receivable as uncollectible as of March 31,
    2005, for which payment was subsequently received after
    March 31, 2005 but prior to the completion of the quarterly
    close process. As a result of this material weakness, Accounts
    Receivable and Services Revenue were incorrectly stated.
    Adjustments were recorded to increase Accounts Receivable and
    Services Revenue as of December 31, 2004 and as of
    March 31, 2005, prior to the issuance of our financial
    statements for the respective dates.
|
| | Second, management identified a material weakness for
    insufficient controls for the Treasury process related to the
    classification of Cash Equivalents and Investments. The Company
    had incorrectly classified Cash Equivalents and Investments in
    its India subsidiary. As a result of this material weakness,
    Cash Equivalents, Short Term and Long Term Investments were not
    classified in accordance with generally accepted accounting
    principles. An adjustment was recorded to reduce Cash
    Equivalents and increase Short Term and Long Term Investments as
    of March 31, 2005.                                                                                                                                                                                                                                                                                                                       
|
| | Third, management identified the following deficiencies in its
    revenue recognition process, which constitute a material
    weakness in the aggregate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| | a) Insufficient controls over the monitoring of deferred
    revenue accounts for the purpose of determining when revenue
    should be recognized. The Company failed to reverse deferred
    revenue when all criteria for revenue recognition had occurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b) Insufficient controls for the identification of services
    to be provided to customers at no charge. The Company
    inappropriately recorded revenue related to a service provided
    to a customer that was provided for no charge.                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | Fourth, management identified the following deficiencies in its
    payroll process, which constitute a material weakness in the
    aggregate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | a) Insufficient controls over the recording of expenses
    related to the benefits of terminated employees. The Company had
    failed to record the expenses related to the benefits extended
    when employees were involuntarily terminated as part of a
    reduction in force program. These inadequate controls resulted
    in an adjustment as of March 31, 2005 to increase Accrued
    Payroll and Related Liabilities, and increase Sales and
    Marketing expense.                                                                                                                                                                         
|
| | b) Insufficient controls over the recording of expenses
    related to the acceleration of stock options for a former
    executive. The error arose because of a lack of in-depth review
    of the appropriate accounting treatment for this transaction.
    These inadequate controls resulted in an adjustment as of
    March 31, 2005 to decrease Additional Paid In Capital and
    Sales and Marketing expense.                                                                                                                                                                                                                                  
|
| | Fifth, management identified the following deficiencies in our
    financial statement close process, which constitute a material
    weakness in the aggregate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | a) Insufficient controls over the monitoring of the terms
    of employment agreements and bonus programs and determining the
    appropriate accounting treatment for related accrued bonuses in
    accordance with employment agreements and bonus programs. These
    inadequate controls resulted in adjustments as of
    December 31, 2004 and March 31, 2005 to decrease
    Accrued Payroll and Related Liabilities, and decrease General
    and Administrative expense. These adjustments were recorded
    prior to the issuance of the respective financial statements.                                                                      
|
| | b) Insufficient controls over the monitoring of accrued
    liabilities recorded upon the sale of the e-insurance business
    to Accenture in December 2003. The Company had incorrectly not
    reversed the accrual when the related obligation expired on
    December 31, 2004. The error arose because of a lack of
    in-depth review of the account reconciliation. These inadequate
    controls resulted in an adjustment as of December 31, 2004
    to decrease Accrued Liabilities and decrease General and
    Administrative expense. The adjustment was recorded prior to the
    issuance of the December 31, 2004 financial statements.





Completed and Planned Remediation








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|                                      | 
|------------------------------------- | 
|Date: June 24, 2005                   | 
|                                     
|/s/ VINCENT G. OSTROSKY               | 
|                                      | 
|Vincent G. Ostrosky                   | 
|President and Chief Executive Officer | 
|                                     
|/s/ STEPHEN BENNION                   | 
|                                      | 
|Stephen Bennion                       | 
|Chief Financial Officer               | 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


ON INTERNAL CONTROL OVER FINANCIAL REPORTING






Internal
Control  Integrated Framework












| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | First, the Company identified a material weakness for
    insufficient controls over the Quote to Collect process related
    to the review, approval, and accounting for the Allowance for
    Doubtful Accounts. The Company had incorrectly included a
    general reserve provision in the Allowance for Doubtful Accounts
    as of December 31, 2004. Also, the Company had incorrectly
    recorded a receivable as uncollectible as of March 31,
    2005, for which payment was subsequently received after
    March 31, 2005 but prior to the completion of the quarterly
    close process. As a result of this material weakness, Accounts
    Receivable and Services Revenue were incorrectly stated.
    Adjustments were recorded to increase Accounts Receivable and
    Services Revenue as of December 31, 2004 and as of
    March 31, 2005, prior to the issuance of our financial
    statements for the respective dates.

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Second, the Company identified a material weakness for
    insufficient controls for the Treasury process related to the
    classification of Cash Equivalents and Investments. The Company
    had incorrectly classified Cash Equivalents and Investments in
    its India subsidiary. As a result of this material weakness,
    Cash Equivalents, Short Term and Long Term Investments were not
    classified for in accordance with generally accepted accounting
    principles. An adjustment was recorded to reduce Cash
    Equivalents and increase Short Term and Long Term Investments as
    of March 31, 2005.                            
|
| | Third, the Company identified the following deficiencies in its
    revenue recognition process, which constitute a material
    weakness in the aggregate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | a) Insufficient controls over the monitoring of deferred
    revenue accounts for the purpose of determining when revenue
    should be recognized. The Company failed to reverse deferred
    revenue when all criteria for revenue recognition had occurred.                                                                                                                                                                                                                                                                                                                                                                                            
|
| | b) Insufficient controls for the identification of services
    to be provided to customers at no charge. The Company
    inappropriately recorded revenue related to a service provided
    to a customer that was provided for no charge.                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | Fourth, the Company identified the following deficiencies in our
    payroll process, which constitute a material weakness in the
    aggregate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | a) Insufficient controls over the recording of expenses
    related to the benefits of terminated employees. The Company had
    failed to record the expenses related to the benefits extended
    when employees were involuntarily terminated as part of a
    reduction in force program. These inadequate controls resulted
    in an adjustment as of March 31, 2005 to increase Accrued
    Payroll and Related Liabilities and increase Sales and Marketing
    expense.                                                                                                                                                                          
|
| | b) Insufficient controls over the recording of expenses
    related to the acceleration of stock options for a former
    executive. The error arose because of a lack of in-depth review
    of the appropriate accounting treatment for this transaction.
    These inadequate controls resulted in an adjustment as of
    March 31, 2005 to decrease Additional Paid In Capital and
    Sales and Marketing expense.                                                                                                                                                                                                                                  
|
| | Fifth, the Company identified the following deficiencies in our
    financial statement close process, which constitute a material
    weakness in the aggregate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | a) Insufficient controls over the monitoring of the terms
    of employment agreements and bonus programs and determining the
    appropriate accounting treatment for related accrued bonuses in
    accordance with employment agreements and bonus programs. These
    inadequate controls resulted in adjustments as of
    December 31, 2004 and March 31, 2005 to decrease
    Accrued Payroll and Related Liabilities, and decrease General
    and Administrative expense. These adjustments were recorded
    prior to the issuance of the respective financial statements.                                                                      
|
| | b) Insufficient controls over the monitoring of accrued
    liabilities recorded upon the sale of the e-insurance business
    to Accenture in December 2003. The Company had incorrectly not
    reversed the accrual when the related obligation expired on
    December 31, 2004. The error arose because of a lack of
    in-depth review of the account reconciliation. These inadequate
    controls resulted in an adjustment as of December 31, 2004
    to decrease Accrued Liabilities and decrease General and
    Administrative expense. The adjustment was recorded prior to the
    issuance of the December 31, 2004 financial statements.





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Item 9B.     Other
Information







PART III







|         |                                                   
|-------- | --------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant

Directors




Executive Officers




Audit Committee Financial Expert




Identification of the Audit Committee




Section 16(a) Beneficial Ownership Reporting
Compliance




Code of Ethics




59



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|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation








|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management and Related Stockholder Matters








|         |                                               
|-------- | ----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions








|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accountant Fees and Services






PART IV







|         |                                                                                  
|-------- | ---------------------------------------------------------------------------------
|Item 15. | Exhibits, Consolidated Financial Statement Schedules, and
    Reports on Form 8-K

The following documents are filed as part of this
report:


(1) Financial Statements:






| |   |                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------
| |  | Consolidated Balance Sheets as of March 31, 2005 and 2004                                            
|
| |  | Consolidated Statement of Operations for the years ended
    March 31, 2005, 2004, and 2003          
|
| |  | Consolidated Statement of Stockholders Equity for the
    years ended March 31, 2005, 2004, and 2003
|
| |  | Consolidated Statements of Cash Flows for the years ended
    March 31, 2005, 2004, and 2003         
|
| |  | Notes to Consolidated Financial Statements                                                           
|
| |  | Report of Independent Registered Public Accounting Firm                                              

(2) Financial Statement Schedules:




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(3) Exhibits:


|        |          |             |  |                                                                                                                                                                       
|------- | -------- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |          |            
|No.     |          | Description
|        |          |            
|        | 3.1(1)   |             |  | The Second Amended and Restated Certificate of Incorporation.                                                                                                         
|        | 3.2(4)   |             |  | Certificate of Designation of Series A Junior or
    Participating Preferred Stock.                                                                                   
|        | 3.3(4)   |             |  | Amended and Restated Bylaws.                                                                                                                                          
|        | 4.1(1)   |             |  | Reference is made to Exhibits 3.1, 3.2 and 3.3.                                                                                                                       
|        | 4.2(1)   |             |  | Form of Registrants Common Stock certificate.                                                                                                                        
|        | 4.3(1)   |             |  | Amended and Restated Investor Rights Agreement dated
    June 16, 1999.                                                                                               
|        | 4.4(2)   |             |  | Rights Agreement between Registrant and U.S. Stock Transfer
    Corporation, as Rights Agent, dated February 4, 2003.                                                 
|        | 10.1(1)  |             |  | Form of Indemnification Agreement.                                                                                                                                    
|        | 10.2(1)  |             |  | 1996 Stock Plan.                                                                                                                                                      
|        | 10.3(4)  |             |  | 1999 Employee Stock Purchase Plan.                                                                                                                                    
|        | 10.4(4)  |             |  | 1999 Equity Incentive Plan, as amended and restated
    December 11, 2002.                                                                                            
|        | 10.5(1)  |             |  | Lease between John Arrillaga Survivors Trust and the Richard T.
    Perry Separate Property Trust as Landlord and the Registrant as
    Tenant, dated October 1, 1999.
|        | 10.6(3)  |             |  | Employment Agreement between the Registrant and Stephen Bennion
    dated as of January 1, 2003.                                                                      
|        | 10.7(1)  |             |  | Lease between John Arrillaga Survivors Trust and Richard T.
    Perry Separate Property Trust as Landlord and the Registrant as
    Tenant, dated October 1, 1999.    
|        | 10.8(4)  |             |  | Warrant to Purchase Common Stock issued to Sales. Technologies
    Limited, dated April 4, 2001.                                                                      
|        | 10.9(4)  |             |  | Licensed Works Agreement between the Registrant and
    International Business Machines Corporation, dated
    December 11, 2002.                                     
|        | 10.10(4) |             |  | Licensed Works Agreement Statement of Work between the
    Registrant and International Business Machines Corporation,
    dated December 11, 2002.                   
|        | 10.11(4) |             |  | Professional Services Agreement between the Registrant and GE
    Medical Services, dated June 28, 2002.                                                              
|        | 10.12(4) |             |  | Major Account License Agreement between the Registrant and
    GE Medical Systems, dated June 28, 2002.                                                               
|        | 10.13(4) |             |  | Amendment #1 to Major Account License Agreement
    between the Registrant and GE Medical Systems.                                                                    
|        | 10.14(4) |             |  | Amendment #2 to Major Account License Agreement
    between the Registrant and GE Medical Systems, dated
    October 8, 2002.                                         
|        | 10.15(4) |             |  | Amendment #3 to Major Account License Agreement
    between the Registrant and GE Medical Systems, dated
    March 31, 2003.                                          
|        | 10.16(4) |             |  | Addendum #1 to Professional Services Agreement between
    Registrant and GE Medical Services, dated August 27, 2002.                                                 
|        | 10.17(4) |             |  | Amendment #2 to Professional Services Agreement between
    Registrant and GE Medical Services, dated March 3, 2003.                                                  
|        | 10.18(5) |             |  | Settlement Agreement and General Release between Registrant and
    David Choi, dated August 13, 2003.                                                                
|        | 10.19(5) |             |  | Letter Agreement between Registrant and Sanjay Mittal, Dated
    September 22, 2003.                                                                                  
|        | 10.20    |             |  | 1999 Equity Incentive Plan Stock Option Agreement.                                                                                                                    
|        | 10.21    |             |  | 1999 Equity Incentive Plan Stock Option Agreement (Initial Grant
    to Directors).                                                                                   
|        | 10.22    |             |  | 1999 Equity Incentive Plan Stock Option Agreement (Annual Grant
    to Directors).                                                                                    
|        | 10.23    |             |  | Selectica UK Limited Major Account License Agreement dated
    December 5, 2003.                                                                                      
|        | 10.24    |             |  | Amendment Agreement between MCI Worldcom, Limited and Selectica
    UK Limited, dated December 23, 2004.                                                              

