##### 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, 2006       
|                                               
|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


o x


o x


x o


S-K 10-K 10-K. x


12b-2


o x o


o x






Documents Incorporated by Reference


10-K.










---



##### 










SELECTICA, INC.


FORM 10-K
ANNUAL REPORT


FOR THE FISCAL YEAR ENDED


MARCH 31, 2006


Table of Contents


|             |  |                                                                                                                         |  |  |    | 
|------------ |  | ----------------------------------------------------------------------------------------------------------------------- |  |  | -- | 
|PART I      
|Item 1.      |  | Business                                                                                                                |  |  | 2  | 
|Item 1A.     |  | Risk Factors                                                                                                            |  |  | 16 | 
|Item 1B.     |  | Unresolved Staff Comments                                                                                               |  |  | 30 | 
|Item 2.      |  | Properties                                                                                                              |  |  | 30 | 
|Item 3.      |  | Legal Proceedings                                                                                                       |  |  | 30 | 
|Item 4.      |  | Submission of Matters to a Vote of Security
    Holders                                                                 |  |  | 32 | 
|            
|PART II     
|Item 5.      |  | Market for Registrants Common Equity,
    Related Stockholder Matters, and Issuers Purchases of
    Equity Securities |  |  | 32 | 
|Item 6.      |  | Selected Consolidated Financial Data                                                                                    |  |  | 35 | 
|Item 7.      |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                               |  |  | 36 | 
|Item 7A.     |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                          |  |  | 49 | 
|Item 8.      |  | Consolidated Financial Statements and
    Supplementary Data                                                            |  |  | 51 | 
|Item 9.      |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure                                |  |  | 53 | 
|Item 9A.     |  | Controls and Procedures                                                                                                 |  |  | 54 | 
|Item 9B.     |  | Other Information                                                                                                       |  |  | 57 | 
|            
|PART III    
|Item 10.     |  | Directors and Executive Officers of the
    Registrant                                                                  |  |  | 57 | 
|Item 11.     |  | Executive Compensation                                                                                                  |  |  | 58 | 
|Item 12.     |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters                      |  |  | 58 | 
|Item 13.     |  | Certain Relationships and Related
    Transactions                                                                      |  |  | 58 | 
|Item 14.     |  | Principal Accountant Fees and Services                                                                                  |  |  | 58 | 
|            
|PART IV     
|Item 15.     |  | Exhibits, Consolidated Financial Statement
    Schedules, and Reports on Form 8-K                                       |  |  | 58 | 
|Signatures   |  |                                                                                                                         |  |  |    | 
|EXHIBIT 23.1
|EXHIBIT 23.2
|EXHIBIT 31.1
|EXHIBIT 31.2
|EXHIBIT 32.1
|EXHIBIT 32.2



1



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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 2006. 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




state-of




2



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Industry Background




| |                                
| | -------------------------------
| | The Growth of Internet Commerce





| |                                
| | -------------------------------
| | Challenges of Internet Commerce







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



3



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







| |   |                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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




4



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





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





| |   |                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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



5



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| |                                                         
| | --------------------------------------------------------
| | Provides a Comprehensive Solution that is Easy to Deploy





| |                                            
| | -------------------------------------------
| | Provides an Opportunity for Increased Sales





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

easy-to




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





| |                          
| | -------------------------
| | Enforces pricing policies





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





| |                           
| | --------------------------
| | Reduces Costs of Ownership



6



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| |                       
| | ----------------------
| | Visibility and Control





| |                              
| | -----------------------------
| | Flexibility and Extensibility





| |                               
| | ------------------------------
| | Leverages Existing Investments





| |                         
| | ------------------------
| | Easy Setup and Migration





| |              
| | -------------
| | Time-to-Value



Selectica Products








7



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|                       |  |                                                                                                     |  |                                                                                           
|---------------------- |  | --------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------
|Product                |  | Features                                                                                            |  | Benefits                                                                                  
|                       |  |                                                                                                     |  |                                                                                           
|ON PREMISE SOLUTIONS   |  |                                                                                                     |  |                                                                                           
|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
    Enterprise JavaBeans (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                                 
|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                                       
|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                                                        

8



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|                                                    |  |                                                                                                                                                                                                                                                                                                                                             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Product                                             |  | Features                                                                                                                                                                                                                                                                                                                                    |  | Benefits                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                    |  |                                                                                                                                                                                                                                                                                                                                             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|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                                                                                                                                                                                                                                                                                                            
|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                                                                                                                                                                                                                                                                                                                                                               
|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                                                                                                                                                                                                                                                                                     
|Selectica Contract Management (On Premise)          |  | Enterprise application 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                                                                                                                                                                                                                                                                                    
|ON PREMISE PARTNER APPLICATIONS                    
|Telecom Sales Order Management  (TSOM Application) |  | The SalesTech Telco Sales Order Management application consists
    of a number of reusable components that have been developed to
    meet the needs of telecommunications service providers                                                                                                                                               |  | The Application maximizes the Telcos ability to sell
    products during a single customer interaction  either
    face-to-face, through the channel, via the call center or
    through a self-service web interface. This ensures that Service
    Orders passed through to provisioning can be successfully
    fulfilled where and when the customer requires them                                                                                       
|Insurance Underwriting Application                  |  | The SalesTech Insurance Application consists of a number of
    re-usable components developed for the worldwide Property,
    Casualty and Life insurance markets. Based on the industry
    leading Selectica business rules driven Configurator, the
    Insurance Suite Application generates a point of sale
    underwriting decision |  | Designed to lower underwriting costs and reduce new business
    cycle-time, the solution enables insurance carriers to receive
    better quality information, resulting in consistency of
    underwriting and increased sales. The Insurance Application
    supports a number of classes of risk that can be mixed and
    matched by a carrier into insurance packs. Other
    specific classes of risk can be configured and added to the
    framework

9



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|                                          |  |                                                                                                                                                                                                                                    |  |                                                                                                                                                                                                                                                                                                                                                                  
|----------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Product                                   |  | Features                                                                                                                                                                                                                           |  | Benefits                                                                                                                                                                                                                                                                                                                                                         
|                                          |  |                                                                                                                                                                                                                                    |  |                                                                                                                                                                                                                                                                                                                                                                  
|ON DEMAND APPLICATIONS                   
|Selectica Contract Management (On Demand) |  | Software as a service 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                                                                                                                                                                                      
|Fastraq on-demand                         |  | New generation end-to-end packaged application based on our
    industry standard 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
    Fastraq Marketing Workbench

Selecticas Architecture




| |                         
| | ------------------------
| | Sales Execution Products





| |                              
| | -----------------------------
| | 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;

10



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| |   |                                               
| | - | ----------------------------------------------
| |  | verify the semantics of the KnowledgeBase; and
|
| |  | create flexible models from individual models.



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





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





| |                     
| | --------------------
| | Fastraq Architecture





| |                             
| | ----------------------------
| | Contract Management Products



| |                                 
| | --------------------------------
| | Contract Management Architecture

state-of


Selectica Services




11



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





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

up-to


Competition












| |   |                                    
| | - | -----------------------------------
| |  | vertical domain expertise;         
|
| |  | product functionality and features;

12



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| |   |                                                                            
| | - | ---------------------------------------------------------------------------
| |  | 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;                                                     
|
| |  | 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




13



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Professional Services




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





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



Research and Development






International Operations




14



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Intellectual Property and Other Proprietary Rights










| |   |                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 commercially
    reasonable terms or at all;
|
| |  | redesign those products or services that incorporate such
    intellectual property; and/or                                                                                                                                
|
| |  | pay money damages to the holder of the infringed intellectual
    property right.                                                                                                                                          



Employees




15



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Acquisitions






AVAILABLE INFORMATION


10-K, 10-Q, 8-K, 1-800-SEC-0330.







|         |             
|-------- | ------------
|Item 1A. | Risk Factors

Set forth below and elsewhere in this annual report on
Form 10-K 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 on
form 10-K .
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.




16



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period-to


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




The loss of any of our key personnel would harm our
competitiveness because of the time and effort that we would
have to expend to replace such personnel.




day-to


17



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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;                                                                                                                                                                                               
|
| |  | incurring legal and professional fees;                                                                                                                                                                                                  
|
| |  | problems combining the purchased operations, technologies or
    products with ours;                                                                                                                                                    
|
| |  | 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.                                                                                                                                                  



18



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|                     |                       |                |     |     |                   |  |   |   | 
|-------------------- | --------------------- | -------------- | --- | --- | ----------------- |  | - | - | 
|                     |                       | Amount         |     |     | Amortization life | 
|                     |                       |                |     |     |                   | 
|                     |                       | (in thousands) |     |     | (years)           | 
|Accounts Receivable  |                       | $              | 74  |     |                   |  |  |  
|Fixed Assets         |                       |                | 17  |     |                   |  |  |  
|Intangible assets:   |                       |                |     |     |                   |  |   |  
|                     | Developed technology  |                |     | 367 |                   |  |   | 3 | 
|                     | Customer relationship |                |     | 338 |                   |  |   | 4 | 
|                     | Customer backlog      |                |     | 96  |                   |  |   | 1 | 
|                     |                       |                |     |     |                   | 
|Total purchase price |                       | $              | 892 |     |                   |  |   |  
|                     |                       |                |     |     |                   | 





|                         |  |                |      |  
|------------------------ |  | -------------- | ---- | -
|                         |  | Amount         |     
|                         |  |                |     
|                         |  | (in thousands) |     
|Cost                     |  | $              | 801  |  
|Accumulated amortization |  |                | (285 | )
|                         |  |                |     
|Net                      |  | $              | 516  |  
|                         |  |                |     



|                            |  |                              |     |  |      |   |     |      |  |   |      |  |  |   |   | 
|--------------------------- |  | ---------------------------- | --- |  | ---- | - | --- | ---- |  | - | ---- |  |  | - | - | 
|                            |  | Fiscal Years Ended March 31, |    
|                            |  | 2007                         |     |  | 2008 |   |     | 2009 |  |   | 2010 | 
|                            |  |                              |     |  |      |   |     |      |  |   |      | 
|                            |  | (in thousands)               |    
|Amortization by fiscal year |  | $                            | 207 |  |      | $ | 207 |      |  | $ | 95   |  |  | $ | 7 | 
|                            |  |                              |     |  |      |   |     |      |  |   |      | 



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, 2006 |            |  |  |    
|                                 | Customer A |  |  | 23% | 
|                                 | Customer B |  |  | 22% | 
|Fiscal Year ended March 31, 2005 |            |  |  |    
|                                 | Customer A |  |  | 14% | 
|                                 | Customer B |  |  | 23% | 
|                                 | Customer C |  |  | 12% | 
|                                 | Customer D |  |  | 11% | 
|Fiscal Year ended March 31, 2004 |            |  |  |    
|                                 | Customer A |  |  | 20% | 
|                                 | Customer B |  |  | 39% | 



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




20



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We have been 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;                                                                                                            
|
| |  | 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 commercially
    reasonable terms or at all;
|
| |  | redesign those products or services that incorporate such
    intellectual property; and/or                                                                                                                                      
|
| |  | pay money damages to the holder of the infringed intellectual
    property right.                                                                                                                                                



21



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##### Table of Contents



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 enterprise software including
configuration, pricing, contract 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.


I-Many






| |   |                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.

22



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##### Table of Contents





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.




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.




23



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##### Table of Contents



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.




|             |          |                    |  |     |      |  |  |      |  |  |  |     | 
|------------ | -------- | ------------------ |  | --- | ---- |  |  | ---- |  |  |  | --- | 
|             |          | Fiscal Years Ended | 
|             |          | March 31,          | 
|             |          |                    | 
|             |          | 2006               |  |     | 2005 |  |  | 2004 | 
|             |          |                    |  |     |      |  |  |      | 
|Gross Margin |          |                    |  |     |      |  |  |      |  |  |  |    
|             | License  |                    |  | 86% |      |  |  | 91%  |  |  |  | 92% | 
|             | Services |                    |  | 55% |      |  |  | 43%  |  |  |  | 27% | 



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.






24



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##### Table of Contents



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.




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.




25



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##### Table of Contents



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.






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 have entered into a joint sales and marketing arrangement
with SalesTech, Pty. Ltd. Failure to achieve the mutual
objectives of this partnership could damage our business.




Our on demand solutions are hosted by a third-party
provider.




26



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##### Table of Contents



We are the target of several securities class action
complaints and have been subject to patent infringement
complaints and could be again, all of which could result in
substantial costs and divert management attention and
resources.




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







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



S-1








27



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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;

28



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| |   |                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.


13a-15(e)


We incur increased costs as a result of being a public
company.




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.




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




29



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##### Table of Contents





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.











|         |                          
|-------- | -------------------------
|Item 1B. | Unresolved Staff Comments








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

Facilities


United States.


India.


