SELECTICA INC, S-1/A, 2000-03-09

SELECTICA INC
S-1/A, 2000-03-09
PREPACKAGED SOFTWARE

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 9, 2000.

REGISTRATION NO. 333-92545

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

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------

AMENDMENT NO. 5

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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SELECTICA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
-------------------------

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<S> <C> <C>
DELAWARE 7372 77-0432030
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>

3 WEST PLUMERIA DRIVE, SAN JOSE, CA 95134
(408) 570-9700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

RAJEN JASWA
CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD
SELECTICA, INC.
3 WEST PLUMERIA DRIVE, SAN JOSE, CA 95134
(408) 570-9700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
-------------------------

COPIES TO:

<TABLE>
<S> <C>
ROBERT V. GUNDERSON, JR., ESQ. MARK A. BERTELSEN, ESQ.
BENNETT L. YEE, ESQ. JOSE F. MACIAS, ESQ.
ANDREW BAW, ESQ. BETSEY SUE, ESQ.
THEODORE G. WANG, ESQ. JON C. AVINA, ESQ.
PARKER E. HOBSON, ESQ. WILSON SONSINI GOODRICH & ROSATI
GUNDERSON DETTMER STOUGH PROFESSIONAL CORPORATION
VILLENEUVE FRANKLIN & HACHIGIAN, LLP 650 PAGE MILL ROAD
155 CONSTITUTION DRIVE PALO ALTO, CALIFORNIA 94304
MENLO PARK, CALIFORNIA 94025 (650) 493-9300
(650) 321-2400
</TABLE>

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ____________

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ____________

If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

CALCULATION OF REGISTRATION FEE CHART

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<S> <C> <C> <C> <C>
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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) SHARE(2) PRICE(2) FEE(3)
- -------------------------------------------------------------------------------------------------------------------------
Common Stock, $.0001
par value.................. 4,600,000 $25.00 $115,000,000 $30,360
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</TABLE>

(1) Includes shares that the Underwriters have the option to purchase to cover
over-allotments, if any.

(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(a).

(3) A fee of $19,800 was previously paid by the Registrant in connection with
the filing on December 10, 1999. Pursuant to Rule 457(b) under the
Securities Act, such fee is being credited against the registration fee.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SUCH SECTION 8(a), MAY DETERMINE. THE INFORMATION IN THIS
PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES
UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE
SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY
STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2

THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.

SUBJECT TO COMPLETION, DATED MARCH 9, 2000

4,000,000 Shares

[Selectica Logo]

Common Stock
------------------

Prior to this offering, there has been no public market for our common
stock. The initial public offering price of our common stock is expected to be
between $23.00 and $25.00 per share. We have made application to list our common
stock on The Nasdaq Stock Market's National Market under the symbol "SLTC."

Selectica and a selling stockholder have granted the underwriters an option
to purchase a maximum of 600,000 additional shares to cover over-allotments of
shares.

INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 6.

<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS SELECTICA
---------------- ---------------- ----------------
<S> <C> <C> <C>
Per Share............................................ $ $ $
Total................................................ $ $ $
</TABLE>

Delivery of the shares of common stock will be made on or about
, 2000.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

CREDIT SUISSE FIRST BOSTON
THOMAS WEISEL PARTNERS LLC
U.S. BANCORP PIPER JAFFRAY
E*OFFERING
The date of this prospectus is , 2000.
<PAGE> 3

[DESCRIPTION OF ARTWORK

At the top of the page is the phrase: "Selectica's Internet Selling System
Solution:" The following phrase is beneath: "Managing the Sale and Lifecycle of
Complex Products and Services."

In the center of the page is a diagram with a small circle situated in the
middle of a larger ring. The small circle is darkly shaded and contains the
following text: "ACE Knowledge Base." The ring is divided into eight sections,
each of which has an arrow which points to and from the shaded circle. The outer
section of the ring contains the following text: "Proposal Preparation," "Order
Fulfillment," "Moves, Changes and Additions," "Needs Analysis," "Product/Service
Configuration," "Cross-Sell Up-Sell," "Financing/Support Configuration" and
"Pricing Quotation." The word "Internet" is between two of the arrows.

Above the ring are three screen shots of our customers' web sites. An arrow
links each screen shot to a section of the ring. Below the screen shot to the
left is the following text: "By using Selectica, BMW provides customers with its
full range of features, options and financing alternatives to configure and
price an automobile, and has had over 240 million hits to date." To the right of
the screen shot in the middle is the following text: "HP has built an advisor
using Selectica that analyzes users' needs and identifies the optimal product
match from among dozens of options." Below the screen shot to the right is the
following text: "3Com used Selectica to assist users in configuring complex
network routers in real time."

Below the ring are three screen shots out of customers' web sites. An arrow
links each screen shot to a section of the ring. Above the screen shot to the
left is the following text: "Selectica's technology is in use both in the U.S.
and internationally at companies such as Samsung where Korean resellers can
configure and buy PCs in an intuitive, guided selling environment." To the right
of the screen shot in the middle is the following text: "Aspect Communications
uses Selectica to keep its sales force current on pricing structures so that
quotes can be generated accurately and quickly." Above the screen shot to the
right is the following text: "3Com also used Selectica to build a network
advisor that is deployed on distributors' web sites."]
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TABLE OF CONTENTS

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Page
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PROSPECTUS SUMMARY.................. 3
RISK FACTORS........................ 6
SPECIAL NOTE REGARDING FORWARD-
LOOKING STATEMENTS................ 19
USE OF PROCEEDS..................... 20
DIVIDEND POLICY..................... 20
CAPITALIZATION...................... 21
DILUTION............................ 23
SELECTED CONSOLIDATED FINANCIAL
DATA.............................. 24
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS..................... 25
BUSINESS............................ 41
</TABLE>

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Page
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MANAGEMENT.......................... 54
RELATED PARTY TRANSACTIONS.......... 64
PRINCIPAL STOCKHOLDERS.............. 66
DESCRIPTION OF CAPITAL STOCK........ 70
SHARES ELIGIBLE FOR FUTURE SALE..... 74
UNDERWRITING........................ 76
NOTICE TO CANADIAN RESIDENTS........ 79
LEGAL MATTERS....................... 81
EXPERTS............................. 81
WHERE YOU CAN FIND MORE
INFORMATION....................... 81
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS........................ F-1
</TABLE>

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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.

DEALER PROSPECTUS DELIVERY OBLIGATION

UNTIL , 2000 (25 DAYS AFTER THE COMMENCEMENT OF THIS
OFFERING), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR
NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN
ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE> 5

PROSPECTUS SUMMARY

You should read the following summary together with the more detailed
information regarding Selectica and the common stock being sold in this offering
in our financial statements and notes appearing elsewhere in this prospectus and
our risk factors beginning on page 6.

SELECTICA, INC.

Selectica is a leading provider of Internet selling system software and
services that enable companies to efficiently sell complex products and services
over intranets, which are networks of computers that are internal to companies
and use Internet technologies, extranets, which are intranets that outsiders,
such as suppliers and customers, are allowed to access, and the public Internet.
Our ACE suite of software products is a comprehensive Internet selling system
solution that guides a new customer through an analysis of its needs and product
or service selection and also guides an experienced customer, partner or
employee through product or service configuration, pricing and order creation
over the Internet, thereby helping convert potential buyers into customers. Our
Internet selling system solution allows companies to use the Internet platform
to deploy a selling application to many points of contact, including personal
computers, in-store kiosks and mobile devices, while offering customers,
partners and employees an interface customized to their specific needs.

The Internet is transforming the business environment by increasing
competition and enabling the development of new business models. In order to
remain competitive, companies must find innovative ways to sell, increase
efficiencies in the sales cycle and deliver greater customer satisfaction. A
growing number of companies are seeking to leverage the Internet to market and
sell their products and services. To date, many electronic commerce transactions
have been simple purchases of products such as books, compact discs, stocks and
toys. We believe, however, that growth in electronic commerce will be driven by
the ability of companies to complete complex transactions such as
business-to-business electronic commerce, which is the sale of products and
services over the Internet from businesses to other businesses, and the sale of
consumer products and services involving multiple features and options.

The completion of a complex sales transaction depends on a seller's ability
to identify and satisfy a buyer's needs. In traditional sales, companies rely on
trained salespeople to interact with customers to address customer needs,
explain product features and ultimately consummate the sale. To date, many
electronic commerce web sites have been static collections of non-interactive
content, and have limited ability to assist and guide a customer through a
purchase decision. Using the Internet to complete complex sales transactions,
however, requires businesses to implement a sophisticated system that performs
the traditional role of the salesperson throughout the sales lifecycle of the
products and services.

In parallel with the growth of electronic commerce, the Internet is
becoming a technology platform for business application deployment. With the
emergence of the Internet platform, which includes intranets, extranets and the
public Internet, companies are able to more broadly and cost-effectively deploy
business applications to customers, partners and employees and make the most
current applications and information immediately available on Internet-enabled
devices.

Our ACE suite of products enables businesses to easily develop and rapidly
deploy an Internet sales channel, or a means for selling products and services
over the Internet, that interactively assists their customers, partners and
employees through the selection, configuration, pricing, quoting and fulfillment
processes. ACE is a comprehensive Internet selling system that meets the needs
of companies looking to efficiently sell complex products and services. Our
product architecture has been designed specifically for the Internet, providing
our solution with scalability, which is the ability to accommodate substantial
increases in the number of users concurrently using the product, reliability and
flexibility. Additionally, our Internet selling system solution has been
developed with an open architecture that leverages data in existing enterprise
applications, such as enterprise resource planning systems, providing an
easy-to-install application that is designed to reduce deployment time.

Our current customers include 3Com, Allied Signal, Aspect Communications,
BMW, Centigram, Cisco, expenseVision, Fireman's Fund, Fujitsu, Hewlett-Packard,
LoanMarket, Redback Networks, RTS Software, Samsung, Sun Microsystems and
Watlow. We have developed strong working relationships with system integrators,
such as Andersen Consulting, Arthur Andersen, EDS, A.T. Kearny, KPMG and
PricewaterhouseCoopers, with independent software vendors, such as BroadVision,
InterWorld, Netscape/ AOL and Tibco, and with application service providers such
as Asera and Corio. Our strategic investors are the Intel 64 Fund and ITOCHU
Corporation.

Selectica was incorporated in June 1996. Our principal offices are located
at 3 West Plumeria Drive, San Jose, California 95134 and our telephone number is
(408) 570-9700. Our Internet address is www.selectica.com. The information
contained on our web site does not constitute a part of this prospectus.
3
<PAGE> 6

THE OFFERING

Common stock offered...................... 4,000,000 shares

Common stock offered in the private
placement................................. 2,400,000 shares to two investors
as follows: 1,200,000 shares to
Dell USA, L.P. and 1,200,000
shares to Samsung SDS Co., Ltd.

Common stock to be outstanding after this
offering and the private placement........ 34,556,334 shares

Use of proceeds from this offering and the
private placement......................... Working capital and general
corporate purposes. See "Use of
Proceeds."

Proposed Nasdaq National Market symbol.... SLTC

The table above is based on shares outstanding as of December 31, 1999 and
assumes the exercise of outstanding warrants to purchase 253,879 shares of
common stock that terminate upon the consummation of this offering. This table
excludes:

- 2,180,815 shares of common stock issuable upon exercise of stock options
outstanding under our stock option plans at a weighted average exercise
price of $2.97 per share at December 31, 1999;

- 1,371,077 shares of common stock available for issuance under our 1996
Stock Plan of which 1,000,000 increase to shares available under the plan
was approved subsequent to December 31, 1999;

- 820,408 shares of common stock issuable upon exercise of warrants with a
weighted average exercise price of $12.71 per share, assuming an exercise
price of $13.00 per share for one warrant to purchase 800,000 shares of
common stock;

- 2,200,000 shares of common stock available for issuance under our 1999
Equity Incentive Plan;

- 1,000,000 shares of common stock available for issuance under our 1999
Employee Stock Purchase Plan; and

- An aggregate of 1,420,050 shares of common stock issuable pursuant to
options granted between December 31, 1999 and March 8, 2000 at a weighted
average exercise price of $11.00 per share. In addition we intend to
grant an aggregate of 200,000 shares of common stock pursuant to options
to three executive officers at an exercise price per share equal to the
initial public offering price of our common stock.

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

Except as otherwise indicated, information in this prospectus is based on
the following assumptions:

- conversion of all outstanding shares of preferred stock into shares of
common stock upon the consummation of this offering;

- exercise of outstanding warrants to purchase 253,879 shares of our common
stock; and

- no exercise of the underwriters' over-allotment option.

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

Selectica, ACE and Selectica's logo are our trademarks and we have filed
applications to register Selectica and ACE. Trade names, service marks or
trademarks of other companies appearing in this prospectus are the property of
their respective holders.
4
<PAGE> 7

SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
PERIOD FROM INCEPTION MARCH 31, DECEMBER 31,
(JUNE 6, 1996) TO ----------------- -------------------
MARCH 31, 1997 1998 1999 1998 1999
--------------------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Total revenues.............................. $ 55 $ 170 $ 3,444 $ 1,980 $ 9,140
Loss from operations........................ (256) (3,188) (7,636) (4,816) (12,686)
Net loss applicable to common
stockholders.............................. (251) (3,101) (7,537) (4,721) (13,342)
Net loss per share applicable to common
stockholders:
Basic and diluted......................... $(0.15) $ (0.91) $ (1.58) $ (1.05) $ (2.53)
Weighted average shares -- basic and
diluted................................. 1,634 3,425 4,782 4,479 5,270
Pro forma net loss per share applicable to
common stockholders:
Basic and diluted......................... $ (0.44) $ (0.59)
Weighted average shares -- basic and
diluted................................. 17,282 22,455
</TABLE>

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<CAPTION>
DECEMBER 31, 1999
--------------------------
ACTUAL AS ADJUSTED
----------- -----------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $14,124 $156,584
Working capital............................................. 10,551 153,011
Total assets................................................ 27,120 169,580
Total stockholders' equity.................................. 19,347 161,807
</TABLE>

See Note 1 of notes to consolidated financial statements for a description
of the method that we used to compute our basic and diluted net loss per share
applicable to common stockholders and pro forma basic and diluted net loss per
share applicable to common stockholders.