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|        |          |             |  |                                                                                                     
|------- | -------- | ----------- |  | ----------------------------------------------------------------------------------------------------
|Exhibit |          |            
|No.     |          | Description
|        |          |            
|        | 10.25(6) |             |  | Employment Agreement between the Registrant and Vincent G.
    Ostrosky dated as of October 1, 2004.
|        | 21.1(4)  |             |  | Subsidiaries.                                                                                       
|        | 23.1     |             |  | Consent of Independent Registered Public Accounting Firm.                                           
|        | 31.1     |             |  | Certification Pursuant to Section 302 of the Sarbanes-Oxley
    Act of 2002.                        
|        | 31.2     |             |  | Certification Pursuant to Section 302 of the Sarbanes-Oxley
    Act of 2002.                        
|        | 32.1     |             |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley
    Act of 2002.                        
|        | 32.2     |             |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley
    Act of 2002.                        






|    |                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------
|(1) | Previously filed in the Companys Registration Statement
    (No. 333-92545) declared effective on March 9, 2000.
|   
|(2) | Previously filed in the Companys report on Form 8-K
    filed on February 6, 2003.                              
|   
|(3) | Previously filed in the Companys report on Form 10-Q
    filed on February 14, 2003.                            
|   
|(4) | Previously filed in the Companys report on Form 10-K
    filed on June 30, 2003.                                
|   
|(5) | Previously filed in the Companys report on Form 10-Q
    filed on November 11, 2003.                            
|   
|(6) | Previously filed in the Companys report on Form 8-K
    filed on October 21, 2004.                              

Exhibits.




Financial Statement Schedule.




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FINANCIAL STATEMENTS




INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


|                                                                                                     |  |  |      | 
|---------------------------------------------------------------------------------------------------- |  |  | ---- | 
|Consolidated Balance Sheets as of
    March 31, 2005 and 2004                                        |  |  | F-2  | 
|Consolidated Statements of
    Operations  Years ended March 31, 2005, 2004,
    and 2003           |  |  | F-3  | 
|Consolidated Statements of
    Stockholders Equity  Years ended March 31,
    2005, 2004, and 2003 |  |  | F-4  | 
|Consolidated Statements of Cash
    Flows  Years ended March 31, 2005, 2004, and
    2003           |  |  | F-5  | 
|Notes to Consolidated Financial
    Statements                                                       |  |  | F-6  | 
|Report of Independent Registered Public
    Accounting Firm                                          |  |  | F-31 | 

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SELECTICA, INC.





CONSOLIDATED BALANCE SHEETS


|                                                                                             |                                                                                                                                         |                   |          |        |      |   |          |         | 
|-------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------- | ----------------- | -------- | ------ | ---- | - | -------- | ------- | 
|                                                                                             |                                                                                                                                         | March 31,         |         
|                                                                                             |                                                                                                                                         |                   |         
|                                                                                             |                                                                                                                                         | 2005              |          |        | 2004 |  
|                                                                                             |                                                                                                                                         |                   |          |        |      |  
|                                                                                             |                                                                                                                                         | (in thousands,    |         
|                                                                                             |                                                                                                                                         | except par value) |         
|Assets                                                                                       |                                                                                                                                         |                   |          |        |      |   |          |        
|Current assets:                                                                              |                                                                                                                                         |                   |          |        |      |   |          |        
|                                                                                             | Cash and cash equivalents                                                                                                               |                   | $        | 29,360 |      |   | $        | 28,728  | 
|                                                                                             | Short-term investments                                                                                                                  |                   |          | 63,903 |      |   |          | 68,575  | 
|                                                                                             | Accounts receivable, net of allowance for doubtful accounts of
    $149 and $115, respectively                                          |                   |          | 2,811  |      |   |          | 697     | 
|                                                                                             | Prepaid expenses and other current assets                                                                                               |                   |          | 2,093  |      |   |          | 2,597   | 
|                                                                                             | Investments, restricted  short term                                                                                                    |                   |          | 182    |      |   |          |        | 
|                                                                                             |                                                                                                                                         |                   |          |        |      |  
|                                                                                             | Total current assets                                                                                                                    |                   |          | 98,349 |      |   |          | 100,597 | 
|Property and equipment, net                                                                  |                                                                                                                                         |                   | 3,158    |        |      |   | 3,620    |        
|Other assets                                                                                 |                                                                                                                                         |                   | 511      |        |      |   | 548      |        
|Long term investments                                                                        |                                                                                                                                         |                   | 5,606    |        |      |   | 21,471   |        
|Investments, restricted  long term                                                          |                                                                                                                                         |                   |         |        |      |   | 180      |        
|                                                                                             |                                                                                                                                         |                   |          |        |      |  
|Total assets                                                                                 |                                                                                                                                         | $                 | 107,624  |        |      | $ | 126,416  |        
|                                                                                             |                                                                                                                                         |                   |          |        |      |  
|                                                                                            
|Liabilities and Stockholders Equity                                                         |                                                                                                                                         |                   |          |        |      |   |          |        
|Current liabilities:                                                                         |                                                                                                                                         |                   |          |        |      |   |          |        
|                                                                                             | Accounts payable                                                                                                                        |                   | $        | 2,261  |      |   | $        | 644     | 
|                                                                                             | Accrued payroll and related liabilities                                                                                                 |                   |          | 1,935  |      |   |          | 1,726   | 
|                                                                                             | Other accrued liabilities                                                                                                               |                   |          | 1,472  |      |   |          | 2,769   | 
|                                                                                             | Deferred revenues                                                                                                                       |                   |          | 2,802  |      |   |          | 7,757   | 
|                                                                                             |                                                                                                                                         |                   |          |        |      |  
|                                                                                             | Total current liabilities                                                                                                               |                   |          | 8,470  |      |   |          | 12,896  | 
|                                                                                             |                                                                                                                                         |                   |          |        |      |  
|Other long term liabilities                                                                  |                                                                                                                                         |                   | 1,434    |        |      |   | 1,482    |        
|                                                                                             |                                                                                                                                         |                   |          |        |      |  
|Commitments and contingencies                                                                |                                                                                                                                         |                   |          |        |      |   |          |        
|Stockholders equity:                                                                        |                                                                                                                                         |                   |          |        |      |   |          |        
|Preferred stock, $0.0001 par value:                                                          |                                                                                                                                         |                   |          |        |      |   |          |        
|                                                                                             | Authorized: 25,000 shares at March 31, 2005 and 2004;
    None issued and outstanding                                                   |                   |          |       |      |   |          |        | 
|Common stock, $0.0001 par value:                                                             |                                                                                                                                         |                   |          |        |      |   |          |        
|                                                                                             | Authorized: 150,000 shares at March 31, 2005 and 2004
    Issued: 39,234 and 38,731 shares at March 31, 2005 and
    2004, respectively |                   |          |        |      |   |          |         | 
|                                                                                             | Outstanding: 32,796 and 32,495 shares at March 31,
    2005 and 2004, respectively                                                      |                   |          | 4      |      |   |          | 4       | 
|Additional paid-in capital                                                                   |                                                                                                                                         |                   | 292,616  |        |      |   | 291,055  |        
|Deferred compensation                                                                        |                                                                                                                                         |                   | (91      | )      |      |   | (158     | )      
|Accumulated deficit                                                                          |                                                                                                                                         |                   | (172,613 | )      |      |   | (157,960 | )      
|Accumulated other comprehensive income                                                       |                                                                                                                                         |                   | (448     | )      |      |   | 47       |        
|Treasury stock at cost  6,438 shares and 6,236
    at March 31, 2005 and 2004, respectively |                                                                                                                                         |                   | (21,748  | )      |      |   | (20,950  | )      
|                                                                                             |                                                                                                                                         |                   |          |        |      |  
|Total stockholders equity                                                                   |                                                                                                                                         |                   | 97,720   |        |      |   | 112,038  |        
|                                                                                             |                                                                                                                                         |                   |          |        |      |  
|Total liabilities and stockholders equity                                                   |                                                                                                                                         | $                 | 107,624  |        |      | $ | 126,416  |        
|                                                                                             |                                                                                                                                         |                   |          |        |      |  



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SELECTICA, INC.





CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                                                                   |                            |                                          |         |        |        |   |         |        |        |   |         |        |        | 
|-------------------------------------------------------------------------------------------------- | -------------------------- | ---------------------------------------- | ------- | ------ | ------ | - | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                                                                                   |                            | Years Ended March 31,                    |        
|                                                                                                   |                            |                                          |        
|                                                                                                   |                            | 2005                                     |         |        | 2004   |   |         | 2003   |       
|                                                                                                   |                            |                                          |         |        |        |   |         |        |       
|                                                                                                   |                            | (in thousands, except per share amounts) |        
|Revenues:                                                                                          |                            |                                          |         |        |        |   |         |        |        |   |         |       
|                                                                                                   | License                    |                                          | $       | 9,133  |        |   | $       | 16,935 |        |   | $       | 10,218 |       
|                                                                                                   | Services                   |                                          |         | 21,987 |        |   |         | 23,089 |        |   |         | 25,350 |       
|                                                                                                   |                            |                                          |         |        |        |   |         |        |       
|                                                                                                   |                            | Total revenues                           |         |        | 31,120 |   |         |        | 40,024 |   |         |        | 35,568 | 
|Cost of revenues:                                                                                  |                            |                                          |         |        |        |   |         |        |        |   |         |       
|                                                                                                   | License                    |                                          |         | 819    |        |   |         | 1,410  |        |   |         | 1,185  |       
|                                                                                                   | Services                   |                                          |         | 12,428 |        |   |         | 16,827 |        |   |         | 18,518 |       
|                                                                                                   |                            |                                          |         |        |        |   |         |        |       
|                                                                                                   |                            | Total cost of revenues                   |         |        | 13,247 |   |         |        | 18,237 |   |         |        | 19,703 | 
|                                                                                                   |                            |                                          |         |        |        |   |         |        |       
|Gross profit                                                                                       |                            |                                          | 17,873  |        |        |   | 21,787  |        |        |   | 15,865  |       
|                                                                                                   |                            |                                          |         |        |        |   |         |        |       
|                                                                                                   | Research and development   |                                          |         | 12,359 |        |   |         | 13,474 |        |   |         | 13,202 |       
|                                                                                                   | Sales and marketing        |                                          |         | 11,861 |        |   |         | 14,491 |        |   |         | 19,368 |       
|                                                                                                   | General and administrative |                                          |         | 10,396 |        |   |         | 5,385  |        |   |         | 6,068  |       
|                                                                                                   |                            |                                          |         |        |        |   |         |        |       
|Total operating expenses                                                                           |                            |                                          | 34,616  |        |        |   | 33,350  |        |        |   | 38,638  |       
|                                                                                                   |                            |                                          |         |        |        |   |         |        |       
|Loss from operations                                                                               |                            |                                          | (16,743 | )      |        |   | (11,563 | )      |        |   | (22,773 | )     
|Other income, net                                                                                  |                            |                                          | 82      |        |        |   | 1,092   |        |        |   |        |       
|Interest income                                                                                    |                            |                                          | 1,891   |        |        |   | 1,625   |        |        |   | 2,999   |       
|                                                                                                   |                            |                                          |         |        |        |   |         |        |       
|Loss before provision for income taxes                                                             |                            |                                          | (14,770 | )      |        |   | (8,846  | )      |        |   | (19,774 | )     
|Income tax benefit                                                                                 |                            |                                          | 117     |        |        |   |        |        |        |   |        |       
|                                                                                                   |                            |                                          |         |        |        |   |         |        |       
|Loss before cumulative effect of an accounting change to adopt
    FAS 142                         |                            |                                          | (14,653 | )      |        |   | (8,846  | )      |        |   | (19,774 | )     
|Cumulative effect of an accounting change to adopt FAS 142                                         |                            |                                          |        |        |        |   |        |        |        |   | (9,974  | )     
|                                                                                                   |                            |                                          |         |        |        |   |         |        |       
|Net loss                                                                                           |                            | $                                        | (14,653 | )      |        | $ | (8,846  | )      |        | $ | (29,748 | )     
|                                                                                                   |                            |                                          |         |        |        |   |         |        |       
|Basic and diluted loss per share:                                                                  |                            |                                          |         |        |        |   |         |        |        |   |         |       
|Loss before cumulative effect of an accounting change to adopt
    FAS 142                         |                            | $                                        | (0.45   | )      |        | $ | (0.28   | )      |        | $ | (0.61   | )     
|Cumulative effect of an accounting change to adopt FAS 142                                         |                            |                                          |        |        |        |   |        |        |        |   | (0.31   | )     
|                                                                                                   |                            |                                          |         |        |        |   |         |        |       
|Basic and diluted net loss per share                                                               |                            | $                                        | (0.45   | )      |        | $ | (0.28   | )      |        | $ | (0.92   | )     
|                                                                                                   |                            |                                          |         |        |        |   |         |        |       
|Weighted-average shares of common stock used in computing basic
    and diluted net loss per share |                            |                                          | 32,665  |        |        |   | 31,165  |        |        |   | 32,219  |       