United Kingdom. month-to









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

Patent Infringement




30



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Class Action




S-1








31



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##### Table of Contents













Other









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






PART II







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



32



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|            |                |      |   |      |     |  |   |      | 
|----------- | -------------- | ---- | - | ---- | --- |  | - | ---- | 
|            |                | High |   |      | Low | 
|            |                |      |   |      |     | 
|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 | 
|Fiscal 2006 |                |      |   |      |     |  |   |     
|            | First Quarter  |      | $ | 3.72 |     |  | $ | 2.91 | 
|            | Second Quarter |      | $ | 3.33 |     |  | $ | 2.83 | 
|            | Third Quarter  |      | $ | 3.25 |     |  | $ | 2.55 | 
|            | Fourth Quarter |      | $ | 2.99 |     |  | $ | 2.48 | 





Dividend Policy




Equity Compensation Plan Information




|                                                           |  |                                                    |       |  |                    |                         |      |                           |  |  |       |       
|---------------------------------------------------------- |  | -------------------------------------------------- | ----- |  | ------------------ | ----------------------- | ---- | ------------------------- |  |  | ----- | ------
|                                                           |  | A                                                  |       |  | B                  |                         |      | C                         | 
|                                                           |  |                                                    |       |  |                    |                         |      |                           | 
|                                                           |  |                                                    |       |  |                    | Number of securities    |     
|                                                           |  |                                                    |       |  |                    | remaining available for |     
|                                                           |  | Number of securities                               |       |  | Weighted-average   |                         |      | future issuance under     | 
|                                                           |  | to be issued upon                                  |       |  | exercise price of  |                         |      | equity compensation plans | 
|                                                           |  | exercise of outstanding                            |       |  | outstanding        |                         |      | (excluding securities     | 
|Plan category                                              |  | options and rights                                 |       |  | options and rights |                         |      | reflected in Column A)    | 
|                                                           |  |                                                    |       |  |                    |                         |      |                           | 
|                                                           |  | (in thousands, except for per share amounts below) |      
|Equity compensation plans approved by security holders     |  |                                                    | 5,068 |  |                    | $                       | 3.72 |                           |  |  | 7,457 | (1)(2)
|Equity compensation plans not approved by security holders |  |                                                    | 1,861 |  |                    | $                       | 3.58 |                           |  |  | 975   |       
|                                                           |  |                                                    |       |  |                    |                         |      |                           | 
|Total                                                      |  |                                                    | 6,929 |  |                    | $                       | 3.68 |                           |  |  | 8,432 |       
|                                                           |  |                                                    |       |  |                    |                         |      |                           | 






|    |                                                                                                                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 common stock or 1.8 million shares.
    On each May 1, starting in 2001, the number of shares
    reserved for

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| |                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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



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



24-month


34



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

|                                                              |                            |                                       |         |        |        |   |         |        |        |   |         |        |        |      |         |        |        |   |         |        |        | 
|------------------------------------------------------------- | -------------------------- | ------------------------------------- | ------- | ------ | ------ | - | ------- | ------ | ------ | - | ------- | ------ | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                                              |                            | Fiscal Years Ended March 31,          |        
|                                                              |                            |                                       |        
|                                                              |                            | 2006                                  |         |        | 2005   |   |         | 2004   |        |   | 2003    |        |        | 2002 |        
|                                                              |                            |                                       |         |        |        |   |         |        |        |   |         |        |        |      |        
|                                                              |                            | (in thousands, except per share data) |        
|Consolidated Statement of Operations Data:                    |                            |                                       |         |        |        |   |         |        |        |   |         |        |        |      |         |        |        |   |         |       
|Revenues:                                                     |                            |                                       |         |        |        |   |         |        |        |   |         |        |        |      |         |        |        |   |         |       
|                                                              | License                    |                                       | $       | 4,431  |        |   | $       | 9,133  |        |   | $       | 16,935 |        |      | $       | 10,218 |        |   | $       | 16,683 |       
|                                                              | Services                   |                                       |         | 19,002 |        |   |         | 21,987 |        |   |         | 23,089 |        |      |         | 25,350 |        |   |         | 30,511 |       
|                                                              |                            |                                       |         |        |        |   |         |        |        |   |         |        |        |      |        
|                                                              |                            | Total revenues                        |         |        | 23,433 |   |         |        | 31,120 |   |         |        | 40,024 |      |         |        | 35,568 |   |         |        | 47,194 | 
|Cost of revenues:                                             |                            |                                       |         |        |        |   |         |        |        |   |         |        |        |      |         |        |        |   |         |       
|                                                              | License                    |                                       |         | 625    |        |   |         | 819    |        |   |         | 1,410  |        |      |         | 1,185  |        |   |         | 1,023  |       
|                                                              | Services                   |                                       |         | 8,613  |        |   |         | 12,428 |        |   |         | 16,827 |        |      |         | 18,518 |        |   |         | 28,660 |       
|                                                              |                            |                                       |         |        |        |   |         |        |        |   |         |        |        |      |        
|                                                              |                            | Total cost of revenues                |         |        | 9,238  |   |         |        | 13,247 |   |         |        | 18,237 |      |         |        | 19,703 |   |         |        | 29,683 | 
|                                                              |                            |                                       |         |        |        |   |         |        |        |   |         |        |        |      |        
|Gross profit                                                  |                            |                                       | 14,195  |        |        |   | 17,873  |        |        |   | 21,787  |        |        |      | 15,865  |        |        |   | 17,511  |       
|Operating expenses:                                           |                            |                                       |         |        |        |   |         |        |        |   |         |        |        |      |         |        |        |   |         |       
|                                                              | Research and development   |                                       |         | 8,782  |        |   |         | 12,359 |        |   |         | 13,474 |        |      |         | 13,202 |        |   |         | 15,343 |       
|                                                              | Sales and marketing        |                                       |         | 6,645  |        |   |         | 11,861 |        |   |         | 14,491 |        |      |         | 19,368 |        |   |         | 25,215 |       
|                                                              | General and administrative |                                       |         | 11,364 |        |   |         | 10,396 |        |   |         | 5,385  |        |      |         | 6,068  |        |   |         | 8,922  |       
|                                                              | Litigation settlement      |                                       |         | 7,500  |        |   |         |       |        |   |         |       |        |      |         |       |        |   |         |       |       
|                                                              |                            |                                       |         |        |        |   |         |        |        |   |         |        |        |      |        
|                                                              |                            | Total operating expenses              |         |        | 34,291 |   |         |        | 34,616 |   |         |        | 33,350 |      |         |        | 38,638 |   |         |        | 49,480 | 
|                                                              |                            |                                       |         |        |        |   |         |        |        |   |         |        |        |      |        
|Loss from operations                                          |                            |                                       | (20,096 | )      |        |   | (16,743 | )      |        |   | (11,563 | )      |        |      | (22,773 | )      |        |   | (31,969 | )     
|Other income (expense), net                                   |                            |                                       | (196    | )      |        |   | 82      |        |        |   | 1,092   |        |        |      |        |        |        |   |        |       
|Interest income                                               |                            |                                       | 2,907   |        |        |   | 1,891   |        |        |   | 1,625   |        |        |      | 2,999   |        |        |   | 5,896   |       
|                                                              |                            |                                       |         |        |        |   |         |        |        |   |         |        |        |      |        
|Net loss before taxes                                         |                            |                                       | (17,385 | )      |        |   | (14,770 | )      |        |   | (8,846  | )      |        |      | (19,774 | )      |        |   | (26,073 | )     
|Provision (benefit) for income taxes                          |                            |                                       | 122     |        |        |   | (117    | )      |        |   |        |        |        |      |        |        |        |   | 304     |       
|                                                              |                            |                                       |         |        |        |   |         |        |        |   |         |        |        |      |        
|Net loss before cumulative effect of an accounting change     |                            |                                       | (17,507 | )      |        |   | (14,653 | )      |        |   | (8,846  | )      |        |      | (19,774 | )      |        |   | (26,377 | )     
|Cumulative effect of an accounting change to adopt SFAS 142   |                            |                                       |        |        |        |   |        |        |        |   |        |        |        |      | (9,974  | )      |        |   |        |       
|                                                              |                            |                                       |         |        |        |   |         |        |        |   |         |        |        |      |        
|Net loss                                                      |                            | $                                     | (17,507 | )      |        | $ | (14,653 | )      |        | $ | (8,846  | )      |        | $    | (29,748 | )      |        | $ | (26,377 | )     
|                                                              |                            |                                       |         |        |        |   |         |        |        |   |         |        |        |      |        
|Basic and diluted net loss per share                          |                            | $                                     | (0.53   | )      |        | $ | (0.45   | )      |        | $ | (0.28   | )      |        | $    | (0.92   | )      |        | $ | (0.75   | )     
|Shares used in computing basic and diluted net loss per share |                            |                                       | 32,808  |        |        |   | 32,665  |        |        |   | 31,165  |        |        |      | 32,219  |        |        |   | 35,090  |       

|                                 |  |                              |        |  |      |   |         |      |  |   |         |  |  |      |         |  |  |   |         | 
|-------------------------------- |  | ---------------------------- | ------ |  | ---- | - | ------- | ---- |  | - | ------- |  |  | ---- | ------- |  |  | - | ------- | 
|                                 |  | Fiscal Years Ended March 31, |       
|                                 |  |                              |       
|                                 |  | 2006                         |        |  | 2005 |   |         | 2004 |  |   | 2003    |  |  | 2002 |        
|                                 |  |                              |        |  |      |   |         |      |  |   |         |  |  |      |        
|                                 |  | (in thousands)               |       
|Consolidated Balance Sheet Data: |  |                              |        |  |      |   |         |      |  |   |         |  |  |      |         |  |  |   |         | 
|Current assets                   |  | $                            | 79,507 |  |      | $ | 98,349  |      |  | $ | 100,597 |  |  | $    | 117,853 |  |  | $ | 133,456 | 
|Non current assets               |  |                              | 6,363  |  |      |   | 9,275   |      |  |   | 25,819  |  |  |      | 19,296  |  |  |   | 36,628  | 
|Current liabilities              |  |                              | 6,464  |  |      |   | 8,470   |      |  |   | 12,896  |  |  |      | 22,731  |  |  |   | 15,509  | 
|Non current liabilities          |  |                              | 1,091  |  |      |   | 1,434   |      |  |   | 1,482   |  |  |      | 1,338   |  |  |   | 1,223   | 
|Working capital                  |  |                              | 73,043 |  |      |   | 89,879  |      |  |   | 87,701  |  |  |      | 95,122  |  |  |   | 117,947 | 
|Total assets                     |  |                              | 85,870 |  |      |   | 107,624 |      |  |   | 126,416 |  |  |      | 137,149 |  |  |   | 170,084 | 
|Total stockholders equity       |  |                              | 78,315 |  |      |   | 97,720  |      |  |   | 112,038 |  |  |      | 113,080 |  |  |   | 153,352 | 

35



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

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
this Item entitled Managements Discussion and
Analysis and Item 1A entitled Risks Factors
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; existing and potential litigation:
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 earlier in this report entitled Risks
Factors. 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. Selectica assumes no obligation to
update these forward-looking statements.




|                                                 |                            |                          |     |    |      |  |     |      |     |  |     |    |     | 
|------------------------------------------------ | -------------------------- | ------------------------ | --- | -- | ---- |  | --- | ---- | --- |  | --- | -- | --- | 
|                                                 |                            | Fiscal Years Ended       |    
|                                                 |                            | March 31,                |    
|                                                 |                            |                          |    
|                                                 |                            | 2006                     |     |    | 2005 |  |     | 2004 |    
|                                                 |                            |                          |     |    |      |  |     |      |    
|As a Percentage of Total Revenues:               |                            |                          |     |    |      |  |     |      |     |  |     |   
|Revenues:                                        |                            |                          |     |    |      |  |     |      |     |  |     |   
|                                                 | License                    |                          |     | 19 | %    |  |     | 29   | %   |  |     | 42 | %  
|                                                 | Services                   |                          |     | 81 |      |  |     | 71   |     |  |     | 58 |    
|                                                 |                            |                          |     |    |      |  |     |      |    
|                                                 |                            | Total revenues           |     |    | 100  |  |     |      | 100 |  |     |    | 100 | 
|Cost of revenues:                                |                            |                          |     |    |      |  |     |      |     |  |     |   
|                                                 | License                    |                          |     | 3  |      |  |     | 3    |     |  |     | 4  |    
|                                                 | Services                   |                          |     | 37 |      |  |     | 40   |     |  |     | 42 |    
|                                                 |                            |                          |     |    |      |  |     |      |    
|                                                 |                            | Total cost of revenues   |     |    | 40   |  |     |      | 43  |  |     |    | 46  | 
|                                                 |                            |                          |     |    |      |  |     |      |    
|                                                 |                            | Gross profit             |     |    | 60   |  |     |      | 57  |  |     |    | 54  | 
|Operating expenses:                              |                            |                          |     |    |      |  |     |      |     |  |     |   
|                                                 | Research and development   |                          |     | 37 |      |  |     | 40   |     |  |     | 34 |    
|                                                 | Sales and marketing        |                          |     | 28 |      |  |     | 38   |     |  |     | 36 |    
|                                                 | General and administrative |                          |     | 48 |      |  |     | 33   |     |  |     | 13 |    
|                                                 | Litigation settlement      |                          |     | 32 |      |  |     |     |     |  |     |   |    
|                                                 |                            |                          |     |    |      |  |     |      |    
|                                                 |                            | Total operating expenses |     |    | 145  |  |     |      | 111 |  |     |    | 83  | 
|                                                 |                            |                          |     |    |      |  |     |      |    
|Loss from operations                             |                            |                          | (85 | )  |      |  | (54 | )    |     |  | (29 | ) 
|Other income (expense), net                      |                            |                          | (1  | )  |      |  |    |      |     |  | 3   |   
|Interest income                                  |                            |                          | 12  |    |      |  | 6   |      |     |  | 4   |   
|                                                 |                            |                          |     |    |      |  |     |      |    
|Loss before provision (benefit) for income taxes |                            |                          | (74 | )  |      |  | (48 | )    |     |  | (22 | ) 
|Provision (benefit) for income taxes             |                            |                          | 1   |    |      |  |    |      |     |  |    |   
|                                                 |                            |                          |     |    |      |  |     |      |    
|Net loss                                         |                            |                          | (75 | )% |      |  | (48 | )%   |     |  | (22 | )%
|                                                 |                            |                          |     |    |      |  |     |      |    



36



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state-of




Summary of Operating Results for Fiscal 2006




Key Performance Indicators




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



37



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





Outlook for Fiscal Year 2007






Critical Accounting Policies and Estimates






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



38



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Arrangements consisting of license and maintenance only.


Arrangements consisting of license, maintenance and other
services. off-the


off-the


81-1, 81-1).