The as adjusted column in the consolidated balance sheet data table above
reflects the exercise of warrants to purchase 253,879 shares of common stock at
$4.382 per share that terminate upon the consummation of this offering and our
sale of 4,000,000 shares of common stock in this offering and the sale of
2,400,000 shares of common stock issued in the private placement, in each case
at an assumed initial public offering price of $24.00 per share, after deducting
estimated underwriting discounts and commissions, discounts for private
placements, estimated offering expenses payable by us and the application of our
net proceeds from this offering and the private placement.

5
<PAGE> 8

RISK FACTORS

This offering and an investment in our common stock involve a high degree
of risk. You should carefully consider the following risk factors and the other
information in this prospectus before investing in our common stock.

RISKS RELATED TO OUR BUSINESS

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

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

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

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

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

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

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

In those instances where licenses are bundled with other elements for which
we have vendor specific objective evidence of fair value, we have used the
residual method to account for license revenues. As such we defer the total fair
value of the undelivered elements, until such time as they are delivered, and
recognize as license revenues the difference between the total arrangement and
the amount deferred for the undelivered elements.

6
<PAGE> 9

In addition, because we rely on a limited number of customers, the timing
of milestone achievement or customer acceptance by, the amount of services we
provide to, or the recognition of significant license revenues upon shipment to
a single customer can significantly affect our operating results. For example,
our services revenues declined significantly in the quarter ended June 30, 1999
due to completion of a services contract with BMW of North America, one of our
significant customers. Our license and service revenues increased significantly
in the quarters ended September 30, 1999 and December 31, 1999 generally due to
the addition of two new customers in each respective quarter. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Quarterly Results of Operations." We intend to significantly
increase our operating expenses for the foreseeable future. Because these
expenses are relatively fixed in the near term, any shortfall from anticipated
revenues could cause our quarterly operating results to fall below anticipated
levels.

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

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

WE HAVE A HISTORY OF LOSSES AND EXPECT TO CONTINUE TO INCUR NET LOSSES FOR THE
FORESEEABLE FUTURE.

We have experienced operating losses in each quarterly and annual period
since inception. We incurred net losses applicable to common stockholders of
$3.1 million for the fiscal year ended March 31, 1998, $7.5 million for the
fiscal year ended March 31, 1999 and $13.3 million for the nine months ended
December 31, 1999. As of December 31, 1999, we had an accumulated deficit of
$24.7 million. We expect to significantly increase our research and development,
sales and marketing, and general and administrative expenses, and consequently
our losses will significantly increase in the future. In order to accommodate
our increase in employees, we have recently leased a larger facility, and we
will incur increased capital equipment costs. 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.

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

We were founded in June 1996 and have a limited operating history. We began
marketing our ACE suite of products in early 1997 and released ACE 4.0 in
November 1999. Our business model is still emerging, and the revenue and income
potential of our business and market are unproven. As a result of our limited
operating history, we have limited financial data that you can use to evaluate
our business. You must consider our prospects in light of the risks and
difficulties we may encounter as an early stage company in the new and rapidly
evolving market for Internet selling systems.

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

The market for Internet selling system software, which has only recently
begun to develop, is evolving rapidly and likely will have an increased number
of competitors. Because this market is new,

7
<PAGE> 10

it is difficult to assess its competitive environment, growth rate and potential
size. The growth of the market is dependent upon the willingness of businesses
and consumers to purchase complex goods and services over the Internet and the
acceptance of the Internet as a platform for business applications. In addition,
companies that have already invested substantial resources in other methods of
Internet selling may be reluctant or slow to adopt a new approach or application
that may replace, limit or compete with their existing systems.

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

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

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

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

- a longer operating history;

- preferred vendor status with our customers;

- more extensive name recognition and marketing power; and

- significantly greater financial, technical, marketing and other
resources, giving them the ability to respond more quickly to new or
changing opportunities, technologies and customer requirements.

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

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

Our industry is characterized by rapid technological change, changes in
customer requirements, frequent new product and service introductions and
enhancements and emerging industry standards. In order to achieve broad customer
acceptance, our products must be compatible with major software and hardware
platforms used by our customers. Our products currently operate on the Microsoft

8
<PAGE> 11

Windows NT and Sun Solaris 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. Internet selling system
technology is complex and new products and product enhancements can require long
development and testing periods. If our products were to be incompatible with a
popular new operating system, electronic commerce application or database, our
business would be significantly harmed. In addition, the development of entirely
new technologies to replace existing software could lead to new competitive
products that have better performance or lower prices than our products and
could render our products obsolete and unmarketable.

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

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

IF WE FAIL TO IMPROVE OUR ACCOUNTING AND FINANCIAL CONTROL SYSTEMS OR ACCURATELY
MANAGE THE PROGRESS OF OUR CUSTOMER CONTRACTS, OUR OPERATING RESULTS WILL BE
SIGNIFICANTLY HARMED.

In the past, we have had difficulty managing our accounting and financial
reporting systems and the volume and complexity of our customer contracts. We
need to improve our financial and accounting controls, improve our reporting and
approval procedures, expand and train key personnel within our finance and
management organizations, implement more robust information systems, and
accurately record and track our customer contracts. If we fail to improve our
financial systems, procedures and controls or if we fail to effectively manage
our customer contracts, our business and operating results would be
significantly harmed.

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

Our business and financial condition is dependent on a limited number of
customers. Our five largest customers accounted for approximately 85% and 57% of
our revenues for the fiscal year ended March 31, 1999 and the nine months ended
December 31, 1999, respectively, and our ten largest customers accounted for 96%
and 78% of our revenues for the fiscal year ended March 31, 1999 and the nine
months ended December 31, 1999, respectively. Revenues from significant clients
as a percentage of total revenues are as follows:

FISCAL YEAR ENDED MARCH 31, 1999

<TABLE>
<S> <C>
BMW of North America........................................ 60%
Olicom...................................................... 10%
</TABLE>

NINE MONTHS ENDED DECEMBER 31, 1999

<TABLE>
<S> <C>
Aspect Communications....................................... 15%
3Com Corporation............................................ 14%
Fireman's Fund Insurance.................................... 14%
</TABLE>

9
<PAGE> 12

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

OUR FAILURE TO MEET CUSTOMER EXPECTATIONS ON DEPLOYMENT OF OUR PRODUCTS COULD
RESULT IN NEGATIVE PUBLICITY AND REDUCED SALES, BOTH OF WHICH WOULD
SIGNIFICANTLY HARM OUR BUSINESS AND OPERATING RESULTS.

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

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

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

IF WE ARE UNABLE TO MAINTAIN AND EXPAND OUR DIRECT SALES FORCE, SALES OF OUR
PRODUCTS AND SERVICES MAY NOT MEET OUR EXPECTATIONS AND OUR BUSINESS AND
OPERATING RESULTS WILL BE SIGNIFICANTLY HARMED.

We depend on our direct sales force for all of our current sales and our
future growth depends on the ability of our direct sales force to develop
customer relationships and increase sales to a level that will allow us to reach
and maintain profitability.

There is a shortage of the sales personnel we need, such as sales
engineers, and competition for qualified personnel is intense. In addition, it
will take time for new sales personnel to achieve full productivity. If we are
unable to hire or retain qualified sales personnel, or if newly hired personnel

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<PAGE> 13

fail to develop the necessary skills or to reach productivity when anticipated,
we may not be able to expand our sales organization and increase sales of our
products and services.

IF WE ARE UNABLE TO GROW AND MANAGE OUR PROFESSIONAL SERVICES ORGANIZATION, WE
WILL BE UNABLE TO PROVIDE OUR CUSTOMERS WITH TECHNICAL SUPPORT FOR OUR PRODUCTS,
WHICH COULD SIGNIFICANTLY HARM OUR BUSINESS AND OPERATING RESULTS.

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

Although services revenues, which are primarily comprised of revenues from
consulting fees, maintenance contracts and training, are important to our
business, representing 52% and 43% of total revenues for the year ended March
31, 1999 and the nine months ended December 31, 1999, respectively services
revenues have lower gross margins than license revenues. Gross margins for
services revenues were 34% and negative 32% for the year ended March 31, 1999
and the nine months ended December 31, 1999, respectively, compared to gross
margins for license revenues of 89% and 95% for the respective periods. As a
result, a continued increase in the percentage of total net revenues represented
by services revenues or an unexpected decrease in license revenues could have a
detrimental impact on our overall gross margins and our operating results.

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

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

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

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<PAGE> 14

OUR OPERATING RESULTS ARE SIGNIFICANTLY DEPENDENT UPON THE SALE OF OUR ACE SUITE
OF PRODUCTS, INCLUDING THE NEW VERSION OF OUR PRODUCT RELEASED IN NOVEMBER 1999.

We expect that we will continue to depend on revenue from new and enhanced
versions of ACE for the foreseeable future, and if companies do not adopt or
expand their use of ACE, our business and operating results would be
significantly harmed. ACE 4.0 was introduced in November 1999. Since ACE 4.0 has
only recently been introduced, customers may discover errors or other problems
with the product, which may adversely affect its acceptance.

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. ACE and other future products may contain defects or errors, which
could result in lost revenues, a delay in market acceptance or negative
publicity, which would significantly harm our business and operating results.

MANY OF OUR EXECUTIVE OFFICERS AND KEY PERSONNEL ARE RELATIVELY NEW AND MUST BE
INTEGRATED INTO OUR ORGANIZATION.

Many of our executive officers and key personnel have recently joined
Selectica, including our Vice President of Marketing and our Chief Financial
Officer, each of whom have joined Selectica since June 1999. Our future
performance will depend, in part, on our ability to successfully integrate our
newly hired executive officers and key personnel into our management team, and
our ability to develop an effective working relationship among management.

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

We have recently experienced a period of rapid growth and expansion, which
places significant demands on our managerial, administrative, operational,
financial and other resources. From December 31, 1998 to December 31, 1999, we
expanded from 68 to 269 employees. We have also significantly expanded our
operations in the U.S. and internationally and we plan to continue to expand the
geographic scope of our operations.

To accommodate continued anticipated growth and expansion, we will be
required to improve existing and implement new operational and financial
systems, procedures and controls. In particular, we will be required to improve
our accounting and financial reporting systems and to successfully manage an
increasing number of relationships with customers, suppliers and employees, and
an increasing number of complex contracts. These demands will require the
addition of new management personnel, and we are currently in the process of
recruiting individuals to fill important management positions. If we are not
able to install adequate systems, procedures and controls to support our future
operations in an efficient and timely manner, or if we are unable to otherwise
manage growth effectively, our business would be harmed.

12
<PAGE> 15

THE LOSS OF ANY OF OUR KEY PERSONNEL WOULD HARM OUR COMPETITIVENESS BECAUSE OF
THE TIME AND EFFORT THAT WE WOULD HAVE TO EXPEND TO REPLACE SUCH PERSONNEL.

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

A SUBSTANTIAL PORTION OF OUR OPERATIONS ARE CONDUCTED BY INDIA-BASED PERSONNEL,
AND ANY CHANGE IN THE POLITICAL AND ECONOMIC CONDITIONS OF INDIA OR IN
IMMIGRATION POLICIES, WHICH WOULD ADVERSELY AFFECT OUR ABILITY TO CONDUCT OUR
OPERATIONS IN INDIA, COULD SIGNIFICANTLY HARM OUR BUSINESS.

We conduct quality assurance and professional services operations in India.
As of December 31, 1999, there were 101 persons employed in India. We are
dependent on our India-based operations for these aspects of our business and we
intend to grow our operations in India. As a result, we are directly influenced
by the political and economic conditions affecting India. Operating expenses
incurred by our operations in India are denominated in Indian currency and
accordingly, we are exposed to adverse movements in currency exchange rates.
This, as well as any other political or economic problems or changes in India,
could have a negative impact on our India-based operations, resulting in
significant harm to our business and operating results. Furthermore, the
intellectual property laws of India may not adequately protect our proprietary
rights. We believe that it is particularly difficult to find quality management
personnel in India, and we may not be able to timely replace our current
India-based management team if any of them were to leave our company.

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

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

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

13
<PAGE> 16

OUR RESULTS OF OPERATIONS WILL BE HARMED BY CHARGES ASSOCIATED WITH OUR PAYMENT
OF STOCK-BASED COMPENSATION AND CHARGES ASSOCIATED WITH OTHER SECURITIES
ISSUANCES BY US.