F-3



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SELECTICA, INC.





CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY


|                                                                                                   |                          |                          |        |   |            |   |   |          |  |             |              |       |  |             |               |   |         |                |      |        |       |   |               |         |   |               |      |      |        |  |        |      |  |   |         |   |  |   |         |         |   |   |         |         |         |  
|-------------------------------------------------------------------------------------------------- | ------------------------ | ------------------------ | ------ | - | ---------- | - | - | -------- |  | ----------- | ------------ | ----- |  | ----------- | ------------- | - | ------- | -------------- | ---- | ------ | ----- | - | ------------- | ------- | - | ------------- | ---- | ---- | ------ |  | ------ | ---- |  | - | ------- | - |  | - | ------- | ------- | - | - | ------- | ------- | ------- | -
|                                                                                                   |                          |                          |        |   |            |   |   |          |  |             |              |       |  | Accumulated |               |   |         |                |      |        |       |   |              
|                                                                                                   |                          |                          |        |   |            |   |   |          |  |             |              | Other |  |             |               |   |         |                |     
|                                                                                                   |                          | Common Stock             |        |   | Additional |   |   |          |  | Stockholder |              |       |  |             | Comprehensive |   |         | Treasury Stock |      |        | Total |   |               |        
|                                                                                                   |                          |                          |        |   | Paid-In    |   |   | Deferred |  |             | Notes        |       |  | Accumulated |               |   | Income  |                |      |        |       |   | Stockholders |         |   | Comprehensive |     
|                                                                                                   |                          | Shares                   |        |   | Amount     |   |   | Capital  |  |             | Compensation |       |  | Receivable  |               |   | Deficit |                |      | (Loss) |       |   | Shares        |         |   | Amount        |      |      | Equity |  |        | Loss | 
|                                                                                                   |                          |                          |        |   |            |   |   |          |  |             |              |       |  |             |               |   |         |                |      |        |       |   |               |         |   |               |      |      |        |  |        |      | 
|                                                                                                   |                          | (in thousands)           |       
|Balance at March 31, 2002                                                                          |                          |                          | 36,288 |   |            | $ | 4 |          |  | $           | 283,847      |       |  | $           | (4,032        | ) |         | $              | (880 | )      |       | $ | (119,366      | )       |   | $             | 29   |      |        |  | (1,800 | )    |  | $ | (6,250  | ) |  | $ | 153,352 |         |   |   |         |        
|Repurchase of common stock                                                                         |                          |                          |       |   |            |   |  |          |  |             |             |       |  |             |              |   |         |                |     |        |       |   |              |         |   |               |     |      |        |  | (4,052 | )    |  |   | (13,422 | ) |  |   | (13,422 | )       |   |   |         |        
|Exercise of stock options by employees, net of repurchase                                          |                          |                          | 177    |   |            |   |  |          |  |             | 309          |       |  |             |              |   |         |                |     |        |       |   |              |         |   |               |     |      |        |  |       |      |  |   |        |   |  |   | 309     |         |   |   |         |        
|Issuance of common stock for services                                                              |                          |                          | 18     |   |            |   |  |          |  |             | 48           |       |  |             |              |   |         |                |     |        |       |   |              |         |   |               |     |      |        |  |       |      |  |   |        |   |  |   | 48      |         |   |   |         |        
|Net option cancellation                                                                            |                          |                          |       |   |            |   |  |          |  |             | (376         | )     |  |             | 376           |   |         |                |     |        |       |   |              |         |   |               |     |      |        |  |       |      |  |   |        |   |  |   |        |         |   |   |         |        
|Shares issued in connection with ESPP                                                              |                          |                          | 137    |   |            |   |  |          |  |             | 370          |       |  |             |              |   |         |                |     |        |       |   |              |         |   |               |     |      |        |  |       |      |  |   |        |   |  |   | 370     |         |   |   |         |        
|Compensation expense related to acceleration of stock options
    for certain terminated employees |                          |                          |       |   |            |   |  |          |  |             | 249          |       |  |             |              |   |         |                |     |        |       |   |              |         |   |               |     |      |        |  |       |      |  |   |        |   |  |   | 249     |         |   |   |         |        
|Compensation expense related to variable accounting of exercised
    options                       |                          |                          |       |   |            |   |  |          |  |             | 7            |       |  |             |              |   |         |                |     |        |       |   |              |         |   |               |     |      |        |  |       |      |  |   |        |   |  |   | 7       |         |   |   |         |        
|Net deferred compensation related to options granted at less
    than FMV                          |                          |                          |       |   |            |   |  |          |  |             |             |       |  |             | 1,787         |   |         |                |     |        |       |   |              |         |   |               |     |      |        |  |       |      |  |   |        |   |  |   | 1,787   |         |   |   |         |        
|Repayment of shareholders notes receivable                                                        |                          |                          |       |   |            |   |  |          |  |             |             |       |  |             |              |   |         |                | 150  |        |       |   |              |         |   |               |     |      |        |  |       |      |  |   |        |   |  |   | 150     |         |   |   |         |        
|Comprehensive loss:                                                                                |                          |                          |        |   |            |   |   |          |  |             |              |       |  |             |               |   |         |                |      |        |       |   |               |         |   |               |      |      |        |  |        |      |  |   |         |   |  |   |         |         |   |   |         |        
|                                                                                                   | Other comprehensive loss |                          |        |  |            |   |   |         |  |             |              |      |  |             |               |  |         |                |      |       |       |   |               |        |   |               |      | (22  | )      |  |        |     |  |   |         |  |  |   |         | (22     | ) |   | $       | (22     | )      
|                                                                                                   | Net loss                 |                          |        |  |            |   |   |         |  |             |              |      |  |             |               |  |         |                |      |       |       |   |               | (29,748 | ) |               |      |     |        |  |        |     |  |   |         |  |  |   |         | (29,748 | ) |   |         | (29,748 | )      
|                                                                                                   |                          |                          |        |   |            |   |   |          |  |             |              |       |  |             |               |   |         |                |      |        |       |   |               |         |   |               |      |      |        |  |        |      | 
|                                                                                                   |                          | Total Comprehensive loss |        |   |            |   |   |          |  |             |              |       |  |             |               |   |         |                |      |        |       |   |               |         |   |               |      |      |        |  |        |      |  |   |         |   |  |   |         |         |   |   |         | $       | (29,770 | )
|                                                                                                   |                          |                          |        |   |            |   |   |          |  |             |              |       |  |             |               |   |         |                |      |        |       |   |               |         |   |               |      |      |        |  |        |      | 
|Balance at March 31, 2003                                                                          |                          |                          | 36,620 |   |            | $ | 4 |          |  | $           | 284,454      |       |  | $           | (1,869        | ) |         | $              | (730 | )      |       | $ | (149,114      | )       |   | $             | 7    |      |        |  | (5,852 | )    |  | $ | (19,672 | ) |  | $ | 113,080 |         |   |   |         |        
|Repurchase of common stock                                                                         |                          |                          |       |   |            |   |  |          |  |             |             |       |  |             |              |   |         |                |     |        |       |   |              |         |   |               |     |      |        |  | (384   | )    |  |   | (1,278  | ) |  |   | (1,278  | )       |   |   |         |        
|Exercise of stock options by employees, net of repurchase                                          |                          |                          | 1,984  |   |            |   |  |          |  |             | 6,163        |       |  |             |              |   |         |                |     |        |       |   |              |         |   |               |     |      |        |  |       |      |  |   |        |   |  |   | 6,163   |         |   |   |         |        
|Issuance of common stock for services                                                              |                          |                          | 2      |   |            |   |  |          |  |             | 9            |       |  |             |              |   |         |                |     |        |       |   |              |         |   |               |     |      |        |  |       |      |  |   |        |   |  |   | 9       |         |   |   |         |        
|Net option cancellation                                                                            |                          |                          |       |   |            |   |  |          |  |             | (604         | )     |  |             | 604           |   |         |                |     |        |       |   |              |         |   |               |     |      |        |  |       |      |  |   |        |   |  |   |        |         |   |   |         |        
|Shares issued in connection with ESPP                                                              |                          |                          | 94     |   |            |   |  |          |  |             | 206          |       |  |             |              |   |         |                |     |        |       |   |              |         |   |               |     |      |        |  |       |      |  |   |        |   |  |   | 206     |         |   |   |         |        
|Compensation expense related to acceleration of stock options
    for certain terminated employees |                          |                          |       |   |            |   |  |          |  |             | 234          |       |  |             |              |   |         |                |     |        |       |   |              |         |   |               |     |      |        |  |       |      |  |   |        |   |  |   | 234     |         |   |   |         |        
|Compensation expense related to variable accounting of exercised
    options                       |                          |                          |       |   |            |   |  |          |  |             | 149          |       |  |             |              |   |         |                |     |        |       |   |              |         |   |               |     |      |        |  |       |      |  |   |        |   |  |   | 149     |         |   |   |         |        
|Net deferred compensation related to options granted at less
    than FMV                          |                          |                          |       |   |            |   |  |          |  |             |             |       |  |             | 1,107         |   |         |                |     |        |       |   |              |         |   |               |     |      |        |  |       |      |  |   |        |   |  |   | 1,107   |         |   |   |         |        
|Compensation expense related to modification of stock options                                      |                          |                          |       |   |            |   |  |          |  |             | 444          |       |  |             |              |   |         |                |     |        |       |   |              |         |   |               |     |      |        |  |       |      |  |   |        |   |  |   | 444     |         |   |   |         |        
|Exercise of warrant                                                                                |                          |                          | 31     |   |            |   |  |          |  |             |             |       |  |             |              |   |         |                |     |        |       |   |              |         |   |               |     |      |        |  |       |      |  |   |        |   |  |   |        |         |   |   |         |        
|Repayment of shareholders notes receivable                                                        |                          |                          |       |   |            |   |  |          |  |             |             |       |  |             |              |   |         |                | 730  |        |       |   |              |         |   |               |     |      |        |  |       |      |  |   |        |   |  |   | 730     |         |   |   |         |        
|Comprehensive loss:                                                                                |                          |                          |        |   |            |   |   |          |  |             |              |       |  |             |               |   |         |                |      |        |       |   |               |         |   |               |      |      |        |  |        |      |  |   |         |   |  |   |         |         |   |   |         |        
|                                                                                                   | Other comprehensive loss |                          |        |  |            |   |   |         |  |             |              |      |  |             |               |  |         |                |      |       |       |   |               |        |   |               |      | 40   |        |  |        |     |  |   |         |  |  |   |         | 40      |   |   |         | 40      |        
|                                                                                                   | Net loss                 |                          |        |  |            |   |   |         |  |             |              |      |  |             |               |  |         |                |      |       |       |   |               | (8,846  | ) |               |      |     |        |  |        |     |  |   |         |  |  |   |         | (8,846  | ) |   |         | (8,846  | )      
|                                                                                                   |                          |                          |        |   |            |   |   |          |  |             |              |       |  |             |               |   |         |                |      |        |       |   |               |         |   |               |      |      |        |  |        |      | 
|Balance at March 31, 2004                                                                          |                          |                          | 38,731 |   |            | $ | 4 |          |  | $           | 291,055      |       |  | $           | (158          | ) |         | $              | 0    |        |       | $ | (157,960      | )       |   | $             | 47   |      |        |  | (6,236 | )    |  | $ | (20,950 | ) |  | $ | 112,038 |         |   | $ | (8,806  | )      
|                                                                                                   |                          |                          |        |   |            |   |   |          |  |             |              |       |  |             |               |   |         |                |      |        |       |   |               |         |   |               |      |      |        |  |        |      | 
|Repurchase of common stock                                                                         |                          |                          |       |   |            |   |  |          |  |             |             |       |  |             |              |   |         |                |     |        |       |   |              |         |   |               |     |      |        |  | (202   | )    |  |   | (798    | ) |  |   | (798    | )       |   |   |         |        
|Exercise of stock options by employees, net of repurchase                                          |                          |                          | 389    |   |            |   |  |          |  |             | 1,123        |       |  |             |              |   |         |                |     |        |       |   |              |         |   |               |     |      |        |  |       |      |  |   |        |   |  |   | 1,123   |         |   |   |         |        
|Issuance of restricted common stock for services                                                   |                          |                          | 15     |   |            |   |  |          |  |             | 51           |       |  |             | (51           | ) |         |                |     |        |       |   |              |         |   |               |     |      |        |  |       |      |  |   |        |   |  |   |        |         |   |   |         |        
|Net option cancellation                                                                            |                          |                          |       |   |            |   |  |          |  |             | 13           |       |  |             | (13           | ) |         |                |     |        |       |   |              |         |   |               |     |      |        |  |       |      |  |   |        |   |  |   |        |         |   |   |         |        
|Shares issued in connection with ESPP                                                              |                          |                          | 99     |   |            |   |  |          |  |             | 237          |       |  |             |              |   |         |                |     |        |       |   |              |         |   |               |     |      |        |  |       |      |  |   |        |   |  |   | 237     |         |   |   |         |        
|Net deferred compensation related to options granted at less
    than FMV                          |                          |                          |       |   |            |   |  |          |  |             |             |       |  |             | 131           |   |         |                |     |        |       |   |              |         |   |               |     |      |        |  |       |      |  |   |        |   |  |   | 131     |         |   |   |         |        
|Compensation expense related to modification of stock options
    for terminated employee          |                          |                          |       |   |            |   |  |          |  |             | 137          |       |  |             |              |   |         |                |     |        |       |   |              |         |   |               |     |      |        |  |       |      |  |   |        |   |  |   | 137     |         |   |   |         |        
|Comprehensive loss:                                                                                |                          |                          |        |   |            |   |   |          |  |             |              |       |  |             |               |   |         |                |      |        |       |   |               |         |   |               |      |      |        |  |        |      |  |   |         |   |  |   |         |         |   |   |         |        
|                                                                                                   | Other comprehensive loss |                          |        |  |            |   |   |         |  |             |              |      |  |             |               |  |         |                |      |       |       |   |               |        |   |               |      | (495 | )      |  |        |     |  |   |         |  |  |   |         | (495    | ) |   |         | (495    | )      
|                                                                                                   | Net loss                 |                          |        |  |            |   |   |         |  |             |              |      |  |             |               |  |         |                |      |       |       |   |               | (14,653 | ) |               |      |     |        |  |        |     |  |   |         |  |  |   |         | (14,653 | ) |   |         | (14,652 | )      
|                                                                                                   |                          |                          |        |   |            |   |   |          |  |             |              |       |  |             |               |   |         |                |      |        |       |   |               |         |   |               |      |      |        |  |        |      | 
|Balance at March 31, 2005                                                                          |                          |                          | 39,234 |   |            | $ | 4 |          |  | $           | 292,616      |       |  | $           | (91           | ) |         | $              | 0    |        |       | $ | (172,613      | )       |   | $             | (448 | )    |        |  | (6,438 | )    |  | $ | (21,748 | ) |  | $ | 97,720  |         |   | $ | (15,147 | )      
|                                                                                                   |                          |                          |        |   |            |   |   |          |  |             |              |       |  |             |               |   |         |                |      |        |       |   |               |         |   |               |      |      |        |  |        |      | 