39



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Arrangements consisting of consulting services. off-the




|                                      |                |                    |    |     |      |  |    |      |   |  |    |     |  
|------------------------------------- | -------------- | ------------------ | -- | --- | ---- |  | -- | ---- | - |  | -- | --- | -
|                                      |                | Fiscal Years Ended |   
|                                      |                | March 31,          |   
|                                      |                |                    |   
|                                      |                | 2006               |    |     | 2005 |  |    | 2004 |  
|                                      |                |                    |    |     |      |  |    |      |  
|As a Percentage of Total Revenues:    |                |                    |    |     |      |  |    |      |   |  |    |    
|Contract Accounting                   |                |                    | 67 | %   |      |  | 73 | %    |   |  | 51 | %  
|Residual Method                       |                |                    |   |     |      |  |   |      |   |  | 3  |    
|Ratable Method (includes Maintenance) |                |                    | 33 |     |      |  | 27 |      |   |  | 46 |    
|                                      |                |                    |    |     |      |  |    |      |  
|                                      | Total Revenues |                    |    | 100 | %    |  |    | 100  | % |  |    | 100 | %
|                                      |                |                    |    |     |      |  |    |      |  



Short Term
Investments




40



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Allowance for Doubtful
Accounts




Contingencies and Litigation




Related Party Transaction and
Severance Agreement






Factors Affecting Operating Results




|                                 |            |  |  |    |  
|-------------------------------- | ---------- |  |  | -- | -
|Fiscal Year ended March 31, 2006 |            |  |  |   
|                                 | Customer A |  |  | 23 | %
|                                 | Customer B |  |  | 22 | %
|Fiscal Year ended March 31, 2005 |            |  |  |   
|                                 | Customer A |  |  | 14 | %
|                                 | Customer B |  |  | 23 | %
|                                 | Customer C |  |  | 12 | %
|                                 | Customer D |  |  | 11 | %
|Fiscal Year ended March 31, 2004 |            |  |  |   
|                                 | Customer A |  |  | 20 | %
|                                 | Customer B |  |  | 39 | %

41



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period-to




Results of Operations


Revenues


|         |                              |                                    |        |        |        |  |     |      |    |   |        |        |   |      |     |     |    |   |        |        |  
|-------- | ---------------------------- | ---------------------------------- | ------ | ------ | ------ |  | --- | ---- | -- | - | ------ | ------ | - | ---- | --- | --- | -- | - | ------ | ------ | -
|         |                              | 2006                               |        |        | Change |  |     | 2005 |    |   | Change |        |   | 2004 |    
|         |                              |                                    |        |        |        |  |     |      |    |   |        |        |   |      |    
|         |                              | (in thousands, except percentages) |       
|License  |                              | $                                  | 4,431  |        |        |  | (51 | )%   |    | $ | 9,133  |        |   |      | (46 | )%  |    | $ | 16,935 |       
|         | Percentage of total revenues |                                    |        | 19     | %      |  |     |      |    |   |        | 29     | % |      |     |     |    |   |        | 42     | %
|Services |                              | $                                  | 19,002 |        |        |  | (14 | )%   |    | $ | 21,987 |        |   |      | (5  | )%  |    | $ | 23,089 |       
|         | Percentage of total revenues |                                    |        | 81     | %      |  |     |      |    |   |        | 71     | % |      |     |     |    |   |        | 58     | %
|         | Total revenues               |                                    | $      | 23,433 |        |  |     | (25  | )% |   | $      | 31,120 |   |      |     | (22 | )% |   | $      | 40,024 |  

License.




Services.


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Cost of Revenues


|                          |                                 |                                    |       |    |        |  |     |      |  |   |        |    |   |      |     |    |  |   |        |    |  
|------------------------- | ------------------------------- | ---------------------------------- | ----- | -- | ------ |  | --- | ---- |  | - | ------ | -- | - | ---- | --- | -- |  | - | ------ | -- | -
|                          |                                 | 2006                               |       |    | Change |  |     | 2005 |  |   | Change |    |   | 2004 |    
|                          |                                 |                                    |       |    |        |  |     |      |  |   |        |    |   |      |    
|                          |                                 | (in thousands, except percentages) |      
|Cost of license revenues  |                                 | $                                  | 625   |    |        |  | (24 | )%   |  | $ | 819    |    |   |      | (42 | )% |  | $ | 1,410  |   
|                          | Percentage of license revenues  |                                    |       | 14 | %      |  |     |      |  |   |        | 9  | % |      |     |    |  |   |        | 8  | %
|Cost of services revenues |                                 | $                                  | 8,613 |    |        |  | (31 | )%   |  | $ | 12,428 |    |   |      | (26 | )% |  | $ | 16,827 |   
|                          | Percentage of services revenues |                                    |       | 45 | %      |  |     |      |  |   |        | 57 | % |      |     |    |  |   |        | 73 | %

Cost of License Revenues.


Cost of Services Revenues.




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Gross Margin


|                                |  |      |    |   |      |  |    |      |  |  |    |  
|------------------------------- |  | ---- | -- | - | ---- |  | -- | ---- |  |  | -- | -
|                                |  | 2006 |    |   | 2005 |  |    | 2004 | 
|                                |  |      |    |   |      |  |    |      | 
|Gross margin, license revenues  |  |      | 86 | % |      |  | 91 | %    |  |  | 92 | %
|Gross margin, services revenues |  |      | 55 | % |      |  | 43 | %    |  |  | 27 | %
|Gross margin, total revenues    |  |      | 61 | % |      |  | 57 | %    |  |  | 54 | %

Gross Margin  Licenses.




Gross Margin  Services.




Operating Expenses


|                           |                              |                                    |        |    |        |  |     |      |  |   |        |    |   |      |     |    |  |   |        |    |  
|-------------------------- | ---------------------------- | ---------------------------------- | ------ | -- | ------ |  | --- | ---- |  | - | ------ | -- | - | ---- | --- | -- |  | - | ------ | -- | -
|                           |                              | 2006                               |        |    | Change |  |     | 2005 |  |   | Change |    |   | 2004 |    
|                           |                              |                                    |        |    |        |  |     |      |  |   |        |    |   |      |    
|                           |                              | (in thousands, except percentages) |       
|Research and development   |                              | $                                  | 8,782  |    |        |  | (29 | )%   |  | $ | 12,359 |    |   |      | (8  | )% |  | $ | 13,474 |   
|                           | Percentage of total revenues |                                    |        | 37 | %      |  |     |      |  |   |        | 40 | % |      |     |    |  |   |        | 34 | %
|Sales and marketing        |                              | $                                  | 6,645  |    |        |  | (44 | )%   |  | $ | 11,861 |    |   |      | (18 | )% |  | $ | 14,491 |   
|                           | Percentage of total revenues |                                    |        | 28 | %      |  |     |      |  |   |        | 38 | % |      |     |    |  |   |        | 36 | %
|General and administrative |                              | $                                  | 11,364 |    |        |  | 9   | %    |  | $ | 10,396 |    |   |      | 93  | %  |  | $ | 5,385  |   
|                           | Percentage of total revenues |                                    |        | 48 | %      |  |     |      |  |   |        | 33 | % |      |     |    |  |   |        | 13 | %
|Litigation settlement      |                              | $                                  | 7,500  |    |        |  | NA  |      |  | $ |       |    |   |      | NA  |    |  | $ |       |   
|                           | Percentage of total revenues |                                    |        | 32 | %      |  |     |      |  |   |        | NA |   |      |     |    |  |   |        | NA |  

Research and Development.


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Sales and Marketing.






General and Administrative and Litigation Settlement.






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Restructuring. 94-3


94-3




Other Income (Expense), Net




Interest Income


|                |  |                                    |       |  |        |  |    |      |  |   |        |  |  |      |    |   |  |   |       | 
|--------------- |  | ---------------------------------- | ----- |  | ------ |  | -- | ---- |  | - | ------ |  |  | ---- | -- | - |  | - | ----- | 
|                |  | 2006                               |       |  | Change |  |    | 2005 |  |   | Change |  |  | 2004 |   
|                |  |                                    |       |  |        |  |    |      |  |   |        |  |  |      |   
|                |  | (in thousands, except percentages) |      
|Interest Income |  | $                                  | 2,907 |  |        |  | 54 | %    |  | $ | 1,891  |  |  |      | 16 | % |  | $ | 1,625 | 





Provision (Benefit) for Income Taxes




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Recent Accounting Pronouncements




Liquidity and Capital Resources


|                                                     |  |                                    |         |   |        |  |      |      |  |   |         |   |  |      |      |    |  |   |         |  
|---------------------------------------------------- |  | ---------------------------------- | ------- | - | ------ |  | ---- | ---- |  | - | ------- | - |  | ---- | ---- | -- |  | - | ------- | -
|                                                     |  | 2006                               |         |   | Change |  |      | 2005 |  |   | Change  |   |  | 2004 |     
|                                                     |  |                                    |         |   |        |  |      |      |  |   |         |   |  |      |     
|                                                     |  | (in thousands, except percentages) |        
|Cash, cash equivalents and short-term investments    |  | $                                  | 74,005  |   |        |  | (21  | )%   |  | $ | 93,263  |   |  |      | (4   | )% |  | $ | 97,303  |  
|Working capital                                      |  | $                                  | 73,043  |   |        |  | (19  | )%   |  | $ | 89,879  |   |  |      | 2    | %  |  | $ | 87,701  |  
|Net cash used for operating activities               |  | $                                  | (19,147 | ) |        |  |     |      |  | $ | (19,172 | ) |  |      | 89   | %  |  | $ | (10,167 | )
|Net cash provided by (used for) investing activities |  | $                                  | 4,759   |   |        |  | (75  | )%   |  | $ | 19,243  |   |  |      | (188 | )% |  | $ | (21,919 | )
|Net cash provided by (used for) financing activities |  | $                                  | (2,344  | ) |        |  | (518 | )%   |  | $ | 561     |   |  |      | (90  | )% |  | $ | 5,821   |  







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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         |  | $                      | 9,273 |           |        | $ | 2,436 |       |  | $   | 6,837 |         |       | $ |  |  |  | $ |  | 






Item 7A:     Quantitative
and Qualitative Disclosures About Market Risk




Foreign Currency Exchange Rate Risk






Interest Rate Risk








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|                        |  |                    |        |   |      |   |       |       |  |   |        |  
|----------------------- |  | ------------------ | ------ | - | ---- | - | ----- | ----- |  | - | ------ | -
|                        |  | Maturing in Fiscal |        |   |     
|                        |  |                    |        |   |     
|                        |  | 2006               |        |   | 2007 |   |       | Total | 
|                        |  |                    |        |   |      |   |       |       | 
|                        |  | (thousands)        |       
|Auction rate preferred  |  | $                  | 35,251 |   |      | $ |      |       |  | $ | 35,251 |  
|Weighted Average yield  |  |                    | 4.64   | % |      |   |      |       |  |   | 4.64   | %
|Government agencies     |  |                    | 19,024 |   |      |   | 1,492 |       |  |   | 20,516 |  
|Weighted Average yield  |  |                    | 3.71   | % |      |   | 4.66  | %     |  |   | 3.78   | %
|Corporate notes & bonds |  |                    | 3,035  |   |      |   |      |       |  |   | 3,035  |  
|Weighted Average yield  |  |                    | 4.13   | % |      |   |      |       |  |   | 4.13   | %
|Certificate of Deposit  |  |                    | 4,067  |   |      |   | 1,437 |       |  |   | 5,504  |  
|Weighted Average yield  |  |                    | 4.96   | % |      |   | 5.86  | %     |  |   | 5.10   | %
|                        |  |                    |        |   |      |   |       |       | 
|Total investments       |  | $                  | 61,377 |   |      | $ | 2,929 |       |  | $ | 64,306 |  
|                        |  |                    |        |   |      |   |       |       | 

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

Annual Financial Statements


10-K.


Quarterly Results of Operations (Unaudited)




|                                                                                                   |                            |                          |        |       |           |   |        |          |       |   |          |       |        |   |        |       |       | 
|-------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------ | ------ | ----- | --------- | - | ------ | -------- | ----- | - | -------- | ----- | ------ | - | ------ | ----- | ----- | 
|                                                                                                   |                            | Quarters Ended           |       
|                                                                                                   |                            |                          |       
|                                                                                                   |                            | June 30,                 |        |       | Sept. 30, |   |        | Dec. 31, |       |   | Mar. 31, |      
|                                                                                                   |                            | 2005                     |        |       | 2005      |   |        | 2005     |       |   | 2006     |      
|                                                                                                   |                            |                          |        |       |           |   |        |          |       |   |          |      
|                                                                                                   |                            | (in thousands)           |       
|Consolidated Statement of Operations Data:                                                         |                            |                          |        |       |           |   |        |          |       |   |          |       |        |   |        |      
|Revenues:                                                                                          |                            |                          |        |       |           |   |        |          |       |   |          |       |        |   |        |      
|                                                                                                   | License                    |                          | $      | 2,034 |           |   | $      | 1,039    |       |   | $        | 520   |        |   | $      | 838   |      
|                                                                                                   | Services                   |                          |        | 5,045 |           |   |        | 5,040    |       |   |          | 4,737 |        |   |        | 4,180 |      
|                                                                                                   |                            |                          |        |       |           |   |        |          |       |   |          |      
|                                                                                                   |                            | Total revenues           |        |       | 7,079     |   |        |          | 6,079 |   |          |       | 5,257  |   |        |       | 5,018 | 
|Cost of revenues:                                                                                  |                            |                          |        |       |           |   |        |          |       |   |          |       |        |   |        |      
|                                                                                                   | License                    |                          |        | 132   |           |   |        | 206      |       |   |          | 164   |        |   |        | 123   |      
|                                                                                                   | Services                   |                          |        | 2,587 |           |   |        | 1,938    |       |   |          | 2,255 |        |   |        | 1,833 |      
|                                                                                                   |                            |                          |        |       |           |   |        |          |       |   |          |      
|                                                                                                   |                            | Total cost of revenues   |        |       | 2,719     |   |        |          | 2,144 |   |          |       | 2,419  |   |        |       | 1,956 | 
|                                                                                                   |                            |                          |        |       |           |   |        |          |       |   |          |      
|                                                                                                   |                            | Gross profit             |        |       | 4,360     |   |        |          | 3,935 |   |          |       | 2,838  |   |        |       | 3,062 | 
|                                                                                                   |                            |                          |        |       |           |   |        |          |       |   |          |      
|Operating expenses:                                                                                |                            |                          |        |       |           |   |        |          |       |   |          |       |        |   |        |      
|                                                                                                   | Research and development   |                          |        | 2,565 |           |   |        | 2,212    |       |   |          | 1,943 |        |   |        | 2,062 |      
|                                                                                                   | Sales and marketing        |                          |        | 1,737 |           |   |        | 1,685    |       |   |          | 1,592 |        |   |        | 1,631 |      
|                                                                                                   | General and administrative |                          |        | 3,302 |           |   |        | 3,081    |       |   |          | 3,204 |        |   |        | 1,777 |      
|                                                                                                   | Litigation settlement      |                          |        |      |           |   |        |         |       |   |          | 7,500 |        |   |        |      |      
|                                                                                                   |                            |                          |        |       |           |   |        |          |       |   |          |      
|                                                                                                   |                            | Total operating expenses |        |       | 7,604     |   |        |          | 6,978 |   |          |       | 14,239 |   |        |       | 5,470 | 
|                                                                                                   |                            |                          |        |       |           |   |        |          |       |   |          |      
|Loss from operations                                                                               |                            |                          | (3,244 | )     |           |   | (3,043 | )        |       |   | (11,401  | )     |        |   | (2,408 | )    
|Other income (expense), net                                                                        |                            |                          | (56    | )     |           |   | (42    | )        |       |   | (157     | )     |        |   | 59     |      
|Interest income                                                                                    |                            |                          | 601    |       |           |   | 682    |          |       |   | 804      |       |        |   | 820    |      
|                                                                                                   |                            |                          |        |       |           |   |        |          |       |   |          |      
|Net loss before taxes                                                                              |                            |                          | (2,699 | )     |           |   | (2,403 | )        |       |   | (10,754  | )     |        |   | (1,529 | )    
|Provision (benefit) for income taxes                                                               |                            |                          | 30     |       |           |   | 18     |          |       |   | 25       |       |        |   | 49     |      
|                                                                                                   |                            |                          |        |       |           |   |        |          |       |   |          |      
|Net loss                                                                                           |                            | $                        | (2,729 | )     |           | $ | (2,421 | )        |       | $ | (10,779  | )     |        | $ | (1,578 | )    
|                                                                                                   |                            |                          |        |       |           |   |        |          |       |   |          |      
|Basic and diluted, net loss per share                                                              |                            | $                        | (0.08  | )     |           | $ | (0.07  | )        |       | $ | (0.33    | )     |        | $ | (0.05  | )    
|                                                                                                   |                            |                          |        |       |           |   |        |          |       |   |          |      
|Weighted-average shares of common stock used in computing basic
    and diluted net loss per share |                            |                          | 32,821 |       |           |   | 32,906 |          |       |   | 32,958   |       |        |   | 32,453 |      
|                                                                                                   |                            |                          |        |       |           |   |        |          |       |   |          |      

