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

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

                                   FORM 10-Q
                            ------------------------

            QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001

                         COMMISSION FILE NUMBER 0-26130

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

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


                                            
                   DELAWARE                                      77-0432030
           (STATE OF INCORPORATION)                  (IRS EMPLOYER IDENTIFICATION NO.)


                   3 WEST PLUMERIA DRIVE, SAN JOSE, CA 95134
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

                                 (408) 570-9700
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

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

     Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.

     Approximately 36,098,428 shares of Common Stock, $0.0001 par value, as of
July 31, 2001.

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   2

                                   FORM 10-Q

                                 SELECTICA INC.

                                     INDEX



                                                                       PAGE
                                                                       ----
                                                                 
                       PART I FINANCIAL INFORMATION
Item 1:  Financial Statements
         Condensed Consolidated Balance Sheets as of June 30, 2001
         and March 31, 2001..........................................    1
         Condensed Consolidated Statements of Operations for the
         three months ended June 30, 2001 and 2000...................    2
         Condensed Consolidated Statements of Cash Flows for the
         three months ended June 30, 2001 and 2000...................    3
         Notes to Condensed Consolidated Financial Statements........    4
Item 2:  Management's Discussion and Analysis of Financial Condition
         and Results of Operations...................................   10
Item 3:  Quantitative and Qualitative Disclosures about Market
         Risk........................................................   27

                         PART II OTHER INFORMATION
Item 1:  Legal Proceedings...........................................   28
Item 2:  Changes in Securities and Use of Proceeds...................   28
Item 3:  Defaults Upon Senior Securities.............................   29
Item 4:  Submission of Matters to a Vote of Security Holders.........   29
Item 5:  Other Information...........................................   29
Item 6:  Exhibits and Reports on Form 8-K............................   29
Signatures...........................................................   30


                                        i
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                                SELECTICA, INC.

                          CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)
                                  (UNAUDITED)

                                     ASSETS



                                                              JUNE 30,    MARCH 31,
                                                                2001        2001*
                                                              --------    ---------
                                                                    
Current assets:
  Cash and cash equivalents.................................  $ 40,283    $ 73,306
  Short-term investments....................................    76,195      63,848
  Accounts receivable, net of allowance for doubtful
     accounts of $1,151 and $1,051, respectively............    11,590      18,965
  Prepaid expenses and other current assets.................     3,582       4,009
                                                              --------    --------
          Total current assets..............................   131,650     160,128
Property and equipment, net.................................    10,502      11,469
Goodwill, net of amortization of $2,485 and $1,815,
  respectively..............................................    11,967      12,637
Other assets................................................       826       1,311
Long-term investments.......................................    47,956      31,144
Investments, restricted.....................................     2,079       2,079
Development agreements, net of amortization of $3,661 and
  $3,117, respectively......................................       733       1,051
                                                              --------    --------
          Total assets......................................  $205,713    $219,819
                                                              ========    ========

                       LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................  $  2,041    $  3,210
  Accrued payroll and related liabilities...................     3,799       5,003
  Other accrued liabilities.................................     5,731       5,717
  Deferred revenues.........................................    16,513      22,382
                                                              --------    --------
          Total current liabilities.........................    28,084      36,312
Other long-term liabilities.................................     1,039         969
Commitments and contingencies
Stockholders' equity:
  Preferred stock...........................................        --          --
  Common stock..............................................         4           4
  Additional paid-in capital................................   284,998     285,179
  Deferred compensation.....................................    (6,654)     (7,970)
  Stockholder notes receivable..............................    (1,703)     (1,915)
  Accumulated deficit.......................................  (100,409)    (92,989)
  Accumulated other comprehensive loss......................       354         229
                                                              --------    --------
          Total stockholders' equity........................   176,590     182,538
                                                              --------    --------
          Total liabilities and stockholders' equity........  $205,713    $219,819
                                                              ========    ========


---------------
* Amounts derived from audited financial statements at the date indicated

                            See accompanying notes.

                                        1
   4

                                SELECTICA, INC.

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



                                                              THREE MONTHS ENDED
                                                                   JUNE 30,
                                                              -------------------
                                                               2001        2000
                                                              -------    --------
                                                                   
Revenues:
  License...................................................  $ 6,085    $  3,674
  Services..................................................    8,060       3,907
                                                              -------    --------
          Total revenues....................................   14,145       7,581
Cost of revenues:
  License...................................................      335         231
  Services..................................................    7,248       5,227
                                                              -------    --------
          Total cost of revenues............................    7,583       5,458
                                                              -------    --------
Gross profit................................................    6,562       2,123
  Research and development..................................    4,424       4,382
  Sales and marketing.......................................    8,323      12,723
  General and administrative................................    3,162       1,953
                                                              -------    --------
          Total operating expenses..........................   15,909      19,058
                                                              -------    --------
Loss from operations........................................   (9,347)    (16,935)
Other income (expense):
  Interest income...........................................    2,002       3,342
  Interest expense..........................................       --          --
                                                              -------    --------
Loss before provision for income taxes......................   (7,345)    (13,593)
Provision for income taxes..................................       75          --
                                                              -------    --------
Net loss....................................................  $(7,420)   $(13,593)
                                                              =======    ========
Basic and diluted, net loss per share.......................  $ (0.21)   $  (0.41)
                                                              =======    ========
Weighted-average shares of common stock used in computing
  basic and diluted, net loss per share applicable to common
  stockholders..............................................   35,520      33,340
                                                              =======    ========


                            See accompanying notes.

                                        2
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                                SELECTICA, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                                 (IN THOUSANDS)
                                  (UNAUDITED)



                                                               THREE MONTHS ENDED
                                                                    JUNE 30,
                                                              --------------------
                                                                2001        2000
                                                              --------    --------
                                                                    
OPERATING ACTIVITIES
Net loss....................................................  $ (7,420)   $(13,593)
Adjustments to reconcile net loss to net cash used in
  operating activities:
  Depreciation..............................................     1,035         486
  Amortization of private placement discount................       254         534
  Amortization of warrants in connection with license and
    service agreement.......................................       125       2,728
  Net realized loss on short-term investments...............        59          --
  Net realized gain on long-term investments................      (789)         --
  Amortization of goodwill..................................       670           6
  Amortization of development agreements....................       544         530
  Amortization of deferred compensation.....................       633         849
  Accelerated vesting of stock options to employees.........       125         475
  Changes in assets and liabilities:
    Accounts receivable.....................................     7,375      (3,577)
    Prepaid expenses and other current assets...............       427        (178)
    Other assets............................................       485        (191)
    Accounts payable........................................    (1,169)     (1,095)
    Accrued payroll and related liabilities.................    (1,204)      1,496
    Other accrued liabilities...............................        84      (2,428)
    Deferred revenues.......................................    (6,248)      4,324
                                                              --------    --------
Net cash used in operating activities.......................    (5,014)     (9,634)
INVESTING ACTIVITIES
  Capital expenditures......................................       (68)     (2,285)
  Purchase of short-term investments........................   (39,280)         --
  Net purchase of short-term investments....................        --     (57,418)
  Proceeds from sales and maturities of short-term
    investments.............................................    26,921          --
  Purchase of long-term investments.........................   (17,429)         --
  Net purchase of long-term investments.....................        --     (21,277)
  Proceeds from sales and maturities of long-term
    investments.............................................     1,484          --
                                                              --------    --------
Net cash used in investing activities.......................   (28,372)    (80,980)
FINANCING ACTIVITIES
  Proceeds from stockholder notes receivable................       212          --
  Net proceeds from initial public offering.................        --         (98)
  Proceeds from issuance of common stock, net of purchase...       151          38
                                                              --------    --------
Net cash provided by financing activities...................       363         (60)
Net decrease in cash and cash equivalents...................   (33,023)    (90,674)
Cash and cash equivalents at beginning of the period........    73,306     215,818
                                                              --------    --------
Cash and cash equivalents at end of the period..............  $ 40,283    $125,144
                                                              ========    ========
SUPPLEMENTAL CASH FLOW INFORMATION
  Deferred compensation related to stock options............  $    632    $    284
  Warrants issued in connection with development
    agreement...............................................  $    226    $     --


                            See accompanying notes.

                                        3
   6

                                SELECTICA, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  Basis of Presentation

     The consolidated balance sheets as of June 30, 2001, the consolidated
statements of operations for the three months ended June 30, 2001 and 2000, and
the consolidated statements of cash flows for the three months ended June 30,
2001 and 2000, have been prepared by the Company and are unaudited. In the
opinion of management, all necessary adjustments (which include normal recurring
adjustments) have been made to present fairly the financial position, results of
operations, and cash flows at June 30, 2001 and for all periods presented.
Interim results are not necessarily indicative of the results for a full fiscal
year. The consolidated balance sheet as of March 31, 2001 has been derived from
audited consolidated financial statements at that date.

     Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These consolidated financial statements should
be read in conjunction with the audited consolidated financial statements and
notes included in the Company's Annual Report on Form 10-K for the year ended
March 31, 2001.

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

  Customer Concentrations

     A limited number of customers have historically accounted for a substantial
portion of the Company's revenues.

     Customers who accounted for at least 10% of total revenues were as follows:



                                                              THREE MONTHS
                                                                 ENDED
                                                                JUNE 30,
                                                              ------------
                                                              2001    2000
                                                              ----    ----
                                                                
Samsung SDS.................................................   13%     31%
Tellabs.....................................................   12%      *
Applied BioSystems..........................................   10%      *
Southwestern Bell...........................................    *      19%
Dell........................................................    *      14%


---------------
* Revenues were less than 10%.