We expect to incur a significant amount of amortization of charges related
to securities issuances in future periods, which will negatively affect our
operating results. We have deferred compensation charges of $6.0 million for
stock-based compensation as of December 31, 1999 and have related amortization
of $590,000 for the nine months ended December 31, 1999. We expect to amortize
approximately $2.8 million of stock-based compensation for the fiscal year
ending March 31, 2001 and we may incur additional charges in the future in
connection with grants of stock-based compensation at less than fair value. We
also expect to amortize approximately $3.3 million in connection with a
development agreement entered into in September 1999 with an investor who
received shares of Series E Preferred Stock and a warrant to purchase 57,000
shares of common stock at less than the deemed fair value. In January 2000 in
connection with a license and maintenance agreement we issued a warrant to
purchase 800,000 shares of common stock for $800,000. The fair value of the
warrant at the date of issuance was $12.0 million. As the fair value of the
warrants, less the purchase price, exceeds revenues to be earned under the
license and services agreement we will record a loss of $8.3 million in the
fourth quarter of fiscal 2000. See Note 10 of the Notes to Consolidated
Financial Statements.

IF WE BECOME SUBJECT TO PRODUCT LIABILITY LITIGATION, IT COULD BE COSTLY AND
TIME CONSUMING TO DEFEND AND COULD DISTRACT US FROM FOCUSING ON OUR BUSINESS AND
OPERATIONS.

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

OUR FUTURE SUCCESS DEPENDS ON OUR PROPRIETARY INTELLECTUAL PROPERTY, AND IF WE
ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY FROM POTENTIAL COMPETITORS OUR
BUSINESS MAY BE SIGNIFICANTLY HARMED.

We rely on a combination of trademark, trade secret and copyright law and
contractual restrictions to protect the proprietary aspects of our technology.
These legal protections afford only limited protection for our technology. We
currently have three pending U.S. patent applications and two pending U.S.
trademark applications. We do not have any foreign patents or patent
applications. Our trademark and patent applications might not result in the
issuance of any trademarks or patents. If any patent or trademark is issued, it
might be invalidated or circumvented or otherwise fail to provide us any
meaningful protection. We seek to protect source code for our software,
documentation and other written materials under trade secret and copyright laws.
We license our software pursuant to signed license agreements, which impose
certain restrictions on the licensee's ability to utilize the software. We also
seek to avoid disclosure of our intellectual property by requiring employees and
consultants with access to our proprietary information to execute
confidentiality agreements. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy aspects of our products or to
obtain and use information that we regard as proprietary. In addition, the laws
of many countries do not protect our proprietary rights to as great an extent as
do the laws of the United States. Litigation may be necessary in the future to
enforce our intellectual property rights, to protect our trade secrets and to
determine the validity and scope of the proprietary rights of others. Our
failure to adequately protect our intellectual property could significantly harm
our business and operating results.

14
<PAGE> 17

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

Our success and ability to compete are dependent on our ability to operate
without infringing upon the proprietary rights of others. Any intellectual
property litigation could result in substantial costs and diversion of resources
and could significantly harm our business and operating results. In the past, we
received correspondence from two patent holders recommending that we license
their respective patents. After review of these patents, we informed these
patent holders that in our opinion, it would not be necessary to license these
patents. However, we may be required to license either or both patents or incur
legal fees to defend our position that such licenses are not necessary. We
cannot assure you that if required to do so, we would be able to obtain a
license to use either patent on commercially reasonable terms, or at all. In
January 2000 we received correspondence from Celestica, Inc. alleging that our
use of the mark SELECTICA infringes upon their registered mark of CELESTICA. We
are currently evaluating the validity of their claim. We may be required to
incur legal fees and enter into litigation with respect to defending our mark.

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

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

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

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

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

In the event of a successful claim of infringement against us and our
failure or inability to license the infringed intellectual property on
reasonable terms or license a substitute intellectual property or redesign our
product to avoid infringement, our business and operating results would be
significantly harmed. If we are forced to abandon use of our trademark, we may
be forced to change our name and incur substantial expenses to build a new
brand, which would significantly harm our business and operating results.

RESTRICTIONS ON EXPORT OF ENCRYPTED TECHNOLOGY COULD CAUSE US TO INCUR DELAYS IN
INTERNATIONAL PRODUCT SALES, WHICH WOULD ADVERSELY IMPACT THE EXPANSION AND
GROWTH OF OUR BUSINESS.

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

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

We intend to expand our operations internationally. This expansion may be
more difficult or take longer than we anticipate, and we may not be able to
successfully market, sell or deliver our products

15
<PAGE> 18

internationally. If successful in our international expansion, we will be
subject to a number of risks associated with international operations,
including:

- longer accounts receivable collection cycles;

- expenses associated with localizing products for foreign markets;

- difficulties in managing operations across disparate geographic areas;

- difficulties in hiring qualified local personnel;

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

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

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

YEAR 2000 ISSUES COULD FORCE US TO INCUR SIGNIFICANT COSTS OR CAUSE OUR
CUSTOMERS TO DELAY THE LICENSING OF OUR PRODUCTS.

Most of our license agreements with our customers represent and warrant
that our products are Year 2000 compliant. If our products do not operate
properly with date calculations involving the Year 2000 and subsequent dates, we
could incur unanticipated expenses to remedy any problems, which could
significantly harm our business and operating results. Our products are
generally integrated into computer systems involving sophisticated hardware and
complex software products, which may not be Year 2000 compliant. The failure of
our customers' systems to be Year 2000 compliant could impede the success of
applications that we have developed for them. Accordingly, known or unknown
defects that affect the operation of our software, including any defects or
errors in applications that include our products, could result in a delay or
loss of revenue, diversion of development resources, damage to our reputation or
increased service or warranty costs and litigation costs, which could harm our
business and operating results. We may also experience reduced licensing of our
software and services as current or potential customers place a priority on
correcting Year 2000 problems and defer purchase decisions for software
products.

RISKS RELATED TO THE INDUSTRY

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

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

- inadequate reliability of the network infrastructure;

- slow development of enabling technologies and complementary products; and

- limited accessibility and ability to deliver quality service.

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<PAGE> 19

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

INCREASING GOVERNMENT REGULATION OF THE INTERNET COULD LIMIT THE MARKET FOR OUR
PRODUCTS AND SERVICES, OR IMPOSE GREATER TAX BURDENS ON US OR LIABILITY FOR
TRANSMISSION OF PROTECTED DATA.

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

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

RISKS RELATED TO THIS OFFERING

BECAUSE WE ARE IN THE INTERNET INDUSTRY, OUR STOCK PRICE MAY BE PARTICULARLY
VOLATILE, WHICH COULD LEAD TO CLASS ACTION LITIGATION.

The stock market in general has recently experienced extreme price and
volume fluctuations. In addition, the market prices of securities of technology
companies, particularly Internet-related companies, have been extremely
volatile, and have experienced fluctuations that have often been unrelated to or
disproportionate to the operating performance of these companies. These broad
market fluctuations could adversely affect the market price of our common stock.

In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and divert management's attention
and resources, which could harm our business and operating results.

OUR EXECUTIVE OFFICER AND DIRECTORS WILL RETAIN SUBSTANTIAL VOTING CONTROL OVER
US AFTER THE OFFERING THAT WILL ALLOW THEM TO INFLUENCE THE OUTCOME OF MATTERS
SUBMITTED TO STOCKHOLDERS FOR APPROVAL.

On completion of this offering and the private placement, our executive
officers and directors and their affiliates, based on ownership as of December
31, 1999, will beneficially own, in the aggregate, approximately 55% of our
outstanding common stock (assuming no exercise of the underwriters' over-
allotment option). As a result, these stockholders will be able to exercise
significant influence over all matters requiring stockholder approval, including
the election of directors and approval of significant corporate transactions,
which could have the effect of delaying or preventing a third party from

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<PAGE> 20

acquiring control over us. For more information regarding the ownership of our
outstanding stock by our executive officers and directors and their affiliates,
see "Principal Stockholders."

WE HAVE VARIOUS MECHANISMS IN PLACE TO DISCOURAGE TAKEOVER ATTEMPTS THAT COULD
SUPPRESS OUR STOCK PRICE AND MAKE IT MORE DIFFICULT TO ACQUIRE US.

Our certificate of incorporation, our bylaws and Delaware law contain
provisions that could make it more difficult for a third party to acquire us,
even if doing so would be beneficial to our stockholders. These provisions
include:

- authorizing the issuance of shares of blank check preferred stock;

- providing for a classified board of directors with staggered, three year
terms; and

- prohibiting specified stockholder action by written consent.

For information regarding these and other provisions, please see
"Description of Capital Stock." We are also currently considering other
anti-takeover measures, including a stockholders' rights plan.

IF A SIGNIFICANT NUMBER OF SHARES BECOME AVAILABLE FOR SALE AND ARE SOLD IN A
SHORT PERIOD OF TIME, THE MARKET PRICE OF OUR STOCK COULD DECLINE.

If our stockholders sell substantial amounts of our common stock in the
public market following this offering, the market price of our common stock
could fall. Based on shares outstanding as of December 31, 1999, upon completion
of this offering and the private placement, we will have outstanding 34,556,334
shares of common stock. Other than the shares of common stock sold in this
offering, no shares will immediately be eligible for sale in the public market
immediately. Our stockholders will be subject to agreements with the
underwriters or us that restrict their ability to transfer their stock for 180
days from the date of this prospectus. After these agreements expire, an
additional 25,216,753 shares will be eligible for sale in the public market. For
a detailed discussion of the shares eligible for future sale, please see "Shares
Eligible for Future Sale."

AS A NEW INVESTOR, YOU WILL INCUR SUBSTANTIAL DILUTION AS A RESULT OF THIS
OFFERING AND FUTURE EQUITY ISSUANCES.

The initial public offering price will be substantially higher than the
book value per share of our outstanding common stock. As a result, investors
purchasing common stock in this offering will incur immediate dilution of $19.43
a share, assuming an initial public offering price of $24.00 per share. The
exercise of outstanding options and warrants would result in further dilution.

WE HAVE BROAD DISCRETION TO USE THE PROCEEDS FROM THIS OFFERING FOR PURPOSES
WITH WHICH YOU MAY NOT AGREE, AND WE MAY NOT BE SUCCESSFUL IN INVESTING THESE
PROCEEDS.

We plan to use the proceeds from this offering for general corporate
purposes. Therefore, we will have broad discretion as to how we will spend the
proceeds, and our stockholders may not agree with the ways in which we use the
proceeds. We may not be successful in investing the proceeds from this offering
in our operations or external investments to yield a favorable return.

18
<PAGE> 21

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. These statements
relate to future events or our future financial performance. In some cases, you
can identify forward-looking statements by terminology; for instance, may, will,
should, intend, expect, plan, anticipate, believe, estimate, predict, potential
or continue, the negative of these terms or other comparable terminology. These
statements are only predictions. Actual events or results may differ materially.
In evaluating these statements, you should specifically consider various
factors, including the risks outlined in the Risk Factors section. These factors
may cause our actual results to differ materially from any forward-looking
statement.

Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither any other person nor we
assumes responsibility for the accuracy and completeness of the forward-looking
statements.

19
<PAGE> 22

USE OF PROCEEDS

Our net proceeds from the sale of the 4,000,000 shares of common stock in
this offering and from the sale of 2,400,000 shares of common stock in the
private placement are estimated to be $141.3 million, after deducting estimated
underwriting discounts and commissions and estimated offering expenses. If the
underwriters' over-allotment option is exercised in full, we estimate that our
net proceeds will be approximately $151.4 million.

We intend to use the net proceeds of this offering for additional working
capital and other general corporate purposes. We have not yet determined our
expected use of such proceeds, but we currently estimate that through March 31,
2001, we will use approximately $32.1 million for research and development,
sales and marketing and general and administrative expenses. These operating
expenses will be offset by the degree to which we recognize revenues from the
sales of our products and services. The amounts that we actually expend for
working capital and other general corporate purposes will vary significantly
depending on a number of factors, including future revenue growth, if any, and
the amount of cash that we generate from operations. As a result, we will retain
broad discretion over the allocation of the net proceeds from this offering. A
portion of the net proceeds may also be used for the acquisition of businesses,
products and technologies that are complementary to ours. We have no current
agreements or commitments for acquisitions of complementary businesses, products
or technologies. Pending these uses, we will invest the net proceeds of this
offering in short-term, investment grade and interest-bearing securities.

DIVIDEND POLICY

We have not paid any cash dividends since inception and do not currently
intend to pay any cash dividends.

20
<PAGE> 23

CAPITALIZATION

The following table sets forth the following information:

- our actual capitalization as of December 31, 1999;

- our pro forma capitalization after giving effect to the conversion of all
outstanding shares of preferred stock into common stock; and

- our pro forma as adjusted capitalization to reflect our receipt of the
estimated net proceeds from the exercise of warrants to purchase 253,879
shares of common stock at $4.382 that terminate upon the consummation of
this offering and our sale of 4,000,000 shares of common stock in this
offering and the sale of 2,400,000 shares of common stock in the private
placement, after deducting the estimated underwriting discounts and
commissions, estimated private placement discounts, and estimated
offering expenses, the filing of a new certificate of incorporation after
the closing of this offering and the application of our proceeds from
this offering.

