UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2008

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

For the transition period from       to

SELECTICA, INC.

DELAWARE (State of Incorporation)		77-0432030 (IRS Employer Identification No.)

(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 þ NO o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ		Smaller reporting company o
				(Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act. YES o NO þ

     The number of shares outstanding of the registrant’s common stock, par value $0.0001 per share, as of July 31, 2008, was 28,694,542.

 

 

FORM 10-Q
SELECTICA, INC.
INDEX

PART I FINANCIAL INFORMATION
ITEM 1: Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2008 and March 31, 2008			4
Condensed Consolidated Statements of Operations for the three months ended June 30, 2008 and 2007			5
Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2008 and 2007			6
Notes to Condensed Consolidated Financial Statements			7
ITEM 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations			14
ITEM 3: Quantitative and Qualitative Disclosures about Market Risk			19
ITEM 4: Controls and Procedures			20
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings			21
ITEM 1A: Risk Factors			21
ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds			29
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			29
Signatures			30
EXHIBIT 31.1
EXHIBIT 32.1

Cautionary Statement Pursuant to Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995

The words “Selectica”, “we”, “our”, “ours”, “us”, and the “Company” refer to Selectica, Inc. In addition to historical information, this quarterly report on Form 10-Q contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors.” You should carefully review the risks described in other documents the Company files from time to time with the Securities and Exchange Commission. 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 on Form 10-Q. The Company undertakes no obligation to release publicly any updates to the forward-looking statements included herein after the date of this document.

PART I: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

SELECTICA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

		June 30,				March 31,
		2008				2008
		(unaudited)
Assets
Current assets:
Cash and cash equivalents		$	24,665			$	22,137
Short-term investments			8,656				13,076
Accounts receivable, net of allowance for doubtful accounts $117 and $0, respectively			2,041				1,330
Prepaid expenses and other current assets			840				919
Total current assets			36,202				37,462
Property and equipment, net			1,928				2,185
Other assets			737				593
Total assets		$	38,867			$	40,240
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of note payable to Versata		$	786			$	786
Accounts payable			690				518
Current portion of accrual for restructuring liability			1,891				1,937
Accrued payroll and related liabilities			1,253				740
Other accrued liabilities			815				735
Deferred revenues			2,680				1,984
Total current liabilities			8,115				6,700
Accrual for restructuring liability, net of current portion			557				924
Note payable to Versata, net of current portion			4,984				5,113
Other long-term liabilities			186				245
Total liabilities			13,842				12,982
Stockholders’ equity:
Common stock			4				4
Additional paid-in capital			301,300				300,939
Accumulated deficit			(243,374	)			(240,783	)
Accumulated other comprehensive loss			1				4
Treasury stock			(32,906	)			(32,906	)
Total stockholders’ equity			25,025				27,258
Total liabilities and stockholders’ equity		$	38,867			$	40,240

The accompanying notes are an integral part of these condensed consolidated financial statements.

SELECTICA, INC.

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

		Three Months Ended
		June 30,
		2008				2007
Revenues:
License		$	756			$	1,711
Services			3,010				2,630
Total revenues			3,766				4,341
Cost of revenues:
License			51				60
Services			1,187				1,023
Total cost of revenues			1,238				1,083
Gross profit			2,528				3,258
Operating expenses:
Research and development			1,147				1,178
Sales and marketing			1,760				1,925
General and administrative			1,466				1,372
Legal settlement			114				—
Restructuring			380				90
Professional fees related to stock option investigation			19				1,851
Total operating expenses			4,886				6,416
Loss from operations			(2,358	)			(3,158	)
Interest and other income (expense), net			(216	)			1,065
Loss before provision for income taxes			(2,574	)			(2,093	)
Provision for income taxes			17				206
Net loss		$	(2,591	)		$	(2,299	)
Basic and diluted net loss per share		$	(0.09	)		$	(0.08	)
Weighted-average shares of common stock used in computing basic and diluted net loss per share			28,585				28,407

The accompanying notes are an integral part of these condensed consolidated financial statements.

SELECTICA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

		Three Months Ended
		June 30,
		2008				2007
Operating activities
Net loss		$	(2,591	)		$	(2,299	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation			103				(6	)
Amortization			31				52
Loss on disposition of property and equipment			81				—
Stock based compensation			362				178
Changes in assets and liabilities:
Accounts receivable, net			(711	)			(418	)
Prepaid expenses and other current assets			79				(527	)
Other assets			(175	)			(747	)
Accounts payable			172				(1,519	)
Accrual for restructuring liabilities			(413	)			—
Accrued payroll and related liabilities			514				199
Other accrued liabilities and long-term liabilities			90				(1,485	)
Deferred revenues			696				382
Net cash used in operating activities			(1,762	)			(6,190	)
Investing activities
Purchase of capital assets			(6	)			52
Purchase of short-term investments			(3,335	)			(17,235	)
Proceeds from maturities of short-term investments			7,723				19,331
Proceeds from maturities of long-term investments			—				980
Proceeds from disposal of fixed assets			9				5
Net cash provided by investing activities			4,391				3,133
Financing activities
Principal payments on note payable to Versata			(200	)			—
Net cash used in financing activities			(200	)			—
Effect of exchange rate changes on cash			99				—
Net increase (decrease) in cash and cash equivalents			2,528				(3,057	)
Cash and cash equivalents at beginning of the period			22,137				30,165
Cash and cash equivalents at end of the period		$	24,665			$	27,108

The accompanying notes are an integral part of these condensed consolidated financial statements.

SELECTICA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. Basis of Presentation

     The condensed consolidated balance sheet as of June 30, 2008, the condensed consolidated statements of operations for the three months ended June 30, 2008 and 2007, and the condensed consolidated statements of cash flows for the three months ended June 30, 2008 and 2007 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 at June 30, 2008, and the results of operations and cash flows for the three months ended June 30, 2008 and 2007, respectively. Interim results are not necessarily indicative of the results for a full fiscal year. The condensed consolidated balance sheet as of March 31, 2008 has been derived from the audited consolidated financial statements at that date.

     Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. These condensed 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-KSB for the year ended March 31, 2008.

2. Summary of Significant Accounting Policies

     There have been no material changes to any of our critical accounting policies and estimates as disclosed in our report on Form 10-KSB for the year ended March 31, 2008.