                                        4
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                                SELECTICA, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. CASH EQUIVALENTS AND INVESTMENTS

  Cash Equivalents

     All cash equivalents as of June 30, 2001 and March 31, 2001 are classified
as available-for-sale securities and included under the caption "cash and cash
equivalents." The following is a summary of the aggregate cost, gross unrealized
losses, and estimated fair value of the Company's cash equivalents:



                                                          JUNE 30,    MARCH 31
                                                            2001        2001
                                                          --------    --------
                                                             (IN THOUSANDS)
                                                                
CASH EQUIVALENTS:
Auction rate floater/
Commercial papers.......................................  $18,519     $15,741
Money market............................................    8,454      31,366
Government agency notes.................................       --       8,947
Corporate notes.........................................       --       6,066
                                                          -------     -------
          Total.........................................  $26,973     $62,120
                                                          =======     =======


INVESTMENTS

     All investments as of June 30, 2001 and March 31, 2001 are classified as
available-for-sale securities. The following is a summary of the aggregate cost,
gross unrealized losses, and estimated fair value of the Company's short-term
investments:



                                                          JUNE 30,    MARCH 31,
                                                            2001        2001
                                                          --------    ---------
                                                             (IN THOUSANDS)
                                                                
SHORT-TERM INVESTMENTS:
  Government agencies...................................  $55,944      $40,893
  Corporate notes and bonds.............................   17,033       18,369
  Commercial paper......................................    1,998        4,494
  Municipal bonds.......................................    1,081           --
                                                          -------      -------
     Short-term investments at cost.....................   76,056       63,756
  Unrealized gains......................................      139           92
                                                          -------      -------
     Fair value.........................................  $76,195      $63,848
                                                          =======      =======




                                                          JUNE 30,    MARCH 31,
                                                            2001        2001
                                                          --------    ---------
                                                             (IN THOUSANDS)
                                                                
LONG-TERM INVESTMENTS:
  Corporate notes and bonds.............................  $27,374      $20,981
  Government agencies...................................   20,367       10,026
                                                          -------      -------
     Long-term investments at cost......................   47,741       31,007
  Unrealized gains......................................      215          137
                                                          -------      -------
     Fair value.........................................  $47,956      $31,144
                                                          =======      =======


     As of June 30, 2001, the Company has four operating leases that require
security deposits to be maintained at financial institutions for the term of the
leases. The total security deposits of the leases in the amount of approximately
$582,000 is classified as a restricted long-term investment and is held in
commercial paper. In addition, due to the acquisition of Wakely Software, Inc.,
an escrow fund of approximately $1.5 million is held in corporate bonds and
classified as a restricted long-term investment. The escrow fund in

                                        5
   8
                                SELECTICA, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

amounts of $500,000 and $1.0 million will be paid in 18 months and 36 months
from the date of acquisition, respectively. The interest earned on the
investment can be used in operations.

     Unrealized holding gains on available-for-sale securities as of June 30,
2001 and March 31, 2001 were approximately $354,000 and $229,000, respectively.

3. STOCKHOLDERS' EQUITY

  Warrants

     In September 1999, the Company entered into a development agreement with an
investor whereby the investor and the Company will work to port the current
suite of ACE products to additional platforms. In connection with the
development agreement, the Company issued warrants to purchase 57,000 shares of
Series E convertible preferred stock at $4.382 per share. The warrants were
issued in December 1999 and were exercised on March 9, 2000. The Company
determined the fair value of the warrants using the Black-Scholes valuation
model assuming a fair value of the Company's Series E convertible preferred
stock of $19.00, risk free interest rate of 5.5%, volatility factor of 80% and a
life of 22 months. The fair value of approximately $381,000 is being amortized
over the remaining life of the development agreement. As June 30, 2001, total
accumulated amortization of this warrant was approximately $329,000. The
remaining balance of $52,000 will be fully amortized by September 30, 2001.

     In November 1999, the Company entered into a license agreement and one year
maintenance contract in the amount of approximately $3.0 million with a customer
and in connection with the agreement committed to the issuance of a warrant to
purchase 800,000 shares of common stock. In January 2000 the warrant was issued
with an exercise price of $13.00 and was net exercised on July 25, 2000. The
value of the warrant was estimated to be approximately $16.4 million and was
based upon a Black-Scholes valuation model with the following assumptions: risk
free interest rate of 5.5%, dividend yield of 0%, volatility of 80%, expected
life of 2 years, exercise price of $13.00 and fair value of $30.00. As the
warrant value less the warrant purchase price of $800,000, exceeds the related
license and maintenance revenue under the agreement and subsequent services
agreements, the Company recorded an approximate $9.7 million loss on the
contract in the year ended March 31, 2000, of which approximately $4.1 million
was charged to costs of license revenues and approximately $5.6 million was
charged to cost of services revenues. For the fiscal year of 2001, the Company
amortized approximately $5.5 million related to the fair value of the warrants
against the license revenue. For the three months ended June 30, 2001, the total
amortization of the charges related to this agreement was $125,000. As of June
30, 2001, the remaining balance of the fair value of the warrants was $250,000
which balance will be fully amortized by the third quarter ended December 31,
2001.

     In connection with a development agreement entered into in April 2001, the
Company issued a warrant to purchase 100,000 shares of the Company's common
stock. The Company determined the fair value of the warrant using the
Black-Scholes valuation model assuming a fair value of the Company's common
stock at $3.53 per share, risk free interest rate of 6%, dividend yield of 0%,
volatility factor of 99% and expected life of 3 years. The value of the warrant
was estimated to be approximately $227,000 and will be amortized over the next
three years. As of June 30, 2001, the company has amortized approximately
$19,000 related to the fair value of the warrant.

  Deferred Compensation

     During the three months ending June 30, 2001, options worth approximately
$452,000 were granted to employees with exercise prices that were less than fair
value. Such compensation will be amortized over the vesting period of the
options, typically four years. For the three months ended June 30, 2001 and
2000, the Company amortized approximately $633,000 and $849,000 of deferred
compensation, respectively.

                                        6
   9
                                SELECTICA, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

  Accelerated Options

     During the three months ended June 30, 2001, in association with employee
termination agreements, the Company accelerated the vesting of options to
purchase 38,659 shares of unvested common stock and recorded approximately
$125,000 of related compensation expense.

  Stock Options

     On April 27, 2001, the Company commenced an option exchange program in
which its employees were offered the opportunity to exchange stock options with
exercise prices of $8.50 and above for new stock options. Participants in the
exchange program will receive new options to purchase one hundred and twenty
percent (120%) of the number of shares of its common stock subject to the
options that were exchanged and canceled. The new options will be granted more
than six months and one day from May 28, 2001, the date the old options were
cancelled. The exercise price of the new options will be the closing market
price on the NASDAQ Stock Market on the grant date of the new options. The
exchange offer was not available to executive officers or the members of our
Board of Directors.

     In addition, on May 30, 2001, the Company granted additional options to
purchase an aggregate of approximately 4 million shares of its common stock to
all its employees that did not participate in the option exchange offer. The
Company will amortize approximately $350,000 in deferred compensation expense
associated with these grants over the next four years. Although these programs
have been designed to improve employee retention by creating additional
incentives for its employees, they may not have the desired impact. This could
adversely affect on its ability to retain employees.

4. INCOME TAXES

     The Company has recorded a tax provision of $75,000 for the three months
ended June 30, 2001 and no income tax provision for the three months ended June
30, 2000. The provision for income taxes for the three months ended June 30,
2001 is intended primarily for the payment of state taxes and foreign taxes.

5. EARNINGS PER SHARE

     The Company calculates earnings per share in accordance with Financial
Accounting Standards Board No. 128, Earnings per Share. The diluted net loss per
share is equivalent to the basic net loss per share because the Company has
experienced losses since inception and thus no potential common shares from the
exercise of stock options, conversion of convertible preferred stock, or
exercise of warrants have been included in the net loss per share calculation.
Options and warrants to purchase 2,275,080 and 100,000 shares of common stock
were excluded from the three months ended June 30, 2001 computation as their
effect is antidilutive.

                                        7
   10
                                SELECTICA, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The following table presents the computation of basic and diluted net loss
per share



                                                          THREE MONTHS ENDED
                                                               JUNE 30,
                                                          -------------------
                                                           2001        2000
                                                          -------    --------
                                                            (IN THOUSANDS)
                                                               
Net loss applicable to common stockholders..............  $(7,420)   $(13,593)
Basic and diluted:
  Weighted-average shares of common stock outstanding...   36,258      35,931
  Less weighted-average shares subject to repurchase....     (738)     (2,591)
                                                          -------    --------
  Weighted-average shares used in computing basic and
     diluted, net loss per share applicable to common
     stockholders.......................................   35,520      33,340
                                                          =======    ========
  Basic and diluted, net loss per share applicable to
     common stockholders................................  $ (0.21)   $  (0.41)
                                                          =======    ========


6. COMPREHENSIVE LOSS

     The components of comprehensive loss, net of related income tax, for the
three months ended June 30, 2001 and 2000 are as follows:



                                                               JUNE 30,
                                                          -------------------
                                                           2001        2000
                                                          -------    --------
                                                            (IN THOUSANDS)
                                                               
Net loss................................................  $(7,420)   $(13,593)
Change in unrealized gain (loss) on securities..........      354        (234)
                                                          -------    --------
Comprehensive income (loss).............................  $(7,066)   $(13,827)
                                                          =======    ========


7. LITIGATION

     On June 5, 2001, a number of securities class action complaints were filed
against the Company, the underwriters of the Company's initial public offering,
and certain of the Company's executives in the United States District Court for
the Southern District of New York. The complaints allege that the underwriters
of the Company's initial public offering, Selectica and the other named
defendants violated federal securities laws by making material false and
misleading statements in the prospectus incorporated in our registration
statement on Form S-1 filed with the SEC in March, 2000. The complaints allege,
among other things, that Credit Suisse First Boston solicited and received
excessive and undisclosed commissions from several investors in exchange for
which Credit Suisse First Boston allocated to these investors material portions
of the restricted number of shares of common stock issued in connection with the
Company's initial public offering. The complaints further allege that Credit
Suisse First Boston entered into agreements with its customers in which Credit
Suisse First Boston agreed to allocate the common stock sold in the Company's
initial public offering to certain customers in exchange for which such
customers agreed to purchase additional shares of the Company's common stock in
the after-market at pre-determined prices.