<TABLE>
<CAPTION>
DECEMBER 31, 1999
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Stockholders' equity:
Convertible preferred stock: $.0001 par value;
25,500,000 shares authorized, 19,710,957 shares
issued and outstanding, actual; 25,500,000 shares
authorized, no shares outstanding, pro forma;
10,000,000 shares
authorized, no shares outstanding, pro forma as
adjusted........................................... $ 2 $ -- $ --
Common stock: $.0001 par value; 40,000,000 shares
authorized, 8,191,498 shares issued and
outstanding, actual; 75,000,000 shares authorized,
27,902,455 shares outstanding, pro forma;
150,000,000 shares authorized, 34,556,334 shares
outstanding, pro forma as adjusted................. 1 3 3
Additional paid-in capital.............................. 57,057 57,057 199,517
Deferred compensation................................... (6,011) (6,011) (6,011)
Stockholder notes receivable............................ (7,016) (7,016) (7,016)
Accumulated deficit..................................... (24,686) (24,686) (24,686)
-------- -------- -------
Total stockholders' equity......................... 19,347 19,347 161,807
-------- -------- -------
Total capitalization............................... 19,347 19,347 161,807
======== ======== =======
</TABLE>

This table excludes the following shares:

- 2,180,815 shares of common stock issuable upon exercise of stock options
outstanding as of December 31, 1999 at a weighted average exercise price
of $2.97 per share;

- 1,371,077 shares of common stock available for issuance under our 1996
Stock Plan, of which a 1,000,000 share increase to the shares available
under the plan was approved subsequent to December 31, 1999;

- 820,408 shares of common stock issuable upon the exercise of warrants
outstanding as of January 31, 1999 at a weighted average exercise price
of $12.71 per share assuming an exercise price of $13.00 per share of one
warrant to purchase 800,000 shares of common stock;

21
<PAGE> 24

- 2,200,000 shares of common stock available for issuance under our 1999
Equity Incentive Plan; and

- 1,000,000 shares of common stock available for issuance under our 1999
Employee Stock Purchase Plan.

See "Management -- Employee Benefit Plans," and Notes 10 and 14 of "Notes
to Consolidated Financial Statements" for a description of our equity plans.

22
<PAGE> 25

DILUTION

Our pro forma net tangible book value as of December 31, 1999 was $16.7
million, or approximately $0.59 per share. Net tangible book value per share
represents the amount of stockholders' equity, less intangible assets, plus
proceeds of $1.1 million from the exercise of 253,879 warrants, divided by
28,156,334 shares of common stock outstanding after giving effect to the assumed
exercise of warrants to purchase 253,879 shares of Series E Preferred Stock and
the conversion of all outstanding shares of preferred stock into shares of
common stock upon completion of this offering.

Net tangible book value dilution per share to new investors represents the
difference between the amount per share paid by purchasers of shares of common
stock in this offering and the net tangible book value per share of common stock
immediately after completion of this offering and the private placement. After
giving effect to our sale of 4,000,000 shares of common stock in this offering
and 2,400,000 shares of common stock in the private placement at an assumed
initial public offering price of $24.00 per share and after deducting the
estimated underwriting discounts and commissions, discounts for private
placements and estimated offering expenses, our net tangible book value as of
December 31, 1999 would have been $158.1 million or $4.57 per share. This
represents an immediate increase in net tangible book value of $3.98 per share
to existing stockholders and an immediate dilution in net tangible book value of
$19.43 per share to purchasers of common stock in the offering, as illustrated
in the following table:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $24.00
Pro forma net tangible book value per share as of December
31, 1999............................................... $0.59
Increase per share attributable to new investors.......... 3.98
-----
Pro forma net tangible book value per share after the
offering.................................................. 4.57
------
Dilution per share to new investors......................... $19.43
======
</TABLE>

The following table presents on a pro forma basis as of December 31, 1999,
after giving effect to the conversion of all outstanding shares of preferred
stock into common stock upon completion of this offering and the exercise of
warrants to purchase 253,879 shares of common stock, the differences between the
existing stockholders, the purchasers of shares in the offering and the private
placement investor with respect to the number of shares purchased from us, the
total consideration paid and the average price paid per share:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 28,156,334 81.5% $ 38,176,338 20.2% $ 1.36
New stockholders.............. 4,000,000 11.6 96,000,000 50.9 24.00
Private placement investors... 2,400,000 6.9 54,432,000 28.9 22.68
---------- ----- ------------ -----
Total.................... 34,556,334 100.0% $188,608,338 100.0% $ 5.46
========== ===== ============ =====
</TABLE>

As of December 31, 1999, there were options outstanding to purchase a total
of 2,180,815 shares of common stock at a weighted average exercise price of
$2.97 per share. In addition, as of December 31, 1999, there were warrants
outstanding to purchase 20,408 shares of common stock at a weighted average
exercise price of $1.47 per share. To the extent outstanding options or warrants
are exercised, there will be further dilution to new investors. For a
description of our equity plans, please see "Management -- Employee Benefit
Plans" and Notes 10 and 14 of Notes to Consolidated Financial Statements.

23
<PAGE> 26

SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this prospectus. The consolidated statement
of operations data for the period from June 6, 1996 (inception) to March 31,
1997, the fiscal years ended March 31, 1998 and 1999 and for the nine months
ended December 31, 1999 and the consolidated balance sheet data at March 31,
1997, 1998 and 1999 and at December 31, 1999 are derived from our consolidated
financial statements included elsewhere in this prospectus. The statement of
operations data for the nine months ended December 31, 1998 is derived from
unaudited consolidated financial statements included elsewhere in this
prospectus and, in the opinion of our management, includes all adjustments,
consisting only of normal recurring adjustments, that are necessary for a fair
presentation of the results of operations for this period. The historical
results are not necessarily indicative of the operating results to be expected
in the future. Catalogics Software Corporation our predecessor corporation, had
assets of $8,177, $6,154 and $5,952 at March 31, 1995 and 1996 and May 31, 1996,
respectively. The net loss was none, $(2,828) and $(337) for the years ended
March 31, 1995 and 1996 and the two months ended May 31, 1996, respectively.

<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
PERIOD FROM INCEPTION MARCH 31, DECEMBER 31,
(JUNE 6, 1996) TO ----------------- ------------------
MARCH 31, 1997 1998 1999 1998 1999
--------------------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
License........................................ $ 50 $ 170 $ 1,656 $ 970 $ 5,181
Services....................................... 5 -- 1,788 1,010 3,959
------- ------- ------- ------- --------
Total revenues............................... 55 170 3,444 1,980 9,140
Cost of revenues:
License........................................ 3 9 184 118 259
Services....................................... -- -- 881 483 5,105
Services -- related party...................... -- 51 303 153 135
------- ------- ------- ------- --------
Total cost of revenues....................... 3 60 1,368 754 5,499
------- ------- ------- ------- --------
Gross profit..................................... 52 110 2,076 1,226 3,641
Operating expenses:
Research and development....................... 169 1,950 3,893 2,498 4,132
Sales and marketing............................ 62 1,055 4,430 2,683 9,271
General and administrative..................... 77 293 1,389 861 2,924
------- ------- ------- ------- --------
Total operating expenses..................... 308 3,298 9,712 6,042 16,327
------- ------- ------- ------- --------
Loss from operations............................. (256) (3,188) (7,636) (4,816) (12,686)
Interest and other income, net................... 5 87 99 95 319
------- ------- ------- ------- --------
Net loss before taxes............................ (251) (3,101) (7,537) (4,721) (12,367)
Provision for income taxes....................... -- -- -- -- 50
------- ------- ------- ------- --------
Net loss......................................... $ (251) $(3,101) $(7,537) $(4,721) $(12,417)
Deemed dividend on Series E convertible preferred
stock.......................................... -- -- -- -- 925
------- ------- ------- ------- --------
Net loss applicable to common stockholders....... $ (251) $(3,101) $(7,537) $(4,721) $(13,342)
======= ======= ======= ======= ========
Basic and diluted net loss per share applicable
to common stockholders......................... $ (0.15) $ (0.91) $ (1.58) $ (1.05) $ (2.53)
Shares used in computing basic and diluted net
loss per share applicable to common
stockholders................................... 1,634 3,425 4,782 4,479 5,270
Pro forma basic and diluted net loss per share
applicable to common stockholders.............. $ (0.44) $ (0.59)
Shares used in computing pro forma basic and
diluted net loss per share applicable to common
stockholders................................... 17,282 22,455
</TABLE>

<TABLE>
<CAPTION>
MARCH 31,
---------------------- DECEMBER 31,
1997 1998 1999 1999
---- ------ ------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $788 $ 504 $ -- $14,124
Working capital (deficit)................................... 770 422 (639) 10,551
Total assets................................................ 983 1,357 3,193 27,120
Total stockholders' equity.................................. 957 856 736 19,347
</TABLE>

24
<PAGE> 27

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the
consolidated financial statements and the notes to those statements that appear
elsewhere in this prospectus.

OVERVIEW

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

History

Selectica was incorporated in June 1996 and acquired the technology and
assets of Catalogics Software Corporation, a development stage Internet software
company founded by Dr. Sanjay Mittal, a co-founder of Selectica, in July 1996.
Selectica was a development-stage company until October 1997. In October 1997,
we released our first version of ACE, which consisted of the ACE Enterprise
Server and ACE Studio. During the following year, we primarily licensed our
products to businesses for pilot programs that involved limited deployments.
Beginning in calendar 1999, we licensed our products for larger scale
deployments and continued to develop and market our ACE suite of products,
expanding our product offering with ACE Enterprise Manager, ACE Quoter and ACE
Mobile. In November 1999, we released the current version of ACE, ACE 4.0, and
expanded our product offering with ACE Repository and ACE Connector.

In addition to our engineering and professional services employees based in
San Jose, California, we provide professional services and perform quality
assurance testing with the assistance of Selectica Configurators India Private
Limited, or Selectica India, a corporation located in Pune, India. Selectica
India was formed in June 1997. From June 1997 through July 1999, we purchased
services from Selectica India on an arms-length contract basis. In July 1999, we
completed an agreement to acquire a 99.9% ownership of Selectica India, making
it a subsidiary of Selectica, Inc. As of December 31, 1999, there were 101
employees of Selectica India. Because we believe that Selectica India provides
us with a strategic advantage in advancing our product development and
consulting activities, we plan to continue expanding this operation. See
"Related Party Transactions -- Selectica Configurators India Pvt. Ltd."

Revenues

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

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

25
<PAGE> 28

Arrangements consisting of license and maintenance only. For those
contracts that consist solely of license and maintenance we recognize license
revenues based upon the residual method after all elements other than
maintenance have been delivered and recognize maintenance revenues over the term
of the maintenance contract as vendor specific objective evidence of fair value
for maintenance does exist.

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

In all cases, we assess whether the service element of the arrangement is
essential to the functionality of the other elements of the arrangement. In this
determination we focus on whether the software is off-the-shelf software,
whether the services include significant alterations to the features and
functionality of the software, whether the services involve the building of
complex interfaces, the timing of payments and the existence of milestones.
Often the installation of our software requires the building of interfaces to
the customer's existing applications or customization of the software for
specific applications. As a result, judgement is required in the determination
of whether such services constitute "complex" interfaces. In making this
determination we consider the following: (1) the relative fair value of the
services compared to the software, (2) the amount of time and effort subsequent
to delivery of the software until the interfaces or other modifications are
completed, (3) the degree of technical difficulty in building of the interface
and uniqueness of the application, (4) the degree of involvement of customer
personnel, and (5) any contractual cancellation, acceptance, or termination
provisions for failure to complete the interfaces. We also consider refunds,
forfeitures and concessions when determining the significance of such services.

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

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

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

26
<PAGE> 29

In accordance with paragraph 10 of Statement of Position 97-2, Software
Revenue Recognition, vendor specific objective evidence of fair value of
maintenance is determined by reference to the price the customer will be
required to pay when it is sold separately (that is, the renewal rate), which is
based on the price established by management having the relevant authority. Each
license agreement offers additional maintenance renewal periods at a stated
price. Maintenance contracts are typically one year in duration. To date we have
had one maintenance contract come up for renewal for which the customer elected
to renew such maintenance contract. We believe that given the nature of our
products as selling solutions for the Internet, our customers view maintenance
of those products as important to their business and will continue to need
upgrades and support of licensed products. As a result, we believe renewals will
occur in the future as more contracts come up for renewal.

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

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

For the fiscal year ended March 31, 1999 we recognized 63% of license and
services revenues under the percentage-of-completion method and 36% using the
completed contract method. For the nine months ended December 31, 1999 we
recognized 23% of license and services revenues under the residual method, 29%
under the percentage-of-completion method, and 40% using completed contract
method.

Because we rely on a limited number of customers, the timing of customer
acceptance or milestone achievement, or the amount of services we provide to a
single customer can significantly affect our operating results. For example, our
services revenues declined significantly in the quarter ended June 30, 1999 due
to the completion of services under a contract with BMW of North America, one of
our significant customers. Our license and services revenues increased
significantly in the quarters ended September 30, 1999 and December 31, 1999
generally due to the addition of two new customers in each respective quarter.

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

Factors Affecting Operating Results

A relatively small number of customers account for a significant portion of
our total revenues. For the fiscal year ended March 31, 1998, revenue from
Hewlett-Packard--Germany, Ascend Communications, InterVoice and Insight
accounted for 45%, 27%, 16% and 12% of our total revenues, respectively. For the
fiscal year ended March 31, 1999, revenue from BMW of North America and Olicom
accounted for 60% and 10% of our revenues, respectively. For the nine months
ended December 31, 1999, revenue from Aspect Communications, Fireman's Fund and
3Com Corporation accounted for 15%, 14% and 14% of our revenues, respectively.
We expect that revenues from a limited number of customers will continue to
account for a large percentage of total revenues in future quarters.

To date, our revenues have been predominantly attributable to sales in the
United States. We plan to expand our international operations significantly,
because we believe international markets represent a significant growth
opportunity. Consequently, we expect that international revenues will increase
as a percentage of total revenues in the future. The expansion of our
international operations will be subject to a variety of risks that could
significantly harm our business and operating results.