   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,
		2008				2007
Customer A			*				19	%
Customer B			20	%			24	%
Customer C			*				17	%
Customer D			11	%			10	%
Customer E			11	%			*

     Customers who accounted for at least 10% of net accounts receivable were as follows:

		June 30,				March 31,
		2008				2008
Customer A			*				15	%
Customer B			*				15	%
Customer C			10	%			15	%
Customer D			10	%			12	%
Customer E			*				10	%
Customer F			19	%			*

   Accumulated and Other Comprehensive Income

     Statement of Financial Accounting Standards No. 130 “Reporting Comprehensive Income” (“SFAS 130”) establishes standards for reporting and displaying comprehensive net income or loss and its components in stockholders’ equity. However, it has no impact on the net loss as presented in the Company’s condensed consolidated financial statements. Accumulated other comprehensive income is comprised of net unrealized gain on available for sale securities of approximately $1,000 and approximately $4,000 at June 30, 2008 and March 31, 2008, respectively.

     The components of comprehensive loss, net of related income tax, for the three months ended June 30, 2008 and 2007 are as follows:

		Three Months Ended
		June 30,
		2008				2007
		(In thousands)
Net loss		$	(2,591	)		$	(2,299	)
Change in unrealized gain on securities			(3	)			103
Comprehensive loss		$	(2,594	)		$	(2,196	)

   Segment Information

     The following is a summary of our net sales, costs of sales, gross profit and income (loss) from operations by segment and consolidated total for the periods presented below (in thousands):

		Three Months Ended June 30,
		2008				2007
		(in thousands)
Sales Configuration:
Revenue		$	1,941			$	2,962
Cost of sales			500				756
Gross profit			1,441				2,206
Income/(Loss) from operations			465				(2,700	)
Contract Management:
Revenue			1,825				1,379
Cost of sales			738				327
Gross profit			1,087				1,052
Loss from operations			(844	)			(458	)
Consolidated
Revenue			3,766				4,341
Cost of sales			1,238				1,083
Gross profit			2,528				3,258
Loss from operations		$	(2,358	)		$	(3,158	)

     For the three months ended June 30, 2008, the Company’s total revenues were $3.8 million of which 20% represented license revenues and 80% represented services revenues. For the three months ended June 30, 2007, the Company’s total revenues were $4.3 million of which 39% represented license revenues and 61% represented services revenue.

     Revenue from the Sales Configuration segment was approximately $1.9 and $2.9 million for the three months ended June 30, 2008 and 2007, respectively. The revenue reduction of approximately $1 million in the Sales Configuration segment was primarily due to fewer license transactions.

     Revenue from the Contract Management segment was approximately $1.8 and $1.4 million for the three months ended June 30, 2008 and 2007, respectively. The revenue increase of approximately $0.4 million was due to more maintenance, subscription and consulting revenue in fiscal 2008 as the company executed a shift away from other

license products. The Contract Management business continued to ramp in 2008 as more dedicated resources were involved in marketing efforts combined with a sales organization focused on the business.

3. Income Taxes

     On April 1, 2007, the Company adopted Financial Accounting Standards Board Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes.” FIN 48 clarifies the accounting for uncertainty in income taxes and prescribes a recognition threshold, measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. Under FIN 48, the Company is required to recognize in the financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. The Company policy is to record interest and penalties related to unrecognized tax benefits in income tax expense.

     At March 31, 2008, the Company has accrued $0.13 million of income tax expense and $0.02 million of interest and penalties due to Selectica India Private Ltd.’s branch operations within the U.S. resulting in an increase on the Company’s effective tax rate. In addition at March 31, 2008, the Company had $1.41 million of unrecognized tax benefits of which was netted against deferred tax assets with a full valuation allowance or other fully reserved amounts, and if recognized there will be no effect on the Company’s effective tax rate.

     At June 30, 2008, the Company accrued a discrete item of $3K additional income tax expense and $3K of interest and penalties due to Selectica India Private Ltd’s branch operations within the US. This has a minimal effect of -0.36% on the Company’s effective tax rate.

     The Company’s Federal, state, and foreign tax returns are subject to examination by the tax authorities from 1997 to 2007 due to net operating losses and tax carryforwards unutilized from such years.

4. Stock-Based Compensation

     Effective April 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123R “No. 123 (Revised 2004): Share-Based Payment” (“SFAS 123R”). SFAS 123R establishes accounting for stock-based awards exchanged for employee services. Accordingly, stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the requisite service period, which is the vesting period. All of the Company’s stock compensation is accounted for as an equity instrument. The Company previously applied APB No. 25 and related interpretations and provided the required pro forma disclosures of SFAS No. 123.

     Equity Incentive Program

     The Company’s equity incentive program is a broad-based, retention program comprised of stock option plans and an employee stock purchase plan designed to align stockholder and employee interests. For a description of the Company’s equity plans, see the notes to consolidated financial statements contained in the Company’s Annual Report on Form 10-KSB for the year ended March 31, 2008.

     There was no restricted stock issued during the first quarter of fiscal 2009.

     Valuation Assumptions

          The Company estimates the fair value of each stock option on the date of grant using a Black-Scholes option-pricing model, consistent with the provisions of SFAS No. 123R and SAB No. 107. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by the stock price as well as assumptions regarding a number of complex and subjective variables. These variables include expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends.

          The Company estimates the expected term of options granted by calculating the average term from the Company’s historical stock option exercise experience. The Company estimates the volatility of its stock options by

using historical volatility in accordance with SAB No. 107. The Company believes its historical volatility is representative of its estimate of expectations of the expected term of its equity instruments. The Company bases the risk-free interest rate that is used in the option-pricing model on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options. The Company does not anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero in the option-pricing model. The Company is required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses predicted data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest. All share based payment awards are amortized on a straight-line basis over the requisite service periods of the awards, which are the vesting periods.

          If factors change and the Company employs different assumptions for estimating stock-based compensation expense in future periods or if it decides to use a different option-pricing model, the future periods may differ significantly from what has been recorded in the current period and could materially affect operating income (loss), net income (loss) and net income (loss) per share.

          The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable, characteristics not present in our option grants and employee stock purchase plan shares. Existing option-pricing models, including the Black-Scholes and lattice binomial models, may not provide reliable measures of the fair values of our stock-based compensation. Consequently, there is a risk that the Company’s estimates of the fair values of its stock-based compensation awards on the grant dates may bear little resemblance to the actual values realized upon the exercise, expiration, early termination or forfeiture of those stock-based payments in the future. Certain stock-based payments, such as employee stock options, may expire worthless or otherwise result in zero intrinsic value as compared to the fair values originally estimated on the grant date and reported in our financial statements. Alternatively, value may be realized from these instruments that are significantly higher than the fair values originally estimated on the grant date and reported in the Company’s financial statements. There currently is no market-based mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these option-pricing models, nor is there a means to compare and adjust the estimates to actual values.