8. RESTRUCTURING

     During the three months ended June 30, 2001, the Company has recorded
restructuring charges of approximately $1.4 million, which were the result of a
plan established to align the Company's global workforce with existing and
anticipated market requirements and necessitated by the Company's improved
operating efficiencies. Approximately $189,000 of restructuring costs was
accounted as cost of services revenues, $287,000 as research and development
expense, $359,000 as sales and marketing expense and $556,000 as general and
administrative expense. The restructuring charges were primarily for the
severance

                                        8
   11
                                SELECTICA, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

and benefits paid to the terminated employees. The company terminated 152
employees (or 20% of its workforce) globally as June 30, 2001 in the areas of
administration, marketing, business development, engineering, sales, consulting
and services support. The Company estimates that annual salary and fringe
benefits savings of approximately $7.4 million will be recognized beginning in
fiscal 2002 as a result of these activities. The restructuring activities are
expected to be complete by the second quarter of fiscal year of 2002. For the
three months ended June 30, 2001, the reserve for the restructuring was
$221,000, which was included in current liabilities and is summarized as
follows:

  Severance and Benefits:


                                                       
FY 2001 Restructuring Charges...........................  $   667,000
Cash Charges............................................     (317,000)
                                                          -----------
Reserve Balance, March 31, 2001.........................  $   350,000
FY 2002 Restructuring Charges 04/01/01 to 06/30/01......    1,391,000
Cash Charges............................................   (1,520,000)
                                                          -----------
Reserve Balance, June 30, 2001..........................  $   221,000
                                                          ===========


9. SUBSEQUENT EVENTS

     As of August 10, 2001, the Company repurchased 223,800 shares of its common
shares at an average of $3.0804 per share for a total amount of approximately
$689,000.

                                        9
   12

                      MANAGEMENT'S DISCUSSION AND ANALYSIS

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

OVERVIEW

     Selectica is a leading provider of Interactive Selling System software and
services that enable companies to efficiently sell complex products and services
over intranets, extranets and the Internet. Our ACE suite of software products
is a comprehensive Interactive Selling System solution that gives sellers the
ability to manage the sales process in order to facilitate the conversion of
prospective buyers into customers. Our Interactive selling system solution
allows companies to use the Internet platform to deploy a selling application to
many points of contact, including personal computers, in-store kiosks and mobile
devices, while offering customers, partners and employees an interface
customized to their specific needs.

  Revenues

     We enter into arrangements for the sale of (1) licenses of our software
products and related maintenance contracts; (2) bundled licenses, maintenance
contracts, and services; and (3) services on a time and materials basis. In
instances where maintenance contracts are bundled with a license of our software
products, such maintenance contracts are typically for a one-year term.

     For each arrangement, we determine whether evidence of an arrangement
exists, delivery has occurred, the fee is fixed or determinable, and collection
is probable. If any of these criteria are not met, revenue recognition is
deferred until such time as all of the criteria are met.

     For those arrangements that consist of a license and a maintenance
contract, we recognize license revenues based upon the residual method after all
elements other than maintenance have been delivered and we recognize maintenance
revenues over the term of the maintenance contract as vendor specific-objective
evidence of fair value for maintenance is determined.

     Services can consist of maintenance, training and/or consulting services.
Consulting services include a range of services including installation of our
off-the-shelf software, customization of our software for the customer's
specific application, data conversion and building of interfaces to allow our
software to operate in customized environments.

     In all cases, we assess whether the service element of the arrangement is
essential to the functionality of the other elements of the arrangement. In this
determination we focus on whether the software is off-the-shelf software,
whether the services include significant alterations to the features and
functionality of the software, whether the services involve the building of
complex interfaces, the timing of payments and the existence of milestones.
Often the installation of our software requires the building of interfaces to
the customer's existing applications or customization of the software for
specific applications. As a result, judgement is required in the determination
of whether such services constitute "complex" interfaces. In making this
determination we consider the following: (1) the relative fair value of the
services compared to the software, (2) the amount of time and effort subsequent
to delivery of the software until the interfaces or other modifications are
completed,

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(3) the degree of technical difficulty in building of the interface and
uniqueness of the application, (4) the degree of involvement of customer
personnel, and (5) any contractual cancellation, acceptance, or termination
provisions for failure to complete the interfaces. We also consider refunds,
forfeitures and concessions when determining the significance of such services.

     In those instances where we determine that the service elements are
essential to the other elements of the arrangement, we account for the entire
arrangement using contract accounting.

     For those arrangements accounted for using contract accounting that do not
include contractual milestones or other acceptance criteria we utilize the
percentage of completion method based upon input measures of hours. For those
contracts that include contractual milestones or acceptance criteria we
recognize revenue as such milestones are achieved or as such acceptance occurs.

     In some instances the acceptance criteria in the contract requires
acceptance after all services are complete and all other elements have been
delivered. In these instances we recognize revenue based upon the completed
contract method after such acceptance has occurred.

     For those arrangements for which we have concluded that the service element
is not essential to the other elements of the arrangement we determine whether
the services are available from other vendors, do not involve a significant
degree of risk or unique acceptance criteria, and whether we have sufficient
experience in providing the service to be able to separately account for the
service. When the service qualifies for separate accounting, we use
vendor-specific objective evidence to determine the fair value of the services
and the maintenance. In such instances, we account for the arrangement using the
residual method, regardless of any separate prices stated within the contract
for each element.

     Vendor-specific objective evidence of fair value of services is based upon
hourly rates. As noted above, we enter into contracts for services alone and
such contracts are based on a time and materials basis. Such hourly rates are
used to assess the vendor-specific objective evidence in multiple element
arrangements.

     In accordance with paragraph 10 of Statement of Position 97-2, Software
Revenue Recognition, vendor-specific objective evidence of fair value of
maintenance is determined by reference to the price the customer will be
required to pay when it is sold separately (that is, the renewal rate). Each
license agreement offers additional maintenance renewal periods at a stated
price. Maintenance contracts are typically one year in duration.

     To date we have not entered into arrangements solely for the license of our
products and, therefore, we have not demonstrated vendor-specific objective
evidence for the fair value of the license element.

     In all cases we classify revenues for these arrangements as license
revenues and services revenues based on the estimates of fair value for each
element.

     For the three months ended June 30, 2001 we recognized 75% of license and
services revenues under the percentage-of-completion method, 15% under the
residual method and 10% under the completed contract method. For the three
months ended June 30, 2000 we recognized 49% of license and services revenues
under the percentage-of-completion method, 46% under the residual method and 5%
under the completed contract method.

     Because we rely on a limited number of customers, the timing of customer
acceptance or milestone achievement, or the amount of services we provide to a
single customer can significantly affect our operating results. For example, our
license and services revenues declined significantly in the quarters ended March
31, 2001 and June 30, 1999 due to the delay of milestone achievement of services
under a particular contract.

     Customer billing occurs in accordance with contract terms. Customer
advances and amounts billed to customers in excess of revenue recognized are
recorded as deferred revenue. Amounts recognized as revenue in advance of
billing (typically under percentage-of-completion accounting) are recorded as
unbilled receivables.

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  Factors Affecting Operating Results

     A relatively small number of customers account for a significant portion of
our total revenues. For the three months ended June 30, 2001, revenue from
Samsung (SDS), Tellabs and Applied BioSystems accounted for 13%, 12%, and 10% of
our revenues, respectively. For the three months ended June 30, 2000, revenue
from Samsung SDS, Southwestern Bell, and Dell accounted for 31%, 19% and 14% of
our revenues, respectively. We expect that revenues from a limited number of
customers will continue to account for a large percentage of total revenues in
future quarters.

     To date, our revenues have been predominantly attributable to sales in the
United States. We plan to expand our international operations significantly,
because we believe international markets represent a significant growth
opportunity. Consequently, we expect that international revenues will increase
as a percentage of total revenues in the future. The expansion of our
international operations will be subject to a variety of risks that could
significantly harm our business and operating results. As our international
sales and operations expand, we anticipate that our exposure to foreign currency
fluctuations will increase because we have not adopted a hedging program to
protect us from risks associated with foreign currency fluctuations.

     We have a limited operating history upon which we may be evaluated. We have
incurred significant losses since inception and, as of June 30, 2001, we had an
accumulated deficit of approximately $100.4 million. We believe our success
depends on the continued growth of our customer base and the development of the
emerging Interactive Selling System market. However, due to the slowing of the
U.S. economy, particularly in the area of technology infrastructure investment
and in an effort to achieve profitability, we underwent restructuring activities
from March 2001 throughout the first quarter of fiscal year 2002. During the
restructuring activities in March 2001, we reduced our headcount, primarily in
India, by 158 individuals or approximately 20% of our workforce. We expect to
reduce our annual operating expenses by approximately $3.7 million, principally
from reduced salaries and associated expenses. During the restructuring
activities for the three months ended June 30, 2001, we further reduced our
headcount by 152 individuals globally or approximately 20% of our workforce at
March 31, 2001. We expect to further reduce our annual expenses by approximately
$7.4 million principally from reduced salaries and associated expenses. As the
result of the restructuring, our operating losses will be decreased in the
foreseeable future.

     In view of the rapidly changing nature of our business and our limited
operating history, we believe that period-to-period comparisons of revenues and
operating results are not necessarily meaningful and should not be relied upon
as indications of future performance. Our limited operating history makes it
difficult to forecast future operating results. Additionally, despite our recent
revenue growth, we do not believe that historical growth rates are necessarily
sustainable or indicative of future growth and we cannot be certain that
revenues will increase. This was evidenced by the results of the fourth quarter
of fiscal 2001 and first quarter of fiscal 2002. Even if we were to achieve
profitability in any period, we may not be able to sustain or increase
profitability on a quarterly or annual basis.

  Equity Transactions

     In connection with a development agreement entered into in April 2001, we
issued a warrant to purchase 100,000 shares of our common stock. We determined
the fair value of the warrant using the Black-Scholes valuation model assuming a
fair value of our common stock at $3.53 per share, risk free interest rate of
6%, dividend yield of 0%, volatility factor of 99% and expected life of 3 years.
The value of the warrant was estimated to be approximately $227,000 and would be
amortized over the next three years. As of June 30, 2001, we have amortized
approximately $19,000 related to the fair value of the warrant.

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RESULTS OF OPERATIONS

     The following table sets forth the percentage of total revenues for certain
items in our Consolidated Statements of Income data for the three months ended
June 30, 2001 and 2000.