F-4



---



##### Table of Contents



SELECTICA, INC.





CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                                                |                                                                               |                                           |         |       |        |   |          |       |        |   |          |       |       |  
|------------------------------------------------------------------------------- | ----------------------------------------------------------------------------- | ----------------------------------------- | ------- | ----- | ------ | - | -------- | ----- | ------ | - | -------- | ----- | ----- | -
|                                                                                |                                                                               | Years Ended March 31,                     |        
|                                                                                |                                                                               |                                           |        
|                                                                                |                                                                               | 2005                                      |         |       | 2004   |   |          | 2003  |       
|                                                                                |                                                                               |                                           |         |       |        |   |          |       |       
|                                                                                |                                                                               | (in thousands)                            |        
|Operating activities:                                                           |                                                                               |                                           |         |       |        |   |          |       |        |   |          |      
|Net loss                                                                        |                                                                               | $                                         | (14,653 | )     |        | $ | (8,846   | )     |        | $ | (29,748  | )    
|Adjustments to reconcile net loss to net cash used in operating
    activities: |                                                                               |                                           |         |       |        |   |          |       |        |   |          |      
|                                                                                | Depreciation                                                                  |                                           |         | 1,285 |        |   |          | 2,104 |        |   |          | 3,505 |      
|                                                                                | Gain and loss on disposition of property and equipment                        |                                           |         | (25   | )      |   |          | 107   |        |   |          | (5    | )    
|                                                                                | Amortization of deferred compensation                                         |                                           |         | 131   |        |   |          | 1,107 |        |   |          | 1,787 |      
|                                                                                | Cumulative effect of an accounting change to adopt FAS 142                    |                                           |         |      |        |   |          |      |        |   |          | 9,974 |      
|                                                                                | Issuance of common stock in exchange for services                             |                                           |         |      |        |   |          | 9     |        |   |          | 48    |      
|                                                                                | Compensation expenses related to variable accounting of
    exercised options |                                           |         |      |        |   |          | 149   |        |   |          | 7     |      
|                                                                                | Accelerated vesting of stock options to employees                             |                                           |         | 16    |        |   |          | 234   |        |   |          | 249   |      
|                                                                                | Compensation expenses related to modification of options                      |                                           |         | 121   |        |   |          | 444   |        |   |          |      |      
|                                                                                | Changes in assets and liabilities:                                            |                                           |         |       |        |   |          |       |        |   |          |       |      
|                                                                                |                                                                               | Accounts receivable                       |         |       | (2,114 | ) |          |       | 2,788  |   |          |       | 254   |  
|                                                                                |                                                                               | Prepaid expenses and other current assets |         |       | 504    |   |          |       | 1,266  |   |          |       | (203  | )
|                                                                                |                                                                               | Other assets                              |         |       | 37     |   |          |       | 162    |   |          |       | 11    |  
|                                                                                |                                                                               | Accounts payable                          |         |       | 1,617  |   |          |       | (292   | ) |          |       | (389  | )
|                                                                                |                                                                               | Accrued payroll and related liabilities   |         |       | 209    |   |          |       | (206   | ) |          |       | (785  | )
|                                                                                |                                                                               | Other accrued and long term liabilities   |         |       | (1,345 | ) |          |       | (464   | ) |          |       | 114   |  
|                                                                                |                                                                               | Deferred revenue                          |         |       | (4,955 | ) |          |       | (8,729 | ) |          |       | 8,397 |  
|                                                                                |                                                                               |                                           |         |       |        |   |          |       |       
|Net cash used for operating activities                                          |                                                                               |                                           | (19,172 | )     |        |   | (10,167  | )     |        |   | (6,784   | )    
|Investing activities                                                            |                                                                               |                                           |         |       |        |   |          |       |        |   |          |      
|Purchase of capital assets                                                      |                                                                               |                                           | (880    | )     |        |   | (573     | )     |        |   | (1,454   | )    
|Proceeds from disposition of property and equipment                             |                                                                               |                                           | 83      |       |        |   | 16       |       |        |   | 5        |      
|Proceeds and investment in restricted investments                               |                                                                               |                                           | (2      | )     |        |   | 1,286    |       |        |   |         |      
|Purchase of short-term investments                                              |                                                                               |                                           | (34,043 | )     |        |   | (109,045 | )     |        |   | (108,494 | )    
|Purchase of long-term investments                                               |                                                                               |                                           | (38,502 | )     |        |   | (77,037  | )     |        |   | (70,299  | )    
|Proceeds from maturities of short-term investments                              |                                                                               |                                           | 59,913  |       |        |   | 126,834  |       |        |   | 136,204  |      
|Proceeds from maturities of long-term investments                               |                                                                               |                                           | 32,674  |       |        |   | 36,600   |       |        |   | 65,651   |      
|                                                                                |                                                                               |                                           |         |       |        |   |          |       |       
|Net cash provided by (used for) investing activities                            |                                                                               |                                           | 19,243  |       |        |   | (21,919  | )     |        |   | 21,613   |      
|Financing activities                                                            |                                                                               |                                           |         |       |        |   |          |       |        |   |          |      
|Purchase of treasury stock                                                      |                                                                               |                                           | (798    | )     |        |   | (1,278   | )     |        |   | (13,422  | )    
|Proceeds from stockholder notes receivable                                      |                                                                               |                                           |        |       |        |   | 730      |       |        |   | 150      |      
|Proceeds from issuance of common stock                                          |                                                                               |                                           | 1,359   |       |        |   | 6,369    |       |        |   | 679      |      
|                                                                                |                                                                               |                                           |         |       |        |   |          |       |       
|Net cash provided by (used for) financing activities                            |                                                                               |                                           | 561     |       |        |   | 5,821    |       |        |   | (12,593  | )    
|                                                                                |                                                                               |                                           |         |       |        |   |          |       |       
|Net increase (decrease) in cash and cash equivalents                            |                                                                               |                                           | 632     |       |        |   | (26,265  | )     |        |   | 2,236    |      
|Cash and cash equivalents at beginning of the period                            |                                                                               |                                           | 28,728  |       |        |   | 54,993   |       |        |   | 52,757   |      
|                                                                                |                                                                               |                                           |         |       |        |   |          |       |       
|Cash and cash equivalents at end of the period                                  |                                                                               | $                                         | 29,360  |       |        | $ | 28,728   |       |        | $ | 54,993   |      
|                                                                                |                                                                               |                                           |         |       |        |   |          |       |       
|Supplemental disclosure of non-cash financing activities                        |                                                                               |                                           |         |       |        |   |          |       |        |   |          |      
|Deferred compensation related to cancelled stock options                        |                                                                               | $                                         | 201     |       |        | $ | 574      |       |        | $ | 376      |      
|Change in unrealized gain (loss) on available for sales
    securities          |                                                                               | $                                         | (495    | )     |        | $ | 40       |       |        | $ | (22      | )    