          The Company calculated the fair value of its employee stock options at the date of grant with the following weighted average assumptions:

		Three Months Ended June 30,
		2008				2007
Risk-free interest rate			2.81	%			N/A
Dividend yield			0.00	%			N/A
Expected volatility			34.35	%			N/A
Expected option life in years			4.00				N/A

     The following table summarizes activity under the equity incentive plans for the indicated periods:

						Options Outstanding
		Shares available								Weighted-average
		for grant				Number of shares				exercise price
		(in thousands)
Outstanding at March 31, 2008			13,316				2,674				3.32
Options granted			(45	)			45				1.45
Options exercised			—				—
Options cancelled			422				(422	)			2.77
Options expired			—				—
Outstanding at June 30, 2008			13,693				2,297				3.26

     The weighted average term for exercisable options is 5.70 years. The intrinsic value is calculated as the difference between the market value as of June 30, 2008 and the exercise price of the shares. The market value of

the Company’s common stock as of June 30, 2008 was $1.35 as reported by the NASDAQ National Market. The aggregate intrinsic value of stock options outstanding at June 30, 2008 was $0. The aggregate intrinsic value of stock options outstanding at June 30, 2007 was $18,645, of which $0 was related to exercisable options.

     The options outstanding and exercisable at June 30, 2008 were in the following exercise price ranges:

		Options Outstanding								Options Vested
						Weighted-
		Number of				Average								Weighted-
		Outstanding				Remaining								Average
Range of		Shares as of				Contractual				Options Vested at				Exercise
Exercise Prices per share		June 30, 2008				Life (in years)				June 30, 2008				Price per share
		(in thousands except for per share amount)
$  1.45 — $  1.81			524,115				6.12				64,478				1.75
$  1.89 — $  1.89			912,895				9.30				168,792				1.89
$  1.97 — $  3.40			440,395				5.45				356,979				2.97
$  3.44 — $33.89			255,065				3.94				254,960				4.86
$52.70 — $52.70			500				1.96				500				52.70
			2,132,970				7.08				845,709				3.26

     The following table summarizes the Company’s outstanding weighted average options for the indicated periods:

		Three Months Ended June 30,
		2008				2007
Weighted average options with strike price below FMV			0				83,500
Weighted average options with strike price at FMV			0				0
Weighted average options with strike price above FMV			2,132,970				3,133,297

     During the three months ended June 30, 2008, the Company granted 45,000 shares of stock options. The weighted average remaining contractual term of all options exercisable at June 30, 2008 is 7 years. SFAS No. 123R requires forfeitures to be estimated at the time of grant and revised if necessary in subsequent periods if actual forfeitures differ from those estimates. Based on the Company’s estimates of future forfeiture rates, the Company has assumed an annualized forfeiture rate of 20% for its options.

   1999 Employee Stock Purchase Plan (“ESPP”)

     The price paid for the Company’s common stock purchased under the ESPP is equal to 85% of the lower of the fair market value of the Company’s common stock at the beginning of each offering period or at the end of each offering period. The compensation cost in connection with the ESPP for the three months ended June 30, 2008 was $32,875. The compensation expense in connection with the ESPP for the three months ended June 30, 2007 was $8,902. During the three months ended June 30, 2008 and 2007, there were no shares issued under the ESPP.

     The Company calculated the fair value of rights granted under its employee stock purchase plan at the date of grant using the following weighted average assumptions:

		Three Months Ended June 30,
		2008				2007
Risk-free interest rate			2.81	%			4.64	%
Dividend yield			0.00	%			0.00	%
Expected volatility			34.35	%			55.10	%
Expected life in years			1.25				1.25

5. Computation of Basic and Diluted Net Loss per Share

     Basic and diluted net loss per common share is presented in conformity with SFAS No. 128, “Earnings per Share” (“SFAS 128”), for all periods presented. In accordance with SFAS 128, basic and diluted net loss per share has been computed using the weighted-average number of shares of common stock outstanding during the period.

     The Company excludes potentially dilutive securities from its diluted net loss per share computation when their effect would be antidilutive to net loss per share amounts. The following common stock equivalents were excluded from the net loss per share computation:

		Three Months Ended June 30,
		2008				2007
		(In thousands)
Options excluded due to the exercise price exceeding the average fair market value of the Company’s common stock during the period			2,133				3,133
Options excluded for which the exercise price was at or less than the average fair market value of the Company’s common stock during the period but were excluded as inclusion would decrease the Company’s net loss per share			0				84
Total common stock equivalents excluded from diluted net loss per common share			2,133				3,217

6. Litigation and Contingencies

     The Company is subject to certain routine legal proceedings, as well as demands, claims and threatened litigation, that arise in the normal course of its business. The Company believes that the ultimate amount of liability, if any, for any pending claims of any type, except for the items described in the Company’s Annual Report on Form 10-KSB for the year ended March 31, 2008, (either alone or combined) will not materially affect its financial position, results of operations or liquidity.

7. Restructuring

     On June 30, 2008, the Company entered into a Separation Arrangement (“Separation Agreement”) with its former CEO, Bob Jurkowski. Pursuant to the terms of the Separation Agreement, Mr. Jurkowski’s employment with the Company terminated on June 30, 2008. Mr. Jurkowski also resigned as a member of the Company’s Board of Directors effective June 30, 2008. Under the Separation Agreement, Mr. Jurkowski received a payment of $45,000 representing his target bonus for the first quarter of fiscal 2009 and also a payment of $180,000 equal to six months of his base salary on July 10, 2008. The Company will also continue to pay Mr. Jurkowski payments equal to six months of his base salary and health insurance premiums for himself and his dependents until June 30, 2009. These amounts have been accrued for as of June 30, 2008.

     During the fiscal year 2009, the Company continued with cost reduction efforts. The restructuring accrual and the related utilization for the fiscal years ended March 31, 2008, 2007, and for the quarter ended June 30, 2008 were, respectively (in thousands):

		Severance and				Excess
		Benefits				Facilities				Total
Balance, March 31, 2006			—				—				—
Additional accruals			$488				$6,392				$6,880
Amounts paid in cash			(385	)			(652	)			(1,037	)
Balance, March 31, 2007			103				5,740				5,843
Additional accruals			300				436				736
Amounts paid in cash			(277	)			(2,974	)			(3,251	)
Loan to Sublessee			—				(497	)			(497	)
Balance, March 31, 2008			126				2,705				2,831
Additional accruals			0				30				30
Amounts paid in cash			(73	)			(455	)			(528	)
Loan to Sublessee			—				67				67
Balance, June 30, 2008			$53				$2,347				$2,400

8. Recent Accounting Pronouncements

     In March 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 161, Disclosures about Derivative Instruments and Hedging Activities. SFAS No. 161 requires companies with derivative instruments to disclose information that should enable financial-statement users to understand how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities and how derivative instruments and related hedged items affect a company’s financial position, financial performance and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We are currently evaluating the effect, if any, the adoption of SFAS No. 161 would have on its consolidated results of operations, financial position and cash flows.     