                                                              THREE MONTHS
                                                                 ENDED
                                                                JUNE 30,
                                                              ------------
                                                              2001    2000
                                                              ----    ----
                                                                
AS A PERCENTAGE OF TOTAL REVENUES:
Revenues:
  License...................................................   43%      48%
  Services..................................................   57       52
                                                              ---     ----
          Total revenues....................................  100      100
Cost of revenues:
  License...................................................    3        3
  Services..................................................   51       69
                                                              ---     ----
          Total cost of revenues............................   54       72
          Gross profit......................................   46       28
Operating expenses:
  Research and development..................................   31       58
  Sales and marketing.......................................   59      168
  General and administrative................................   22       25
                                                              ---     ----
          Total operating expenses..........................  112      251
                                                              ---     ----
Loss from operations........................................  (66)    (223)
Interest and other income (expense), net....................   14       44
                                                              ---     ----
Net loss before taxes.......................................  (52)    (179)
Provision for income taxes..................................   --       --
                                                              ---     ----
Net loss....................................................  (52)%   (179)%
                                                              ===     ====


REVENUES

     Total revenues were $14.1 million in the quarter ended June 30, 2001, an
increase of approximately $6.6 million or 87% over the comparable period in
2000. We believe that the future percentage increase in revenues will be
significantly smaller than what has been achieved in prior years.

     License. License revenues totaled approximately $6.1 million in the quarter
ended June 30, 2001, an increase of approximately $2.4 million or 66% over the
comparable period in 2000. The increase in license revenues was primarily due to
the addition of new customers as a result of expanded marketing activities,
growth in our sales force, and greater demand for and the acceptance of our ACE
suite of products. We intend to generate additional license revenues from our
existing customers and anticipate that this number will increase in absolute
dollars in future periods, although it will fluctuate as a percentage of total
revenues as our customers and size of transactions change.

     Services. Services revenues totaled approximately $8.0 million in the
quarter ended June 30, 2001, an increase of approximately $4.2 million or 106%
compared to the same period a year ago. Our services revenues are comprised of
fees from consulting, maintenance and training services. The increase in
services revenues was due primarily to the increase in maintenance and
maintenance renewals, consulting, and training services associated with
increased sales of our products. During the three months ended June 30, 2001,
the services revenues were reduced by amortization of $125,000, the fair value
of the warrant issued to a significant customer in connection with a license and
service agreement entered into in November 1999. We will amortize the remaining
$250,000 of the fair value of the warrant as an offset to services revenue for
the second and third quarters in the fiscal year of 2002. In comparison, for the
three months ended June 30, 2000, we amortized approximately $2.0 million of the
fair value of this warrant. We expect services revenues to continue

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to increase in terms of absolute dollars in future periods as the number of
consulting projects and maintenance contracts increases with the addition of new
customers.

COST OF REVENUES

     Cost of License Revenues. Cost of license revenues consists of the costs of
the product media, duplication, packaging and delivery of our software products
to our customers, which may include documentation, shipping and other data
transmission costs. Cost of license revenues totaled approximately $335,000 and
$231,000 and represented 6% of license revenues in the three months ended June
30, 2001 and as well as the three months ended June 30, 2000. As we enter into
more independent software vendor agreements, we expect cost of license revenues
to increase in absolute dollars and to fluctuate as a percentage of license
revenues.

     Cost of Services Revenues. Cost of services revenues is comprised mainly of
salaries and related expenses of our services organization. For the three months
ended June 30, 2001 and 2000, cost of services revenues totaled approximately
$7.2 million and $5.2 million and represented 90% and 134% of services revenues,
respectively. The increase of $2.0 million or 39% in costs of services was
primarily due to an increase in the number of consulting and technical support
personnel necessary to support both the expansion of our installed base of
customers and new implementations. In addition, during the quarter ending June
30, 2001, we amortized approximately $194,000 for deferred compensation,
$189,000 for restructuring costs related to the severance and benefits paid to
terminated employees and $281,000 for goodwill in connection with the Wakely
Software acquisition which occurred in August 2000. However, there were no
similar charges amortized in the comparable periods of 2000. We expect cost of
services revenues to fluctuate as a percentage of service revenue.

GROSS MARGIN

     For the three months ended June 30, 2001, we experienced overall gross
margins of 46%, compared to 28% in the same period a year ago. We expect that
our overall gross margins will continue to fluctuate due to the timing of
services revenue recognition and will continue to be adversely affected by the
lower margins associated with services revenues. The impact on our gross profit
will depend on the mix of services we provide, whether the services are
performed by our in-house staff or third party consultants, and the overall
utilization rates of our professional services organization.

     Gross Margin -- Licenses. Gross margin for license revenues was
approximately 94% for the three months ended June 30, 2001 and for the same
period a year ago.

     Gross Margin -- Services. Gross margin for services was approximately 10%
in the quarter ended June 30, 2001 and negative 34% for the same period a year
ago. The negative gross margin for the three months ended June 30, 2000 was
primarily due to a $2.0 million charge associated with a license agreement
entered into in November 1999. This warrant was fully amortized as of December
31, 2000. We anticipate that cost of services revenues will decrease in absolute
dollars in future periods as we decrease spending due to the slow down of the
economy. We anticipate that the cost of services revenues will continue to
fluctuate as a percentage of service revenue.

OPERATING EXPENSES

     Research and Development. Our research and development costs primarily
consist of salaries and related costs of our engineering, quality assurance, and
technical publications efforts. Research and development costs were
approximately $4.4 million in both the quarter ended June 30, 2001 and in the
quarter ended June 30, 2000. We amortized approximately $70,000 for deferred
compensation, $544,000 for the development agreement entered into with Intel,
and $287,000 for restructuring costs for the three months ended June 30, 2001.
For the quarter ended June 30, 2000, we amortized approximately $86,000 for
deferred compensation and approximately $530,000 for the development agreement
entered into with Intel. We believe our investment in research and development
will decrease in future periods as we decrease spending due to a decline in
technology infrastructure spending.

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     Sales and Marketing. Our sales and marketing expenses primarily consist of
salaries and related costs for our sales and marketing organization and
marketing programs, including trade shows, collateral, sales materials, and
advertising. Sales and marketing expenses totaled approximately $8.3 and $12.7
million in the quarters ended June 30, 2001 and 2000, respectively. The decrease
of $4.4 million or 35% was primarily due to our restructuring and a reduction in
spending on marketing programs. We amortized approximately $262,000 for deferred
compensation, $106,000 for acceleration of stock option vesting, and $359,000
for restructuring costs for the three months ended June 30, 2001. For the three
months ended June 30, 2000, we amortized approximately $465,000 for deferred
compensation and $431,000 for acceleration of stock option vesting. We expect
that sales and marketing expenses will decrease in absolute dollars over the
next year as we decrease spending due to a decline in technology infrastructure
spending.

     General and Administrative. Our general and administrative expenses consist
primarily of personnel and related costs for general corporate functions,
including finance, accounting, legal, human resources and facilities as well as
information system expenses not allocated to other departments. General and
administrative expenses totaled approximately $3.2 million in the quarter ended
June 30, 2001 and $2.0 million for the same period a year ago. An increase of
$1.2 million or 62% was primarily due to additional legal and accounting costs
incurred in connection with business activities. We amortized approximately
$107,000 for deferred compensation, $12,000 for acceleration of stock option
vesting, $556,000 for restructuring costs and $383,000 for the amortization of
goodwill in connection with the Wakely Software acquisition for the three months
ended June 30, 2001. For the three months ended June 30, 2000, we amortized
approximately $116,000 for deferred compensation and $44,000 for acceleration of
stock option vesting. We expect that general and administrative expenses will
decrease in absolute dollars over the next year as we decrease spending due to a
decline in technology infrastructure spending.

INTEREST AND OTHER INCOME, NET

     Interest and other income, net primarily consists of interest earned on
cash balances and stockholders notes receivable. Interest and other income, net
totaled approximately $2.0 million and $3.3 million for the three months ended
June 30, 2001 and 2000, respectively. The decrease was primarily due to the
reduction of the cash balance, which used for our expansion and the operation of
our business during the fiscal year of 2001.

PROVISION FOR INCOME TAXES

     We have recorded a tax provision of $75,000 for the three months ended June
30, 2001 and none in the comparable period of 2000.

     FASB Statement No. 109 provides for the recognition of deferred tax assets
if realization of such assets is more likely than not. Based upon the weight of
available evidence, which includes our historical operating performance and the
reported cumulative net losses in all prior years, we have provided a full
valuation allowance against its net deferred tax assets. We intend to evaluate
the deferred tax assets on a quarterly basis.

RECENT ACCOUNTING PRONOUNCEMENTS

     In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets." These standards become
effective for fiscal years beginning after December 15, 2001. Beginning in the
first quarter of fiscal 2003, goodwill will no longer be amortized but will be
subject to annual impairment tests. All other intangible assets will continue to
be amortized over their estimated useful lives. Based on acquisitions completed
as of June 30, 2001, application of the non-amortization provisions of these
rules is expected to result in an increase in net income of approximately $2.7
million per year.

     The new rules also require business combinations after June 30, 2001 to be
accounted for using the purchase method of accounting and goodwill acquired
after June 30, 2001 will not be amortized. Goodwill existing at June 30, 2001,
will continue to be amortized through the end of fiscal 2001. During fiscal
2003, the Company will test goodwill for impairment under the new rules,
applying a fair-value-based test. Through the

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   18

end of fiscal 2002, the Company will test goodwill for impairment using the
current method, which uses an undiscounted cash flow test.

     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes methods for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. We have
implemented SFAS No. 133 beginning April 01, 2001. For the three months ended
June 30, 2001, we did not hold any derivative instruments and did not engage in
hedging activities, the adoption of SFAS No. 133 had no material impact on our
financial position, results of operations or cash flows.

CONSOLIDATED BALANCE SHEET DATA

     Cash, cash equivalents, short and long-term investments were approximately
$164.4 million at June 30, 2001 compared to $168.3 million at March 31, 2001.
The decrease primarily related to cash used in operations during the three
months ended June 30, 2001 of $5.0 million. Accounts receivable was
approximately $11.6 million at June 30, 2001 compared to $19.0 million at March
31, 2001. The decrease of $7.4 million was a direct result of the payments
received from clients. Development Agreement, net was $733,000 at June 30, 2001
and $1.1 million at March 31, 2001. The decrease was due to the warrant with the
value of $227,000 issued to Sales Technologies Limited in connection with the
development agreement signed in April 2001 offset against the quarterly
amortization of $544,000.