F-5



---



##### Table of Contents



SELECTICA, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




|   |                            
|-- | ---------------------------
|1. | Organization and Operations





|   |                                           
|-- | ------------------------------------------
|2. | Summary of Significant Accounting Policies



| |                            
| | ---------------------------
| | Principles of Consolidation





| |                 
| | ----------------
| | Use of Estimates





| |                              
| | -----------------------------
| | Foreign Currency Transactions





| |                              
| | -----------------------------
| | Concentrations of Credit Risk





| |                                 
| | --------------------------------
| | Cash Equivalents and Investments



F-6



---



##### Table of Contents



SELECTICA, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








| |                                                        
| | -------------------------------------------------------
| | Accounts Receivable and Allowance for Doubtful Accounts



|            |  |                |       |  |         |   |     |             |  |          |            |  |         |           |     |  |  |   |     | 
|----------- |  | -------------- | ----- |  | ------- | - | --- | ----------- |  | -------- | ---------- |  | ------- | --------- | --- |  |  | - | --- | 
|            |  | Balance at     |       |  | Charged |   |     |             |  | Reversal |            |  | Balance |          
|            |  | Beginning      |       |  | Against |   |     | Amounts     |  |          | Benefit to |  |         | at End of |    
|Fiscal Year |  | of Period      |       |  | Revenue |   |     | Written Off |  |          | Revenue    |  |         | Period    |    
|            |  |                |       |  |         |   |     |             |  |          |            |  |         |           |    
|            |  | (In thousands) |      
|2005        |  | $              | 115   |  |         | $ | 228 |             |  | $        |           |  |         | $         | 194 |  |  | $ | 149 | 
|2004        |  | $              | 741   |  |         | $ | 58  |             |  | $        | 241        |  |         | $         | 443 |  |  | $ | 115 | 
|2003        |  | $              | 1,194 |  |         | $ |    |             |  | $        | 453        |  |         | $         |    |  |  | $ | 741 | 





| |                       
| | ----------------------
| | Property and Equipment





| |                    
| | -------------------
| | Revenue Recognition



F-7



---



##### Table of Contents



SELECTICA, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Arrangements consisting of license and maintenance only.


Arrangements consisting of license, maintenance and other
services.






F-8



---



##### Table of Contents



SELECTICA, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)
















Arrangements consisting of consulting services.




| |                        
| | -----------------------
| | Customer Concentrations



F-9



---



##### Table of Contents



SELECTICA, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|           |  |           |    |   |      |  |    |      |  |  |    |  
|---------- |  | --------- | -- | - | ---- |  | -- | ---- |  |  | -- | -
|           |  | March 31, |   
|           |  |           |   
|           |  | 2005      |    |   | 2004 |  |    | 2003 | 
|           |  |           |    |   |      |  |    |      | 
|Customer A |  |           | 23 | % |      |  | 39 | %    |  |  | *  |  
|Customer B |  |           | 14 | % |      |  | 20 | %    |  |  | 25 | %
|Customer C |  |           | 12 | % |      |  | *  |      |  |  | *  |  
|Customer D |  |           | 11 | % |      |  | *  |      |  |  | *  |  
|Customer E |  |           | *  |   |      |  | *  |      |  |  | 14 | %






|  |                                               
|- | ----------------------------------------------
|* | Revenues were less than 10% of total revenues.



|           |  |           |    |   |      |  |    |  
|---------- |  | --------- | -- | - | ---- |  | -- | -
|           |  | March 31, |   
|           |  |           |   
|           |  | 2005      |    |   | 2004 | 
|           |  |           |    |   |      | 
|Customer A |  |           | 45 | % |      |  | *  |  
|Customer B |  |           | 26 | % |      |  | *  |  
|Customer C |  |           | 10 | % |      |  | *  |  
|Customer D |  |           | *  |   |      |  | 47 | %
|Customer E |  |           | *  |   |      |  | 18 | %
|Customer F |  |           | *  |   |      |  | 12 | %






|  |                                                                 
|- | ----------------------------------------------------------------
|* | Customer account was less than 10% of gross accounts receivable.



| |                                
| | -------------------------------
| | Warranties and Indemnifications







| |                    
| | -------------------
| | Advertising Expense



F-10



---



##### Table of Contents



SELECTICA, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                  
| | -----------------
| | Development Costs





| |                                               
| | ----------------------------------------------
| | Accumulated Other Comprehensive Income or Loss





| |                         
| | ------------------------
| | Stock-Based Compensation





| |                                                                   
| | ------------------------------------------------------------------
| | Pro Forma Disclosure of the Effect of Stock-Based
    Compensation





|                                          |  |           |       |   |      |   |       |      |  |   |       |  
|----------------------------------------- |  | --------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                          |  | March 31, |      
|                                          |  |           |      
|                                          |  | 2005      |       |   | 2004 |   |       | 2003 | 
|                                          |  |           |       |   |      |   |       |      | 
|Risk-free interest rate                   |  |           | 2.64  | % |      |   | 2.83  | %    |  |   | 2.91  | %
|Dividend yield                            |  |           | 0.00  | % |      |   | 0.00  | %    |  |   | 0.00  | %
|Expected volatility                       |  |           | 65.93 | % |      |   | 64.76 | %    |  |   | 71.54 | %
|Expected option life in years             |  |           | 1.92  |   |      |   | 1.70  |      |  |   | 1.28  |  
|Weighted average fair value at grant date |  | $         | 1.81  |   |      | $ | 1.70  |      |  | $ | 2.45  |  



F-11



---



##### Table of Contents



SELECTICA, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                          |  |           |       |   |      |   |       |      |  |   |       |  
|----------------------------------------- |  | --------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                          |  | March 31, |      
|                                          |  |           |      
|                                          |  | 2005      |       |   | 2004 |   |       | 2003 | 
|                                          |  |           |       |   |      |   |       |      | 
|Risk-free interest rate                   |  |           | 3.31  | % |      |   | 2.89  | %    |  |   | 2.75  | %
|Dividend yield                            |  |           | 0.00  | % |      |   | 0.00  | %    |  |   | 0.00  | %
|Expected volatility                       |  |           | 68.29 | % |      |   | 42.77 | %    |  |   | 75.15 | %
|Expected option life in years             |  |           | 3.85  |   |      |   | 3.86  |      |  |   | 4.00  |  
|Weighted average fair value at grant date |  | $         | 1.90  |   |      | $ | 1.68  |      |  | $ | 1.51  |  



|                                                                                                            |  |      |         |   |      |   |         |      |  |   |         |  
|----------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                            |  | 2005 |         |   | 2004 |   |         | 2003 | 
|                                                                                                            |  |      |         |   |      |   |         |      | 
|Net loss, as reported                                                                                       |  | $    | (14,653 | ) |      | $ | (8,846  | )    |  | $ | (29,748 | )
|Add: Stock based employee compensation expense included in
    reported net loss                            |  |      | 131     |   |      |   | 1,107   |      |  |   | 1,787   |  
|Deduct: Total stock based employee compensation determined under
    fair value based method for all awards |  |      | 3,662   |   |      |   | 7,856   |      |  |   | 15,091  |  
|                                                                                                            |  |      |         |   |      |   |         |      | 
|Pro forma net loss                                                                                          |  | $    | (18,446 | ) |      | $ | (15,595 | )    |  | $ | (43,052 | )
|                                                                                                            |  |      |         |   |      |   |         |      | 
|Basic and diluted net loss per share, as reported                                                           |  | $    | (0.45   | ) |      | $ | (0.28   | )    |  | $ | (0.92   | )
|                                                                                                            |  |      |         |   |      |   |         |      | 
|Basic and diluted pro forma net loss per share                                                              |  | $    | (0.57   | ) |      | $ | (.50    | )    |  | $ | (1.34   | )
|                                                                                                            |  |      |         |   |      |   |         |      | 



| |                    
| | -------------------
| | Segment Information





|                       |  |                       |     |   |      |  |     |      |  |  |     |  
|---------------------- |  | --------------------- | --- | - | ---- |  | --- | ---- |  |  | --- | -
|                       |  | Years Ended March 31, |    
|                       |  |                       |    
|                       |  | 2005                  |     |   | 2004 |  |     | 2003 | 
|                       |  |                       |     |   |      |  |     |      | 
|International revenues |  |                       | 33  | % |      |  | 10  | %    |  |  | 24  | %
|Domestic revenues      |  |                       | 67  | % |      |  | 90  | %    |  |  | 76  | %
|                       |  |                       |     |   |      |  |     |      | 
|Total Revenues         |  |                       | 100 | % |      |  | 100 | %    |  |  | 100 | %
|                       |  |                       |     |   |      |  |     |      | 



F-12



---



##### Table of Contents



SELECTICA, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                     
| | --------------------
| | Contract termination





| |                          
| | -------------------------
| | Sale of eInsurance Assets





| |                       
| | ----------------------
| | Concurrent Transaction





| |                                                  
| | -------------------------------------------------
| | Related Party Transaction and Severance Agreement





| |                              
| | -----------------------------
| | New Accounting Pronouncements



F-13



---



##### Table of Contents



SELECTICA, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                  
| | -----------------
| | Reclassifications







|   |                                       
|-- | --------------------------------------
|3. | Cash, Cash Equivalents and Investments



|                             |                         |                |        |        |      |   |      |   |  |        |      |      |   |   |        |        | 
|---------------------------- | ----------------------- | -------------- | ------ | ------ | ---- | - | ---- | - |  | ------ | ---- | ---- | - | - | ------ | ------ | 
|                             |                         | Unrealized     |       
|                             |                         |                |       
|                             |                         | Cost           |        |        | Gain |   | Loss |   |  | Market |     
|                             |                         |                |        |        |      |   |      |   |  |        |     
|                             |                         | (in thousands) |       
|March 31, 2005:              |                         |                |        |        |      |   |      |   |  |        |      |      |   |   |        |       
|Cash and cash equivalents:   |                         |                |        |        |      |   |      |   |  |        |      |      |   |   |        |       
|                             | Cash                    |                | $      | 3,861  |      |   | $    |  |  |        | $    |     |   |   | $      | 3,861  | 
|                             | Money market fund       |                |        | 17,002 |      |   |      |  |  |        |      |     |   |   |        | 17,002 | 
|                             | Commercial paper        |                |        | 8,498  |      |   |      |  |  |        |      | (1   | ) |   |        | 8,497  | 
|                             |                         |                |        |        |      |   |      |   |  |        |      |     
|                             |                         | $              | 29,361 |        |      | $ |     |   |  | $      | (1   | )    |   | $ | 29,360 |       
|                             |                         |                |        |        |      |   |      |   |  |        |      |     
|Short-term investments:      |                         |                |        |        |      |   |      |   |  |        |      |      |   |   |        |       
|(due in less than 12 months) |                         |                |        |        |      |   |      |   |  |        |      |      |   |   |        |       
|                             | Auction rate securities |                | $      | 7,000  |      |   | $    |  |  |        | $    |     |   |   | $      | 7,000  | 
|                             | Government agencies     |                |        | 46,517 |      |   |      |  |  |        |      | (358 | ) |   |        | 46,159 | 
|                             | Corporate notes & bonds |                |        | 9,225  |      |   |      |  |  |        |      | (47  | ) |   |        | 9,178  | 
|                             | Certificate of deposit  |                |        | 1,566  |      |   |      |  |  |        |      |      |   |   |        | 1,566  | 
|                             |                         |                |        |        |      |   |      |   |  |        |      |     
|                             |                         | $              | 64,308 |        |      | $ |     |   |  | $      | (405 | )    |   | $ | 63,903 |       
|                             |                         |                |        |        |      |   |      |   |  |        |      |     