27
<PAGE> 30

As our international sales and operations expand, we anticipate that our
exposure to foreign currency fluctuations will increase because we have not
adopted a hedging program to protect us from risks associated with foreign
currency fluctuations.

We have a limited operating history upon which we may be evaluated. We have
incurred significant losses since inception and, as of December 31, 1999, we had
an accumulated deficit of approximately $24.7 million. We believe our success
depends on the continued growth of our customer base and the development of the
emerging Internet selling system market. Accordingly, we intend to continue to
invest heavily in sales and marketing and research and development. Furthermore,
we expect to continue to incur substantial operating losses for the foreseeable
future.

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

Equity Transactions

During October 1999, we issued 1,505,702 shares of Series E Preferred Stock
to various investors, including parties related to us, for gross proceeds of
$6,597,986. Of this amount, $23,000 related to the exercise of warrants to
purchase 5,250 shares of Series E Preferred Stock issued in connection with the
convertible debt financing in May 1999. We issued 1,500,452 of these shares at
$4.382 per share while the deemed fair value of such preferred stock at that
date was approximately $7.70. As a result, in the third quarter of fiscal 2000
we recorded $5.0 million of charges related to the difference between the actual
issuance price of the preferred stock and its deemed fair value. Of this amount,
$266,000 was accounted for as compensation expense, $925,000 was accounted for
as a dividend to stockholders in the third quarter of fiscal 2000 and the
remaining amount will be amortized over an approximate two-year period in
connection with a development agreement entered into in September 1999 with
Intel, one of the investors. As of December 31, 1999, approximately $472,000 had
been amortized.

Under the terms of the development agreement with Intel, we will work with
Intel to port the current suite of ACE products to additional platforms. In
connection with the development agreement, we issued warrants to purchase 57,000
shares of Series E convertible Preferred Stock. The warrants were issued in
December 1999 and were valued using the Black-Scholes valuation model. The value
of the warrants is approximately $381,000 and this amount will be expensed over
the remaining life of the development agreement, which will be approximately two
years.

On January 7, 2000, in connection with a license agreement entered into in
November 1999 and one year maintenance agreement of $3.0 million, we issued a
warrant to purchase 800,000 shares of common stock to one of our customers, for
$800,000. The warrant is fully vested, has a life of two years, and an exercise
price per share of the lesser of $13 or the initial public offering price of
this offering. The value of the warrant is approximately $12.0 million and was
determined based upon a Black-Scholes valuation model with an assumed exercise
price of $13.00 per share. The value of the warrant, less the warrant purchase
price of $800,000, is greater than the revenues associated with the license and
maintenance agreement, and accordingly, we will record a loss of approximately
$8.3 million in the fourth quarter of fiscal 2000.

28
<PAGE> 31

Between January 1, 2000 and March 8, 2000, an aggregate of 1,420,050
options to purchase common stock were granted at a weighted average price of
$11. We will record aggregate deferred compensation of approximately $4.5
million representing the difference between the exercise price of the options
granted and the deemed fair value of our common stock at the date of grant.

RESULTS OF OPERATIONS

Selectica reports financial results on a fiscal year basis ending March 31.
Therefore, the following references to years relate to our fiscal years. Fiscal
1997 includes only ten months of financial results during which we had no
significant revenue while expenditures were of a start-up nature related to
research and development of our products. All revenue and expense categories for
fiscal 1998 have increased compared to fiscal 1997 due to a full year of revenue
and expenses and increased activities as we introduced and expanded our initial
product offerings. Therefore, fiscal 1997 and 1998 are not comparable periods.

NINE MONTHS ENDED DECEMBER 31, 1998 AND 1999

Revenues

Our revenues increased from $2.0 million for the nine months ended December
31, 1998 to $9.1 million for the nine months ended December 31, 1999, an
increase of 361%. Revenues for the nine months ended December 31, 1998 were
primarily attributable to a single customer, BMW of North America. During the
nine months ended December 31, 1999, we substantially increased our customer
base with the addition of 22 new customers. During this period, customer
concentration decreased and no single customer accounted for more than 15% of
total revenue during the period. We do not believe that the percentage increases
in revenues achieved should be anticipated in future periods.

License. License revenues increased from $970,000 for the nine months ended
December 31, 1998 to $5.2 million for the nine months ended December 31, 1999,
an increase of 434%. License revenues consist of revenues from initial licenses
for our products and sales of additional licenses to existing customers. The
increase in license revenues was primarily due to the addition of new customers
as a result of expanded marketing activities, growth in our sales force, and
greater demand for and the acceptance of our ACE suite of products. During the
nine months ended December 31, 1999, 89% of our license revenue was attributable
to new customer implementations, as compared to 97% of our license revenue
attributable to new customer implementations during the nine months ended
December 31, 1998. We intend to continue to generate additional license revenues
from our existing customers and anticipate that this number will increase in
absolute dollars in future periods, although it will fluctuate as a percentage
of total revenues as our customers and size of transactions change.

Services. Services revenues increased from $1.0 million for the nine months
ended December 31, 1998 to $4.0 million for the nine months ended December 31,
1999, an increase of 292%. Our services revenues are comprised of fees from
consulting, maintenance and training services. The increase in services revenues
was due primarily to several large consulting projects and maintenance
contracts. Services revenues related to new customer consulting projects
represented 73% and 60% of total service revenues for the nine months ended
December 31, 1999 and 1998, respectively. We expect services revenues to
continue to increase in terms of absolute dollars in future periods as the
number of consulting projects and maintenance contracts increases with the
addition of new customers.

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<PAGE> 32

Cost of Revenues

Cost of License Revenues. Cost of license revenues increased from $118,000
for the nine months ended December 31, 1998 to $259,000 for the nine months
ended December 31, 1999, an increase of 120% and representing 12% and 5% of
license revenues, respectively. Cost of license revenues consists of the costs
of the product media, duplication, packaging and delivery of our software
products to our customers, which may include documentation, shipping and other
data transmission costs.

Cost of Services Revenues, including Related Party. Cost of services
revenues including cost of services from a related party, increased from
$636,000 for the nine months ended December 31, 1998 to $5.2 million for the
nine months ended December 31, 1999, representing 63% and 132% of services
revenues, respectively. Cost of services revenue is comprised mainly of salaries
and related expenses of our services organization. For the period from inception
through June 30, 1999, cost of services revenues excludes expenses of our
professional services organization in Pune, India, which are included in costs
of services revenues -- related party. Of the increase in cost of services
revenues, $1.3 million was attributable to increased personnel in our services
organization to support the increase in the amount of professional services
provided to our customers. The increase in cost of services revenues was also
attributable to $1.2 million in travel and accommodations expenses and
amortization of deferred compensation. The increased travel and accommodations
expenses were primarily a result of an increase in employee travel to client
locations and travel and accommodations for Indian employees traveling to the
United States. We anticipate that cost of services revenues will increase in
absolute dollars in future periods as our number of customers increases and to a
lesser degree as additional expenses are incurred with Indian employees
traveling to the United States and as additional deferred compensation is
expensed. We expect cost of services revenues to fluctuate as a percentage of
service revenue.

Gross Profit

The increase in services revenues has resulted in reduced overall gross
margins, since services revenues typically have lower gross margins than license
revenues. For the nine months ended December 31, 1999, we experienced negative
gross margins for services revenues due to the timing of services revenues
recognition. We expect that our overall gross margins will continue to fluctuate
due to timing of services revenues recognition and will continue to be adversely
affected by the lower margins on our service contracts. The amount of impact on
our gross profit will depend on the mix of services we provide, whether the
services are performed by our in-house staff or third party consultants, and the
overall utilization rates of our professional services organization.

Operating Expenses

Research and Development. Our research and development costs primarily
consist of salaries and related costs of our engineering organization and an
allocation of facilities, overhead and depreciation costs. Research and
development costs increased from $2.5 million in the nine months ended December
31, 1998 to $4.1 million in the nine months ended December 31, 1999. The
increase in research and development costs was primarily due to an increase of
$852,000 from the hiring of additional technical personnel to support the
development of ACE 4.0, the payment of a $544,000 bonus to our Chief Technology
Officer, $472,000 of amortization of the development agreement entered into with
Intel, and $57,000 of amortization of deferred compensation. We believe our
investment in research and development will increase substantially in future
periods.

Sales and Marketing. Our sales and marketing expenses primarily consist of
salaries and related costs for our sales and marketing organization, sales
commissions, expenses for trade shows, public

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<PAGE> 33

relations, collateral sales materials, advertising and an allocation of
facilities, overhead and depreciation costs. Sales and marketing expenses
increased from $2.7 million in the nine months ended December 31, 1998 to $9.3
million in the nine months ended December 31, 1999. The increase in sales and
marketing expenses is primarily attributable to increases in payroll expenses of
$2.3 million from the hiring of additional sales and marketing personnel,
including our Vice President of Marketing, $1.0 million for increased marketing
activities, $1.8 million from increased travel and sales commissions resulting
from higher revenues and $324,000 of amortization of deferred compensation. We
expect that sales and marketing expenses will increase substantially over the
next year as we hire additional sales and marketing personnel, increase spending
on advertising and marketing programs and establish sales offices in additional
domestic and international locations.

General and Administrative. Our general and administrative expenses include
compensation for administrative personnel, fees for outside professional
advisors and an allocation of overhead costs. General and administrative
expenses increased from $861,000 for the nine months ended December 31, 1998 to
$2.9 million for the nine months ended December 31, 1999. The increase in
general and administrative expenses primarily resulted from a $700,000 increase
in payroll expenses due to hiring additional administrative and support
personnel, including our Chief Financial Officer, a $472,000 increase in legal
and accounting services to support our overall growth, and $142,000 of
amortization of deferred compensation. We expect that general and administrative
expenses will increase substantially over the next year as we assume the
responsibilities of a public company and as we hire additional general and
administrative personnel.

Interest and Other Income, Net

Interest and other income, net primarily consists of interest earned on
cash balances and stockholders notes receivable, offset by interest expense
related to convertible debt issued in the first quarter of fiscal 2000 and
converted in the same quarter. Interest and other income, net increased from
$95,000 for the nine months ended December 31, 1998 to $319,000 in the nine
months ended December 31, 1999.

Provision for Income Taxes

We have recorded a tax provision of $50,000 for the nine months ended
December 31, 1999. The provision for income taxes consists primarily of state
income taxes and foreign taxes.

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

FISCAL YEARS ENDED MARCH 31, 1997, 1998 AND 1999

Revenues

Total revenues increased from $170,000 in fiscal 1998 to $3.4 million in
fiscal 1999. We had no material revenues in fiscal 1997.

License. License revenues increased from $170,000 in fiscal 1998 to $1.7
million in fiscal 1999. We attribute the increase in license revenues from
fiscal 1998 to fiscal 1999 primarily to growth in our customer base and an
increase in the average contract amount of license agreements, each of which was
driven by growth in our direct sales force, and, to a lesser extent, the release
of our new

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<PAGE> 34

ACE Enterprise Manager, ACE Quoter and ACE Mobile products and new versions of
existing products.

Services. We did not recognize any services revenues in fiscal 1998.
Services revenues were $1.8 million in fiscal 1999. Services revenues in fiscal
1999 were attributable to our initial customers electing to utilize our
professional services organization for product deployment, maintenance, support
and training.

Cost of Revenues

Cost of revenues increased from $60,000 in fiscal 1998 to $1.4 million in
fiscal 1999. Cost of revenues was not material in fiscal 1997.

License. Cost of license revenues increased from $9,000 in fiscal 1998 to
$184,000 in fiscal 1999, consistent with the increase in license revenues and
representing 5% and 11% of license revenues, respectively.

Services. Cost of services revenues, including related party amounts, were
$51,000 in fiscal 1998. Cost of services revenues, including related party
amounts, were $1.2 million in fiscal 1999, representing 66% of services
revenues. Cost of services revenues in fiscal 1999 is primarily attributable to
the development of our customer support and consulting organizations.

Operating Expenses

Research and Development. Research and development expenses increased from
$169,000 in fiscal 1997 to $2.0 million in fiscal 1998 and to $3.9 million in
fiscal 1999. The increase in research and development expenses from fiscal 1997
to fiscal 1998 were primarily due to a $1.2 million increase in salaries expense
from growth in engineering personnel. The increase in research and development
expenses from fiscal 1998 to fiscal 1999 was primarily due to a $1.3 million
increase in salaries expense from growth in engineering personnel. To date, all
software development costs have been expensed in the period incurred.

Sales and Marketing. Sales and marketing expenses increased from $62,000 in
fiscal 1997 to $1.1 million in fiscal 1998 and to $4.4 million in fiscal 1999.
The increase in sales and marketing expenses from fiscal 1997 to fiscal 1998 was
due primarily to a $539,000 increase in salaries expense from the growth in our
sales and marketing organizations and a $137,000 increase from the expansion of
our marketing programs, including increased marketing expenses for trade shows
and travel. The increase in sales and marketing expenses from fiscal 1998 to
fiscal 1999 was due primarily to a $2.0 million increase in salaries expense
from the growth in our sales and marketing organizations, and a $633,000
increase from the expansion of our marketing programs, including increased
marketing expenses for trade shows and travel.

General and Administrative. General and administrative expenses increased
from $77,000 in fiscal 1997 to $293,000 in fiscal 1998 and to $1.4 million in
fiscal 1999. The increase in general and administrative expenses from fiscal
1997 to fiscal 1998 primarily resulted from a $106,000 increase in payroll
expenses due to hiring additional administrative and support personnel. The
increase in general and administrative expenses from fiscal 1998 to fiscal 1999
primarily resulted from a $503,000 increase in payroll expenses due to hiring
additional administrative and support personnel.