     Current liabilities were approximately $28.1 million at June 30, 2001 and
$36.3 million at March 31, 2001. The decrease was due to the major decrease of
our marketing activities, accrued payroll expenses and overall general spending.
For instance, we released employee contributions withheld under our Employee
Stock Purchase Plan totaling approximately $800,000 and the reduction of
approximately $500,000 in commission accrual due to the reduction of headcounts
in sales and marketing under the restructuring plan for 2001. In addition,
deferred revenue was reduced by $6.0 million in the current period.

LIQUIDITY AND CAPITAL RESOURCES

     As of June 30, 2001, cash, and cash equivalents and short-term investments
totaled approximately $116.5 million, compared to $137.2 million at March 31,
2001. We currently have no significant capital commitments and expenditures
other than obligations under operating leases.

     Cash used by operating activities for the three months ended June 30, 2001
was approximately $5.0 million. We have funded our operations with proceeds from
our initial public offering, private placements, and the sale of preferred
stock. Cash used in operations for the quarter ended June 30, 2001 was primarily
a result of our net loss, decrease of accounts receivable, accounts payable, and
deferred revenues offset by noncash items.

     Cash used for investing activities for the three months ended June 30, 2001
was approximately $28.4 million. Investing activities consisted primarily of net
purchases of long-term and short-term investments.

     Cash provided by financing activities for the three months ended June 30,
2001 was approximately $364,000. Financing activities for the three months ended
June 30, 2001 was comprised of the proceeds from shareholders' notes receivable
and from the issuance of common stock, net of repurchase.

     Due to the decline in technology infrastructure spending, we intend to
reduce our operating expenses in absolute dollars to achieve our goal of
profitability in the future. As a result, we anticipate the reduction of budgets
on operating expenses, sales and marketing expenses, general and administrative
expenses, and capital expenditures in the next year will preserve cash resources
for the future growth and development of the business.

     We believe that our existing cash and cash equivalents and our anticipated
cash flows from operations will be sufficient to meet our working capital and
operating resource expenditure requirements for the foreseeable future.

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                         RISKS RELATED TO OUR BUSINESS

     In addition to other information in this Form 10-Q, the following risk
factors should be carefully considered in evaluating Selectica and its business
because such factors currently may have a significant impact on Selectica's
business, operating results and financial condition. As a result of the risk
factors set forth below and elsewhere in this Form 10-Q, and the risks discussed
in Selectica's other Securities and Exchange Commission filings including our
Form 10-K for our fiscal year ended March 31, 2001, actual results could differ
materially from those projected in any forward-looking statements.

THE UNPREDICTABILITY OF OUR QUARTERLY REVENUES AND RESULTS OF OPERATIONS MAKES
IT DIFFICULT TO PREDICT OUR FINANCIAL PERFORMANCE AND MAY CAUSE VOLATILITY OR A
DECLINE IN THE PRICE OF OUR COMMON STOCK IF WE ARE UNABLE TO SATISFY THE
EXPECTATIONS OF INVESTORS OR THE MARKET.

     In the past, our quarterly operating results have varied significantly, and
we expect these fluctuations to continue. Future operating results may vary
depending on a number of factors, many of which are outside of our control.

     Our quarterly revenues may fluctuate as a result of our ability to
recognize revenue in a given quarter. We enter into arrangements for the sale of
(1) licenses of our software products and related maintenance contract; (2)
bundled license, maintenance, and services; and (3) services on a time and
material basis. For each arrangement, we determine whether evidence of an
arrangement exists, delivery has occurred, the fee is fixed or determinable, and
collection is probable. If any of these criteria are not met, revenue
recognition is deferred until such time as all of the criteria are met.
Additionally, because we rely on a limited number of customers for our revenue,
the loss or delay of one prospective customer may seriously significantly harm
our operating results.

     For those contracts that consist solely of license and maintenance we
recognize license revenues based upon the residual method after all elements
other than maintenance have been delivered as we have vendor specific objective
evidence of fair value of maintenance we recognize maintenance revenues over the
term of the maintenance contract. For those contracts that bundle the license
with maintenance, training, and/or consulting services, we assess whether the
service element of the arrangement is essential to the functionality of the
other elements of the arrangement. In those instances where we determine that
the service elements are essential to the other elements of the arrangement, we
account for the entire arrangement using contract accounting.

     For those arrangements accounted for using contract accounting that do not
include contractual milestones or other acceptance criteria we utilize the
percentage of completion method based upon input measures of hours. For those
contracts that include contract milestones or acceptance criteria we recognize
revenue as such milestones are achieved or as such acceptance occurs.

     In some instances the acceptance criteria in the contract requires
acceptance after all services are complete and all other elements have been
delivered. In these instances we recognize revenue based upon the completed
contract method after such acceptance has occurred.

     For those arrangements for which we have concluded that the service element
is not essential to the other elements of the arrangements we determine whether
the services are available from other vendors, do not involve a significant
degree of risk or unique acceptance criteria, and whether we have sufficient
experience in providing the service to be able to separately account for the
service. When the service qualifies for separate accounting we use
vendor-specific objective evidence of fair value for the service.

     Because we rely on a limited number of customers, the timing of customer
acceptance or milestone achievement, or the amount of services we provide to a
single customer can significantly affect our operating results. For example, our
services and license revenues declined significantly in the quarters ended March
31, 2001 and June 30, 1999 due to the delay of milestone achievement of services
under a particular contract. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Quarterly Results of
Operations." Because these expenses are relatively fixed in the near term, any
shortfall from anticipated revenues could cause our quarterly operating results
to fall below anticipated levels.

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     We may also experience seasonality in revenues. For example, our quarterly
results may fluctuate based upon our customers' calendar year budgeting cycles.
These seasonal variations may lead to fluctuations in our quarterly revenues and
operating results.

     Based upon the foregoing, we believe that period-to-period comparisons of
our results of operations are not necessarily meaningful and that such
comparisons should not be relied upon as indications of future performance. In
some future quarter, our operating results may be below the expectations of
public market analysts and investors, which could cause volatility or a decline
in the price of our common stock.

WE HAVE A HISTORY OF LOSSES AND EXPECT TO CONTINUE TO INCUR NET LOSSES IN THE
NEAR-TERM.

     We have experienced operating losses in each quarterly and annual period
since inception. We incurred net losses applicable to common stockholders of
approximately $49.9 million, $31.8 million and $7.5 million for the fiscal years
ended March 31, 2001, 2000 and 1999, respectively. We have incurred net losses
of approximately $7.4 million for the first quarter of the fiscal year of 2002
and an accumulated deficit of approximately $100.4 million as of June 30, 2001.
We intend to reduce our research and development, sales and marketing, and
general and administrative expenses, and consequently expect our losses to be
reduced in the future. We will need to generate significant increases in our
revenues to achieve profitability. If our revenue fails to grow or grows more
slowly than we anticipate or our operating expenses exceed our expectations, our
losses will significantly increase which would significantly harm our business
and operating results.

A DECLINE IN GENERAL ECONOMIC CONDITIONS OR A DECREASE IN INFORMATION TECHNOLOGY
SPENDING COULD HARM OUR RESULTS OF OPERATIONS.

     The change in economic conditions may lead to revised budgetary constraints
regarding information technology spending for our customers. For example, a
potential customer which had selected our Interactive Selling System from a
number of competitors recently decided not to implement any configuration
system. That company had decided to reduce its expenditures for information
technology. A general slowdown in information technology spending due to
economic conditions or other factors could significantly harm our business and
operating results.

IF THE MARKET FOR INTERACTIVE SELLING SYSTEM SOFTWARE DOES NOT DEVELOP AS WE
ANTICIPATE, OUR OPERATING RESULTS WILL BE SIGNIFICANTLY HARMED, WHICH COULD
CAUSE A DECLINE IN THE PRICE OF OUR COMMON STOCK.

     The market for Interactive Selling System software, which has only recently
begun to develop, is evolving rapidly and likely will have an increased number
of competitors. Because this market is new, it is difficult to assess its
competitive environment, growth rate and potential size. The growth of the
market is dependent upon the willingness of businesses and consumers to purchase
complex goods and services over the Internet and the acceptance of the Internet
as a platform for business applications. In addition, companies that have
already invested substantial resources in other methods of Internet selling may
be reluctant or slow to adopt a new approach or application that may replace,
limit or compete with their existing systems.

     The acceptance and growth of the Internet as a business platform may not
continue to develop at historical rates and a sufficiently broad base of
companies may not adopt Internet platform-based business applications, either of
which could significantly harm our business and operating results. The failure
of the market for Interactive Selling System software to develop, or a delay in
the development of this market, would significantly harm our business and
operating results.

OUR LIMITED OPERATING HISTORY AND THE FACT THAT WE OPERATE IN A NEW INDUSTRY
MAKES EVALUATING OUR BUSINESS PROSPECTS AND RESULTS OF OPERATIONS DIFFICULT.

     We were founded in June 1996 and have a limited operating history. We began
marketing our ACE suite of products in early 1997 and released ACE 4.5, the
newest version of our software, in October 2000. Our business model is still
emerging, and the revenue and income potential of our business and market are
unproven. As a result of our limited operating history, we have limited
financial data that you can use to

                                        18
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evaluate our business. You must consider our prospects in light of the risks and
difficulties we may encounter as an early stage company in the new and rapidly
evolving market for Interactive Selling Systems.

FAILURE TO ESTABLISH AND MAINTAIN RELATIONSHIPS WITH SYSTEMS INTEGRATORS AND
CONSULTING FIRMS, WHICH ASSIST US WITH THE SALE AND INSTALLATION OF OUR
PRODUCTS, WOULD IMPEDE ACCEPTANCE OF OUR PRODUCTS AND THE GROWTH OF OUR
REVENUES.

     We rely in part upon systems integrators and consulting firms to recommend
our products to their customers and to install and deploy our products. To
increase our revenues and implementation capabilities, we must develop and
expand our relationships with these systems integrators and consulting firms. If
systems integrators and consulting firms develop, market or recommend
competitive Interactive Selling Systems, our revenues may decline. In addition,
if these systems integrators and consulting firms are unwilling to install and
deploy our products, we may not have the resources to provide adequate
implementation services to our customers and our business and operating results
could be significantly harmed.

WE FACE INTENSE COMPETITION, WHICH COULD REDUCE OUR SALES, PREVENT US FROM
ACHIEVING OR MAINTAINING PROFITABILITY AND INHIBIT OUR FUTURE GROWTH.