      In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations.  SFAS No. 141R will establish new principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired.  Among the more significant changes from existing principles and requirements, SFAS No. 141R expands the definition of a business and a business combination; requires that all assets, liabilities and non-controlling interests (including goodwill) acquired in a business combination, whether full or partial, be recorded at fair value; requires acquisition related expenses and restructuring costs to be expensed as incurred rather than included as part of the acquisition cost; requires contingent assets, liabilities and contingent consideration to be recognized at fair value at the date of acquisition with subsequent changes recognized in earnings; requires changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period to be recognized as adjustments to income tax expense; and requires in-process research and development to be capitalized at fair value as an indefinite-lived asset and then amortized over its useful life when development is complete. SFAS No. 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination.  SFAS No. 141R is effective for fiscal years beginning after December 15, 2008.  We are currently evaluating the potential impact of SFAS No. 141R. 

     In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS No. 159). SFAS No. 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. SFAS No. 159 is effective for the Company beginning in the first quarter of fiscal year 2009, although earlier adoption is permitted. We are currently evaluating the impact that SFAS No. 159 will have on our consolidated financial statements.

     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS No. 157). The purpose of SFAS No. 157 is to define fair value, establish a framework for measuring fair value, and enhance disclosures about fair value measurements. The measurement and disclosure requirements are effective for the Company beginning in the first quarter of fiscal year 2009. We are currently evaluating the impact that SFAS No. 157 will have on our consolidated financial statements.

9. Subsequent Events

     On July 1, 2008, Michael Shaw tendered his resignation as Vice President and General Manager of Sales Configuration Solutions of the Company. Michael Shaw entered into a Separation Arrangement (“Separation Agreement”) with the Company on July 1, 2008. Pursuant to the terms of the Separation Agreement, Mr. Shaw’s employment with the Company terminated on July 1, 2008. Under the Separation Agreement, the Company will continue to pay Mr. Shaw payments equal to six months of his base salary and health insurance premiums for himself and his dependents until December 31, 2008.

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     In addition to historical information, this quarterly report contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as in Part II Item 1A “Risk Factors.” 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; risks associated with potential acquisitions; and adverse financial, customer and employee consequences that might result to us if litigation were to be resolved in an adverse manner to us. For a more detailed discussion of the risks relating to our business, readers should refer to Part II Item 1A found later in this report entitled “Risks Factors.” Readers are cautioned not to place undue reliance on the forward-looking statements, including statements regarding our expectations, beliefs, intentions or strategies regarding the future, which speak only as of the date of this quarterly report. We assume no obligation to update these forward-looking statements.

Overview

     We provide Sales Configuration (SCS) and Contract Management (CM) software solutions that allow enterprises to efficiently manage sell-side business processes. Our solutions include software, on demand hosting, professional services and expertise. Our SCS products enable customers to increase revenues and reduce costs through seamless, web-enabled automation of the “quote to contract” business processes, which reside between legacy Customer Relationship Management (CRM) and Enterprise Resource Planning (ERP) systems. These products are built using Java technology and utilize a unique business logic engine, repository, and a multi-threaded architecture. This design reduces the amount of memory used to support new user sessions and to deploy a cost-effective, robust and highly scalable, Internet-enhanced sales channel.

     Our CM products enable customers to create, manage and analyze contracts in a single, easy to use repository and are offered as an on-premise or hosted solution. Our software enables any and all corporate departments (e.g. Sales, Services, Procurement, Finance, IT and others) to model their specific contracting processes using our application and to manage the lifecycle of the department’s relationships with the counterparty from creation through closure.

Quarterly Financial Overview

     For the three months ended June 30, 2008, our revenues were approximately $3.8 million with license revenues representing 20% and services revenues representing 80% of total revenues. In addition, approximately 42% of our quarterly revenue came from three customers. License margins for the quarter were 93% and services margins were 61%. Net loss for the quarter was approximately $2.6 million or $(0.09) per share. For the three months ended June 30, 2007, our revenues were approximately $4.3 million with license revenues representing 39% and services revenues representing 61% of total revenues. In addition, approximately 70% of our quarterly revenue came from four customers. License margins for the quarter were 96% and services margins were 61%. Net loss for the quarter was approximately $2.3 million or $(0.08) per share.

Critical Accounting Policies and Estimates

     There have been no material changes to any of our critical accounting policies and estimates as disclosed in our report on Form 10-KSB for the year ended March 31, 2008.

   Factors Affecting Operating Results

          A small number of customers account for a significant portion of our total revenues. We expect that our revenue will continue to depend upon a limited number of customers. If we were to lose a customer, it would have a

significant impact upon future revenue. Customers who accounted for at least 10% of total revenues were as follows:

		Three Months Ended
		June 30,
		2008				2007
Customer A			*				19	%
Customer B			20	%			24	%
Customer C			*				17	%
Customer D			11	%			10	%
Customer E			11	%			*

     We have incurred significant losses since inception and, as of June 30, 2008, we had an accumulated deficit of approximately $243 million. We believe our success depends on the growth of our customer base and the development of the emerging configuration, pricing management, quoting solutions and the contract management and compliance market.

     In view of the rapidly changing nature of our business, 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 operating history has been volatile and makes it difficult to forecast future operating results. This was evidenced by the decline in revenue in fiscal 2008 and 2007.

     Because our services tend to be specific to each customer and how that customer will use our products, and because each customer sets different acceptance criteria, it is difficult for us to accurately forecast the amount of revenue that will be recognized on any particular customer contract during any quarter or fiscal year. As a result, we base our revenue estimates, and our determination of associated expense levels, on our analysis of the likely revenue recognition events under each contract during a particular period. Although the value of customer contracts signed during any particular quarter or fiscal year is not an accurate indicator of revenues that will be recognized during any particular quarter or fiscal year, in general, if the value of customer contracts signed in any particular quarter or fiscal year is lower than expected, revenue recognized in future quarters and fiscal years will likely be negatively effected.

Results of Operations:

Revenues

		Three Months Ended
		June 30,
		2008				2007				Change
		(in thousands except percentages)
License		$	756			$	1,711			$	(955	)
Percentage of total revenues			20	%			39	%			(56	)%
Services		$	3,010			$	2,630			$	380
Percentage of total revenues			80	%			61	%			14	%
Total revenues		$	3,766			$	4,341			$	(575	)

     License. For the three months ending June 30, 2008, license revenues decreased on a quarterly basis by approximately $1 million compared to the three months ending June 30, 2007. We expect license revenues to continue to fluctuate in future periods as a percentage of total revenues and in absolute dollars depending on the number and size of new license contracts.