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<PAGE> 35

Interest and Other Income, Net

Interest and other income, net consists primarily of interest earned on our
cash, cash equivalents and short-term investments offset by interest expense
incurred with respect to our line of credit obligation. Interest and other
income, net increased from $87,000 in fiscal 1998 to $99,000 in fiscal 1999 and
was immaterial in fiscal 1997. The increase in interest income and other income,
net relates primarily to interest earned on proceeds from our equity financing
in June 1998.

Provision for Income Taxes

No provision for federal or state income taxes has been recorded because we
experienced net losses through fiscal 1999.

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<PAGE> 36

QUARTERLY RESULTS OF OPERATIONS

The following table sets forth, for the periods presented, selected data
from our consolidated statements of operations. The data has been derived from
our unaudited consolidated financial statements, and, in the opinion of our
management, include all adjustments, consisting only of normal recurring
adjustments, that are necessary for a fair presentation of the results of
operations for these periods. This unaudited information should be read in
conjunction with the consolidated financial statements and notes included
elsewhere in this prospectus. The operating results in any quarter are not
necessarily indicative of the results that may be expected for any future
period. We have incurred losses in each quarter since inception and expect to
continue to incur losses for the foreseeable future.

<TABLE>
<CAPTION>
QUARTERS ENDED
----------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1999 1999 1999 1999
-------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
License.......................................... $ 164 $ 243 $ 563 $ 686 $ 708 $ 2,125 2,348
Services......................................... 219 108 683 778 493 1,309 2,157
------- ------- ------- ------- ------- ------- -------
Total revenues................................. 383 351 1,246 1,464 1,201 3,434 4,505
Cost of revenues:
License.......................................... 28 39 51 66 52 90 117
Services......................................... 93 118 272 398 1,069 2,082 1,954
Services -- related party........................ 50 50 53 150 135 -- --
------- ------- ------- ------- ------- ------- -------
Total cost of revenues......................... 171 207 376 614 1,256 2,172 2,071
------- ------- ------- ------- ------- ------- -------
Gross profit (loss)............................ 212 144 870 850 (55) 1,262 2,434
Operating expenses:
Research and development......................... 594 827 1,077 1,395 1,479 761 1,892
Sales and marketing.............................. 781 776 1,126 1,747 1,885 2,978 4,408
General and administrative....................... 212 293 356 528 498 1,229 1,197
------- ------- ------- ------- ------- ------- -------
Total operating expenses....................... 1,587 1,896 2,559 3,670 3,862 4,968 7,497
------- ------- ------- ------- ------- ------- -------
Loss from operations............................... (1,375) (1,752) (1,689) (2,820) (3,917) (3,706) (5,063)
Interest and other income (expense), net........... 3 60 31 5 (47) 145 221
------- ------- ------- ------- ------- ------- -------
Net loss before taxes.............................. (1,372) (1,692) (1,658) (2,815) (3,964) (3,561) (4,842)
Provision for income taxes......................... -- -- -- -- 26 24 --
------- ------- ------- ------- ------- ------- -------
Net loss........................................... (1,372) (1,692) (1,658) (2,815) (3,990) (3,585) (4,842)
Deemed dividend related to Series E convertible
preferred stock.................................. -- -- -- -- -- -- 925
------- ------- ------- ------- ------- ------- -------
Net loss applicable to common stockholders......... $(1,372) $(1,692) $(1,658) $(2,815) $(3,990) $(3,585) $(5,767)
======= ======= ======= ======= ======= ======= =======

AS A PERCENTAGE OF TOTAL REVENUES:
Revenues:
License.......................................... 43% 69% 45% 47% 59% 62% 52%
Services......................................... 57 31 55 53 41 38 48
------- ------- ------- ------- ------- ------- -------
Total revenues................................. 100 100 100 100 100 100 100
Cost of revenues:
License.......................................... 7 11 4 5 4 3 3
Services......................................... 24 34 22 27 90 61 43
Services -- related party........................ 13 14 4 10 11 -- --
------- ------- ------- ------- ------- ------- -------
Total cost of revenues......................... 44 59 30 42 105 63 46
------- ------- ------- ------- ------- ------- -------
Gross profit (loss)............................ 56 41 70 58 (5) 37 54
Operating expenses:
Research and development......................... 155 236 86 95 123 22 42
Sales and marketing.............................. 204 221 90 120 157 87 98
General and administrative....................... 55 83 29 36 41 36 26
------- ------- ------- ------- ------- ------- -------
Total operating expenses....................... 414 540 205 251 321 145 166
------- ------- ------- ------- ------- ------- -------
Loss from operations............................... (358) (499) (135) (193) (326) (108) (112)
Interest and other income (expense), net........... 1 17 2 -- (4) 4 5
------- ------- ------- ------- ------- ------- -------
Net loss before taxes.............................. (357) (482) (133) (193) (330) (104) (107)
Provision for income taxes......................... -- -- -- -- 2 1 --
------- ------- ------- ------- ------- ------- -------
Net loss........................................... (357) (482) (133) (193) (332) (105) (107)
Deemed dividend related to Series E convertible
preferred stock.................................. -- -- -- -- -- -- (21)
------- ------- ------- ------- ------- ------- -------
Net loss applicable to common stockholders......... (357)% (482)% (133)% (193)% (332)% (105)% (128)%
======= ======= ======= ======= ======= ======= =======
</TABLE>

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<PAGE> 37

Total revenues declined significantly in the quarter ended June 30, 1999
due to the completion of a services contract with a single customer, and
increased significantly in the quarter ended September 30, 1999 primarily as a
result of the addition of two new customers. Revenues for the quarter ended
December 31, 1999 increased by $1.1 million primarily due to the increase in the
number of customers during the quarter, including two customers which, in the
aggregate, comprised approximately 41% of total revenues for the quarter. We
experience significant variability in license and services revenues from quarter
to quarter due to our dependence on a limited number of customers, the large
transaction size of contracts with these customers, the timing of customer
acceptance and the timing of milestone achievement under contracts with
recognition of revenues on a percentage-of-completion basis. Gross profit has
also fluctuated as a result of increased investment in the development of our
customer support and consulting organizations to support the increase in
professional services provided to our customers. Cost of services revenues are
affected by our allocation of overhead costs by department based upon headcount.
As headcount in our professional services organization has increased as a
percentage of overall headcount from fiscal 1999 through the third quarter of
fiscal 2000, an increasing percentage of overhead costs were allocated to cost
of services revenues, resulting in a corresponding reduction in the allocation
of overhead costs to research and development, sales and marketing and general
and administrative expenses in those quarters. We expect gross margin to
continue to fluctuate as a result of continued variation in the mix of our
revenues between high margin license revenues and lower margin services
revenues.

Our operating expenses have increased significantly from inception through
the first nine months of fiscal 2000 as we have transitioned from a development
stage to the commercialization of our services. Research and development
expenses fluctuated from the end of fiscal 1999 through the first three quarters
of fiscal 2000, with an increase in the quarter ended June 30, 1999 as a result
of the payment of a $544,000 bonus to our Chief Technology Officer, offset by a
reduction in the allocation of overhead costs. Sales and marketing expenses
increased significantly during the second and third quarters of fiscal 2000 as a
result of the additional hiring of sales and marketing personnel, including our
Vice President of Sales, Americas and Vice President of Marketing, increased
sales commissions resulting from higher revenues and increased advertising and
promotion expenses, offset by a reduction in the allocation of overhead costs.
General and administrative expenses increased significantly during the second
and third quarters of fiscal 2000 as a result of an increase in payroll expenses
due to hiring additional administrative and support personnel and an increase in
legal and accounting services, offset by a reduction in the allocation of
overhead costs.

We plan to increase our operating expenses as we continue to increase sales
and marketing operations, expand our professional services organization and
continue to fund research and development. Consequently, our losses will
increase in the future. Although we have experienced revenue growth in recent
periods, we cannot be certain that such growth will continue at its current rate
or at all. If our revenue growth is slower than we anticipate or our operating
expenses exceed our expectations, our losses will be significantly greater.

During October and November 1999, we issued a total of 1,505,702 shares of
Series E Preferred Stock to various investors, including 261,981 shares to
related parties and a member of our board of directors, of which 5,250 shares
were a result of exercise of warrants to purchase stock, 79,871 shares to our
officers, 22,820 shares to unrelated parties and 1,141,030 shares to an investor
who will work with us to port the current suite of ACE products to additional
platforms. Gross proceeds from these issuances were $6,597,986. Excluding those
related to warrant exercises, the shares were issued at $4.382 per share while
the deemed fair value of our preferred stock at that date was approximately
$7.70, 110% of the deemed fair value of our common stock on the date of the
closing of Series E convertible Preferred Stock. We recorded approximately $5.0
million of charges related to cheap stock valuation in the third quarter of
fiscal 2000. Of this amount, approximately $925,000 was

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<PAGE> 38

accounted for as a dividend to stockholders, approximately $190,000 as sales and
marketing compensation expense, and approximately $76,000 as general and
administrative compensation expense. The remaining $3.8 million will be
amortized over a two-year period in connection with a development agreement with
one of our investors. Amortization of the development agreement in the amount of
$472,000 was recorded in the nine months ended December 31, 1999, consistent
with the level of our efforts in the area of research and development.

In the short term, we expect our quarterly revenues to be significantly
dependent on the sale of a small number of relatively large orders for our
products and services. In addition, our products and services generally have a
long sales cycle. As a result, our quarterly revenues may fluctuate
significantly if we are unable to complete one or more substantial sales in any
given quarter. In many cases, we recognize revenues from licenses and services
on a percentage-of-completion basis. Deployment of our products requires a
substantial commitment of resources by our customers or their consultants over
an extended period of time. The time required to complete a deployment may vary
from customer to customer and may be protracted due to unforeseen circumstances.
Our ability to recognize these revenues thus may be delayed if we are unable to
meet milestones on a timely basis. We intend to significantly increase our
operating expenses for the foreseeable future. Because these expenses are
relatively fixed in the near term, any shortfall in anticipated revenues could
cause our quarterly operating results to fall below anticipated levels.

CONSOLIDATED BALANCE SHEET DATA

Cash and cash equivalents were approximately $14.1 million at December 31,
1999 compared to none at March 31, 1999. This was primarily due to the issuance
of Series E Preferred Stock in July, August, and October of 1999 offset by cash
used in operations and investing. Receivables increased from approximately $1.6
million at March 31, 1999 to approximately $3.5 million at December 31, 1999 as
a direct result of increased revenues from the addition of 22 new customers
during the nine months. Other long term assets increased approximately $1.3
million primarily due to the capitalization of approximately $700,000 of
offering costs and deposits of approximately $500,000 for our San Jose
facilities. We also incurred $3.4 million in fixed asset purchases during the
nine months ended December 31, 1999 to support the increased headcount and the
addition of our new facilities in San Jose and India.

Accrued payroll and related liabilities increased by approximately $700,000
during the nine months ended December 31, 1999 due to the increased headcount
for all departments. Other accrued liabilities increased approximately $1.7
million primarily due to approximately $500,000 in accrued legal and accounting
fees associated with the offering in addition to accrued expenses related to our
new facility. Deferred revenues were approximately $4.3 million at December 31,
1999 compared to

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<PAGE> 39

approximately $1.3 million at March 31, 1999. This increase was primarily due to
increased revenues and the addition of 22 new customers during the nine months.

LIQUIDITY AND CAPITAL RESOURCES

We have funded our operations since inception primarily through the private
placement of our equity securities and convertible notes through which we have
raised net proceeds of approximately $37.1 million as of December 31, 1999. At
December 31, 1999, our principal sources of liquidity included approximately
$14.1 million of cash and cash equivalents.

Cash used in operations was $6.6 million in fiscal 1999 primarily as a
result of our net losses and increases in accounts receivable corresponding to
increased revenues, which were partially offset by an increase of $902,000 in
deferred revenues, an increase of $484,000 in accounts payable and, to a lesser
degree, increases in accrued liabilities and accrued payroll and related
liabilities. Cash used in operations for the nine months ended December 31, 1999
was $8.2 million primarily as a result of our net loss and increases in accounts
receivable corresponding to increased revenues, increases in other assets
related to costs of our initial public offering, partially offset by a $3.0
million increase in deferred revenues, a $1.7 million increase in accrued
liabilities and a $699,000 increase in accrued payroll and related liabilities.

Cash used in investing activities was $731,000 in fiscal 1999 primarily as
a result of investments in computer equipment and computer software to support
increased headcount. Cash used in investing activities for the nine months ended
December 31, 1999 was $3.5 million primarily as a result of investments in
computer equipment and computer software to support our increased headcount.

Net cash provided by financing activities was $7.1 million in fiscal 1999
and $25.8 million for the nine months ended December 31, 1999. Net cash from
financing activities resulted primarily from the sale of preferred stock and
common stock. For the nine months ended December 31, 1999, cash provided by
financing was also due to the issuance of $1.0 million of convertible notes,
partially offset by common stock repurchases totaling $456,000.

We expect to experience significant growth in our operating expenses for
the foreseeable future in order to execute our business plan. As a result, we
anticipate that operating expenses and planned capital expenditures will
constitute a material use of our cash resources. Our capital requirements depend
on numerous factors, including developing, marketing, selling and supporting our
products, the timing and extent of establishing international operations, and
other factors. We expect to devote substantial resources to hire additional
research and development personnel to support the development of new products
and new versions of existing products. Sales and marketing expenses are expected
to substantially increase as we hire additional sales and marketing personnel,
increase spending on advertising and marketing programs and establish sales
offices in additional domestic and international locations. General and
administrative expenses are expected to substantially increase as we assume the
responsibilities of a public company and as we hire additional general and
administrative personnel.