F-14



---



##### Table of Contents



SELECTICA, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                             |                         |                |        |        |      |   |    |      |  |   |        |     |   |   |        |        | 
|---------------------------- | ----------------------- | -------------- | ------ | ------ | ---- | - | -- | ---- |  | - | ------ | --- | - | - | ------ | ------ | 
|                             |                         | Unrealized     |       
|                             |                         |                |       
|                             |                         | Cost           |        |        | Gain |   |    | Loss |  |   | Market |    
|                             |                         |                |        |        |      |   |    |      |  |   |        |    
|                             |                         | (in thousands) |       
|Long-term investments:       |                         |                |        |        |      |   |    |      |  |   |        |     |   |   |        |       
|(due in 12 to 18 months)     |                         |                |        |        |      |   |    |      |  |   |        |     |   |   |        |       
|                             | Government agencies     |                | $      | 4,503  |      |   | $  |     |  |   | $      | (42 | ) |   | $      | 4,461  | 
|                             | Corporate notes & bonds |                |        | 1,145  |      |   |    |     |  |   |        |    |   |   |        | 1,145  | 
|                             |                         |                |        |        |      |   |    |      |  |   |        |    
|                             |                         | $              | 5,648  |        |      | $ |   |      |  | $ | (42    | )   |   | $ | 5,606  |       
|                             |                         |                |        |        |      |   |    |      |  |   |        |    
|March 31, 2004:              |                         |                |        |        |      |   |    |      |  |   |        |     |   |   |        |       
|Cash and cash equivalents:   |                         |                |        |        |      |   |    |      |  |   |        |     |   |   |        |       
|                             | Cash                    |                | $      | 24,929 |      |   | $  |     |  |   | $      |    |   |   | $      | 24,929 | 
|                             | Money market fund       |                |        | 2,800  |      |   |    |     |  |   |        |    |   |   |        | 2,800  | 
|                             | Commercial paper        |                |        | 999    |      |   |    |     |  |   |        |    |   |   |        | 999    | 
|                             |                         |                |        |        |      |   |    |      |  |   |        |    
|                             |                         | $              | 28,728 |        |      | $ |   |      |  | $ |       |     |   | $ | 28,728 |       
|                             |                         |                |        |        |      |   |    |      |  |   |        |    
|Short-term investments:      |                         |                |        |        |      |   |    |      |  |   |        |     |   |   |        |       
|(due in less than 12 months) |                         |                |        |        |      |   |    |      |  |   |        |     |   |   |        |       
|                             | Auction rate securities |                | $      | 27,850 |      |   | $  |     |  |   | $      |    |   |   | $      | 27,850 | 
|                             | Government agencies     |                |        | 25,536 |      |   |    | 27   |  |   |        |    |   |   |        | 25,563 | 
|                             | Corporate notes & bonds |                |        | 14,411 |      |   |    | 7    |  |   |        |    |   |   |        | 14,418 | 
|                             | Certificate of deposit  |                |        | 744    |      |   |    |     |  |   |        |    |   |   |        | 744    | 
|                             |                         |                |        |        |      |   |    |      |  |   |        |    
|                             |                         | $              | 68,541 |        |      | $ | 34 |      |  | $ |       |     |   | $ | 68,575 |       
|                             |                         |                |        |        |      |   |    |      |  |   |        |    
|Long-term investments:       |                         |                |        |        |      |   |    |      |  |   |        |     |   |   |        |       
|(due in 12 to 18 months)     |                         |                |        |        |      |   |    |      |  |   |        |     |   |   |        |       
|                             | Government agencies     |                | $      | 18,543 |      |   | $  | 15   |  |   | $      |    |   |   | $      | 18,558 | 
|                             | Corporate notes & bonds |                |        | 849    |      |   |    |     |  |   |        | (2  | ) |   |        | 847    | 
|                             | Certificate of deposit  |                |        | 2,066  |      |   |    |     |  |   |        |    |   |   |        | 2,066  | 
|                             |                         |                |        |        |      |   |    |      |  |   |        |    
|                             |                         | $              | 21,458 |        |      | $ | 15 |      |  | $ | (2     | )   |   | $ | 21,471 |       
|                             |                         |                |        |        |      |   |    |      |  |   |        |    





F-15



---



##### Table of Contents



SELECTICA, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                       
|-- | ----------------------
|4. | Property and Equipment



|                               |                                   |                |         |       |      |   |         |       | 
|------------------------------ | --------------------------------- | -------------- | ------- | ----- | ---- | - | ------- | ----- | 
|                               |                                   | March 31,      |        
|                               |                                   |                |        
|                               |                                   | 2005           |         |       | 2004 |  
|                               |                                   |                |         |       |      |  
|                               |                                   | (in thousands) |        
|Computers and software         |                                   | $              | 8,397   |       |      | $ | 9,768   |      
|Furniture and equipment        |                                   |                | 2,878   |       |      |   | 3,162   |      
|Leasehold improvements         |                                   |                | 2,409   |       |      |   | 2,615   |      
|Land and building              |                                   |                | 1,118   |       |      |   | 1,109   |      
|Automobile                     |                                   |                | 39      |       |      |   |        |      
|                               |                                   |                |         |       |      |  
|                               |                                   |                | 14,841  |       |      |   | 16,654  |      
|Less: accumulated depreciation |                                   |                | (11,683 | )     |      |   | (13,034 | )    
|                               |                                   |                |         |       |      |  
|                               | Total property and equipment, net |                | $       | 3,158 |      |   | $       | 3,620 | 
|                               |                                   |                |         |       |      |  



|   |                             
|-- | ----------------------------
|5. | Stockholder Notes Receivable





|   |                            
|-- | ---------------------------
|6. | Operating Lease Commitments



|     |                               |                |       |        |           |   |    |       |  |   |       |        | 
|---- | ----------------------------- | -------------- | ----- | ------ | --------- | - | -- | ----- |  | - | ----- | ------ | 
|     |                               | Offices        |       |        | Equipment |   |    | Total | 
|     |                               |                |       |        |           |   |    |       | 
|     |                               | (In thousands) |      
|2006 |                               | $              | 2,382 |        |           | $ | 38 |       |  | $ | 2,420 |       
|2007 |                               |                | 2,370 |        |           |   | 27 |       |  |   | 2,397 |       
|2008 |                               |                | 2,466 |        |           |   | 27 |       |  |   | 2,493 |       
|2009 |                               |                | 2,562 |        |           |   | 12 |       |  |   | 2,574 |       
|2010 |                               |                | 1,975 |        |           |   |   |       |  |   | 1,975 |       
|     |                               |                |       |        |           |   |    |       | 
|     | Total future minimum payments |                | $     | 11,755 |           |   | $  | 104   |  |   | $     | 11,859 | 
|     |                               |                |       |        |           |   |    |       | 





|   |           
|-- | ----------
|7. | Litigation



F-16



---



##### Table of Contents



SELECTICA, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                    
| | -------------------
| | Patent Infringement







| |             
| | ------------
| | Class Action







F-17



---



##### Table of Contents



SELECTICA, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












|   |                  
|-- | -----------------
|8. | Letters of Credit





|   |         
|-- | --------
|9. | Goodwill





F-18



---



##### Table of Contents



SELECTICA, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|    |                     
|--- | --------------------
|10. | Stockholders Equity



| |                                          
| | -----------------------------------------
| | Common Stock Reserved for Future Issuance



|                             |                            |                                                 |       |       |        | 
|---------------------------- | -------------------------- | ----------------------------------------------- | ----- | ----- | ------ | 
|                             |                            | (in thousands)                                  |      
|Stock option plans:          |                            |                                                 |       |      
|                             | Outstanding                |                                                 |       | 8,440 |       
|                             | Reserved for future grants |                                                 |       | 5,587 |       
|Employee Stock Purchase Plan |                            |                                                 | 1,807 |      
|                             |                            |                                                 |      
|                             |                            | Total common stock reserved for future issuance |       |       | 15,834 | 
|                             |                            |                                                 |      



| |                
| | ---------------
| | Preferred Stock







| |                          
| | -------------------------
| | Stock Issued for Services





F-19



---



##### Table of Contents



SELECTICA, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                      
| | ---------------------
| | Deferred Compensation







| |                 
| | ----------------
| | Stock Repurchase







| |                                                         
| | --------------------------------------------------------
| | Dividend Distribution of Preferred Stock Purchase Rights



F-20



---



##### Table of Contents



SELECTICA, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |             
| | ------------
| | Tender Offer





| |                                              
| | ---------------------------------------------
| | Stock Option Plans  Approved by Stockholders



| |          
| | ---------
| | 1996 Plan





F-21



---



##### Table of Contents



SELECTICA, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                           
| | --------------------------
| | 1999 Equity Incentive Plan





F-22



---



##### Table of Contents



SELECTICA, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                                  
| | ---------------------------------
| | 1999 Employee Stock Purchase Plan







| |                                                                     
| | --------------------------------------------------------------------
| | Stock Option Plans  Not Required to be Approved by
    Stockholders



| |                         
| | ------------------------
| | Officer Option Agreement



F-23



---



##### Table of Contents



SELECTICA, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








| |                       
| | ----------------------
| | 2001 Supplemental Plan





F-24



---



##### Table of Contents



SELECTICA, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                          |                             |                |       |                     |           |  |           |                |   |         |                |               |  |   |      |       | 
|------------------------- | --------------------------- | -------------- | ----- | ------------------- | --------- |  | --------- | -------------- | - | ------- | -------------- | ------------- |  | - | ---- | ----- | 
|                          |                             |                |       | Options Outstanding |          
|                          |                             |                |       |                     |          
|                          |                             | Shares         |       |                     |           |  | Weighted- |               
|                          |                             | Available for  |       |                     | Number of |  |           |                |   | Average |               
|                          |                             | Grant          |       |                     | Shares    |  |           | Exercise Price |   |         | Exercise Price |              
|                          |                             |                |       |                     |           |  |           |                |   |         |                |              
|                          |                             | (in thousands) |      
|Balance at March 31, 2002 |                             |                | 1,003 |                     |           |  | 9,015     |                |   | $       | 0.10  $74.69  |               |  | $ | 8.45 |      
|                          | Increase in shares reserved |                |       | 3,308               |           |  |           |               |   |         |                |               |  |   |      |       | 
|                          | Options granted             |                |       | (2,623              | )         |  |           | 2,623          |   |         | $              | 1.99  $4.35  |  |   | $    | 2.73  | 
|                          | Options exercised           |                |       |                    |           |  |           | (187           | ) |         | $              | 0.10  $3.92  |  |   | $    | 1.80  | 
|                          | Options canceled            |                |       | 2,080               |           |  |           | (2,893         | ) |         | $              | 0.30  $74.69 |  |   | $    | 13.50 | 
|                          |                             |                |       |                     |           |  |           |                |   |         |                |              
|Balance at March 31, 2003 |                             |                | 3,768 |                     |           |  | 8,558     |                |   | $       | 0.20  $63.48  |               |  | $ | 5.13 |      
|                          | Increase in shares reserved |                |       | 1,571               |           |  |           |               |   |         |                |               |  |   |      |       | 
|                          | Options granted             |                |       | (2,289              | )         |  |           | 2,289          |   |         | $              | 2.35  $5.30  |  |   | $    | 4.46  | 
|                          | Options exercised           |                |       |                    |           |  |           | (1,984         | ) |         | $              | 0.20  $4.38  |  |   | $    | 3.11  | 
|                          | Options canceled            |                |       | 1,750               |           |  |           | (1,841         | ) |         | $              | 1.25  $63.48 |  |   | $    | 6.82  | 
|                          |                             |                |       |                     |           |  |           |                |   |         |                |              
|Balance at March 31, 2004 |                             |                | 4,800 |                     |           |  | 7,022     |                |   | $       | 0.20  $63.48  |               |  | $ | 5.62 |      
|                          | Increase in shares reserved |                |       | 1,635               |           |  |           |               |   |         |                |               |  |   |      |       | 
|                          | CEO compensation plan       |                |       | 990                 |           |  |           |               |   |         |                |               |  |   |      |       | 
|                          | Options granted             |                |       | (3,615              | )         |  |           | 3,615          |   |         | $              | 3.13  $5.38  |  |   | $    | 3.56  | 
|                          | Options exercised           |                |       |                    |           |  |           | (389           | ) |         | $              | 0.20  $4.24  |  |   | $    | 2.87  | 
|                          | Options canceled            |                |       | 1,777               |           |  |           | (1,777         | ) |         | $              | 1.99  $63.48 |  |   | $    | 6.49  | 
|                          | Awards issued               |                |       |                    |           |  |           | (15            | ) |         | $              | 3.40  $3.40  |  |   | $    | 3.40  | 
|                          |                             |                |       |                     |           |  |           |                |   |         |                |              
|Balance at March 31, 2005 |                             |                | 5,587 |                     |           |  | 8,440     |                |   | $       | 0.50  $63.48  |               |  | $ | 4.17 |      
|                          |                             |                |       |                     |           |  |           |                |   |         |                |              