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|                                                                                                   |                            |                          |        |       |           |   |        |          |       |   |          |       |       |   |        |       |       | 
|-------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------ | ------ | ----- | --------- | - | ------ | -------- | ----- | - | -------- | ----- | ----- | - | ------ | ----- | ----- | 
|                                                                                                   |                            | 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 | )    
|Other income (expense), net                                                                        |                            |                          |       |       |           |   |       |          |       |   |         |       |       |   | 82     |      
|Interest income                                                                                    |                            |                          | 223    |       |           |   | 515    |          |       |   | 798      |       |       |   | 355    |      
|                                                                                                   |                            |                          |        |       |           |   |        |          |       |   |          |      
|Net loss before taxes                                                                              |                            |                          | (3,599 | )     |           |   | (4,066 | )        |       |   | (1,512   | )     |       |   | (5,593 | )    
|Provision (benefit) 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 |      
|                                                                                                   |                            |                          |        |       |           |   |        |          |       |   |          |      







period-to


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

















| |                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.                   





| |                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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

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| |                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.










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

Report of Management on Internal Controls over Financial
Reporting


13a-15(f)






54



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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We had insufficient controls over the External Reporting process
    related to the preparation, review and approval of the annual
    and the interim financial statements. Specifically, we had
    insufficient: a) review within the accounting and finance
    departments; b) preparation and review of footnote
    disclosures accompanying our financial statements; and
    c) technical accounting resources. As of March 31,
    2006, we did not have sufficient personnel and technical
    accounting expertise within our accounting function to
    sufficiently address complex transactions and/or accounting and
    financial reporting issues that arise from time to time in the
    course of our operations. Although these deficiencies did not
    result in errors in the financial statements, there is however,
    more than a remote likelihood that a material misstatement of
    our annual or interim financial statements would not have been
    prevented or detected.





Planned Remediation






Limitations on Effectiveness of Controls






Vincent G. Ostrosky





|                                      | 
|------------------------------------- | 
|Vincent G. Ostrosky                   | 
|President and Chief Executive Officer | 

Stephen Bennion





|                        | 
|----------------------- | 
|Stephen Bennion         | 
|Chief Financial Officer | 

55



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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


ON INTERNAL CONTROL OVER FINANCIAL REPORTING





Internal Control  Integrated
Framework












| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company had insufficient controls over the external
    reporting process related to the preparation, review and
    approval of annual and interim financial statements.
    Specifically the Company had insufficient: a) review within
    the accounting and finance departments; b) preparation and
    review of footnote disclosures accompanying our financial
    statements; and c) technical accounting resources. As of
    March 31, 2006, the Company did not have sufficient
    personnel and technical accounting expertise within their
    accounting function to sufficiently address complex transactions
    and/or accounting and financial reporting issues that arise from
    time to time in the course of our operations. Although these
    deficiencies did not result in errors in the financial
    statements, there is however, more than a remote likelihood that
    a material misstatement of the annual or interim financial
    statements would not have been prevented or detected.

56



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##### Table of Contents


















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




57



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##### Table of Contents



Code of Ethics









|         |                       
|-------- | ----------------------
|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:


10-K.




| |   |                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------
| |  | Consolidated Balance Sheets as of March 31, 2006 and 2005                                            
|
| |  | Consolidated Statement of Operations for the years ended
    March 31, 2006, 2005, and 2004          
|
| |  | Consolidated Statement of Stockholders Equity for the
    years ended March 31, 2006, 2005, and 2004
|
| |  | Consolidated Statements of Cash Flows for the years ended
    March 31, 2006, 2005, and 2004         
|
| |  | Notes to Consolidated Financial Statements                                                           
|
| |  | Report of Successor Independent Registered Public Accounting
    Firm (Armanino McKenna LLP)         
|
| |  | Report of Predecessor Independent Registered Public Accounting
    Firm (Ernst and Young LLP)        

58



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##### Table of Contents



(2) Financial Statement Schedules:




(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(7)      |  | 1999 Equity Incentive Plan Stock Option Agreement.                                                                                                                    
|        | 10 | .21(7)      |  | 1999 Equity Incentive Plan Stock Option Agreement (Initial Grant
    to Directors).                                                                                   

59



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|        |    |             |  |                                                                                                     
|------- | -- | ----------- |  | ----------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 10 | .22(7)      |  | 1999 Equity Incentive Plan Stock Option Agreement (Annual Grant
    to Directors).                  
|        | 10 | .23(7)      |  | Selectica UK Limited Major Account License Agreement dated
    December 5, 2003.                    
|        |    |             |  | Amendment Agreement between MCI WorldCom, Limited and Selectica
    UK                              
|        | 10 | .24(7)      |  | Limited, dated December 23, 2004.                                                                   
|        | 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 Successor Independent Accounting Firm (Armanino
    McKenna LLP).                        
|        | 23 | .2          |  | Consent of Predecessor Independent Accounting Firm (Ernst and
    Young LLP).                       
|        | 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.                              
|   
|(7) | Previously filed in the Companys report on
    Form 10-K filed on
    June 29, 2005.                                

Exhibits.




Financial Statement Schedule.




60



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##### Table of Contents



FINANCIAL STATEMENTS




INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


|                                                                                                               |  |  |      | 
|-------------------------------------------------------------------------------------------------------------- |  |  | ---- | 
|Consolidated Balance Sheets as of
    March 31, 2006 and 2005                                                  |  |  | F-2  | 
|Consolidated Statements of
    Operations  Years ended March 31, 2006, 2005,
    and 2004                     |  |  | F-3  | 
|Consolidated Statements of
    Stockholders Equity (Deficit)  Years ended
    March 31, 2006, 2005, and 2004 |  |  | F-4  | 
|Consolidated Statements of Cash
    Flows  Years ended March 31, 2006, 2005, and
    2004                     |  |  | F-5  | 
|Notes to Consolidated Financial
    Statements                                                                 |  |  | F-6  | 
|Report of Successor Independent Registered
    Public Accounting Firm (Armanino McKenna LLP)                   |  |  | F-31 | 
|Report of Predecessor Independent
    Registered Public Accounting Firm (Ernst and Young LLP)                  |  |  | F-32 | 

F-1



---



##### Table of Contents



SELECTICA, INC.





CONSOLIDATED BALANCE SHEETS


|                                                                                             |                                                                                                |                    |          |        |      |   |          |        | 
|-------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------- | ------------------ | -------- | ------ | ---- | - | -------- | ------ | 
|                                                                                             |                                                                                                | Fiscal Years Ended |         
|                                                                                             |                                                                                                | March 31,          |         
|                                                                                             |                                                                                                |                    |         
|                                                                                             |                                                                                                | 2006               |          |        | 2005 |  
|                                                                                             |                                                                                                |                    |          |        |      |  
|                                                                                             |                                                                                                | (in thousands,     |         
|                                                                                             |                                                                                                | except par value)  |         
|Assets                                                                                      
|Current assets:                                                                              |                                                                                                |                    |          |        |      |   |          |       
|                                                                                             | Cash and cash equivalents                                                                      |                    | $        | 12,628 |      |   | $        | 29,360 | 
|                                                                                             | Short-term investments                                                                         |                    |          | 61,377 |      |   |          | 63,903 | 
|                                                                                             | Accounts receivable, net of allowance for doubtful accounts of
    $167 and $149, respectively |                    |          | 3,243  |      |   |          | 2,811  | 
|                                                                                             | Prepaid expenses and other current assets                                                      |                    |          | 2,259  |      |   |          | 2,093  | 
|                                                                                             | Investments, restricted  short term                                                           |                    |          |       |      |   |          | 182    | 
|                                                                                             |                                                                                                |                    |          |        |      |  
|                                                                                             | Total current assets                                                                           |                    |          | 79,507 |      |   |          | 98,349 | 
|Property and equipment, net                                                                  |                                                                                                |                    | 2,407    |        |      |   | 3,158    |       
|Intangible assets                                                                            |                                                                                                |                    | 516      |        |      |   |         |       
|Other assets                                                                                 |                                                                                                |                    | 511      |        |      |   | 511      |       
|Long term investments                                                                        |                                                                                                |                    | 2,929    |        |      |   | 5,606    |       
|                                                                                             |                                                                                                |                    |          |        |      |  
|Total assets                                                                                 |                                                                                                | $                  | 85,870   |        |      | $ | 107,624  |       
|                                                                                             |                                                                                                |                    |          |        |      |  
|                                                                                            
|Liabilities and Stockholders Equity (Deficit)                                              
|Current liabilities:                                                                         |                                                                                                |                    |          |        |      |   |          |       
|                                                                                             | Accounts payable                                                                               |                    | $        | 1,651  |      |   | $        | 2,261  | 
|                                                                                             | Accrued payroll and related liabilities                                                        |                    |          | 1,431  |      |   |          | 1,935  | 
|                                                                                             | Other accrued liabilities                                                                      |                    |          | 1,330  |      |   |          | 1,472  | 
|                                                                                             | Deferred revenues                                                                              |                    |          | 2,052  |      |   |          | 2,802  | 
|                                                                                             |                                                                                                |                    |          |        |      |  
|                                                                                             | Total current liabilities                                                                      |                    |          | 6,464  |      |   |          | 8,470  | 
|                                                                                             |                                                                                                |                    |          |        |      |  
|Other long term liabilities                                                                  |                                                                                                |                    | 1,091    |        |      |   | 1,434    |       
|                                                                                             |                                                                                                |                    |          |        |      |  
|Commitments                                                                                  |                                                                                                |                    |          |        |      |   |          |       
|Stockholders equity:                                                                        |                                                                                                |                    |          |        |      |   |          |       
|Preferred stock, $0.0001 par value:                                                          |                                                                                                |                    |          |        |      |   |          |       
|                                                                                             | Authorized: 25,000 shares at March 31, 2006 and 2005;
    None issued and outstanding          |                    |          |       |      |   |          |       | 
|Common stock, $0.0001 par value:                                                             |                                                                                                |                    |          |        |      |   |          |       
|                                                                                             | Authorized: 150,000 shares at March 31, 2006 and 2005                                          |                    |          |        |      |   |          |        | 
|                                                                                             | Issued: 39,519 and 39,234 shares at March 31, 2006 and
    2005, respectively                  |                    |          |        |      |   |          |        | 
|                                                                                             | Outstanding: 31,967 and 32,796 shares at March 31,
    2006 and 2005, respectively             |                    |          | 4      |      |   |          | 4      | 
|Additional paid-in capital                                                                   |                                                                                                |                    | 293,383  |        |      |   | 292,616  |       
|Deferred compensation                                                                        |                                                                                                |                    | (20      | )      |      |   | (91      | )     
|Accumulated deficit                                                                          |                                                                                                |                    | (190,136 | )      |      |   | (172,613 | )     
|Accumulated other comprehensive income, net of taxes                                         |                                                                                                |                    | (107     | )      |      |   | (448     | )     
|Treasury stock at cost  7,552 and 6,438 shares
    at March 31, 2006 and 2005, respectively |                                                                                                |                    | (24,809  | )      |      |   | (21,748  | )     
|                                                                                             |                                                                                                |                    |          |        |      |  
|Total stockholders equity (deficit)                                                         |                                                                                                |                    | 78,315   |        |      |   | 97,720   |       
|                                                                                             |                                                                                                |                    |          |        |      |  
|Total liabilities and stockholders equity (deficit)                                         |                                                                                                | $                  | 85,870   |        |      | $ | 107,624  |       
|                                                                                             |                                                                                                |                    |          |        |      |  



F-2



---



##### Table of Contents



SELECTICA, INC.





CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                                                                   |                            |                                 |         |        |        |   |         |        |        |   |         |        |        | 
|-------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------- | ------- | ------ | ------ | - | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                                                                                   |                            | Fiscal Years Ended March 31,    |        
|                                                                                                   |                            |                                 |        
|                                                                                                   |                            | 2006                            |         |        | 2005   |   |         | 2004   |       
|                                                                                                   |                            |                                 |         |        |        |   |         |        |       
|                                                                                                   |                            | (in thousands, except per share |        
|                                                                                                   |                            | amounts)                        |        
|Revenues:                                                                                          |                            |                                 |         |        |        |   |         |        |        |   |         |       
|                                                                                                   | License                    |                                 | $       | 4,431  |        |   | $       | 9,133  |        |   | $       | 16,935 |       
|                                                                                                   | Services                   |                                 |         | 19,002 |        |   |         | 21,987 |        |   |         | 23,089 |       
|                                                                                                   |                            |                                 |         |        |        |   |         |        |       
|                                                                                                   |                            | Total revenues                  |         |        | 23,433 |   |         |        | 31,120 |   |         |        | 40,024 | 
|Cost of revenues:                                                                                  |                            |                                 |         |        |        |   |         |        |        |   |         |       
|                                                                                                   | License                    |                                 |         | 625    |        |   |         | 819    |        |   |         | 1,410  |       
|                                                                                                   | Services                   |                                 |         | 8,613  |        |   |         | 12,428 |        |   |         | 16,827 |       
|                                                                                                   |                            |                                 |         |        |        |   |         |        |       
|                                                                                                   |                            | Total cost of revenues          |         |        | 9,238  |   |         |        | 13,247 |   |         |        | 18,237 | 
|                                                                                                   |                            |                                 |         |        |        |   |         |        |       
|Gross profit                                                                                       |                            |                                 | 14,195  |        |        |   | 17,873  |        |        |   | 21,787  |       
|                                                                                                   |                            |                                 |         |        |        |   |         |        |       
|Operating expenses:                                                                                |                            |                                 |         |        |        |   |         |        |        |   |         |       
|                                                                                                   | Research and development   |                                 |         | 8,782  |        |   |         | 12,359 |        |   |         | 13,474 |       
|                                                                                                   | Sales and marketing        |                                 |         | 6,645  |        |   |         | 11,861 |        |   |         | 14,491 |       
|                                                                                                   | General and administrative |                                 |         | 11,364 |        |   |         | 10,396 |        |   |         | 5,385  |       
|                                                                                                   | Litigation settlement      |                                 |         | 7,500  |        |   |         |       |        |   |         |       |       
|                                                                                                   |                            |                                 |         |        |        |   |         |        |       
|Total operating expenses                                                                           |                            |                                 | 34,291  |        |        |   | 34,616  |        |        |   | 33,350  |       
|                                                                                                   |                            |                                 |         |        |        |   |         |        |       
|Loss from operations                                                                               |                            |                                 | (20,096 | )      |        |   | (16,743 | )      |        |   | (11,563 | )     
|Other income (expense), net                                                                        |                            |                                 | (196    | )      |        |   | 82      |        |        |   | 1,092   |       
|Interest income                                                                                    |                            |                                 | 2,907   |        |        |   | 1,891   |        |        |   | 1,625   |       
|                                                                                                   |                            |                                 |         |        |        |   |         |        |       
|Loss before provision (benefit) for income taxes                                                   |                            |                                 | (17,385 | )      |        |   | (14,770 | )      |        |   | (8,846  | )     
|Provision (benefit) for income taxes                                                               |                            |                                 | 122     |        |        |   | (117    | )      |        |   |        |       
|                                                                                                   |                            |                                 |         |        |        |   |         |        |       
|Net loss                                                                                           |                            | $                               | (17,507 | )      |        | $ | (14,653 | )      |        | $ | (8,846  | )     
|                                                                                                   |                            |                                 |         |        |        |   |         |        |       
|Basic and diluted loss per share:                                                                  |                            |                                 |         |        |        |   |         |        |        |   |         |       
|Basic and diluted net loss per share                                                               |                            | $                               | (0.53   | )      |        | $ | (0.45   | )      |        | $ | (0.28   | )     
|                                                                                                   |                            |                                 |         |        |        |   |         |        |       
|Weighted-average shares of common stock used in computing basic
    and diluted net loss per share |                            |                                 | 32,808  |        |        |   | 32,665  |        |        |   | 31,165  |       



F-3



---



##### Table of Contents





SELECTICA, INC.





CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(DEFICIT)


|                                                                                                   |                                        |                          |        |   |            |   |   |          |  |             |              |               |  |             |        |   |                |                |      |       |       |   |               |         |   |               |      |      |        |  |        |      |  |   |         |   |  |   |         |         |   |  |  |         |         |  
|-------------------------------------------------------------------------------------------------- | -------------------------------------- | ------------------------ | ------ | - | ---------- | - | - | -------- |  | ----------- | ------------ | ------------- |  | ----------- | ------ | - | -------------- | -------------- | ---- | ----- | ----- | - | ------------- | ------- | - | ------------- | ---- | ---- | ------ |  | ------ | ---- |  | - | ------- | - |  | - | ------- | ------- | - |  |  | ------- | ------- | -
|                                                                                                   |                                        |                          |        |   |            |   |   |          |  |             |              |               |  | Accumulated |        |   |                |                |      |       |       |   |              
|                                                                                                   |                                        |                          |        |   |            |   |   |          |  |             |              |               |  | Other       |        |   |                |                |      |       |       |   |              
|                                                                                                   |                                        |                          |        |   |            |   |   |          |  |             |              | Comprehensive |  |             |        |   |                |                |     
|                                                                                                   |                                        | Common Stock             |        |   | Additional |   |   |          |  | Stockholder |              |               |  |             | Income |   |                | Treasury Stock |      |       | Total |   |               |        
|                                                                                                   |                                        |                          |        |   | Paid-In    |   |   | Deferred |  |             | Notes        |               |  | Accumulated |        |   | (Loss), net of |                |      |       |       |   | Stockholders |         |   | Comprehensive |     
|                                                                                                   |                                        | Shares                   |        |   | Amount     |   |   | Capital  |  |             | Compensation |               |  | Receivable  |        |   | Deficit        |                |      | taxes |       |   | Shares        |         |   | Amount        |      |      | Equity |  |        | Loss | 
|                                                                                                   |                                        |                          |        |   |            |   |   |          |  |             |              |               |  |             |        |   |                |                |      |       |       |   |               |         |   |               |      |      |        |  |        |      | 
|                                                                                                   |                                        | (in thousands)           |       
|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 gain, net of taxes |                          |        |  |            |   |   |         |  |             |              |              |  |             |        |  |                |                |      |      |       |   |               |        |   |               |      | 40   |        |  |        |     |  |   |         |  |  |   |         | 40      |   |  |  | 40      |        
|                                                                                                   | Net loss                               |                          |        |  |            |   |   |         |  |             |              |              |  |             |        |  |                |                |      |      |       |   |               | (8,846  | ) |               |      |     |        |  |        |     |  |   |         |  |  |   |         | (8,846  | ) |  |  | (8,846  | )      
|                                                                                                   |                                        |                          |        |   |            |   |   |          |  |             |              |               |  |             |        |   |                |                |      |       |       |   |               |         |   |               |      |      |        |  |        |      | 
|                                                                                                   |                                        | Total comprehensive loss |        |   |            |   |   |          |  |             |              |               |  |             |        |   |                |                |      |       |       |   |               |         |   |               |      |      |        |  |        |      |  |   |         |   |  |   |         |         |   |  |  | $       | (8,806  | )
|                                                                                                   |                                        |                          |        |   |            |   |   |          |  |             |              |               |  |             |        |   |                |                |      |       |       |   |               |         |   |               |      |      |        |  |        |      | 
|Balance at March 31, 2004                                                                          |                                        |                          | 38,731 |   |            | $ | 4 |          |  | $           | 291,055      |               |  | $           | (158   | ) |                | $              | 0    |       |       | $ | (157,960      | )       |   | $             | 47   |      |        |  | (6,236 | )    |  | $ | (20,950 | ) |  | $ | 112,038 |         |   |  |  |        
|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, net of taxes |                          |        |  |            |   |   |         |  |             |              |              |  |             |        |  |                |                |      |      |       |   |               |        |   |               |      | (495 | )      |  |        |     |  |   |         |  |  |   |         | (495    | ) |  |  | (495    | )      
|                                                                                                   | Net loss                               |                          |        |  |            |   |   |         |  |             |              |              |  |             |        |  |                |                |      |      |       |   |               | (14,653 | ) |               |      |     |        |  |        |     |  |   |         |  |  |   |         | (14,653 | ) |  |  | (14,653 | )      
|                                                                                                   |                                        |                          |        |   |            |   |   |          |  |             |              |               |  |             |        |   |                |                |      |       |       |   |               |         |   |               |      |      |        |  |        |      | 
|                                                                                                   |                                        | Total comprehensive loss |        |   |            |   |   |          |  |             |              |               |  |             |        |   |                |                |      |       |       |   |               |         |   |               |      |      |        |  |        |      |  |   |         |   |  |   |         |         |   |  |  | $       | (15,148 | )
|                                                                                                   |                                        |                          |        |   |            |   |   |          |  |             |              |               |  |             |        |   |                |                |      |       |       |   |               |         |   |               |      |      |        |  |        |      | 
|Balance at March 31, 2005                                                                          |                                        |                          | 39,234 |   |            | $ | 4 |          |  | $           | 292,616      |               |  | $           | (91    | ) |                | $              | 0    |       |       | $ | (172,613      | )       |   | $             | (448 | )    |        |  | (6,438 | )    |  | $ | (21,748 | ) |  | $ | 97,720  |         |   |  |  |        
|Repurchase of common stock                                                                         |                                        |                          |       |   |            |   |  |          |  |             |             |               |  |             |       |   |                |                |     |       |       |   |              |         |   |               |     |      |        |  | (1,114 | )    |  |   | (3,061  | ) |  |   | (3,061  | )       |   |  |  |        
|Adjustment to retained earnings  prior year                                                       |                                        |                          |       |   |            |   |  |          |  |             |             |               |  |             |       |   |                |                |     |       |       |   | (16           | )       |   |               |     |      |        |  |       |      |  |   |        |   |  |   | (16     | )       |   |  |  |        
|Exercise of stock options by employees, net of repurchase                                          |                                        |                          | 223    |   |            |   |  |          |  |             | 552          |               |  |             |       |   |                |                |     |       |       |   |              |         |   |               |     |      |        |  |       |      |  |   |        |   |  |   | 552     |         |   |  |  |        
|Net option cancellation                                                                            |                                        |                          |       |   |            |   |  |          |  |             | (15          | )             |  |             | 15     |   |                |                |     |       |       |   |              |         |   |               |     |      |        |  |       |      |  |   |        |   |  |   |        |         |   |  |  |        
|Shares issued in connection with ESPP                                                              |                                        |                          | 62     |   |            |   |  |          |  |             | 165          |               |  |             |       |   |                |                |     |       |       |   |              |         |   |               |     |      |        |  |       |      |  |   |        |   |  |   | 165     |         |   |  |  |        
|Net deferred compensation related to options granted at less
    than FMV                          |                                        |                          |       |   |            |   |  |          |  |             |             |               |  |             | 56     |   |                |                |     |       |       |   |              |         |   |               |     |      |        |  |       |      |  |   |        |   |  |   | 56      |         |   |  |  |        
|Compensation expense related to modification of stock options                                      |                                        |                          |       |   |            |   |  |          |  |             | 65           |               |  |             |       |   |                |                |     |       |       |   |              |         |   |               |     |      |        |  |       |      |  |   |        |   |  |   | 65      |         |   |  |  |        
|Comprehensive loss:                                                                                |                                        |                          |        |   |            |   |   |          |  |             |              |               |  |             |        |   |                |                |      |       |       |   |               |         |   |               |      |      |        |  |        |      |  |   |         |   |  |   |         |         |   |  |  |        
|                                                                                                   | Other comprehensive gain, net of taxes |                          |        |  |            |   |   |         |  |             |              |              |  |             |        |  |                |                |      |      |       |   |               |        |   |               |      | 341  |        |  |        |     |  |   |         |  |  |   |         | 341     |   |  |  | 341     |        
|                                                                                                   | Net loss                               |                          |        |  |            |   |   |         |  |             |              |              |  |             |        |  |                |                |      |      |       |   |               | (17,507 | ) |               |      |     |        |  |        |     |  |   |         |  |  |   |         | (17,507 | ) |  |  | (17,507 | )      
|                                                                                                   |                                        |                          |        |   |            |   |   |          |  |             |              |               |  |             |        |   |                |                |      |       |       |   |               |         |   |               |      |      |        |  |        |      | 
|                                                                                                   |                                        | Total comprehensive loss |        |   |            |   |   |          |  |             |              |               |  |             |        |   |                |                |      |       |       |   |               |         |   |               |      |      |        |  |        |      |  |   |         |   |  |   |         |         |   |  |  | $       | (17,166 | )
|                                                                                                   |                                        |                          |        |   |            |   |   |          |  |             |              |               |  |             |        |   |                |                |      |       |       |   |               |         |   |               |      |      |        |  |        |      | 
|Balance at March 31, 2006                                                                          |                                        |                          | 39,519 |   |            | $ | 4 |          |  | $           | 293,383      |               |  | $           | (20    | ) |                | $              | 0    |       |       | $ | (190,136      | )       |   | $             | (107 | )    |        |  | (7,552 | )    |  | $ | (24,809 | ) |  | $ | 78,315  |         |   |  |  |        
|                                                                                                   |                                        |                          |        |   |            |   |   |          |  |             |              |               |  |             |        |   |                |                |      |       |       |   |               |         |   |               |      |      |        |  |        |      | 



F-4



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##### Table of Contents



SELECTICA, INC.





CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                                                |                                                                               |                                           |         |     |      |   |         |       |        |   |          |       |        |  
|------------------------------------------------------------------------------- | ----------------------------------------------------------------------------- | ----------------------------------------- | ------- | --- | ---- | - | ------- | ----- | ------ | - | -------- | ----- | ------ | -
|                                                                                |                                                                               | Years Ended March 31,                     |        
|                                                                                |                                                                               |                                           |        
|                                                                                |                                                                               | 2006                                      |         |     | 2005 |   |         | 2004  |       
|                                                                                |                                                                               |                                           |         |     |      |   |         |       |       
|                                                                                |                                                                               | (in thousands)                            |        
|Operating activities:                                                           |                                                                               |                                           |         |     |      |   |         |       |        |   |          |      
|Net loss                                                                        |                                                                               | $                                         | (17,507 | )   |      | $ | (14,653 | )     |        | $ | (8,846   | )    
|Adjustments to reconcile net loss to net cash used in operating
    activities: |                                                                               |                                           |         |     |      |   |         |       |        |   |          |      
|                                                                                | Depreciation                                                                  |                                           |         | 864 |      |   |         | 1,285 |        |   |          | 2,104 |       
|                                                                                | Amortization                                                                  |                                           |         | 285 |      |   |         |      |        |   |          |      |       
|                                                                                | Gain (loss) on disposition of property and equipment                          |                                           |         | (37 | )    |   |         | (25   | )      |   |          | 107   |       
|                                                                                | Amortization of deferred compensation                                         |                                           |         | 56  |      |   |         | 131   |        |   |          | 1,107 |       
|                                                                                | Issuance of common stock in exchange for services                             |                                           |         |    |      |   |         |      |        |   |          | 9     |       
|                                                                                | Compensation expenses related to variable accounting of
    exercised options |                                           |         |    |      |   |         |      |        |   |          | 149   |       
|                                                                                | Accelerated vesting of stock options to employees                             |                                           |         |    |      |   |         | 16    |        |   |          | 234   |       
|                                                                                | Compensation expenses related to modification of options                      |                                           |         | 65  |      |   |         | 121   |        |   |          | 444   |       
|                                                                                | Changes in assets and liabilities:                                            |                                           |         |     |      |   |         |       |        |   |          |       |       
|                                                                                |                                                                               | Accounts receivable (net)                 |         |     | (358 | ) |         |       | (2,114 | ) |          |       | 2,788  |  
|                                                                                |                                                                               | Prepaid expenses and other current assets |         |     | (166 | ) |         |       | 504    |   |          |       | 1,266  |  
|                                                                                |                                                                               | Other assets                              |         |     |     |   |         |       | 37     |   |          |       | 162    |  
|                                                                                |                                                                               | Accounts payable                          |         |     | (610 | ) |         |       | 1,617  |   |          |       | (292   | )
|                                                                                |                                                                               | Accrued payroll and related liabilities   |         |     | (504 | ) |         |       | 209    |   |          |       | (206   | )
|                                                                                |                                                                               | Other accrued and long term liabilities   |         |     | (485 | ) |         |       | (1,345 | ) |          |       | (464   | )
|                                                                                |                                                                               | Deferred revenue                          |         |     | (750 | ) |         |       | (4,955 | ) |          |       | (8,729 | )
|                                                                                |                                                                               |                                           |         |     |      |   |         |       |       
|Net cash used for operating activities                                          |                                                                               |                                           | (19,147 | )   |      |   | (19,172 | )     |        |   | (10,167  | )    
|Investing activities                                                            |                                                                               |                                           |         |     |      |   |         |       |        |   |          |      
|Purchase of capital assets                                                      |                                                                               |                                           | (161    | )   |      |   | (880    | )     |        |   | (573     | )    
|Proceeds from disposition of property and equipment                             |                                                                               |                                           | 86      |     |      |   | 83      |       |        |   | 16       |      
|Proceeds and investment in restricted investments                               |                                                                               |                                           | 182     |     |      |   | (2      | )     |        |   | 1,286    |      
|Purchase of short-term investments                                              |                                                                               |                                           | (23,848 | )   |      |   | (34,043 | )     |        |   | (109,045 | )    
|Purchase of long-term investments                                               |                                                                               |                                           | (56,398 | )   |      |   | (38,502 | )     |        |   | (77,037  | )    
|Proceeds from maturities of short-term investments                              |                                                                               |                                           | 26,712  |     |      |   | 59,913  |       |        |   | 126,834  |      
|Proceeds from maturities of long-term investments                               |                                                                               |                                           | 59,078  |     |      |   | 32,674  |       |        |   | 36,600   |      
|Acquisition cost paid                                                           |                                                                               |                                           | (892    | )   |      |   |        |       |        |   |         |      
|                                                                                |                                                                               |                                           |         |     |      |   |         |       |       
|Net cash provided by (used for) investing activities                            |                                                                               |                                           | 4,759   |     |      |   | 19,243  |       |        |   | (21,919  | )    
|Financing activities                                                            |                                                                               |                                           |         |     |      |   |         |       |        |   |          |      
|Purchase of treasury stock                                                      |                                                                               |                                           | (3,061  | )   |      |   | (798    | )     |        |   | (1,278   | )    
|Proceeds from stockholder notes receivable                                      |                                                                               |                                           |        |     |      |   |        |       |        |   | 730      |      
|Proceeds from issuance of common stock                                          |                                                                               |                                           | 717     |     |      |   | 1,359   |       |        |   | 6,369    |      
|                                                                                |                                                                               |                                           |         |     |      |   |         |       |       
|Net cash provided by (used for) financing activities                            |                                                                               |                                           | (2,344  | )   |      |   | 561     |       |        |   | 5,821    |      
|                                                                                |                                                                               |                                           |         |     |      |   |         |       |       
|Net increase (decrease) in cash and cash equivalents                            |                                                                               |                                           | (16,732 | )   |      |   | 632     |       |        |   | (26,265  | )    
|Cash and cash equivalents at beginning of the period                            |                                                                               |                                           | 29,360  |     |      |   | 28,728  |       |        |   | 54,993   |      
|                                                                                |                                                                               |                                           |         |     |      |   |         |       |       
|Cash and cash equivalents at end of the period                                  |                                                                               | $                                         | 12,628  |     |      | $ | 29,360  |       |        | $ | 28,728   |      
|                                                                                |                                                                               |                                           |         |     |      |   |         |       |       
|Supplemental disclosure of non-cash financing activities:                       |                                                                               |                                           |         |     |      |   |         |       |        |   |          |      
|Deferred compensation related to cancelled stock options                        |                                                                               | $                                         | 47      |     |      | $ | 201     |       |        | $ | 574      |      
|Change in unrealized gain (loss) on available for sales
    securities          |                                                                               | $                                         | 341     |     |      | $ | (495    | )     |        | $ | 40       |      





F-5



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##### 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 Short-term
Investments




F-6



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##### 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) |    
|2006        |  | $              | 149 |  |         | $ | 93  |             |  | $        |           |   |         | $         | (75  | ) |  | $ | 167 | 
|2005        |  | $              | 115 |  |         | $ | 228 |             |  | $        |           |   |         | $         | (194 | ) |  | $ | 149 | 
|2004        |  | $              | 741 |  |         | $ | 58  |             |  | $        | (241       | ) |         | $         | (443 | ) |  | $ | 115 | 



Property and Equipment




Revenue Recognition






Arrangements consisting of license and maintenance only.


F-7



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##### Table of Contents



SELECTICA, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Arrangements consisting of license, maintenance and other
services. off-the


off-the








F-8



---



##### Table of Contents



SELECTICA, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)










Arrangements consisting of consulting services. off-the




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



|           |  |                              |    |   |      |  |    |      |  |  |    |  
|---------- |  | ---------------------------- | -- | - | ---- |  | -- | ---- |  |  | -- | -
|           |  | Fiscal Years Ended March 31, |   
|           |  |                              |   
|           |  | 2006                         |    |   | 2005 |  |    | 2004 | 
|           |  |                              |    |   |      |  |    |      | 
|Customer A |  |                              | 23 | % |      |  | 14 | %    |  |  | 20 | %
|Customer B |  |                              | 22 | % |      |  | 23 | %    |  |  | 39 | %
|Customer C |  |                              | *  |   |      |  | 12 | %    |  |  | *  |  
|Customer D |  |                              | *  |   |      |  | 11 | %    |  |  | *  |  






F-9



---



##### Table of Contents



SELECTICA, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




|           |  |                    |    |   |      |  |    |  
|---------- |  | ------------------ | -- | - | ---- |  | -- | -
|           |  | Fiscal Years Ended |   
|           |  | March 31,          |   
|           |  |                    |   
|           |  | 2006               |    |   | 2005 | 
|           |  |                    |    |   |      | 
|Customer A |  |                    | 24 | % |      |  | 45 | %
|Customer B |  |                    | 24 | % |      |  | *  |  
|Customer C |  |                    | 11 | % |      |  | *  |  
|Customer D |  |                    | *  |   |      |  | 26 | %
|Customer E |  |                    | *  |   |      |  | 10 | %






Warranties and
Indemnifications






Advertising Expense




Development Costs




Accumulated Other Comprehensive
Income or Loss




F-10



---



##### Table of Contents



SELECTICA, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Stock-Based Compensation


Accounting for Stock Issued to Employees Accounting for
Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction With Selling Goods or
Services.




|                                          |  |                              |       |   |      |   |       |      |  |   |       |  
|----------------------------------------- |  | ---------------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                          |  | Fiscal Years Ended March 31, |      
|                                          |  | 2006                         |       |   | 2005 |   |       | 2004 | 
|                                          |  |                              |       |   |      |   |       |      | 
|Risk-free interest rate                   |  |                              | 3.98  | % |      |   | 2.64  | %    |  |   | 2.83  | %
|Dividend yield                            |  |                              | 0.00  | % |      |   | 0.00  | %    |  |   | 0.00  | %
|Expected volatility                       |  |                              | 62.22 | % |      |   | 65.93 | %    |  |   | 64.76 | %
|Expected option life in years             |  |                              | 1.25  |   |      |   | 1.92  |      |  |   | 1.70  |  
|Weighted average fair value at grant date |  | $                            | 1.32  |   |      | $ | 1.81  |      |  | $ | 1.70  |  



|                                          |  |                              |       |   |      |   |       |      |  |   |       |  
|----------------------------------------- |  | ---------------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                          |  | Fiscal Years Ended March 31, |      
|                                          |  | 2006                         |       |   | 2005 |   |       | 2004 | 
|                                          |  |                              |       |   |      |   |       |      | 
|Risk-free interest rate                   |  |                              | 3.82  | % |      |   | 3.31  | %    |  |   | 2.89  | %
|Dividend yield                            |  |                              | 0.00  | % |      |   | 0.00  | %    |  |   | 0.00  | %
|Expected volatility                       |  |                              | 64.19 | % |      |   | 68.29 | %    |  |   | 42.77 | %
|Expected option life in years             |  |                              | 3.90  |   |      |   | 3.85  |      |  |   | 3.86  |  
|Weighted average fair value at grant date |  | $                            | 1.59  |   |      | $ | 1.90  |      |  | $ | 1.68  |  

F-11



---



##### Table of Contents



SELECTICA, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




|                                                                                                            |  |                              |         |   |      |   |         |      |  |   |         |  
|----------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                            |  | Fiscal Years Ended March 31, |        
|                                                                                                            |  | 2006                         |         |   | 2005 |   |         | 2004 | 
|                                                                                                            |  |                              |         |   |      |   |         |      | 
|                                                                                                            |  | (in thousands)               |        
|Net loss, as reported                                                                                       |  | $                            | (17,507 | ) |      | $ | (14,653 | )    |  | $ | (8,846  | )
|Add: Stock based employee compensation expense included in
    reported net loss                            |  |                              | 121     |   |      |   | 268     |      |  |   | 1,934   |  
|Deduct: Total stock based employee compensation determined under
    fair value based method for all awards |  |                              | (2,751  | ) |      |   | (3,662  | )    |  |   | (7,856  | )
|                                                                                                            |  |                              |         |   |      |   |         |      | 
|Pro forma net loss                                                                                          |  | $                            | (20,137 | ) |      | $ | (18,047 | )    |  | $ | (14,768 | )
|                                                                                                            |  |                              |         |   |      |   |         |      | 
|Basic and diluted net loss per share, as reported                                                           |  | $                            | (0.53   | ) |      | $ | (0.45   | )    |  | $ | (0.28   | )
|                                                                                                            |  |                              |         |   |      |   |         |      | 
|Basic and diluted pro forma net loss per share                                                              |  | $                            | (0.61   | ) |      | $ | (0.55   | )    |  | $ | (0.47   | )
|                                                                                                            |  |                              |         |   |      |   |         |      | 

Segment Information






|                       |  |                              |     |   |      |  |     |      |  |  |     |  
|---------------------- |  | ---------------------------- | --- | - | ---- |  | --- | ---- |  |  | --- | -
|                       |  | Fiscal Years Ended March 31, |    
|                       |  | 2006                         |     |   | 2005 |  |     | 2004 | 
|                       |  |                              |     |   |      |  |     |      | 
|International revenues |  |                              | 17  | % |      |  | 33  | %    |  |  | 10  | %
|Domestic revenues      |  |                              | 83  | % |      |  | 67  | %    |  |  | 90  | %
|                       |  |                              |     |   |      |  |     |      | 
|Total Revenues         |  |                              | 100 | % |      |  | 100 | %    |  |  | 100 | %
|                       |  |                              |     |   |      |  |     |      | 