We currently anticipate that the net proceeds from this offering, together
with our current cash, cash equivalent and short-term investments, will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures for at least the next 12 months. However, we may need to raise
additional funds sooner to fund more rapid expansion, to develop new or enhance
existing services or products, to respond to competitive pressures or to acquire
complementary products, businesses or technologies. If adequate funds are not
available on acceptable terms, our business and operating results could be
harmed.

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<PAGE> 40

Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, cash equivalents,
short-term investments, and accounts receivable. The Company places its
short-term investments in high-credit quality financial institutions. The
Company is exposed to credit risk in the event of default by these institutions
to the extent of the amount recorded on the balance sheet. As of December 31,
1999 all money market funds are invested in the Monarch Funds Cash Fund.

YEAR 2000 COMPLIANCE

Background of Year 2000 Issues

The "year 2000 issue" refers generally to the problems that some software
may have in determining the correct date as a result of the millennium change.
We define "Year 2000 Ready" to mean that testing has revealed that the
electronic components at issue will recognize and properly perform date
sensitive functions into and beyond the year 2000. Software with date sensitive
information that is not Year 2000 Ready may not be able to distinguish whether
"00" means 1900 or 2000, which may result in system failures or the creation of
erroneous results. We are subject to potential year 2000 issues affecting our
products, our internal systems and the systems of our suppliers and customers,
any of which could harm our business.

State of Readiness

Our ACE products are coded Year 2000 Ready and are designed to be Year 2000
Ready upon implementation provided they are configured and used in accordance
with our specifications, and provided that the underlying operating systems and
any other software used with the product are also Year 2000 Ready. Substantial
testing of the ACE suite of products to date has confirmed that there are no
year 2000 issues of which we are currently aware.

However, we have not tested independently installed third-party software
that may be integrated within our customers' systems. Such integrated software
could be susceptible to year 2000 issues and the failure of our customers'
systems to be Year 2000 Ready could impede the success of our applications in
their systems. Accordingly, any year 2000 issues inherent within our software or
within systems which contain our software could result in harm to our business
by way of delay or loss of revenues, diversion of development resources, damage
to our reputation, or increased service or warranty costs, any of which could
harm our business. To date, we have not encountered any material year 2000
issues with respect to our ACE suite of products.

Risks Related to Year 2000 Issues

A significant majority of our license agreements with our customers
represent and warrant that our product is Year 2000 Ready. If our products are
not Year 2000 Ready, we could incur unanticipated expenses to remedy any
problems, which could significantly harm our business and operating results. To
date we have not experienced any Year 2000 issues with regards to our products.

Our current or future customers may incur significant expenses to achieve
year 2000 readiness. If our customers are not Year 2000 Ready, they may
experience material costs to remedy problems, they may face litigation costs and
they may delay purchases or implementation of our products. Year 2000 issues
could reduce or eliminate the budgets that current or potential customers could
have for purchases of our products and services. Also, customers may look to us
to remediate any year 2000 issues associated with their systems. As a result,
our business, financial condition and results of operations could be seriously
harmed.

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<PAGE> 41

We have also completed an assessment of our internal systems, including
software and hardware technology utilized by us, as well as third-party vendors
related to our facilities or otherwise related to our business. We have
inventoried our internal software and hardware systems, as well as products and
services provided by vendors. These systems include those related to product
delivery, customer service, internal and external communications, accounting and
payroll. To the extent that we are not able to test the technology provided by
third-party vendors, we are seeking assurances from such vendors that their
systems are Year 2000 Ready. We are not currently aware of any unresolved
material operational issues or costs associated with preparing our internal
systems for the year 2000. However, we may experience material unanticipated
problems and costs caused by undetected errors, defects in the technology used
in our internal systems or by outside occurrences beyond our control.

We have not adopted a formal contingency plan designed to address Year 2000
issues that may result if our products, our internal systems, or the systems of
our suppliers or customers are not Year 2000 Ready.

We have funded our year 2000 remediation efforts from available cash and
have incurred approximately $54,000 in expenses for such efforts. We currently
estimate that we will not incur any substantial expenses for additional year
2000 remediation efforts. Significant uncertainty exists concerning the
potential costs and effects associated with year 2000 compliance. Any year 2000
compliance problem experienced by us or our customers could decrease demand for
our products that could seriously harm our business and operating results.
However, we may experience unanticipated problems and material costs with
unknown year 2000 issues that could harm our business.

RECENT ACCOUNTING PRONOUNCEMENTS

In March 1998, the AICPA issued SOP No. 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP No. 98-1 requires
entities to capitalize certain costs related to internal-use software once
certain criteria have been met. We expect that the adoption of SOP No. 98-1 will
not have a material impact on our financial position, results of operations or
cash flows. We have implemented SOP No. 98-1 in the current fiscal year.

In April 1998, the AICPA issued SOP No. 98-5, Reporting on the Costs of
Start-Up Activities. SOP No. 98-5 requires that all start-up costs related to
new operations must be expensed as incurred. In addition, all start-up costs
that were capitalized in the past must be written off when SOP No. 98-5 is
adopted. We expect that the adoption of SOP No. 98-5 will not have a material
impact on our financial position, results of operations or cash flows. We have
implemented SOP No. 98-5 in the current fiscal year.

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes methods for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. Because we do
not currently hold any derivative instruments and do not engage in hedging
activities, we expect that the adoption of SFAS No. 133 will not have a material
impact on our financial position, results of operations or cash flows. We will
be required to implement SFAS No. 133 for the year ending March 31, 2002.

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QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

We develop products in the United States and India and sell them worldwide.
As a result, our financial results could be affected by factors such as changes
in foreign currency exchange rates or weak economic conditions in foreign
markets. Since our sales are currently priced in U.S. dollars and are translated
to local currency amounts, a strengthening of the dollar could make our products
less competitive in foreign markets. Interest income is sensitive to changes in
the general level of U.S. interest rates, particularly since our investments are
in short-term instruments calculated at variable rates. Based on the short-term
nature and current levels of our investments, we have concluded that there is no
current material market risk exposure.

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<PAGE> 43

BUSINESS

OVERVIEW

Selectica is a leading provider of Internet selling system software and
services that enable companies to efficiently sell complex products and services
over intranets, extranets and the Internet. Using our Internet selling system
software, businesses can guide their customers, partners and employees through
the selection, configuration, pricing, quotation and fulfillment processes. Our
Internet selling system solution allows companies to use the Internet platform
to deploy a selling application to many points of contact, including personal
computers, in-store kiosks and mobile devices, while offering customers,
partners and employees an interface customized to their specific needs. Our
product architecture has been designed specifically for the Internet, providing
our solution with scalability, reliability and flexibility. Additionally, our
Internet selling system solution has been developed with an open architecture
that leverages data in existing applications, such as enterprise resource
planning, or ERP, systems, providing an easy-to-install application designed to
reduce deployment time. Our current customers include 3Com, Allied Signal,
Aspect Communications, BMW, Centigram, Cisco, expenseVision, Fireman's Fund,
Fujitsu, Hewlett-Packard, LoanMarket, Redback Networks, RTS Software, Samsung,
Sun Microsystems and Watlow.

INDUSTRY BACKGROUND

Evolution of Electronic Commerce

The Internet is transforming the business environment by increasing
competition and enabling the development of new business models. People,
businesses and other organizations are using the Internet as a platform to
communicate, collaborate, access information and conduct business with greater
speed and efficiency. As a result, business-to-business, business-to-consumer
and business-to-employee interactions are being fundamentally altered. In order
to remain competitive, companies must find innovative ways to sell, increase
efficiencies in the sales cycle and deliver greater customer satisfaction.
Forrester Research estimates that the combined value of business-to-consumer and
business-to-business transactions conducted via the Internet will grow to over
$1.4 trillion by 2003. A growing number of companies are seeking to leverage the
Internet to market and sell their products and services. To date, many
electronic commerce transactions have been simple purchases of products such as
books, compact discs, stocks and toys. We believe, however, that the growth in
electronic commerce will be driven by the ability of companies to complete
complex transactions such as business-to-business electronic commerce and the
sale of consumer products and services involving multiple features, options or
involving custom pricing or service options.

Complexity in Electronic Commerce

Complexity in the selling process manifests itself in many ways. One type
is product complexity, where the product has many possible features, with
factors interacting with one another and with other factors to influence the
performance or manufacturability of that item. Examples of complex products
include networking and telecommunications equipment, automobiles and computers.
A second type of complexity is needs complexity, in which the product or service
itself may be relatively simple, such as an insurance policy or a printer, but
the factors that go into evaluating a specific customer's needs and pairing
those needs with the optimal product or service may be complex. A third type of
complexity comes from flexible or customized pricing and discounting schemes,
including those based on the features of the product.

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The Internet as an Emerging Platform for Business Applications

In parallel with the growth of electronic commerce, the Internet is
becoming a technology platform for business application deployment.
Traditionally, companies seeking to improve their operations have implemented
applications such as ERP, customer relationship management, or CRM, or sales
force automation, or SFA, software based on client-server architectures that
require a significant part of the application to be loaded on every user's
computer. With the emergence of the Internet platform, companies are able to
more broadly and cost effectively deploy business applications to customers,
partners and employees and make the most current application and information
immediately available on Internet-enabled devices. We believe that a selling
application based on the Internet platform offers significant advantages over
one based on traditional client-server architectures, such as the ability to be
deployed on a broad range of browser-enabled devices and easy integration with
other Internet-based applications and legacy systems, including those running on
relational database management systems, or RDBMS.

Limitations of Existing Solutions

Until recently, businesses have generally attempted to address the
challenges of complexity in the selling process by building in-house solutions.
These solutions often require significant up-front development costs and lengthy
deployment periods. Furthermore, due to the rapid pace of change in products and
business processes, companies often find it difficult and expensive to maintain
these systems and integrate new functionality and technologies. As a result,
businesses are seeking to implement third-party packaged applications.

Current commercially available software designed to help companies address
the challenges of complexity in the selling process may have one or more of the
following limitations:

- have not been engineered for the Internet platform and as such are not
easily deployed across a broad range of Internet-enabled devices;

- require significant custom programming;

- provide a limited interactive experience; or

- employ application architectures that limit their scalability and
reliability.

We believe that there is a significant opportunity for an Internet selling
system that leverages the Internet platform to enable companies to efficiently
sell complex products and services using a broad range of Internet-enabled
devices.

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THE SELECTICA SOLUTION

Our ACE suite of products is a comprehensive Internet selling system
solution that enables businesses to easily develop and rapidly deploy an
Internet sales channel that interactively assists their customers, partners and
employees through the selection, configuration, pricing, quoting and fulfillment
processes. Our Internet selling system solution allows companies to use the
Internet platform to deploy a selling application to many points of contact
including personal computers, in-store kiosks and mobile devices while offering
customers, partners and employees an interface customized to meet their specific
needs. ACE is built using Java technology and utilizes a multi-threaded
architecture, which is an application server design that manages a server to
reduce the amount of memory used to support new users as they make connections
to the server, to rapidly deploy, without custom programming, a cost-effective,
robust and highly scalable, Internet-enhanced sales channel.

Some of the major benefits of Selectica's Internet selling system solution
are described below:

Provides Comprehensive Solution. ACE provides all of the functionality for
Internet selling in a single comprehensive solution. Our Internet selling system
solution has been developed with an open architecture that leverages data in
existing enterprise applications, such as ERP systems, providing an
easy-to-install application that is designed to reduce deployment time.

Opportunity for Increased Sales. We enable sellers of complex products and
services to reach and sell to additional customers by enabling them to use the
Internet as an effective sales channel. Our Internet selling system solution is
designed for the Internet platform, providing increased scalability and allowing
companies to sell over a broad range of Internet-enabled devices, including
devices with limited processing power, such as mobile devices.

Shorten Sales Cycle. Generally, in a traditional sales environment for
complex products and services, prospective buyers repeatedly interact with a
seller's sales force to determine an appropriate configuration and pricing.
Selectica's ACE software is designed to enable companies to reduce the time
required to convert interested prospects into customers in several ways,
including:

- providing comprehensive product information to the customer or sales
person at the point of sale without requiring interaction with product
experts; and

- automating the pricing and configuration of complex products and
services, thereby providing customers with accurate information in
real-time.

Improves Efficiency of the Indirect Sales Channel. Using our Internet
selling system solution, companies can enable their channel partners, such as
distributors and resellers to access their selling tools and product
information. This allows distributors and resellers to effectively sell complex
products and services with less support from the company. It also improves order
accuracy, which ultimately leads to greater efficiency and increased customer
satisfaction.

Opportunity for Greater Revenue per Customer. Sellers can use our Internet
selling system solution to perform real-time analysis and optimization to
identify cross-selling and up-selling opportunities, thereby increasing average
order size. For example, a prospective buyer of a computer may be prompted by
ACE to consider additional features such as increased memory or complementary
products such as a printer, based on specific selections made. In addition, by
enabling companies to build an easy-to-use selling channel that is always
available to their customers, ACE allows companies to capture a greater
percentage of their customers' business.

Allows Selling Process to Support Key Business Goals. ACE enables companies
to ensure that all orders conform to specific criteria. For example, if a
company had a minimum gross margin

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requirement for a given product, ACE could ensure that the features and options
chosen will result in a product that meets the company's margin objectives. ACE
also improves inventory management. For example, ACE can automatically promote
the sale of a product for which there is excess inventory.