     Services. Services revenues are comprised of fees from consulting, maintenance, training, subscription revenue and out-of pocket reimbursement. During the three months ending June 30, 2008, services revenues increased $0.4 million compared to the period ending June 30, 2007. The increase primarily related to more service opportunities

provided by new license agreements in CM business unit. Maintenance revenues represented 46% and 65% of total services revenues for the three months ended June 30, 2008 and June 30, 2007, respectively.

     We expect services revenues to continue to fluctuate in future periods as a percentage of total revenues and in absolute dollars. This will depend on the number and size of new software implementations and follow-on services to our existing customers. We expect maintenance revenue to fluctuate in absolute dollars and as a percentage of services revenues with respect to the number of maintenance renewals, and number and size of new contracts. In addition, maintenance renewals are extremely dependent upon customer satisfaction and the level of need to make changes or upgrade versions of our software by our customers. Fluctuations in services revenue are also due to timing of revenue recognition, achievement of milestones, customer acceptance, changes in scope or renegotiated terms, and additional services.

Cost of revenues

		Three Months Ended
		June 30,
		2008				2007				Change
		(in thousands, except percentages)
Cost of license revenues		$	51			$	60			$	(9	)
Percentage of license revenues			7	%			4	%			(15	)%
Cost of services revenues		$	1,187			$	1,023			$	164
Percentage of services revenues			39	%			39	%			16	%

     Cost of License Revenues. Cost of license revenues consists of a fixed allocation of our research and development costs, 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. We expect cost of license revenues to maintain a relatively consistent level in absolute dollars in fiscal 2009.

     Cost of Services Revenues. Cost of services revenues is comprised mainly of salaries and related expenses of our services organization plus certain allocated expenses. During the three months ended June 30, 2008, these costs increased 16% compared to the same period in 2007 primarily due to an increase of approximately $0.3M in the CM business unit due to the hiring of additional headcount.

     We expect cost of services revenues to fluctuate as a percentage of service revenues and we plan to reduce our investment in cost of services revenues in absolute dollars over the next year as necessary to balance expense levels with projected revenues.

Gross Margins

Gross margin percentages for services revenues and license revenues for the respective periods are as follows:

		Three Months Ended
		June 30,
		2008				2007
License			93	%			96	%
Services			61	%			61	%

     Gross Margin — Licenses. Because we have certain license costs that are fixed, margins will vary based on gross license revenue and product mix. Due to lower license revenues to offset the fixed license costs, we experienced lower license gross margins during the three months ended June 30, 2008 compared to the three months ending June 30, 2007.

     Gross Margin — Services. During the three months ended June 30, 2008, the gross margin from services margin remained at 61% compared to the three months ending June 30, 2007.

     We expect that our overall gross margins will continue to fluctuate due to the timing of services and license revenue recognition and will continue to be adversely affected by lower margins associated with services revenues. The impact on our gross margin 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.

Operating Expenses

   Research and Development Expenses

		Three Months Ended
		June 30,
		2008				2007				Change
		(in thousands, except percentages)
Research and development		$	1,147			$	1,178			$	(31	)
Percentage of total revenues			30	%			27	%			(3	)%

     Research and development expenses consist primarily of salaries and related costs of our engineering, quality assurance, technical publications efforts and certain allocated expenses. Research and development expenses decreased slightly during the three months ending June 30, 2008 compared to the three months June 30, 2007 and were primarily attributable to a staff reduction and decreases in costs for facilities, overhead and benefits.

   Sales and Marketing

		Three Months Ended
		June 30,
		2008				2007				Change
		(in thousands, except percentages)
Sales and marketing		$	1,760			$	1,925			$	(165	)
Percentage of total revenues			47	%			44	%			(9	)%

     Sales and marketing expenses consist primarily of salaries and related costs for our sales and marketing organization, sales commissions, expenses for travel and entertainment, trade shows, public relations, collateral sales materials, advertising and certain allocated expenses. For the three months ended June 30, 2008, sales and marketing expenses decreased compared to the same period in 2007. The decrease is primarily due to lower commissions from lower sales.

   General and Administrative and Professional fees related to stock option investigation

		Three Months Ended
		June 30,
		2008				2007				Change
		(in thousands, except percentages)
General and administrative		$	1,466			$	1,372			$	94
Percentage of total revenues			39	%			32	%			7	%
Professional fees related to stock option investigation		$	19			$	1,851			$	(1,832	)
Percentage of total revenues			1	%			43	%			(99	)%

     General and administrative expenses consist mainly of personnel and related costs for general corporate functions, including finance, accounting, legal, human resources, bad debt expense and certain allocated expenses. General and administrative expenses increased slightly in the three months ended June 30, 2008 compared to the same period in 2007 primarily due to higher stock option expenses. We incurred approximately $1.9 million in professional fees related to the stock option investigation in the first quarter of fiscal 2007.

Interest and Other Income, Net

     Interest income consists primarily of interest earned on cash balances and short-term investments. During the three months ended June 30, 2008 and June 30, 2007, interest income totaled approximately $0.3 and $1.1 million, respectively. The decrease was due primarily to lower cash balances as well as lower interest rates on our cash and investments balances.

Provision for Income Taxes

     During the three months ended June 30, 2008 and 2007, we recorded income tax provisions of approximately $17,000 and $206,000, respectively. These amounts related to taxes due in foreign jurisdictions and nominal tax amounts for federal and states taxes in the U.S.

Liquidity and Capital Resources

		June 30,				March 31,
		2008				2008				Change
		(in thousands, except percentages)
Cash, cash equivalents and short-term investments		$	33,321			$	35,213				(5	)%
Working capital		$	28,087			$	30,762				(9	)%

		Three Months Ended
		June 30,
		2008				2007
		(in thousands)
Net cash used in operating activities		$	(1,762	)		$	(6,190	)
Net cash provided by investing activities		$	4,391			$	3,133
Net cash used in financing activities		$	(200	)			—

     Our primary sources of liquidity consisted of approximately $33 million in cash, cash equivalents and short-term investments as of June 30, 2008 compared to approximately $35 million in cash, cash equivalents and short-term investments as of March 31, 2008. During the three months ending June 30, 2008, the decrease in cash and cash equivalents was primarily related to approximately $2 million of cash used in operating activities. During the three months ending June 30, 2007, the decrease in cash and cash equivalents was primarily related to approximately $6.2 million of cash used in operations offset by net purchases of short and long-term investments and purchase of assets of approximately $3.1 million. We experienced a net decrease in working capital at June 30, 2008 as compared to March 31, 2008 primarily due to the cash used in operations.

     The net cash provided by investing activities for the three months ending June 30, 2008 and 2007 was due primarily to net maturity of available-for-sale investments.

     The net cash used in financing activities for the three months ended June 30, 2008 was a principal payment on note payable to Versata.