     The market for software and services that enable electronic commerce is
new, intensely competitive and rapidly changing. We expect competition to
persist and intensify, which could result in price reductions, reduced gross
margins and loss of market share. Our principal competitors include FirePond,
Trilogy Software, Oracle Corporation, SAP, I2, and Siebel Systems, all of which
offer integrated solutions for electronic commerce incorporating some of the
functionality of an Interactive Selling System. These competitors may intensify
their efforts in our market. In addition, other enterprise software companies
may offer competitive products in the future.

     Competitors vary in size and in the scope and breadth of the products and
services offered. Some of our competitors and potential competitors have a
number of significant advantages over us, including:

     - 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.

     Our competitors may also bundle their products in a manner that may
discourage users from purchasing our products. Current and potential competitors
may establish cooperative relationships with each other or with third parties,
or adopt aggressive pricing policies to gain market share. Competitive pressures
may require us to reduce the prices of our products and services. We may not be
able to maintain or expand our sales if competition increases and we are unable
to respond effectively.

OUR LENGTHY SALES CYCLE MAKES IT DIFFICULT FOR US TO FORECAST REVENUE AND
AGGRAVATES THE VARIABILITY OF QUARTERLY FLUCTUATIONS, WHICH COULD CAUSE OUR
STOCK PRICE TO DECLINE.

     The sales cycle of our products has historically averaged between four and
six months, and may sometimes be significantly longer. We are generally required
to provide a significant level of education regarding the use and benefits of
our products, and potential customers tend to engage in extensive internal
reviews before making purchase decisions. In addition, the purchase of our
products typically involves a significant commitment by our customers of capital
and other resources, and is therefore subject to delays that are beyond our
control, such as customers' internal budgetary procedures and the testing and
acceptance of new technologies that affect key operations. In addition, because
we intend to target large companies, our sales cycle can be lengthier due to the
decision process in large organizations. As a result of our products' long sales
cycles, we face difficulty predicting the quarter in which sales to expected
customers may occur. If anticipated sales from a specific customer for a
particular quarter are not realized in that quarter, our operating results for

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that quarter could fall below the expectations of financial analysts and
investors, which could cause our stock price to decline.

IF WE DO NOT KEEP PACE WITH TECHNOLOGICAL CHANGE, INCLUDING MAINTAINING
INTEROPERABILITY OF OUR PRODUCT WITH THE SOFTWARE AND HARDWARE PLATFORMS
PREDOMINANTLY USED BY OUR CUSTOMERS, OUR PRODUCT MAY BE RENDERED OBSOLETE AND
OUR BUSINESS MAY FAIL.

     Our industry is characterized by rapid technological change, changes in
customer requirements, frequent new product and service introductions and
enhancements and emerging industry standards. In order to achieve broad customer
acceptance, our products must be compatible with major software and hardware
platforms used by our customers. Our products currently operate on the Microsoft
Windows NT, Sun Solaris, IBM AIX, Linux, and Microsoft Windows 2000 Operating
Systems. In addition, our products are required to interoperate with electronic
commerce applications and databases. We must continually modify and enhance our
products to keep pace with changes in these operating systems, applications and
databases. Interactive Selling System technology is complex and new products and
product enhancements can require long development and testing periods. If our
products were to be incompatible with a popular new operating system, electronic
commerce application or database, our business would be significantly harmed. In
addition, the development of entirely new technologies to replace existing
software could lead to new competitive products that have better performance or
lower prices than our products and could render our products obsolete and
unmarketable.

WE HAVE RELIED AND EXPECT TO CONTINUE TO RELY ON A LIMITED NUMBER OF CUSTOMERS
FOR A SIGNIFICANT PORTION OF OUR REVENUES, AND THE LOSS OF ANY OF THESE
CUSTOMERS COULD SIGNIFICANTLY HARM OUR BUSINESS AND OPERATING RESULTS.

     Our business and financial condition is dependent on a limited number of
customers. Our five largest customers accounted for approximately 53% of our
revenues for the three months ended June 30, 2001 and 55% for the fiscal year
ended March 31, 2001, respectively, and our ten largest customers accounted for
72% of our revenues for the three months ended June 30, 2001 and 67% for the
fiscal year ended March 31, 2001, respectively. Revenues from significant
customers as a percentage of total revenues are as follows:

                        THREE MONTHS ENDED JUNE 30, 2001


                                                           
Samsung, SDS................................................  13%
Tellabs.....................................................  12%
Applied BioSystems..........................................  10%


                        FISCAL YEAR ENDED MARCH 31, 2001


                                                           
Samsung, SDS................................................  17%
Dell........................................................  16%
Cisco.......................................................  14%


     We expect that we will continue to depend upon a relatively small number of
customers for a substantial portion of our revenues for the foreseeable future.
Contracts with our customers can generally be terminated on short notice by the
customer. As a result, if we fail to successfully sell our products and services
to one or more customers in any particular period, or a large customer purchases
less of our products or services, defers or cancels orders, or terminates its
relationship with us, our business and operating results would be harmed.

WE ARE THE TARGET OF SEVERAL SECURITIES CLASS ACTION COMPLAINTS AND ARE AT RISK
OF SECURITIES CLASS ACTION LITIGATION, WHICH COULD RESULT IN SUBSTANTIAL COSTS
AND DIVERT MANAGEMENT ATTENTION AND RESOURCES.

     On June 5, 2001, a number of securities class action complaints were filed
against us, the underwriters of our initial public offering, and certain of our
executives in the United States District Court for the Southern District of New
York. The complaints allege that the underwriters of our initial public
offering, Selectica and the other named defendants violated federal securities
laws by making material false and misleading statements in the prospectus
incorporated in our registration statement on Form S-1 filed with the SEC in

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March, 2000. The complaints allege, among other things, that Credit Suisse First
Boston solicited and received excessive and undisclosed commissions from several
investors in exchange for which Credit Suisse First Boston allocated to these
investors material portions of the restricted number of shares of common stock
issued in connection with our initial public offering. The complaints further
allege that Credit Suisse First Boston entered into agreements with its
customers in which Credit Suisse First Boston agreed to allocate the common
stock sold in our initial public offering to certain customers in exchange for
which such customers agreed to purchase additional shares of our common stock in
the after-market at pre-determined prices. We believe that the claims against us
are without merit and intend to defend against the complaints vigorously.
Securities class action litigation could result in substantial costs and divert
our management's attention and resources, which could seriously harm our
business.

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.

     In the past, our customers have experienced difficulties or delays in
completing implementation of our products. We may experience similar
difficulties or delays in the future. Our Interactive Selling System solution
relies on defining a knowledge base that must contain all of the information
about the products and services being configured. We have found that extracting
the information necessary to construct a knowledge base can be more time
consuming than we or our customers anticipate. If our customers do not devote
the resources necessary to create the knowledge base, the deployment of our
products can be delayed. Deploying our ACE products can also involve
time-consuming integration with our customers' legacy systems, such as existing
databases and enterprise resource planning software. Failing to meet customer
expectations on deployment of our products could result in a loss of customers
and negative publicity regarding us and our products, which could adversely
affect our ability to attract new customers. In addition, time-consuming
deployments may also increase the amount of professional services we must
allocate to each customer, thereby increasing our costs and adversely affecting
our business and operating results.

IF WE ARE UNABLE TO MAINTAIN AND EXPAND 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.

     We depend on our direct sales force for all of our current sales and our
future growth depends on the ability of our direct sales force to develop
customer relationships and increase sales to a level that will allow us to reach
and maintain profitability. If we are unable to retain qualified sales
personnel, or if newly hired personnel fail to develop the necessary skills or
to reach productivity when anticipated, we may not be able to increase sales of
our products and services.

IF WE ARE UNABLE TO GROW AND 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.

     As we increase licensing of our software products, we must grow our
professional services organization to assist our customers with implementation
and maintenance of our products. Because these professional services have been
expensive to provide, we must improve the management of our professional
services organizations to improve our results of operations. Improving the
efficiency of our consulting services is dependent upon attracting and retaining
experienced project managers. Competition for these project managers is intense,
particularly in the Silicon Valley and in India where the majority of our
professional services organization is based, and we may not be able to hire
qualified individuals to fill these positions.

     Although services revenues, which are primarily comprised of revenues from
consulting fees, maintenance contracts and training, are important to our
business, representing 57% and 52% of total revenues for the three months ended
June 30, 2001 and 2000 respectively, services revenues have lower gross margins
than license revenues. Gross margins for services revenues were 10% and negative
34% for the three months ended June 30, 2001 and 2000, respectively, compared to
gross margins for license revenues of 94% for the three months ended June 30,
2001 and for the three months ended June 30, 2000.

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     We anticipate that customers will increasingly utilize third-party
consultants to implement and deploy our products. Additionally, in the future we
intend to charge for our professional services on a time and materials rather
than a fixed-fee basis. To the extent that customers are unwilling to utilize
third-party consultants or require us to provide professional services on a
fixed fee basis, our cost of services revenues could increase and could cause us
to recognize a loss on a specific contract, either of which would adversely
affect our operating results. In addition, if we are unable to provide these
resources, we may lose sales or incur customer dissatisfaction and our business
and operating results could be significantly harmed.

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.

     Complex software products such as ours often contain errors or defects,
including errors relating to security, particularly when first introduced or
when new versions or enhancements are released. In the past, we have discovered
defects in our products and provided product updates to our customers to address
such defects. Our ACE products and other future products may contain defects or
errors, which could result in lost revenues, a delay in market acceptance or
negative publicity, which would significantly harm our business and operating
results.

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.

     We believe that our success will depend on the continued employment of our
senior management team and key technical personnel, none of whom, except Rajen
Jaswa, our President and Chief Executive Officer, and Dr. Sanjay Mittal, our
Chief Technical Officer and Vice President of Engineering, has an employment
agreement with us. If one or more members of our senior management team or key
technical personnel were unable or unwilling to continue in their present
positions, these individuals would be difficult to replace. Consequently, our
ability to manage day-to-day operations, including our operations in Pune,
India, develop and deliver new technologies, attract and retain customers,
attract and retain other employees and generate revenues would be significantly
harmed.

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, WHICH WOULD ADVERSELY AFFECT OUR ABILITY TO CONDUCT OUR
OPERATIONS IN INDIA, COULD SIGNIFICANTLY HARM OUR BUSINESS.