F-25



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##### Table of Contents



SELECTICA, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                |                |                     |                |           |                |             |  |  |                 |  |  |                   |               |  |          |  |       |  |  |   |       | 
|--------------- | -------------- | ------------------- | -------------- | --------- | -------------- | ----------- |  |  | --------------- |  |  | ----------------- | ------------- |  | -------- |  | ----- |  |  | - | ----- | 
|                |                | Options Outstanding |                |           | Options Vested |            
|                |                |                     |                |           |                |            
|                |                |                     |                | Weighted- |                |             |  |  |                
|                |                | Number of           |                |           | Average        |             |  |  |                 |  |  | Weighted-         |              
|                |                | Outstanding         |                |           | Remaining      |             |  |  |                 |  |  | Average           |              
|Range of        |                |                     | Shares as of   |           |                | Contractual |  |  | Range of        |  |  | Options Vested at |               |  | Exercise | 
|Exercise Prices |                |                     | March 31, 2005 |           |                | Life        |  |  | Exercise Prices |  |  | March 31, 2005    |               |  | Price    | 
|                |                |                     |                |           |                |             |  |  |                 |  |  |                   |               |  |          | 
|                |                | (in thousands)      |                |           |                |             |  |  | (in thousands)  |  |  |                  
|                | $0.50  $ 2.56 |                     |                |           | 1,700          |             |  |  | 7.21            |  |  | $                 | 0.50  $ 2.56 |  |          |  | 1,370 |  |  | $ | 2.48  | 
|                | $2.69  $ 3.40 |                     |                |           | 3,020          |             |  |  | 8.39            |  |  | $                 | 2.69  $ 3.40 |  |          |  | 458   |  |  | $ | 3.13  | 
|                | $3.44  $ 4.16 |                     |                |           | 1,920          |             |  |  | 6.98            |  |  | $                 | 3.44  $ 4.16 |  |          |  | 1,416 |  |  | $ | 3.97  | 
|                | $4.20  $ 5.30 |                     |                |           | 1,415          |             |  |  | 7.76            |  |  | $                 | 4.20  $ 5.30 |  |          |  | 1,048 |  |  | $ | 4.47  | 
|                | $5.38  $63.48 |                     |                |           | 385            |             |  |  | 5.69            |  |  | $                 | 5.38  $63.48 |  |          |  | 340   |  |  | $ | 19.27 | 
|                |                |                     |                |           |                |             |  |  |                 |  |  |                   |               |  |          | 
|                | $0.50  $63.48 |                     |                |           | 8,440          |             |  |  | 8.01            |  |  | $                 | 0.50  $63.48 |  |          |  | 4,631 |  |  | $ | 4.68  | 
|                |                |                     |                |           |                |             |  |  |                 |  |  |                   |               |  |          | 



|                                                     |  |           |      |  |      |  |      |      |  |  |      | 
|---------------------------------------------------- |  | --------- | ---- |  | ---- |  | ---- | ---- |  |  | ---- | 
|                                                     |  | March 31, |     
|                                                     |  |           |     
|                                                     |  | 2005      |      |  | 2004 |  |      | 2003 | 
|                                                     |  |           |      |  |      |  |      |      | 
|Weighted average options with strike price below FMV |  |           | 2.79 |  |      |  | 2.08 |      |  |  | 1.87 | 
|Weighted average options with strike price at FMV    |  |           | 1.88 |  |      |  | 1.65 |      |  |  | 1.50 | 
|Weighted average options with strike price above FMV |  |           |     |  |      |  |     |      |  |  |     | 

Equity Compensation Plan Information


|                                                  |  |                         |       |                  |                   |   |                      |                     |  |  |       |    
|------------------------------------------------- |  | ----------------------- | ----- | ---------------- | ----------------- | - | -------------------- | ------------------- |  |  | ----- | ---
|                                                  |  |                         |       | Weighted-Average |                   |   | Number of Securities |                    
|                                                  |  | Number of Securities to |       |                  | Exercise Price of |   |                      | Remaining Available | 
|                                                  |  | be Issued upon Exercise |       |                  | Outstanding       |   |                      | for Future Issuance | 
|                                                  |  | of Outstanding Options, |       |                  | Options and       |   |                      | Under Equity        | 
|                                                  |  | and Rights              |       |                  | Rights            |   |                      | Compensation Plans  | 
|                                                  |  |                         |       |                  |                   |   |                      |                     | 
|Plans Approved by Stockholders                    |  |                         |       |                  |                   |   |                      |                     |  |  |       |    
|1996 Stock Plan                                   |  |                         | 1,165 |                  |                   | $ | 4.85                 |                     |  |  | 712   |    
|1999 Equity Incentive Plan                        |  |                         | 4,772 |                  |                   | $ | 4.25                 |                     |  |  | 4,498 | (1)
|1999 Employee Stock Purchase Plan                 |  |                         |      |                  |                   | $ | 2.41                 |                     |  |  | 1,807 | (2)
|Plans Not Required to be Approved by Stockholders |  |                         |       |                  |                   |   |                      |                     |  |  |       |    
|Officer Option Agreement                          |  |                         | 990   |                  |                   | $ | 3.40                 |                     |  |  |      |    
|2001 Supplemental Plan                            |  |                         | 1,513 |                  |                   | $ | 3.91                 |                     |  |  | 377   |    
|                                                  |  |                         |       |                  |                   |   |                      |                     | 
|Total                                             |  |                         | 8,440 |                  |                   |   |                      |                     |  |  | 7,394 |    
|                                                  |  |                         |       |                  |                   |   |                      |                     | 






|    |                                                                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | On each January 1, starting in 2001, the number of shares
    reserved for issuance will be automatically increased by the
    lesser of 5% of the then outstanding shares of common stock or
    1.8 million shares.
|   
|(2) | On each May 1, starting in 2001, the number of shares
    reserved for issuance will be automatically increased by the
    lesser of 2% of the then outstanding shares of common stock or
    1.0 million shares.    



F-26



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##### Table of Contents



SELECTICA, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                                                    
|--- | ---------------------------------------------------
|11. | Computation of Basic and Diluted Net Loss Per Share





|                                                                                   |  |                                          |         |   |      |   |        |      |  |   |         |  
|---------------------------------------------------------------------------------- |  | ---------------------------------------- | ------- | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                                                                   |  | Years Ended March 31,                    |        
|                                                                                   |  |                                          |        
|                                                                                   |  | 2005                                     |         |   | 2004 |   |        | 2003 | 
|                                                                                   |  |                                          |         |   |      |   |        |      | 
|                                                                                   |  | (in thousands, except per share amounts) |        
|Net loss                                                                           |  | $                                        | (14,653 | ) |      | $ | (8,846 | )    |  | $ | (29,748 | )
|                                                                                   |  |                                          |         |   |      |   |        |      | 
|Basic and diluted:                                                                 |  |                                          |         |   |      |   |        |      |  |   |         |  
|Weighted-average shares of common stock outstanding                                |  |                                          | 32,665  |   |      |   | 31,177 |      |  |   | 32,331  |  
|Less weighted-average shares subject to repurchase                                 |  |                                          |        |   |      |   | (12    | )    |  |   | (112    | )
|                                                                                   |  |                                          |         |   |      |   |        |      | 
|Weighted-average shares used in computing basic and diluted net
    loss per share |  |                                          | 32,665  |   |      |   | 31,165 |      |  |   | 32,219  |  
|                                                                                   |  |                                          |         |   |      |   |        |      | 
|Basic and diluted net loss per share                                               |  | $                                        | (0.45   | ) |      | $ | (0.28  | )    |  | $ | (0.92   | )
|                                                                                   |  |                                          |         |   |      |   |        |      | 



|                                                                                                                                                                                                                                     |  |                       |       |  |      |  |       |      |  |  |       | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------- | ----- |  | ---- |  | ----- | ---- |  |  | ----- | 
|                                                                                                                                                                                                                                     |  | Years Ended March 31, |      
|                                                                                                                                                                                                                                     |  |                       |      
|                                                                                                                                                                                                                                     |  | 2005                  |       |  | 2004 |  |       | 2003 | 
|                                                                                                                                                                                                                                     |  |                       |       |  |      |  |       |      | 
|                                                                                                                                                                                                                                     |  | (in thousands)        |      
|Options excluded due to the exercise price exceeding the average
    fair market value of the Companys common stock during the
    period                                                                                           |  |                       | 6,493 |  |      |  | 589   |      |  |  | 3,798 | 
|Options excluded for which the exercise price was less than the
    average fair market value of the Companys common stock
    during the period but were excluded as inclusion would decrease
    the Companys net loss per share |  |                       | 1,947 |  |      |  | 6,425 |      |  |  | 4,752 | 
|Common shares excluded resulting from common stock subject to
    repurchase                                                                                                                                                         |  |                       |      |  |      |  |      |      |  |  | 43    | 
|                                                                                                                                                                                                                                     |  |                       |       |  |      |  |       |      | 
|Total common stock equivalents excluded from diluted net loss
    per common share                                                                                                                                                   |  |                       | 8,440 |  |      |  | 7,014 |      |  |  | 8,593 | 
|                                                                                                                                                                                                                                     |  |                       |       |  |      |  |       |      | 



|    |             
|--- | ------------
|12. | Income Taxes



|                              |                    |           |         |         |      |   |        |        |   |   |         |         |  
|----------------------------- | ------------------ | --------- | ------- | ------- | ---- | - | ------ | ------ | - | - | ------- | ------- | -
|                              |                    | March 31, |        
|                              |                    |           |        
|                              |                    | 2005      |         |         | 2004 |   |        | 2003   |  
|                              |                    |           |         |         |      |   |        |        |  
|Domestic Pre-Tax Loss         |                    | $         | (15,628 | )       |      | $ | (7,380 | )      |   | $ | (20,358 | )      
|Foreign Pre-Tax Income/(Loss) |                    |           | 858     |         |      |   | (1,466 | )      |   |   | 584     |        
|                              |                    |           |         |         |      |   |        |        |  
|                              | Total Pre-Tax Loss |           | $       | (14,770 | )    |   | $      | (8,846 | ) |   | $       | (19,774 | )
|                              |                    |           |         |         |      |   |        |        |  

F-27



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##### Table of Contents



SELECTICA, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                                     |  |                       |        |   |      |   |        |      |  |   |        |  
|------------------------------------ |  | --------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                     |  | Years Ended March 31, |       
|                                     |  |                       |       
|                                     |  | 2005                  |        |   | 2004 |   |        | 2003 | 
|                                     |  |                       |        |   |      |   |        |      | 
|Federal tax at statutory rate        |  | $                     | (5,170 | ) |      | $ | (3,096 | )    |  | $ | (9,822 | )
|Computed state tax                   |  |                       | 70     |   |      |   | 50     |      |  |   | 50     |  
|Computed foreign tax                 |  |                       | 57     |   |      |   | 240    |      |  |   | 169    |  
|Losses not benefited                 |  |                       | 5,165  |   |      |   | 2,861  |      |  |   | 6,194  |  
|Deferred compensation expense        |  |                       | 52     |   |      |   | 511    |      |  |   | 724    |  
|Nondeductible acquisition expenses   |  |                       |       |   |      |   |       |      |  |   | 3,276  |  
|Change in tax reserve                |  |                       | (235   | ) |      |   | (240   | )    |  |   | (169   | )
|Non-deductible expenses              |  |                       | 4      |   |      |   | 29     |      |  |   | 31     |  
|Research and development tax credits |  |                       | (60    | ) |      |   | (355   | )    |  |   | (453   | )
|                                     |  |                       |        |   |      |   |        |      | 
|Income tax benefit                   |  | $                     | (117   | ) |      | $ |       |      |  | $ |       |  
|                                     |  |                       |        |   |      |   |        |      | 