Contractual Obligations

     We had no significant commitments for capital expenditures as of June 30, 2008. We expect to fund our future capital expenditures, liquidity and strategic operating programs from a combination of available cash balances and internally generated funds. We have no outside debt and do not have any plans to enter into borrowing arrangements. Our cash, cash equivalents, and short-term investment balances as of June 30, 2008 are adequate to fund our operations through at least the next twelve months.

     We do not anticipate any significant capital expenditures, payments due on long-term obligations, or other contractual obligations. However, management is continuing to review our cost structure to minimize expenses and use of cash as we implement our planned business model changes. This activity may result in additional restructuring charges or severance and other benefits.

     Our contractual obligations and commercial commitments at June 30, 2008, are summarized as follows:

		Payments Due By Period
						Less Than				1-3				4-5				After 5
Contractual Obligations:		Total				1 Year				Years				Years				Years
		(in thousands)
Operating leases		$	4,082			$	2,884			$	1,196			$	2			$	—
Sublease income		$	(1,100	)		$	(760	)		$	(340	)		$	—			$	—
Net lease payments		$	2,982			$	2,124			$	856			$	2			$	—

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The following discusses our exposure to market risk related to changes in foreign currency exchange rates and interest rates. This discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results could vary materially as a result of a number of factors including those set forth in the Part II Item 1A entitled “Risk Factors” of this quarterly report on Form 10-Q.

Foreign Currency Exchange Rate 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.

     Our exposure to fluctuation in the relative value of other currencies has been limited because substantially all of our assets are denominated in U.S. dollars. The impact to our financial statements has therefore not been material. To date, we have not entered into any foreign exchange hedges or other derivative financial instruments. We will continue to evaluate our exposure to foreign currency exchange rate risk on a regular basis.

Interest Rate Risk

     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 and long-term investments, consisting primarily of investment grade securities. Our interest income is sensitive to changes in the general level of U.S. interest rates.

     During the three months ending June 30, 2008, a hypothetical 50 basis point increase in interest rates would have resulted in a reduction of approximately $1,300 (less than 0.1%) in the fair market value of our cash equivalents and investments. This potential change is based upon a sensitivity analysis performed on our financial positions at June 30, 2008. During the three months ending June 30, 2007, a hypothetical 50 basis point increase in interest rates would have resulted in a reduction of approximately $31,000 (less than 0.1%) in the fair market value of our cash equivalents and investments. This potential change is based upon a sensitivity analysis performed on our financial positions at June 30, 2007.

     Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted because of a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations because of changes in interest rates or we may suffer losses in principal if forced to sell securities that have seen a decline in market value because of changes in interest rates. Our investments are made in accordance with an investment policy approved by the Board of Directors. In general, our investment policy requires that our securities purchases be rated A1/P1, AA/Aa3 or better. No securities may have a maturity that exceeds 18 months and the average duration of our investment portfolio may not exceed 9 months. At any time, no more than 15% of the investment portfolio may be insured by a single insurer and no more

than 25% of investments may be invested in any one industry other than the US government bonds, commercial paper and money market funds.

     The following summarizes short-term and long-term investments at fair value, weighted average yields and expected maturity dates as of June 30, 2008 through the fiscal years ending March 31, 2009:

		2009				Total
		(In Thousands)
Investment CD		$	2,069			$	2,069
Weighted Average yield			7.60	%			7.60	%
Commercial Paper			3,714				3,714
Weighted Average yield			2.64	%			2.64	%
Corporate notes & bonds			2,873				2,873
Weighted Average yield			2.52	%			2.52	%
Total investments		$	8,656			$	8,656

ITEM 4: CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

     We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit to the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms, and that information is accumulated and communicated to our management, including our principal executive and principal financial officers (whom we refer to in this periodic report as our Certifying Officers), as appropriate to allow timely decisions regarding required disclosure. During the fiscal year ended March 31, 2008, our management evaluated, with the participation of our Certifying Officers, the effectiveness of our disclosure controls and procedures as of March 31, 2008, pursuant to Rule 13a-15(b) under the Securities Exchange Act. Based upon that evaluation, our Certifying Officers concluded that, as of March 31, 2008, our disclosure controls and procedures were effective.

     For the period ended June 30, 2008, management has concluded that our disclosure controls and procedures were not effective due to the adverse impact on our disclosure controls and procedures resulting from the recent departure of our former CEO and CFO.

     In the course of reviewing our financial statements for the period ended June 30, 2008, our auditors noted a significant deficiency in our internal control over financial reporting. A control deficiency exists when the design or operation of a control does not allow our management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects our ability to initiate, authorize, record, process, or report financial data reliably in accordance with generally accepted accounting principles such that there is a more than remote likelihood that a misstatement of our financial statements that is more than inconsequential will not be prevented or detected.

     The significant deficiency noted by our auditors concerned our failure to timely record an entry in the current period to accrue a liability related to severance payments due to our former CEO, Robert Jurkowski. The error indicated a deficiency in the preparation and review of financial statements and related data. This failure was noted by the auditors and our financial statements were appropriately modified prior to filing of this report

Management’s Report of Internal Control over Financial Reporting

     The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting in accordance with Exchange Act Rule 13a-15. During the fiscal year ended March 31, 2008, with the participation of Certifying Officers, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this evaluation, our Certifying Officers concluded that as of March 31, 2008, our internal controls over financial reporting were effective.

     Due to the recent departure of our CFO and CEO, our internal control over financial reporting during our most recently completed fiscal quarter may have been materially affected, or are reasonably likely to be materially affected.

     A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all controls issues and instances of fraud, if any, within the Company have been detected.

PART II: OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

Patent Infringement

     On October 20, 2006, Versata Software, Inc., formerly known as Trilogy Software Inc., and a related party (collectively, “Versata”) filed a complaint against the Company in the United States District Court for the Eastern District of Texas, Marshall Division, alleging that the Company has been and is willfully infringing, directly and indirectly, U.S. Patent Nos. 5,515,524; 5,708,798 and 6,002,854 (collectively, the “Versata Patents”) by making, using, licensing, selling, offering for sale, or importing configuration software and related services (the “Versata Lawsuit”). On October 9, 2007, we reached a settlement on the Versata Lawsuit. Under the terms of the settlement, Selectica paid Versata $10.0 million on October 9, 2007 and agreed to pay an additional amount of not more than $7.5 million in quarterly payments. The quarterly payments are based on 10% of revenues from the Company’s Sales Configuration Solution’s (“SCS”) products and services and a 50% revenue share of SCS revenue from new Company SCS customers that are currently Versata customers and to whom Versata makes an introduction to Selectica. The Company agreed that its quarterly payments will be the greater of the sum calculated by the percentages of SCS revenues or $200,000. Both parties entered into mutual releases, releasing any and all claims that they may have against the other occurring before the settlement date.