     We conduct quality assurance and professional services operations in India.
As of June 30, 2001, there were 262 persons employed in India. We are dependent
on our India-based operations for these aspects of our business and we intend to
grow our operations in India. As a result, we are directly influenced by the
political and economic conditions affecting India. Operating expenses incurred
by our operations in India are denominated in Indian currency and accordingly,
we are exposed to adverse movements in currency exchange rates. This, as well as
any other political or economic problems or changes in India, could have a
negative impact on our India-based operations, resulting in significant harm to
our business and operating results. Furthermore, the intellectual property laws
of India may not adequately protect our proprietary rights. We believe that it
is particularly difficult to find quality management personnel in India, and we
may not be able to timely replace our current India-based management team if any
of them were to leave our company.

     Our training program for some of our India-based employees includes an
internship at our San Jose, California headquarters. Additionally, we provide
services to some of our customers internationally with India-based employees. We
presently rely on a number of visa programs to enable these India-based
employees to travel and work internationally. Any change in the immigration
policies of India or the countries to which these employees travel and work
could cause disruption or force the termination of these programs, which would
harm our business.

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   25

BECAUSE COMPETITION FOR QUALIFIED PERSONNEL IS INTENSE IN OUR INDUSTRY AND IN
OUR GEOGRAPHIC REGION, WE MAY NOT BE ABLE TO RECRUIT OR RETAIN PERSONNEL, WHICH
COULD IMPACT THE DEVELOPMENT OR SALES OF OUR PRODUCTS.

     Our success depends on our ability to attract and retain qualified
management, engineering, sales and marketing and professional services
personnel. Competition for these types of personnel is intense, especially in
the Silicon Valley. We do not have employment agreements with most of our key
personnel. If we are unable to retain our existing key personnel, or attract and
train additional qualified personnel, our growth may be limited due to our lack
of capacity to develop and market our products.

     Options to purchase our common stock are an important component of our
employee compensation. Because of the decline in our stock price, some of our
employees hold options with an exercise price substantially above the current
market price. This could adversely affect our ability to attract and retain
employees. On April 27, 2001, we commenced an option exchange program in which
our employees were offered the opportunity to exchange stock options with
exercise prices of $8.50 and above for new stock options. Participants in the
exchange program will receive new options to purchase one hundred and twenty
percent (120%) of the number of shares of our common stock subject to the
options that were exchanged and canceled. The new options will be granted more
than six months and one day from May 28, 2001, the date the old options were
cancelled. The exercise price of the new options will be the closing market
price on the NASDAQ Stock Market on the grant date of the new options. The
exchange offer was not available to executive officers or the members of our
Board of Directors.

     In addition, on May 30, 2001, we granted additional options to purchase an
aggregate of approximately 4 million shares of our common stock to all our
employees that did not participate in the option exchange offer. We will
amortize approximately $350,000 in deferred compensation expense associated with
these grants over the next four years. Although these programs have been
designed to improve employee retention by creating additional incentives for our
employees, they may not have the desired impact. This could adversely affect our
ability to retain employees.

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.

     Since our products are company-wide, mission-critical computer applications
with a potentially strong impact on our customers' sales, errors, defects or
other performance problems could result in financial or other damages to our
customers. Although our license agreements generally contain provisions designed
to limit our exposure to product liability claims, existing or future laws or
unfavorable judicial decisions could negate such limitation of liability
provisions. Product liability litigation, even if it were unsuccessful, would be
time consuming and costly to defend.

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.

     We rely on a combination of trademark, trade secret and copyright law and
contractual restrictions to protect the proprietary aspects of our technology.
These legal protections afford only limited protection for our technology. We
currently hold two patents. We, also, currently have one pending U.S. patent
application. In addition, we have one trademarks registered in the U.S. and one
trademark registered in South Korea and have applied to register a total of
eight trademarks in the United States, Canada, Europe, India and Korea. Our
trademark and patent applications might not result in the issuance of any
trademarks or patents. Our patent or any future issued patents or trademarks
might be invalidated or circumvented or otherwise fail to provide us any
meaningful protection. We seek to protect source code for our software,
documentation and other written materials under trade secret and copyright laws.
We license our software pursuant to signed license agreements, which impose
certain restrictions on the licensee's ability to utilize the software. We also
seek to avoid disclosure of our intellectual property by requiring employees and
consultants with access to our proprietary information to execute
confidentiality agreements. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy aspects of our products or to
obtain and use information that we regard as proprietary. In addition, the laws
of many countries do not protect our proprietary rights to as

                                        23
   26

great an extent as do the laws of the United States. Litigation may be necessary
in the future to enforce our intellectual property rights, to protect our trade
secrets and to determine the validity and scope of the proprietary rights of
others. Our failure to adequately protect our intellectual property could
significantly harm our business and operating results.

ANY ACQUISITIONS THAT WE MAY MAKE COULD DISRUPT OUR BUSINESS AND HARM OUR
OPERATING RESULTS.

     We may acquire or make investments in complementary companies, products or
technologies. In the event of any such investments, acquisitions or joint
ventures, we could:

     - issue stock that would dilute our current stockholders' percentage
       ownership;

     - incur debt;

     - assume liabilities;

     - incur amortization expenses related to goodwill and other intangible
       assets; or

     - incur large and immediate write-offs.

     These investments, acquisitions or joint ventures also involve numerous
risks, including:

     - problems combining the purchased operations, technologies or products
       with ours;

     - unanticipated costs;

     - diversion of managements' attention from our core business;

     - adverse effects on existing business relationships with suppliers and
       customers;

     - potential loss of key employees, particularly those of the acquired
       organizations; and

     - reliance to our disadvantage on the judgment and decisions of third
       parties and lack of control over the operations of a joint venture
       partner.

     Any acquisition or joint venture may cause our financial results to suffer
as a result of these risks.

IF WE ARE SUBJECT TO INTELLECTUAL PROPERTY LITIGATION, WE MAY INCUR SUBSTANTIAL
COSTS, WHICH WOULD HARM OUR OPERATING RESULTS.

     Our success and ability to compete are dependent on our ability to operate
without infringing upon the proprietary rights of others. Any intellectual
property litigation could result in substantial costs and diversion of resources
and could significantly harm our business and operating results. In the past, we
received correspondence from two patent holders recommending that we licensed
their respective patents. After review of these patents, we informed these
patent holders that in our opinion, it would not be necessary to license these
patents. However, we may be required to license either or both patents or incur
legal fees to defend our position that such licenses are not necessary. We
cannot assure you that if required to do so, we would be able to obtain a
license to use either patent on commercially reasonable terms, or at all.

     Any threat of intellectual property litigation could force us to do one or
more of the following:

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

     - obtain from the holder of the infringed intellectual property right a
       license to sell or use the relevant intellectual property, which license
       may not be available on reasonable terms;

     - redesign those products or services that incorporate such intellectual
       property; or

     - pay money damages to the holder of the infringed intellectual property
       right.

     In the event of a successful claim of infringement against us and our
failure or inability to license the infringed intellectual property on
reasonable terms or license a substitute intellectual property or redesign our

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product to avoid infringement, our business and operating results would be
significantly harmed. If we are forced to abandon use of our trademark, we may
be forced to change our name and incur substantial expenses to build a new
brand, which would significantly harm our business and operating results.

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.

     Our software utilizes encryption technology, the export of which is
regulated by the United States government. If our export authority is revoked or
modified, if our software is unlawfully exported or if the United States adopts
new legislation restricting export of software and encryption technology, we may
experience delay or reduction in shipment of our products internationally.
Current or future export regulations could limit our ability to distribute our
products outside of the United States. While we take precautions against
unlawful exportation of our software, we cannot effectively control the
unauthorized distribution of software across the Internet.

IF WE ARE UNABLE TO EXPAND OUR OPERATIONS INTERNATIONALLY OR ARE UNABLE TO
MANAGE THE GREATER COLLECTIONS, MANAGEMENT, HIRING, LEGAL, REGULATORY, AND
CURRENCY RISKS FROM THESE INTERNATIONAL OPERATIONS, OUR BUSINESS AND OPERATING
RESULTS WILL BE HARMED.

     We intend to expand our operations internationally. This expansion may be
more difficult or take longer than we anticipate, and we may not be able to
successfully market, sell or deliver our products internationally. If successful
in our international expansion, we will be subject to a number of risks
associated with international operations, including:

     - longer accounts receivable collection cycles;

     - expenses associated with localizing products for foreign markets;

     - difficulties in managing operations across disparate geographic areas;

     - difficulties in hiring qualified local personnel;

     - difficulties associated with enforcing agreements and collecting
       receivables through foreign legal systems;

     - unexpected changes in regulatory requirements that impose multiple
       conflicting tax laws and regulations; and

     - fluctuations in foreign exchange rates and the possible lack of financial
       stability in foreign countries that prevent overseas sales growth.

OUR RAPID GROWTH PLACES A SIGNIFICANT STRAIN ON OUR MANAGEMENT SYSTEMS AND
RESOURCES, AND IF WE FAIL TO MANAGE THIS GROWTH, OUR BUSINESS WILL BE HARMED.

     We have recently experienced a period of rapid growth and expansion, which
places significant demands on our managerial, administrative, operational,
financial and other resources. From December 31, 1998 to June 30, 2001, we
expanded from 68 to 587 employees, including 31 employees from the acquisition
of Wakely Software.

     We will be required to manage an increasing number of relationships with
customers, suppliers and employees, and an increasing number of complex
contracts. If we are unable to initiate procedures and controls to support our
future operations in an efficient and timely manner, or if we are unable to
otherwise manage growth effectively, our business would be harmed.

OUR RESULTS OF OPERATIONS WILL BE HARMED BY CHARGES ASSOCIATED WITH OUR PAYMENT
OF STOCK-BASED COMPENSATION, CHARGES ASSOCIATED WITH OTHER SECURITIES ISSUANCE
BY US, AND CHARGES RELATED TO ACQUISITIONS.