Contract termination




F-12



---



##### Table of Contents



SELECTICA, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




Treasury Stock








Sale of eInsurance Assets




Concurrent Transaction




Related Party Transaction and
Severance Agreement






F-13



---



##### Table of Contents



SELECTICA, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




New Accounting
Pronouncements






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



|                             |                         |                |        |        |      |   |      |   |  |        |      |     |   |   |        |        | 
|---------------------------- | ----------------------- | -------------- | ------ | ------ | ---- | - | ---- | - |  | ------ | ---- | --- | - | - | ------ | ------ | 
|                             |                         | Unrealized     |       
|                             |                         |                |       
|                             |                         | Cost           |        |        | Gain |   | Loss |   |  | Market |     
|                             |                         |                |        |        |      |   |      |   |  |        |     
|                             |                         | (in thousands) |       
|March 31, 2006:              |                         |                |        |        |      |   |      |   |  |        |      |     |   |   |        |       
|Cash and cash equivalents:   |                         |                |        |        |      |   |      |   |  |        |      |     |   |   |        |       
|                             | Cash                    |                | $      | 3,124  |      |   | $    |  |  |        | $    |    |   |   | $      | 3,124  | 
|                             | Money market fund       |                |        | 1,720  |      |   |      |  |  |        |      |    |   |   |        | 1,720  | 
|                             | Commercial paper        |                |        | 7,784  |      |   |      |  |  |        |      |    |   |   |        | 7,784  | 
|                             |                         |                |        |        |      |   |      |   |  |        |      |    
|                             |                         | $              | 12,628 |        |      | $ |     |   |  | $      |     |     |   | $ | 12,628 |       
|                             |                         |                |        |        |      |   |      |   |  |        |      |    
|Short-term investments:      |                         |                |        |        |      |   |      |   |  |        |      |     |   |   |        |       
|(due in less than 12 months) |                         |                |        |        |      |   |      |   |  |        |      |     |   |   |        |       
|                             | Auction rate securities |                | $      | 35,251 |      |   | $    |  |  |        | $    |    |   |   | $      | 35,251 | 
|                             | Government agencies     |                |        | 19,116 |      |   |      |  |  |        |      | (92 | ) |   |        | 19,024 | 
|                             | Corporate notes & bonds |                |        | 3,043  |      |   |      |  |  |        |      | (8  | ) |   |        | 3,035  | 
|                             | Certificate of deposit  |                |        | 4,067  |      |   |      |  |  |        |      |    |   |   |        | 4,067  | 
|                             |                         |                |        |        |      |   |      |   |  |        |      |    
|                             |                         | $              | 61,477 |        |      | $ |     |   |  | $      | (100 | )   |   | $ | 61,377 |       
|                             |                         |                |        |        |      |   |      |   |  |        |      |    
|Long-term investments:       |                         |                |        |        |      |   |      |   |  |        |      |     |   |   |        |       
|(due in 12 to 18 months)     |                         |                |        |        |      |   |      |   |  |        |      |     |   |   |        |       
|                             | Government agencies     |                | $      | 1,499  |      |   | $    |  |  |        | $    | (7  | ) |   | $      | 1,492  | 
|                             | Certificate of deposit  |                |        | 1,437  |      |   |      |  |  |        |      |    |   |   |        | 1,437  | 
|                             |                         |                |        |        |      |   |      |   |  |        |      |    
|                             |                         | $              | 2,936  |        |      | $ |     |   |  | $      | (7   | )   |   | $ | 2,929  |       
|                             |                         |                |        |        |      |   |      |   |  |        |      |    

F-14



---



##### Table of Contents



SELECTICA, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


|                             |                         |                |        |        |      |   |      |   |  |        |      |      |   |   |        |        | 
|---------------------------- | ----------------------- | -------------- | ------ | ------ | ---- | - | ---- | - |  | ------ | ---- | ---- | - | - | ------ | ------ | 
|                             |                         | 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 |       
|                             |                         |                |        |        |      |   |      |   |  |        |      |     
|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  |       
|                             |                         |                |        |        |      |   |      |   |  |        |      |     





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



|                               |                                   |                    |         |       |      |   |         |       | 
|------------------------------ | --------------------------------- | ------------------ | ------- | ----- | ---- | - | ------- | ----- | 
|                               |                                   | Fiscal Years Ended |        
|                               |                                   | March 31,          |        
|                               |                                   | 2006               |         |       | 2005 |  
|                               |                                   |                    |         |       |      |  
|                               |                                   | (in thousands)     |        
|Computers and software         |                                   | $                  | 8,380   |       |      | $ | 8,397   |      
|Furniture and equipment        |                                   |                    | 2,347   |       |      |   | 2,878   |      
|Leasehold improvements         |                                   |                    | 2,350   |       |      |   | 2,409   |      
|Land and building              |                                   |                    | 1,097   |       |      |   | 1,118   |      
|Automobile                     |                                   |                    | 36      |       |      |   | 39      |      
|                               |                                   |                    |         |       |      |  
|                               |                                   |                    | 14,210  |       |      |   | 14,841  |      
|Less: accumulated depreciation |                                   |                    | (11,803 | )     |      |   | (11,683 | )    
|                               |                                   |                    |         |       |      |  
|                               | Total property and equipment, net |                    | $       | 2,407 |      |   | $       | 3,158 | 
|                               |                                   |                    |         |       |      |  



F-15



---



##### Table of Contents



SELECTICA, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




|   |             
|-- | ------------
|5. | Acquisitions





|                     |                       |                                   |     |     |                   |  |   |   | 
|-------------------- | --------------------- | --------------------------------- | --- | --- | ----------------- |  | - | - | 
|                     |                       | Fiscal Years Ended March 31, 2006 |    
|                     |                       | Amount                            |     |     | Amortization life | 
|                     |                       |                                   |     |     |                   | 
|                     |                       | (in thousands)                    |     |     | (years)           | 
|Accounts Receivable  |                       | $                                 | 74  |     |                   |  |  |  
|Fixed Assets         |                       |                                   | 17  |     |                   |  |  |  
|Intangible assets:   |                       |                                   |     |     |                   |  |   |  
|                     | Developed technology  |                                   |     | 367 |                   |  |   | 3 | 
|                     | Customer relationship |                                   |     | 338 |                   |  |   | 4 | 
|                     | Customer backlog      |                                   |     | 96  |                   |  |   | 1 | 
|                     |                       |                                   |     |     |                   | 
|Total purchase price |                       | $                                 | 892 |     |                   |  |   |  
|                     |                       |                                   |     |     |                   | 





|                         |  |                |      |  
|------------------------ |  | -------------- | ---- | -
|                         |  | Amount         |     
|                         |  |                |     
|                         |  | (in thousands) |     
|Cost                     |  | $              | 801  |  
|Accumulated amortization |  |                | (285 | )
|                         |  |                |     
|Net                      |  | $              | 516  |  
|                         |  |                |     



|                            |  |                              |     |  |      |   |     |      |  |   |      |  |  |   |   | 
|--------------------------- |  | ---------------------------- | --- |  | ---- | - | --- | ---- |  | - | ---- |  |  | - | - | 
|                            |  | Fiscal Years Ended March 31, |    
|                            |  | 2007                         |     |  | 2008 |   |     | 2009 |  |   | 2010 | 
|                            |  |                              |     |  |      |   |     |      |  |   |      | 
|                            |  | (in thousands)               |    
|Amortization by fiscal year |  | $                            | 207 |  |      | $ | 207 |      |  | $ | 95   |  |  | $ | 7 | 
|                            |  |                              |     |  |      |   |     |      |  |   |      | 





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



F-16



---



##### Table of Contents



SELECTICA, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


|     |                               |                |       |       |           |   |    |       |  |   |       |       | 
|---- | ----------------------------- | -------------- | ----- | ----- | --------- | - | -- | ----- |  | - | ----- | ----- | 
|     |                               | Offices        |       |       | Equipment |   |    | Total | 
|     |                               |                |       |       |           |   |    |       | 
|     |                               | (in thousands) |      
|2007 |                               | $              | 2,406 |       |           | $ | 30 |       |  | $ | 2,436 |      
|2008 |                               |                | 2,472 |       |           |   | 31 |       |  |   | 2,503 |      
|2009 |                               |                | 2,562 |       |           |   | 16 |       |  |   | 2,578 |      
|2010 |                               |                | 1,756 |       |           |   |   |       |  |   | 1,756 |      
|     |                               |                |       |       |           |   |    |       | 
|     | Total future minimum payments |                | $     | 9,196 |           |   | $  | 77    |  |   | $     | 9,273 | 
|     |                               |                |       |       |           |   |    |       | 





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



Patent Infringement






Class Action




S-1


F-17



---



##### Table of Contents



SELECTICA, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


















F-18



---



##### Table of Contents



SELECTICA, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)








|   |                               
|-- | ------------------------------
|8. | Stockholders Equity (Deficit)



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



|                             |                            |                                                 |       |       |        | 
|---------------------------- | -------------------------- | ----------------------------------------------- | ----- | ----- | ------ | 
|                             |                            | (in thousands)                                  |      
|Stock option plans:          |                            |                                                 |       |      
|                             | Outstanding                |                                                 |       | 6,929 |       
|                             | Reserved for future grants |                                                 |       | 8,432 |       
|Employee Stock Purchase Plan |                            |                                                 | 2,402 |      
|                             |                            |                                                 |      
|                             |                            | Total common stock reserved for future issuance |       |       | 17,763 | 
|                             |                            |                                                 |      



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







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









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



F-19



---



##### Table of Contents



SELECTICA, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)










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











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



F-20



---



##### Table of Contents



SELECTICA, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




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



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



24-month




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



F-21



---



##### Table of Contents



SELECTICA, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




24-month




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



24-month


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 except for per share amount) |      
|Balance at March 31, 2003 |                             |                                            | 3,768 |                     |           |  | 8,550     |                |   | $       | 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 cancelled           |                                            |       | 1,750               |           |  |           | (1,841         | ) |         | $              | 1.25  $63.48 |  |   | $    | 6.82 | 
|                          |                             |                                            |       |                     |           |  |           |                |   |         |                |              
|Balance at March 31, 2004 |                             |                                            | 4,800 |                     |           |  | 7,014     |                |   | $       | 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           |                                            |       |                    |           |  |           | (397           | ) |         | $              | 0.20  $4.24  |  |   | $    | 2.87 | 
|                          | Options cancelled           |                                            |       | 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 |     
|                          | Increase in shares reserved |                                            |       | 1,649               |           |  |           |               |   |         |                |               |  |   |      |      | 
|                          | Options granted             |                                            |       | (1,390              | )         |  |           | 1,390          |   |         | $              | 2.52  $3.44  |  |   | $    | 3.11 | 
|                          | Options exercised           |                                            |       |                    |           |  |           | (223           | ) |         | $              | 2.68  $3.58  |  |   | $    | 2.94 | 
|                          | Options cancelled           |                                            |       | 2,678               |           |  |           | (2,678         | ) |         | $              | 2.23  63.48  |  |   | $    | 5.02 | 
|                          | Options expired             |                                            |       | (92                 | )         |  |           |               |   |         |                |               |  |   |      |      | 
|                          |                             |                                            |       |                     |           |  |           |                |   |         |                |              
|Balance at March 31, 2006 |                             |                                            | 8,432 |                     |           |  | 6,929     |                |   | $       | 0.50  $63.48  |               |  | $ | 3.92 |     
|                          |                             |                                            |       |                     |           |  |           |                |   |         |                |              

|                |                |                                            |                |           |                |             |  |  |                 |  |  |                   |               |  |          |  |       |  |  |   |       | 
|--------------- | -------------- | ------------------------------------------ | -------------- | --------- | -------------- | ----------- |  |  | --------------- |  |  | ----------------- | ------------- |  | -------- |  | ----- |  |  | - | ----- | 
|                |                | 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, 2006 |           |                | Life        |  |  | Exercise Prices |  |  | March 31, 2006    |               |  | Price    | 
|                |                |                                            |                |           |                |             |  |  |                 |  |  |                   |               |  |          | 
|                |                | (in thousands except for per share amount) |                |           |               
|                | $ 0.50  $2.56 |                                            |                |           | 1,458          |             |  |  | 6.29            |  |  | $                 | 0.50  $2.56  |  |          |  | 1,423 |  |  | $ | 2.50  | 
|                | $ 2.65  $3.28 |                                            |                |           | 1,333          |             |  |  | 8.67            |  |  | $                 | 2.65  $3.28  |  |          |  | 257   |  |  | $ | 2.91  | 
|                | $ 3.39  $3.40 |                                            |                |           | 2,481          |             |  |  | 8.78            |  |  | $                 | 3.39  $3.40  |  |          |  | 864   |  |  | $ | 3.40  | 
|                | $ 3.44  $4.32 |                                            |                |           | 1,188          |             |  |  | 6.28            |  |  | $                 | 3.44  $4.32  |  |          |  | 1,115 |  |  | $ | 4.04  | 
|                | $4.38  $63.48 |                                            |                |           | 469            |             |  |  | 6.53            |  |  | $                 | 4.38  $63.48 |  |          |  | 377   |  |  | $ | 10.79 | 
|                |                |                                            |                |           |                |             |  |  |                 |  |  |                   |               |  |          | 
|                | $0.50  $63.48 |                                            |                |           | 6,929          |             |  |  | 7.66            |  |  | $                 | 0.50  $63.48 |  |          |  | 4,036 |  |  | $ | 3.92  | 
|                |                |                                            |                |           |                |             |  |  |                 |  |  |                   |               |  |          | 

|                                                     |  |                              |      |  |      |   |      |      |  |   |      | 
|---------------------------------------------------- |  | ---------------------------- | ---- |  | ---- | - | ---- | ---- |  | - | ---- | 
|                                                     |  | Fiscal Years Ended March 31, |     
|                                                     |  | 2006                         |      |  | 2005 |   |      | 2004 | 
|                                                     |  |                              |      |  |      |   |      |      | 
|Weighted average options with strike price below FMV |  |                              |     |  |      | $ | 2.79 |      |  | $ | 2.08 | 
|Weighted average options with strike price at FMV    |  | $                            | 1.59 |  |      | $ | 1.88 |      |  | $ | 1.65 | 
|Weighted average options with strike price above FMV |  |                              |     |  |      |   |     |      |  |   |     | 

F-25



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##### Table of Contents



SELECTICA, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


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  | 
|                                                  |  |                                             |       |                  |                   |   |                      |                     | 
|                                                  |  | (in thousands, except for per share amount) |      
|Plans Approved by Stockholders                    |  |                                             |       |                  |                   |   |                      |                     |  |  |        |    
|1996 Stock Plan                                   |  |                                             | 682   |                  |                   | $ | 4.50                 |                     |  |  | 924    |    
|1999 Equity Incentive Plan                        |  |                                             | 4,386 |                  |                   | $ | 3.59                 |                     |  |  | 6,533  | (1)
|1999 Employee Stock Purchase Plan                 |  |                                             |      |                  |                   | $ | 2.68                 |                     |  |  | 2,402  | (2)
|Plans Not Required to be Approved by Stockholders |  |                                             |       |                  |                   |   |                      |                     |  |  |        |    
|Officer Option Agreement                          |  |                                             | 990   |                  |                   | $ | 3.40                 |                     |  |  |       |    
|2001 Supplemental Plan                            |  |                                             | 871   |                  |                   | $ | 3.80                 |                     |  |  | 975    |    
|                                                  |  |                                             |       |                  |                   |   |                      |                     | 
|Total                                             |  |                                             | 6,929 |                  |                   |   |                      |                     |  |  | 10,834 |    
|                                                  |  |                                             |       |                  |                   |   |                      |                     | 






|    |                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | On each January 1 the number of shares reserved for issuance is
    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.