Other

     In the future we may be subject to other lawsuits, including claims relating to intellectual property matters or securities laws. Any litigation, even if not successful against us, could result in substantial costs and divert management’s and other resources away from the operations of our business. If successful against us, we could be liable for large damage awards and, in the case of patent litigation, subject to injunctions that significantly harm our business.

ITEM 1A: RISK FACTORS

     In addition to other information in this Form 10-Q, the following risk factors should be carefully considered in evaluating our business because such factors currently may have a significant impact on our 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 our other Securities and Exchange Commission filings including our Form 10-KSB for our fiscal year ended March 31, 2008, actual results could differ materially from those projected in any forward-looking statements.

We have a history of significant losses and may incur significant losses in the future.

     We incurred net losses of approximately $2.6 million and $2.3 million and for the quarters ended June 30, 2008 and 2007, respectively. We had an accumulated deficit of approximately $243 million as of June 30, 2008. We may continue to incur significant losses in the future for a number of reasons. We continue to pursue opportunities to align research and development, sales and marketing, and general and administrative expenses in absolute dollars over the next year in order to better balance expense levels with projected revenues. We will need to generate significant increases in our revenues to achieve and maintain 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.

     We have recently experienced a number of management changes, including the departures of our Chief Executive Officer and Chief Financial Officer in June 2008 and the departures of the General Managers of our CM and SCS businesses in July 2008.  In response, we have retained interim management and are implementing steps to improve the operation of our business.  We believe these management changes will help to better align expenses and revenues and position us for improved operating results in the future however, over the short term and potentially longer, these changes may have a material adverse effect on our financial condition and results of operations and they have adversely impacted our disclosure and financial controls and procedures.

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

     Our revenues are dependent on orders from a relatively small number of customers. Our five largest customers accounted for approximately 52% and 72% of our revenues for the quarters ended June 30, 2008 and 2007, respectively, and our ten largest customers accounted for approximately 68% and 81% of our revenues for the quarters ended June 30, 2008 and 2007, respectively. 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. 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 fewer of our products or services, defers or cancels orders, or terminates its relationship with us, our business and operating results would be harmed. In addition, many of our orders are realized at the end of the quarter. As a result of this concentration and timing, our quarterly operating results, including average selling prices, may fluctuate significantly if we are unable to complete one or more substantial sales in any given quarter.

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

     We enter into arrangements for the sale of: (1) licenses of software products and related maintenance contracts; (2) bundled license, maintenance, and services; (3) services; and (4) subscription for on-demand services. In instances where maintenance is bundled with a license of software products, such maintenance term is typically one year.

     For each arrangement, we determine whether evidence of an arrangement exists, delivery has occurred, the fees are 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.

     Our annual and quarterly revenues may also fluctuate due to our ability to perform services, achieve specific milestones and obtain formal customer acceptance of specific elements of the overall completion of a project. As we provide such services and products, the timing of delivery and acceptance, changed conditions with the customers and projects could result in changes to the timing of our revenue recognition, and thus, our operating results.

     Likewise, if our customers do not renew maintenance services or purchase additional products, our operating results could suffer. Historically, we have derived and expect to continue to derive a significant portion of our total revenue from existing customers who purchase additional products or renew maintenance agreements. Our customers may not renew such maintenance agreements or expand the use of our products. In addition, as we introduce new products, our current customers may not require or desire the features of our new products. If our customers do not renew their subscriptions or maintenance agreements with us or choose not to purchase additional products, our operating results could suffer.

     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 or the failure to replace a significant customer. Because expenses are relatively fixed in the near term, any shortfall from anticipated revenues could cause our quarterly operating results to fall below anticipated levels.

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

In prior periods, management noted certain material weaknesses in our internal control over financial reporting. Failure to maintain effective internal control over financial reporting could result in our failure to accurately report our financial results.

     Management identified material weaknesses in the Company’s procedures and controls for detecting non-compliance with applicable regulations relating to stock based compensation for the period ended March 31, 2007. To address these weaknesses, the Company instituted a remediation program beginning in the fourth fiscal quarter of 2007. We have now substantively completed this remediation program which addressed the matters identified by management. Specifically, we instituted new policies governing the granting of stock options by the Board, undertook a best practices review of existing controls and proposed improvements to the Company’s option granting policies and improved training and education of directors, officers and other personnel in order to increase knowledge and awareness of the rules and restrictions surrounding share-based compensation and stock option awards. Management has completed an evaluation of the effectiveness of internal controls and has concluded that the material weaknesses described above had been remediated as of March 31, 2008 and no longer existed as of that date. Despite the remediation of these prior material weaknesses and significant deficiencies, we could in future periods, including the current year, identify additional material weaknesses or significant deficiencies, which adversely impact our financial statements. If we experience additional material weaknesses, these could result in material audit adjustments, or cause investors to lose confidence in our ability to operate our business, any of which could negatively impact our stock price. Also, the recent departure of our CEO and CFO could adversely impact our internal control over financial reporting.

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

     We have recently revised our product marketing focus. We had previously positioned our company primarily as a seller of Sales Configuration (SCS) software, however, we are now investing a significant portion of our internal resources into a second offering, our contract management products. If the market for these products is smaller than we anticipated or if our products fail to gain widespread acceptance in this market, our results of operations would be adversely affected. In addition, if there is a delay in bringing our new products to market, it would delay our ability to derive revenues from such products and our business and operating results could be significantly harmed.

     On July 1, 2008, the company eliminated the position of General Manager of our Contract Management Business Unit. The elimination could adversely affect our new product marketing strategy.

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

     A change in economic conditions could lead to revised budgetary constraints regarding information technology spending for our customers. We have had potential customers select our software, but decide to delay or not to implement any configuration system. Many companies have decided to reduce their expenditures for information technology by either delaying non-mission critical projects or abandoning them until their levels of business justify the expenses. Stagnation in information technology spending due to economic conditions or other factors could significantly harm our business and operating results.

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 patent, 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 six patents in the United States. In addition, we have two trademarks registered in the United States, one trademark registered and one pending in South Korea, two trademarks registered in Canada and one trademark registered in European Community, and we have also applied to register another two trademarks in the United States. Our trademark applications might not result in the issuance of any trademarks. Our patents or any future issued trademarks might be invalidated or circumvented or otherwise fail to provide us any meaningful protection. We seek to protect the source code for our software, documentation and other written materials under

trade secret and copyright laws. We license our software pursuant to 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 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. Regardless of the outcome, such litigation may require us to incur significant legal expenses and management time. Our failure to adequately protect our intellectual property could have a material adverse effect on our business and operating results.

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

     The sales cycle of our products has historically averaged between nine to twelve 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 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 that quarter could fall below the expectations of financial analysts and investors, which could cause our stock price to decline.