     We have in the past and expect in the future to incur a significant amount
of amortization of charges related to securities issuances in future periods,
which will negatively affect our operating results. Since

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inception we have recorded approximately $8.6 million in net deferred
compensation charges. During the years ended March 31, 2001 and 2000, we
amortized approximately $4.3 million and approximately $1.3 million of such
charges, respectively. For three months ended June 30, 2001, the total
amortization of the deferred compensation expenses was approximately $633,000.
We expect to amortize approximately $2.6 million of stock-based compensation for
the fiscal year ending March 31, 2002 and we may incur additional charges in the
future in connection with grants of stock-based compensation at less than fair
value.

     In January 2000, in connection with a license and maintenance agreement, we
issued a warrant to purchase 800,000 shares of common stock for $800,000. The
fair value of the warrant was approximately $16.4 million. In the quarter ended
March 31, 2000, we recorded a charge of approximately $9.7 million related to
the loss on the license and software maintenance contract, of which
approximately $4.1 million was charged to cost of license revenues and
approximately $5.6 million was charged to costs of services revenues, in
relation to the issuance of these warrants. During the year ended March 31,
2001, revenues were reduced by amortization of approximately $5.5 million in
connection with this license and services agreement. For the three months ended
June 30, 2001, the total amortization of charges related to this agreement was
$125,000 against the revenue. The remaining balance of the fair value of the
warrants was $250,000 and will be fully amortized by the quarter ended December
31, 2001.

     In connection with a development agreement entered into in April 2001, we
issued a warrant to purchase 100,000 shares of our common stock. We determined
the fair value of the warrant using the Black-Scholes valuation model assuming a
fair value of our common stock at $3.53 per share, risk free interest rate of
6%, dividend yield of 0%, volatility factor of 99% and expected life of 3 years.
The value of the warrant was estimated to be approximately $227,000. As of June
30, 2001, we have amortized approximately $19,000 related to the fair value of
the warrant.

     We accounted for the acquisition of Wakely as a purchase for accounting
purposes and allocated approximately $13.1 million to identified intangible
assets and goodwill. These assets are being amortized over a period of three to
five years. We also expensed approximately $1.9 million of in-process research
and development at the time of acquisition. See Note 10 of the Notes to
consolidated financial statements for the year ended March 31, 2000 and Note 9
of Notes to condensed financial statements for the year ended March 31, 2001.

DEMAND FOR OUR PRODUCTS AND SERVICES WILL DECLINE SIGNIFICANTLY IF OUR SOFTWARE
CANNOT SUPPORT AND MANAGE A SUBSTANTIAL NUMBER OF USERS.

     Our strategy requires that our products be highly scalable. To date, only a
limited number of our customers have deployed our ACE products on a large scale.
If our customers cannot successfully implement large-scale deployments, or if
they determine that we cannot accommodate large-scale deployments, our business
and operating results would be significantly harmed.

                         RISKS RELATED TO THE INDUSTRY

IF USE OF THE INTERNET DOES NOT CONTINUE TO DEVELOP AND RELIABLY SUPPORT THE
DEMANDS PLACED ON IT BY ELECTRONIC COMMERCE, THE MARKET FOR OUR PRODUCTS AND
SERVICES MAY BE ADVERSELY AFFECTED, AND WE MAY NOT ACHIEVE ANTICIPATED SALES
GROWTH.

     Growth in sales of our products and services depends upon the continued and
increased use of the Internet as a medium for commerce and communication. Growth
in the use of the Internet is a recent phenomenon and may not continue. In
addition, the Internet infrastructure may not be able to support the demands
placed on it by increased usage and bandwidth requirements. There have also been
well-publicized security breaches involving "denial of service" attacks on major
web sites. Concerns over these and other security breaches may slow the adoption
of electronic commerce by businesses, while privacy concerns over inadequate
security of information distributed over the Internet may also slow the adoption
of electronic

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commerce by individual consumers. Other risks associated with commercial use of
the Internet could slow its growth, including:

     - inadequate reliability of the network infrastructure;

     - slow development of enabling technologies and complementary products; and

     - limited accessibility and ability to deliver quality service.

     In addition, the recent growth in the use of the Internet has caused
frequent periods of poor or slow performance, requiring components of the
Internet infrastructure to be upgraded. Delays in the development or adoption of
new equipment and standards or protocols required to handle increased levels of
Internet activity, or increased government regulation, could cause the Internet
to lose its viability as a commercial medium. If the Internet infrastructure
does not develop sufficiently to address these concerns, it may not develop as a
commercial marketplace, which is necessary for us to increase sales.

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.

     As electronic commerce and the Internet continue to evolve, federal, state
and foreign governments may adopt laws and regulations covering issues such as
user privacy, taxation of goods and services provided over the Internet,
pricing, content and quality of products and services. If enacted, these laws
and regulations could limit the market for electronic commerce, and therefore
the market for our products and services. Although many of these regulations may
not apply directly to our business, we expect that laws regulating the
solicitation, collection or processing of personal or consumer information could
indirectly affect our business.

     Laws or regulations concerning telecommunications might also negatively
impact us. Several telecommunications companies have petitioned the Federal
Communications Commission to regulate Internet service providers and online
service providers in a manner similar to long distance telephone carriers and to
impose access fees on these companies. This type of legislation could increase
the cost of conducting business over the Internet, which could limit the growth
of electronic commerce generally and have a negative impact on our business and
operating results.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     We develop products in the United States and India and sell them worldwide.
As a result, our financial results could be affected by factors such as changes
in foreign currency exchange rates or weak economic conditions in foreign
markets. Since our sales are currently priced in U.S. dollars and are translated
to local currency amounts, a strengthening of the dollar could make our products
less competitive in foreign markets. Interest income is sensitive to changes in
the general level of U.S. interest rates, particularly since our investments are
in short-term instruments calculated at variable rates.

     We established policies and business practices regarding our investment
portfolio to preserve principal while obtaining reasonable rates of return
without significantly increasing risk. This is accomplished by investing in
widely diversified short-term investments, consisting primarily of investment
grade securities, substantially all of which mature within the next twelve
months or have characteristics of short-term investments. A hypothetical 50
basis point increase in interest rates would result in an approximate $398,000
(0.27%) in the fair value of our available-for-sale securities. This potential
change is based upon a sensitivity analysis performed on our financial positions
as of June 30, 2001

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                           PART II  OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     On June 5, 2001, a number of securities class action complaints were filed
against the Company, the Company's underwriters of the Company's IPO, and
certain executives in the United States District Court for the Southern District
of New York. The complaints allege that the underwriters of the Company's IPO,
the Company, and the other named defendants violated federal securities laws by
making material false and misleading statements in the prospectus incorporated
in the Company's registration statement on Form S-1 filed with the SEC in March,
2000. The complaints allege, among other things, that the lead underwriters
solicited and received excessive and undisclosed commissions from several
investors in exchange for which the lead underwriters allocated to these
investors material portions of the restricted number of shares of common stock
issued in connection with the Company's initial public offering. The complaints
further allege that the lead underwriters entered into agreements with their
customers in which the lead underwriters agreed to allocate the Company's common
stock in its initial public offering in exchange for which such customers agreed
to purchase additional shares of its common stock in the after-market at
pre-determined prices.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

     (a) Modification of Constituent Instruments

     Not applicable

     (b) Change in Rights

     Not applicable

     (c) Issuances of Securities

     In April 2001, the Company issued a warrant to Sales Technologies Limited
to purchase 100,000 shares of the Company's common stock. The issuance of the
warrant was exempt from the registration requirements of the Securities Act of
1933, as amended, pursuant to Section 4(2) thereof. The Company relied on the
following criteria to make such exemption available: the number of offerees, the
size and manner of the offering, the sophistication of the offeree and the
availability of material information.

     (d) Use of Proceeds

     On March 15, 2000 Selectica completed the initial public offering of its
common stock. The shares of the common stock sold in the offering were
registered under the Securities Act of 1933, as amended, on a Registration
Statement on Form S-1 (No. 333-92545). The Securities and Exchange Commission
declared the Registration Statement effective on March 9, 2000.

     The offering commenced on March 10, 2000 and terminated on March 15, 2000
after we had sold all of the 4,600,000 shares of common stock registered under
the Registration Statement (including 450,000 shares sold by Selectica and
150,000 sold by one of our stockholders in connection with the exercise of the
underwriters' over-allotment option). The managing underwriters in the offering
were Credit Suisse First Boston, Thomas Weisel Partners LLC, U.S. Bancorp Piper
Jaffray and E*Offering. The initial public offering price was $30.00 per share
for an aggregate initial public offering of $138.0 million. We paid a total of
$11.3 million in underwriting discounts, commissions, and other expenses related
to the offering. None of the costs and expenses related to the offering were
paid directly or indirectly to any director, officer, general partner of
Selectica or their associates, persons owning 10 percent or more of any class of
equity securities of Selectica or an affiliate of Selectica.

     After deducting the underwriting discounts and commissions and the offering
expenses the estimated net proceeds to Selectica from the offering were
approximately $122.2 million. The net offering proceeds have been used for
general corporate purposes, to provide working capital to develop products and
to expand the Company's operations. Funds that have not been used have been
invested in certificate of deposits and other

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investment grade securities. We also may use a portion of the net proceeds to
acquire or invest in businesses, technologies, products or services.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     None

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

     None

ITEM 5. OTHER INFORMATION

     On April 27, 2001, we commenced an option exchange program in which our
employees were offered the opportunity to exchange stock options with exercise
prices of $8.50 and above for new stock options. Participants in the exchange
program will receive new options to purchase one hundred and twenty percent
(120%) of the number of shares of our common stock subject to the options that
were exchanged and canceled. The new options will be granted more than six
months and one day from May 28, 2001, the date the old options were cancelled.
The exercise price of the new options will be the closing market price on the
NASDAQ Stock Market on the grant date of the new options. The exchange offer was
not available to executive officers and the members of our Board of Directors.

     In addition, on May 30, 2001, we granted additional options to purchase an
aggregate of approximately 4 million shares of our common stock to all our
employees that did not participate in the option exchange offer. We will
amortize approximately $350,000 in deferred compensation expense associated with
these grants over the next four years.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     A. Exhibits

     None

     B. Reports on Form 8-K

     None

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                                   SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.

Dated: August 13, 2001                    SELECTICA, INC.

                                                /s/ STEPHEN R. BENNION
                                          --------------------------------------
                                                    Stephen R. Bennion
                                            CFO and Vice President of Finance
                                              (Principal Accounting Officer)

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