|                       |  |                       |      |   |      |   |      |  |  |   |   | 
|---------------------- |  | --------------------- | ---- | - | ---- | - | ---- |  |  | - | - | 
|                       |  | Years Ended March 31,
|                       |  |                      
|                       |  | 2005                  |      |   | 2004 |   | 2003
|                       |  |                       |      |   |      |   |     
|US current tax benefit |  | $                     | (114 | ) |      | $ |     |  |  | $ |  | 
|Foreign tax expense    |  |                       | (3   | ) |      |   |     |  |  |   |  | 
|                       |  |                       |      |   |      |   |      |  | 
|Income tax benefit     |  | $                     | (117 | ) |      | $ |     |  |  | $ |  | 
|                       |  |                       |      |   |      |   |      |  | 





|                                 |                         |           |         |   |      |   |         |      |  |   |         |   | 
|-------------------------------- | ----------------------- | --------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - | 
|                                 |                         | March 31, |        
|                                 |                         |           |        
|                                 |                         | 2005      |         |   | 2004 |   |         | 2003 | 
|                                 |                         |           |         |   |      |   |         |      | 
|Deferred tax assets:             |                         |           |         |   |      |   |         |      |  |   |         |  
|Net operating loss carryforwards |                         | $         | 56,325  |   |      | $ | 47,043  |      |  | $ | 38,181  |  
|Tax credit carryforwards         |                         |           | 5,418   |   |      |   | 4,766   |      |  |   | 4,065   |  
|Deferred revenue                 |                         |           | 767     |   |      |   | 618     |      |  |   | 5,766   |  
|Other                            |                         |           | 4,067   |   |      |   | 4,316   |      |  |   | 4,576   |  
|                                 |                         |           |         |   |      |   |         |      | 
|Total net deferred tax assets    |                         |           | 66,577  |   |      |   | 56,743  |      |  |   | 52,588  |  
|Valuation allowance              |                         |           | (66,577 | ) |      |   | (56,743 | )    |  |   | (52,588 | )
|                                 |                         |           |         |   |      |   |         |      | 
|                                 | Net deferred tax assets |           | $       |  |      |   | $       |     |  |   | $       |  | 
|                                 |                         |           |         |   |      |   |         |      | 





F-28



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##### Table of Contents



SELECTICA, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










|    |             
|--- | ------------
|13. | Benefit Plan





|    |              
|--- | -------------
|14. | Restructuring







F-29



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##### Table of Contents



SELECTICA, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                                                        |  |                |        |  
|----------------------------------------------------------------------- |  | -------------- | ------ | -
|                                                                        |  | (in thousands) |       
|Charge for the year ended March 31, 2001  Plan 1                       |  | $              | 667    |  
|Payments for the year ended March 31, 2001  Plan
    1                 |  |                | (317   | )
|                                                                        |  |                |       
|Accrual balance, March 31, 2001                                         |  |                | 350    |  
|Charge for the year ended March 31, 2002  Plan 2                       |  |                | 1,759  |  
|Payments for the year ended March 31, 2002  Plan
    1                 |  |                | (350   | )
|Payments for the year ended March 31, 2002  Plan
    2                 |  |                | (1,577 | )
|                                                                        |  |                |       
|Accrual balance, March 31, 2002                                         |  |                | 182    |  
|Charge for the year ended March 31, 2003  Plan 3                       |  |                | 1,760  |  
|Payments for the year ended March 31, 2003  Plan
    2                 |  |                | (182   | )
|Stock based compensation for the year ended March 21,
    2003  Plan 3 |  |                | (249   | )
|Payments for the year ended March 31, 2003  Plan
    3                 |  |                | (1,247 | )
|                                                                        |  |                |       
|Accrual balance, March 31, 2003                                         |  |                | 264    |  
|Payments for the year ended March 31, 2004  Plan
    3                 |  |                | (198   | )
|Write back of expense for the year ended March 31,
    2004  Plan 3    |  |                | (66    | )
|                                                                        |  |                |       
|Accrual balance, March 31, 2004                                         |  |                |       |  
|Charge for the year ended March 31, 2005  Plan 4                       |  |                | 929    |  
|Payments for the year March 31, 2005  Plan 4                           |  |                | (891   | )
|                                                                        |  |                |       
|Accrual balance, March 31, 2005                                         |  | $              | 38     |  
|                                                                        |  |                |       



|    |                  
|--- | -----------------
|15. | Subsequent Events





F-30



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##### Table of Contents






REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


















| |                          
| | -------------------------
| | /s/ Ernst & Young
    LLP





F-31



---



##### Table of Contents






SIGNATURES






| |                                      
| | -------------------------------------
| | SELECTICA, INC.                      
| | Registrant                           
|
| | /s/ Vincent G. Ostrosky              
| |                                      
| | Vincent G. Ostrosky                  
| | President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated.


|                                                                  |  |                                       |  |               |  | 
|----------------------------------------------------------------- |  | ------------------------------------- |  | ------------- |  | 
|Signature                                                         |  | Title                                 |  | Date         
|                                                                  |  |                                       |  |              
|Principal Executive Officer:                                      |  |                                       |  |              
|/s/ Vincent G. OstroskyVincent
    G. Ostrosky                    |  | President and Chief Executive Officer |  | June 29, 2005
|                                                                 
|Principal Financial Officer and Principal
    Accounting Officer: |  |                                       |  |              
|                                                                 
|/s/ Stephen BennionStephen
    Bennion                            |  | Chief Financial Officer               |  | June 29, 2005
|                                                                 
|Direc                                                             |  | tors:                                 |  |               |  | 
|                                                                 
|/s/ Jamie ArnoldJamie
    Arnold                                  |  | Director                              |  | June 29, 2005
|                                                                 
|/s/ John FisherJohn
    Fisher                                    |  | Director                              |  | June 29, 2005
|                                                                 
|/s/ Michael LyonsMichael
    Lyons                                |  | Director                              |  | June 29, 2005
|                                                                 
|/s/ Sanjay MittalSanjay
    Mittal                                |  | Director                              |  | June 29, 2005
|                                                                 
|/s/ Thomas NeustaetterThomas
    Neustaetter                      |  | Director                              |  | June 29, 2005
|                                                                 
|/s/ Vincent OstroskyVincent
    Ostrosky                          |  | Director                              |  | June 29, 2005



---



##### Table of Contents



EXHIBIT INDEX


|        |    |        |             |                                                                                                                                                                       
|------- | -- | ------ | ----------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |        |            
|No.     |    |        | Description
|        |    |        |            
|        | 3  | .1(1)  |             | The Second Amended and Restated Certificate of Incorporation.                                                                                                         
|        | 3  | .2(4)  |             | Certificate of Designation of Series A Junior or
    Participating Preferred Stock.                                                                                   
|        | 3  | .3(4)  |             | Amended and Restated Bylaws.                                                                                                                                          
|        | 4  | .1(1)  |             | Reference is made to Exhibits 3.1, 3.2 and 3.3.                                                                                                                       
|        | 4  | .2(1)  |             | Form of Registrants Common Stock certificate.                                                                                                                        
|        | 4  | .3(1)  |             | Amended and Restated Investor Rights Agreement dated
    June 16, 1999.                                                                                               
|        | 4  | .4(2)  |             | Rights Agreement between Registrant and U.S. Stock Transfer
    Corporation, as Rights Agent, dated February 4, 2003.                                                 
|        | 10 | .1(1)  |             | Form of Indemnification Agreement.                                                                                                                                    
|        | 10 | .2(1)  |             | 1996 Stock Plan.                                                                                                                                                      
|        | 10 | .3(4)  |             | 1999 Employee Stock Purchase Plan.                                                                                                                                    
|        | 10 | .4(4)  |             | 1999 Equity Incentive Plan, as amended and restated
    December 11, 2002.                                                                                            
|        | 10 | .5(1)  |             | Lease between John Arrillaga Survivors Trust and the Richard T.
    Perry Separate Property Trust as Landlord and the Registrant as
    Tenant, dated October 1, 1999.
|        | 10 | .6(3)  |             | Employment Agreement between the Registrant and Stephen Bennion
    dated as of January 1, 2003.                                                                      
|        | 10 | .7(1)  |             | Lease between John Arrillaga Survivors Trust and Richard T.
    Perry Separate Property Trust as Landlord and the Registrant as
    Tenant, Dated October 1, 1999.    
|        | 10 | .8(4)  |             | Warrant to Purchase Common Stock issued to Sales. Technologies
    Limited, dated April 4, 2001.                                                                      
|        | 10 | .9(4)  |             | Licensed Works Agreement between the Registrant and
    International Business Machines Corporation, dated
    December 11, 2002.                                     
|        | 10 | .10(4) |             | Licensed Works Agreement Statement of Work between the
    Registrant and International Business Machines Corporation,
    Dated December 11, 2002.                   
|        | 10 | .11(4) |             | Professional Services Agreement between the Registrant and GE
    Medical Services, dated June 28, 2002.                                                              
|        | 10 | .12(4) |             | Major Account License Agreement between the Registrant and
    GE Medical Systems, dated June 28, 2002.                                                               
|        | 10 | .13(4) |             | Amendment #1 to Major Account License Agreement
    between the Registrant and GE Medical Systems.                                                                    
|        | 10 | .14(4) |             | Amendment #2 to Major Account License Agreement
    between the Registrant and GE Medical Systems, dated
    October 8, 2002.                                         
|        | 10 | .15(4) |             | Amendment #3 to Major Account License Agreement
    between the Registrant and GE Medical Systems, dated
    March 31, 2003.                                          
|        | 10 | .16(4) |             | Addendum #1 to Professional Services Agreement between
    Registrant and GE Medical Services, dated August 27, 2002.                                                 
|        | 10 | .17(4) |             | Amendment #2 to Professional Services Agreement between
    Registrant and GE Medical Services, dated March 3, 2003.                                                  
|        | 10 | .18(5) |             | Settlement Agreement and General Release between Registrant and
    David Choi, dated August 13, 2003.                                                                
|        | 10 | .19(5) |             | Letter Agreement between Registrant and Sanjay Mittal, dated
    September 22, 2003.                                                                                  
|        | 10 | .20    |             | 1999 Equity Incentive Plan Stock Option Agreement.                                                                                                                    
|        | 10 | .21    |             | 1999 Equity Incentive Plan Stock Option Agreement (Initial Grant
    to Directors).                                                                                   
|        | 10 | .22    |             | 1999 Equity Incentive Plan Stock Option Agreement (Annual Grant
    to Directors).                                                                                    
|        | 10 | .23    |             | Selectica UK Limited Major Account License Agreement dated
    December 5, 2003.                                                                                      
|        | 10 | .24    |             | Amendment Agreement between MCI Worldcom, Limited and Selectica
    UK Limited, dated December 23, 2004.                                                              



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##### Table of Contents



|        |    |        |             |                                                                                                     
|------- | -- | ------ | ----------- | ----------------------------------------------------------------------------------------------------
|Exhibit |    |        |            
|No.     |    |        | Description
|        |    |        |            
|        | 10 | .25(6) |             | Employment Agreement between the Registrant and Vincent G.
    Ostrosky dated as of October 1, 2004.
|        | 21 | .1(4)  |             | Subsidiaries.                                                                                       
|        | 23 | .1     |             | Consent of Independent Registered Public Accounting Firm.                                           
|        | 31 | .1     |             | Certification Pursuant to Section 302 of the Sarbanes-Oxley
    Act of 2002.                        
|        | 31 | .2     |             | Certification Pursuant to Section 302 of the Sarbanes-Oxley
    Act of 2002.                        
|        | 32 | .1     |             | Certification Pursuant to Section 906 of the Sarbanes-Oxley
    Act of 2002.                        
|        | 32 | .2     |             | Certification Pursuant to Section 906 of the Sarbanes-Oxley
    Act of 2002.                        






|    |                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------
|(1) | Previously filed in the Companys Registration Statement
    (No. 333-92545) declared effective on March 9, 2000.
|   
|(2) | Previously filed in the Companys report on Form 8-K
    filed on February 6, 2003.                              
|   
|(3) | Previously filed in the Companys report on Form 10-Q
    filed on February 14, 2003.                            
|   
|(4) | Previously filed in the Companys report on Form 10-K
    filed on June 30, 2003.                                
|   
|(5) | Previously filed in the Companys report on Form 10-Q
    filed on November 11, 2003.                            
|   
|(6) | Previously filed in the Companys report on Form 8-K
    filed on October 21, 2004.