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

     The market for enterprise software including configuration, pricing, contract management and quoting solutions is evolving rapidly. In view of changing market trends, including vendor consolidation, the competitive environment growth rate and potential size of the market are difficult to assess. 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 rapid change in the marketplace poses a number of concerns. The decrease in technology infrastructure spending may reduce the size of the market for configuration, pricing management and quoting solutions. Our potential customers may decide to purchase more complete solutions offered by larger competitors instead of individual applications. If the market for configuration, pricing management, contract management and quoting solutions is slow to develop, or if our customers purchase more fully integrated products, our business and operating results would 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 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 publicly-traded companies such as Oracle Corporation, Ariba, Open Text, I-Many and AT&T (through its acquisition of Comergent Technologies) as well as privately held companies such as Firepond, Upside Software, Nextance, Model N, DiCarta/Emptoris and Trilogy/Versata, all of which offer integrated solutions for electronic commerce incorporating some of the functionality of our configuration, pricing, contract management and quoting software.

     Our 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, in the scope and breadth of the products and services offered. Although we believe we have advantages over our competitors including the comprehensiveness of our solution, our use of Java technology and our multi-threaded architecture, some of our competitors and potential competitors have 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.

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

     Our 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, J2EE, 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. Our configuration, pricing and quoting products are 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.

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, a small number of our customers have experienced difficulties or delays in completing implementation of our products. We may experience similar difficulties or delays in the future. Deploying our products typically involves integration with our customers’ legacy systems, such as existing databases and enterprise resource planning software as well adding their data to the system. 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 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 a significant portion of our current sales, and our future growth depends in part 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, and our results of operation could be significantly harmed.

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

     Services revenues, which generated 80% and 61% of our revenues during the quarters ended June 30, 2008 and 2007 respectively, are comprised primarily of revenues from consulting fees, maintenance contracts and training and are important to our business. Services revenues have lower gross margins than license revenues. We intend to charge for our professional services on a time and materials rather than a fixed-fee basis. However, in current market conditions, many customers insist on services provided on 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 professional services, 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 products and other future products may contain defects or errors that could result in lost revenues, a delay in market acceptance or negative publicity, each which would significantly harm our business and operating results.

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

     We conduct development, quality assurance and professional services operations in India. As of June 30, 2008, we employed 5 persons in India and outsourced an additional 29 people through IBM, our outsource partner. We are dependent on our India-based operations for these aspects of our business. 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 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.

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 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.

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.

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

     We may further reduce our operating expenses, and as a result, this would place increased demands on our managerial, administrative, operational, financial and other resources.

     Our rapid growth required us to manage a large number of relationships with customers, suppliers and employees, as well as a large number of complex contracts. Additional cost cutting measures would force us to handle these demands with a smaller number of employees. 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 these changes effectively, our business would be harmed.

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

     We have in the past and expect in the future to incur a significant amount of charges related to securities issuances, which will negatively affect our operating results. We adopted the provisions of SFAS 123R using a modified prospective application effective April 1, 2006. We use the Black-Scholes model to determine the fair value of our share-based payments and recognize compensation cost on a straight-line basis over the vesting periods. This pronouncement from the FASB provides for certain changes to the method for valuing stock-based compensation. Among other changes, SFAS 123R applies to new awards and to awards that are outstanding which are subsequently modified or cancelled. Compensation expense cost calculated under SFAS 123R will continue to negatively impact our operating results.

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

     Our strategy has been to rely in part upon systems integrators and consulting firms to recommend our products to their customers and to install and deploy our products. To date, we have had limited success in utilizing these firms as a sales channel or as a provider of professional services. To increase our revenues and implementation capabilities, we must continue to develop and expand our relationships with these systems integrators and consulting firms. 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.

Our subscription-based products are hosted by a third-party provider.

     Some of our Contract Management solutions are hosted by a third party data-center provider. Failure of the data center provider to maintain service levels as contracted, could result in customer dissatisfaction, customer losses and potential product warranty or performance liabilities.

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

     Provisions of our amended and restated certificate of incorporation and amended and restated bylaws, Delaware law and the stockholder rights plan adopted by the Company on February 4, 2003 may make it more difficult for or prevent a third party from acquiring control of us without approval of our directors. These provisions include:

	•		providing for a classified board of directors with staggered three-year terms;
	•		restricting the ability of stockholders to call special meetings of stockholders;
	•		prohibiting stockholder action by written consent;
	•		establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings;
	•		granting our board of directors the ability to designate the terms of and issue new series of preferred stock without stockholder approval; and
	•		issuing shareholders rights to purchase additional shares of stock in the event that (i) a shareholder accumulates 15% or more of the Company’s voting stock or (ii) a tender offer for the Company’s shares is commenced or announced.

     These provisions may have the effect of entrenching our board of directors and may deprive or limit your strategic opportunities to sell your shares.

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

     The Sarbanes-Oxley Act of 2002, as well as new rules implemented by the Securities Exchange Commission and the NASDAQ National Market, has required changes in corporate governance practices of public companies. These rules are increasing our legal and financial compliance costs and causing some management and accounting activities to become more time-consuming and costly. This includes increased levels of documentation, monitoring internal controls, and increased manpower and use of consultants to comply. We have and will continue to expend significant efforts and resources to comply with these rules and regulations and have implemented a comprehensive program of compliance with these requirements and high standards of corporate governance and public disclosure.

     These rules may also make it more difficult and more expensive us to obtain director and officer liability insurance, and may make us accept reduced coverage or incur substantially higher costs for such coverage. The rules and regulations may also make it more difficult for us to attract and retain qualified executive officers and members of our board of directors, particularly to serve on our audit committee.

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.

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

     Our servers are vulnerable to physical or electronic break-ins and similar disruptions, which could lead to loss of data or public release of proprietary information. In addition, unauthorized persons may improperly access our data. These and other types of attacks could harm us. Actions of this sort may be very expensive to remedy and could adversely affect results of operations.

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

     We are required to follow accounting standards and financial reporting set by governing bodies in the U.S. and other countries where we do business. From time to time, these governing bodies implement new and revised laws and regulations. These new and revised accounting standards, financial reporting and tax laws may require changes to accounting principles used in preparing our financial statements. These changes may have a material impact on our business and financial results. For example, a change in accounting rules can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change became effective. As a result, changes to existing rules or reconsideration of current practices caused by such changes may adversely affect our reported financial results or the way we conduct our business.

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 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

Not applicable.

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

Not applicable.

ITEM 5: OTHER INFORMATION

Not applicable.

ITEM 6: EXHIBITS

Exhibit 31.1

Certification of Interim Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.1

Certification of Interim Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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.

Date: August 19, 2008

EXHIBIT INDEX

Exhibit No.		Description
Exhibit 31.1		Certification of Interim Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1		Certification of Interim Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.