|   |                                                    
|-- | ---------------------------------------------------
|9. | Computation of Basic and Diluted Net Loss Per Share





|                                                                                   |  |                                          |         |   |      |   |         |      |  |   |        |  
|---------------------------------------------------------------------------------- |  | ---------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                                                                   |  | Fiscal Years Ended March 31,             |        
|                                                                                   |  | 2006                                     |         |   | 2005 |   |         | 2004 | 
|                                                                                   |  |                                          |         |   |      |   |         |      | 
|                                                                                   |  | (in thousands, except per share amounts) |        
|Net loss                                                                           |  | $                                        | (17,507 | ) |      | $ | (14,653 | )    |  | $ | (8,846 | )
|                                                                                   |  |                                          |         |   |      |   |         |      | 
|Basic and diluted:                                                                 |  |                                          |         |   |      |   |         |      |  |   |        |  
|Weighted-average shares of common stock outstanding                                |  |                                          | 32,808  |   |      |   | 32,665  |      |  |   | 31,177 |  
|Less weighted-average shares subject to repurchase                                 |  |                                          |        |   |      |   |        |      |  |   | (12    | )
|                                                                                   |  |                                          |         |   |      |   |         |      | 
|Weighted-average shares used in computing basic and diluted net
    loss per share |  |                                          | 32,808  |   |      |   | 32,665  |      |  |   | 31,165 |  
|                                                                                   |  |                                          |         |   |      |   |         |      | 
|Basic and diluted net loss per share                                               |  | $                                        | (0.53   | ) |      | $ | (0.45   | )    |  | $ | (0.28  | )
|                                                                                   |  |                                          |         |   |      |   |         |      | 

F-26



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##### Table of Contents



SELECTICA, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




|                                                                                                                                                                                                                                     |  |                              |       |  |      |  |       |      |  |  |       | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------------- | ----- |  | ---- |  | ----- | ---- |  |  | ----- | 
|                                                                                                                                                                                                                                     |  | Fiscal Years Ended March 31, |      
|                                                                                                                                                                                                                                     |  | 2006                         |       |  | 2005 |  |       | 2004 | 
|                                                                                                                                                                                                                                     |  |                              |       |  |      |  |       |      | 
|                                                                                                                                                                                                                                     |  | (in thousands)               |      
|Options excluded due to the exercise price exceeding the average
    fair market value of the Companys common stock during the
    period                                                                                           |  |                              | 5,138 |  |      |  | 6,493 |      |  |  | 589   | 
|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 |  |                              | 1,791 |  |      |  | 1,947 |      |  |  | 6,425 | 
|                                                                                                                                                                                                                                     |  |                              |       |  |      |  |       |      | 
|Total common stock equivalents excluded from diluted net loss
    per common share                                                                                                                                                   |  |                              | 6,929 |  |      |  | 8,440 |      |  |  | 7,014 | 
|                                                                                                                                                                                                                                     |  |                              |       |  |      |  |       |      | 



|    |             
|--- | ------------
|10. | Income Taxes



|                              |                    |                              |         |         |      |   |         |         |   |   |        |        |  
|----------------------------- | ------------------ | ---------------------------- | ------- | ------- | ---- | - | ------- | ------- | - | - | ------ | ------ | -
|                              |                    | Fiscal Years Ended March 31, |        
|                              |                    | 2006                         |         |         | 2005 |   |         | 2004    |  
|                              |                    |                              |         |         |      |   |         |         |  
|                              |                    | (in thousands)               |        
|Domestic Pre-tax Loss         |                    | $                            | (19,453 | )       |      | $ | (15,628 | )       |   | $ | (7,380 | )     
|Foreign Pre-tax Income (Loss) |                    |                              | 2,068   |         |      |   | 858     |         |   |   | (1,466 | )     
|                              |                    |                              |         |         |      |   |         |         |  
|                              | Total Pre-tax Loss |                              | $       | (17,385 | )    |   | $       | (14,770 | ) |   | $      | (8,846 | )
|                              |                    |                              |         |         |      |   |         |         |  

|                                     |  |                              |        |   |      |   |        |      |  |   |        |  
|------------------------------------ |  | ---------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                     |  | Fiscal Years Ended March 31, |       
|                                     |  | 2006                         |        |   | 2005 |   |        | 2004 | 
|                                     |  |                              |        |   |      |   |        |      | 
|                                     |  | (in thousands)               |       
|Federal tax at statutory rate        |  | $                            | (6,085 | ) |      | $ | (5,170 | )    |  | $ | (3,096 | )
|Computed state tax                   |  |                              | (715   | ) |      |   | 70     |      |  |   | 50     |  
|Computed foreign tax                 |  |                              | (735   | ) |      |   | 57     |      |  |   | 240    |  
|Losses not benefited                 |  |                              | 7,590  |   |      |   | 5,165  |      |  |   | 2,861  |  
|Deferred compensation expense        |  |                              | 112    |   |      |   | 52     |      |  |   | 511    |  
|Change in tax reserve                |  |                              |       |   |      |   | (235   | )    |  |   | (240   | )
|Non-deductible expenses              |  |                              | 63     |   |      |   | 4      |      |  |   | 29     |  
|Research and development tax credits |  |                              | (108   | ) |      |   | (60    | )    |  |   | (355   | )
|                                     |  |                              |        |   |      |   |        |      | 
|Income tax provision (benefit)       |  | $                            | 122    |   |      | $ | (117   | )    |  | $ |       |  
|                                     |  |                              |        |   |      |   |        |      | 

F-27



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##### Table of Contents



SELECTICA, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




|          |         |                                |   |    |      |  |   |      |      |   |   |   |   | 
|--------- | ------- | ------------------------------ | - | -- | ---- |  | - | ---- | ---- | - | - | - | - | 
|          |         | Fiscal Years Ended March 31,  
|          |         | 2005                           |   |    | 2004 |  |   | 2003
|          |         |                                |   |    |      |  |   |     
|          |         | (in thousands)                
|Current:  |         |                                |   |    |      |  |   |      |      |   |   |  
|          | US      |                                | $ | 46 |      |  | $ | (114 | )    |   | $ |  |  
|          | Foreign |                                |   | 76 |      |  |   | (3   | )    |   |   |  |  
|          |         |                                |   |    |      |  |   |      |     
|          |         | Income tax benefit             |   |    | 122  |  |   |      | (117 | ) |   |   |  | 
|         
|Deferred: |         |                                |   |    |      |  |   |      |      |   |   |  
|          | Federal |                                |   |   |      |  |   |     |      |   |   |  |  
|          | State   |                                |   |   |      |  |   |     |      |   |   |  |  
|          |         |                                |   |    |      |  |   |      |     
|          |         | Income tax provision (benefit) |   | $  | 122  |  |   | $    | (117 | ) |   | $ |  | 
|          |         |                                |   |    |      |  |   |      |     





|                                 |                         |                              |         |   |      |   |         |      |  |   |         |   | 
|-------------------------------- | ----------------------- | ---------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - | 
|                                 |                         | Fiscal Years Ended March 31, |        
|                                 |                         | 2006                         |         |   | 2005 |   |         | 2004 | 
|                                 |                         |                              |         |   |      |   |         |      | 
|                                 |                         | (in thousands)               |        
|Deferred tax assets:             |                         |                              |         |   |      |   |         |      |  |   |         |  
|Net operating loss carryforwards |                         | $                            | 62,862  |   |      | $ | 56,325  |      |  | $ | 47,043  |  
|Tax credit carryforwards         |                         |                              | 5,784   |   |      |   | 5,418   |      |  |   | 4,766   |  
|Deferred revenue                 |                         |                              | 343     |   |      |   | 767     |      |  |   | 618     |  
|Other                            |                         |                              | 4,081   |   |      |   | 4,067   |      |  |   | 4,316   |  
|                                 |                         |                              |         |   |      |   |         |      | 
|Total net deferred tax asset     |                         |                              | 73,070  |   |      |   | 66,577  |      |  |   | 56,743  |  
|Valuation allowance              |                         |                              | (73,070 | ) |      |   | (66,577 | )    |  |   | (56,743 | )
|                                 |                         |                              |         |   |      |   |         |      | 
|                                 | Net deferred tax assets |                              | $       |  |      |   | $       |     |  |   | $       |  | 
|                                 |                         |                              |         |   |      |   |         |      | 







F-28



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##### Table of Contents



SELECTICA, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




10-year




|    |             
|--- | ------------
|11. | Benefit Plan





|    |              
|--- | -------------
|12. | Restructuring

94-3


94-3




F-29



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##### Table of Contents



SELECTICA, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




|                                                                               |  |                |        |  
|------------------------------------------------------------------------------ |  | -------------- | ------ | -
|                                                                               |  | (in thousands) |       
|Charge for the fiscal year ended March 31, 2001 
    Plan 1                   |  | $              | 667    |  
|Payments for the fiscal year ended March 31,
    2001  Plan 1                 |  |                | (317   | )
|                                                                               |  |                |       
|Accrual balance, March 31, 2001                                                |  |                | 350    |  
|Charge for the fiscal year ended March 31, 2002 
    Plan 2                   |  |                | 1,759  |  
|Payments for the fiscal year ended March 31,
    2002  Plan 1                 |  |                | (350   | )
|Payments for the fiscal year ended March 31,
    2002  Plan 2                 |  |                | (1,577 | )
|                                                                               |  |                |       
|Accrual balance, March 31, 2002                                                |  |                | 182    |  
|Charge for the fiscal year ended March 31, 2003 
    Plan 3                   |  |                | 1,760  |  
|Payments for the fiscal year ended March 31,
    2003  Plan 2                 |  |                | (182   | )
|Stock based compensation for the fiscal year ended
    March 21, 2003  Plan 3 |  |                | (249   | )
|Payments for the fiscal year ended March 31,
    2003  Plan 3                 |  |                | (1,247 | )
|                                                                               |  |                |       
|Accrual balance, March 31, 2003                                                |  |                | 264    |  
|Payments for the fiscal year ended March 31,
    2004  Plan 3                 |  |                | (198   | )
|Reversal of expense for the fiscal year ended March 31,
    2004  Plan 3      |  |                | (66    | )
|                                                                               |  |                |       
|Accrual balance, March 31, 2004                                                |  |                |       |  
|Charge for the fiscal year ended March 31, 2005 
    Plan 4                   |  |                | 929    |  
|Payments for the fiscal year March 31, 2005 
    Plan 4                       |  |                | (891   | )
|                                                                               |  |                |       
|Accrual balance, March 31, 2005                                                |  |                | 38     |  
|Payments for the year March 31, 2006  Plan 4                                  |  |                | (38    | )
|Charge for the fiscal year ended March 31, 2006 
    Plan 5                   |  |                | 824    |  
|Payments for the year March 31, 2006  Plan 5                                  |  |                | (824   | )
|                                                                               |  |                |       
|Accrual Balance, March 31, 2006                                                |  | $              |       |  
|                                                                               |  |                |       

F-30



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##### Table of Contents






REPORT OF ARMANINO MCKENNA LLP, INDEPENDENT REGISTERED
PUBLIC


ACCOUNTING FIRM












Internal Control  Integrated
Framework


Armanino
Mc enna LLP






F-31



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##### Table of Contents






REPORT OF ERNST & YOUNG, INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM












Ernst &
Young LLP






F-32



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##### Table of Contents



Schedule II. Valuation and Qualifying Accounts


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) |    
|2006        |  | $              | 149 |  |         | $ | 93  |             |  | $        |           |   |         | $         | (75  | ) |  | $ | 167 | 
|2005        |  | $              | 115 |  |         | $ | 228 |             |  | $        |           |   |         | $         | (194 | ) |  | $ | 149 | 
|2004        |  | $              | 741 |  |         | $ | 58  |             |  | $        | (241       | ) |         | $         | (443 | ) |  | $ | 115 | 



---



##### 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 13, 2006
|                                                                 
|Principal Financial Officer and Principal
    Accounting Officer: |  |                                       |  |              
|                                                                 
|/s/ Stephen BennionStephen Bennion                                |  | Chief Financial Officer               |  | June 13, 2006
|Directors:                                                        |  |                                       |  |              
|                                                                 
|/s/ Jamie ArnoldJamie Arnold                                      |  | Director                              |  | June 13, 2006
|                                                                 
|/s/ John FisherJohn Fisher                                        |  | Director                              |  | June 13, 2006
|                                                                 
|/s/ Brenda ZawatskiBrenda Zawatski                                |  | Director                              |  | June 13, 2006
|                                                                 
|/s/ Sanjay MittalSanjay Mittal                                    |  | Director                              |  | June 13, 2006
|                                                                 
|/s/ Thomas NeustaetterThomas Neustaetter                          |  | Director                              |  | June 13, 2006
|                                                                 
|/s/ Vincent OstroskyVincent Ostrosky                              |  | Director                              |  | June 13, 2006



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##### 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(7)      |  | 1999 Equity Incentive Plan Stock Option Agreement.                                                                                                                    
|        | 10 | .21(7)      |  | 1999 Equity Incentive Plan Stock Option Agreement (Initial Grant
    to Directors).                                                                                   
|        | 10 | .22(7)      |  | 1999 Equity Incentive Plan Stock Option Agreement (Annual Grant
    to Directors).                                                                                    
|        | 10 | .23(7)      |  | Selectica UK Limited Major Account License Agreement dated
    December 5, 2003.                                                                                      
|        | 10 | .24(7)      |  | 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 Successor Independent Accounting Firm (Armanino
    McKenna LLP).                        
|        | 23 | .2          |  | Consent of Predecessor Independent Accounting Firm (Ernst and
    Young LLP).                       
|        | 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.                        
|        | 31 | .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.                              
|   
|(7) | Previously filed in the Companys report on Form 10-K filed
    on June 29, 2005.