Enhances Customer Relations. ACE enables a seller of complex products and
services to present each customer with different options based upon the
customer's specified needs. This customization of the selling process actively
engages the customer in the decision making process. ACE also ensures that
customers arrive at a product configuration that meets the business and
manufacturing guidelines of the company. We believe that ACE's functionality
enhances customer loyalty and satisfaction, ultimately resulting in increased
sales.

Rapid Deployment and Reduced Costs of Ownership. An effective Internet
selling system requires the user to build a knowledge base that captures its
product configurations and selling rules. ACE allows users to build, tailor and
maintain their knowledge base without custom programming. This enables users to
rapidly deploy our Internet selling system solution. It also reduces the need
for expensive technical specialists and programmers to maintain and enhance
their businesses' Internet selling systems.

STRATEGY

Our objective is to become the leading platform for Internet selling
systems. Key components of our strategy include:

Maintain Technology Leadership. We have developed ACE to be a comprehensive
Internet selling system that meets the needs of companies looking to efficiently
sell complex products and services. Our product architecture has been
specifically designed for the Internet, providing our solution with scalability,
reliability and flexibility. We intend to continue to invest heavily in research
and development to introduce new functionality and develop innovative products
that enable our customers to increase their selling efficiency.

Pursue Vertical Market Strategy. To date, we have targeted the computer,
networking systems, automotive and communication services industries. By
offering a high-performance and feature-rich Internet selling system solution to
meet complex and evolving needs, we have established reference accounts with
high-profile, market leaders including 3Com, BMW AG, BMW of North America,
Fujitsu PC, Fujitsu Networking Communications and Hewlett-Packard. We intend to
expand our position in these markets and leverage this position to target other
markets with complex products and services such as financial services and
manufacturing. In addition, we intend to leverage our experience in specific
industries to develop solutions that incorporate the business processes and
product knowledge used in those industries.

Continue to Build Relationships with Technology Providers. We believe that
establishing relationships with key technology providers is essential in
providing a comprehensive business solution for our customers. We intend to
focus on enhancing our Internet selling system functionality while partnering
with other leading technology providers to offer enhanced infrastructure and
complementary applications such as one-to-one marketing, supply chain
management, SFA or CRM.

Leverage and Expand Strategic Relationships. Our strategy is to complement
our direct sales force and professional service organization with strategic
partnerships with leading systems integrators and application service providers,
or ASPs. We believe that these partnerships will enable us to expand our market
reach, extend into new vertical markets and increase access to senior decision-
makers. These firms influence a customer's technology selection and their
recommendation represents

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a significant endorsement of our products. In addition, our relationships with
systems integrators and ASPs provide additional implementation and integration
resources.

Expand Internationally. As Internet adoption accelerates overseas, we
believe that international market demand for Internet selling system software
and services will increase. We plan to devote significant resources to grow our
sales and marketing efforts in order to penetrate international markets. We
intend to continue to target businesses characterized by high sales volumes and
countries characterized by high growth in demand for Internet selling system
products and services.

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SELECTICA PRODUCTS

The following table provides a list of our products and a brief description
of the features and benefits to our customers.

<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------
PRODUCT FEATURES BENEFITS
- ------------------------------------------------------------------------------------------------------
ACE Enterprise Server Electronic commerce configuration Enables customized, one-to-one
engine selling on the Internet

Highly scalable Internet-architecture Can scale to support millions of
simultaneous users by simply
installing more servers

Java-based Platform independence

Supports open standard integration Seamlessly integrates with other
interfaces Internet based applications and
legacy systems

Dynamic information update Can update product information
without stopping selling process

Easy-to-use, dynamically generated, Maximizes sales for productivity by
customized interface reducing sales training time

Supports devices with limited Can be deployed on a broad range of
processing power devices

HTML-based client Runs on any device with a standard
Internet browser
- ------------------------------------------------------------------------------------------------------
ACE Mobile Includes the features of ACE
Enterprise with the following
additional features:

Complete stand-alone selling system Enables mobile users to access our
that runs on laptop computers customers' Internet selling systems
with the same user interface as a
connected system

Automatically synchronizes knowledge Ensures accurate product and pricing
bases and quotes information and orders
- ------------------------------------------------------------------------------------------------------
ACE Enterprise Manager Administers multiple ACE Enterprise Add and remove ACE Enterprise Servers
Servers and ACE Mobile without stopping the selling process

Dynamically scales the load Optimizes available CPU, or central
distribution as more servers are processing unit, resources
added
- ------------------------------------------------------------------------------------------------------
ACE Quoter Central server and storage facility Enables users to generate, save and
for customer orders, configurations revise quotes online
and pricing information

Provides easy access from remote Eliminates errors in quotes and
devices to quote archives orders
- ------------------------------------------------------------------------------------------------------
ACE Studio Model, test and debug using a single Simplifies development process
tool

Graphical knowledge base and user Enables application deployment and
interface development tools maintenance by non-technical
personnel
- ------------------------------------------------------------------------------------------------------
ACE Repository Database that stores knowledge base Provides an audit trail for the
in readable, queryable format maintenance of large knowledge bases
- ------------------------------------------------------------------------------------------------------
ACE Connector Provides access to other enterprise Enables easy integration and reduces
applications costs and deployment time
- ------------------------------------------------------------------------------------------------------
</TABLE>

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LOGO

[Selectica Prospectus Product Diagram]

Surrounding the entire graphics is a large box. To the left of the box is a
rectangle. Above the rectangle is the text: "Users." The rectangle is divided
into two parts. In the top of the rectangle is a lap-top computer. Below the
lap-top is the text "Remote Sales Force."

In the lower portion of the rectangle are a computer, a kiosk, a mobile phone
and a personal digital assistant. Beneath these items is the text: "Customers,"
"Partners" and "Internal users."

To the right of the rectangle is a cloud. A two-headed arrow runs from the
cloud to the picture of the multiple devices inside the first rectangle. Inside
the cloud is the following text: "Intranet," "Extranet" and "Internet."

To the right of the cloud is a rectangle. A two-headed arrow runs from the
cloud to this rectangle. Inside the rectangle is the following text: "Web
Server."

To the right of the second rectangle is a large box. Inside the box are a set
of rectangles. Inside the first rectangle is the following text: "ACE Enterprise
Manager." A two-headed arrow runs from this rectangle to the prior rectangle.
The next rectangle to the right is divided into two parts. The top portion
contains the following text "ACE Mobile." A two-headed arrow runs from this
portion of the rectangle to the lap-top computer on the first rectangle.

The lower portion of this rectangle contains the following text: "ACE
Enterprise Server."

The next rectangle to the right is divided into two sections. The top section
contains the following text: "ACE Repository." The bottom section contains the
following text: "ACE Quoter."

The final rectangle in the large box is a rectangle that contains the
following text: "ACE Connectors." A two headed arrow runs from this rectangle to
a vertical line. The vertical line connects to four rectangles by four short
lines.

Above the four rectangles is the following text: "Legacy Systems." The first
rectangle contains the following text: "Order Entry." The next rectangle
contains the following text "RDBMS." The next rectangle contains the following
text: "ERP." The bottom rectangle contains the following text: "CRM/SFA."]

SELECTICA SERVICES

Professional Services

We maintain a highly qualified and experienced professional services
organization to deliver quality Internet selling system solutions. Our
professional services organization offers a broad range of services through its
consulting, customer education and technical support groups. These services
include product education, presales prototype development, training seminars,
product installation, application development, customizations, integration and a
full range of education and technical support. This organization is also
responsible for training our partners to provide professional services and
technical support to our customers. The professional services organization
consisted of 107 people as of December 31, 1999, 31 of which are based in San
Jose, California and 76 of which are based in Pune, India. Because significant
portions of Internet selling system implementations can be performed away from
the customer's site, we have the flexibility of being able to provide services
from either our U.S. or India-based operations.

Customer Support

In addition to professional services, we offer various levels of product
maintenance to our customers. Maintenance services are typically subject to an
annual, renewable contract and are typically priced as a percentage of product
license fees. Customers under maintenance contracts receive technical product
support and product upgrades as they are released throughout the life of the
maintenance contracts. We also provide Select Onsite, which consists of
specialized services provided at our customers' locations.

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<PAGE> 50

CUSTOMERS

Our customer base consists of a diverse group of companies operating in a
wide range of industries that are adopting electronic business strategies to
sell their complex products and services. Our current customers include:

<TABLE>
<S> <C> <C> <C>
3Com Centigram Fujitsu RTS Software
Allied Signal Cisco Hewlett-Packard Samsung
Aspect Communications expenseVision LoanMarket Sun Microsystems
BMW Fireman's Fund Redback Networks Watlow
</TABLE>

CASE STUDIES

The following case studies provide insights into how certain businesses are
benefiting from our Internet selling system solution:

Aspect Communications. Aspect Communications is a worldwide vendor of CRM
solutions. As part of a business restructuring, Aspect changed their strategic
direction from selling individual products to providing comprehensive CRM
solutions. This required that Aspect's sales people and distributors learn a new
selling process. Providing a comprehensive solution required Aspect's sales
people to configure a complete package of products and services based on each
customer's needs. Selectica provided Aspect with an Internet selling system that
prompts sales people with an automated set of questions to determine the
customers need and then recommend a comprehensive CRM solution based upon
customer responses. With ACE, Aspect's configuration, quotation and order
processing is standardized, simple and streamlined. In addition, the new selling
system ensures greater accuracy and faster quote generation.

BMW. One of the world's most respected auto manufacturers for high quality
and brand loyalty is utilizing Selectica's Internet selling system for their
vehicle configurator to remain a leader in the rapidly changing marketing and
sales conditions of the Web. BMW of North America and BMW AG each created their
own web sites to compete with the proliferation of third party Internet auto
portals. By using Selectica's Internet selling system, BMW of North America and
BMW AG each provide customers with the full range of features, options and
financing alternatives to configure and price their vehicles, thereby enabling
customers to custom design vehicles. Using this vehicle configurator, BMW
analyzes configurations that have been saved by users for marketing trends and
product development direction. Through the implementation of Selectica's
technology, BMW hopes customer satisfaction is increased and dealers experience
faster sales cycles.

3Com Corporation. The 3Com Corporation, a $5.8 billion networking equipment
manufacturer, has a corporate-wide e-Business strategy that mandates that a
certain percentage of its total sales revenues come from its web site.
Selectica's Internet selling system helps 3Com's customers buy products and
services via the Internet by providing them with accurate product information
and automated assistance. Our solution automates needs analysis, pricing,
quoting and configuration and also helps users select modems, network interface
cards, notebook PC cards, multi-service access platforms and switches.
Previously, orders for products were either phoned in or faxed into 3Com by
direct sales, distributors and retailers, requiring a manual process. Selectica
technology has increased sales volumes by providing 24 hours a day, seven days a
week availability to 3Com's customers, simplifying the complexity of product
decisions, guaranteeing accuracy, and ease of buying processes for customers, as
well as reduced sales cost.

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TECHNOLOGY

We have developed a unique architecture for developing a personalized,
intuitive, interactive and scalable Internet selling system solution that
includes selection, configuration, pricing, quoting and fulfillment processes.
The four key technological advantages of our Internet selling system solution
include:

- a declarative constraint engine;

- an integrated modeling environment;

- a multi-threaded server; and

- a scalable, thin-client architecture.

Declarative constraint engine

Most existing configurators are custom programs that were written
specifically for the product or family of products being configured. This means
both the configuration logic and the data describing product attributes are
combined in a single computer program that necessitates significant
reprogramming to reflect simple product changes. In contrast, our Internet
selling system solution utilizes a constraint-based engine that is completely
separate from the data describing the product attributes. This means that a
business can easily create and modify the knowledge base to reflect product
changes utilizing our integrated modeling environment thereby eliminating the
need for expensive programming teams.

Our engine, written in Java, is easily deployed on various operating
platforms. The use of Java allows us to support a range of deployment
environments including Java applications in a notebook computer and ACE
Enterprise server generated browser-readable pages, with the same engine and the
same knowledge base.

Integrated modeling environment

We have developed an integrated modeling environment that allows our
customers to easily create a sophisticated Internet selling system solution
without any programming. Our Internet selling system solution utilizes drag and
drop tools that enable sales and marketing personnel, rather than expensive
programmers, to maintain and enhance their businesses' Internet selling systems.
Using these drag and drop tools, businesses can:

- easily create and update knowledge bases containing product attributes;

- create HTML-based graphical user interface, or GUI, applications;

- test the application interactively as the application is being built and
conduct batch order checks;

- verify the semantics of the knowledge base and identify some semantic
errors; and

- create flex models from individual models.

Multi-threaded server

We have a unique highly scalable server architecture for deploying our
customers' applications. The n-tier architecture, an architecture that enables
multiple servers to run at the same time, allows us to support a range of
configurations from a single ACE Enterprise Server, to several ACE

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<PAGE> 52

Enterprise Servers managed via a single ACE Enterprise Manager running on an
HTTP server or another server. An ACE Enterprise Manager can manage a single
server running ACE Enterprise Server or multiple, possibly overlapping servers
all running ACE Enterprise Servers. Our multi-threaded technologies enhance the
performance for each buyer session because each session state is preserved as
the buyer makes subsequent selections. Furthermore, our ACE Enterprise Server
supports a large number of concurrent user sessions because the engine uses a
very small amount of memory for each incremental user session.

Scalable thin-client architecture

Our software, employing a thin-client architecture, supports an Internet
computing model, enabling users to access an ISS with only an industry-standard
browser on a broad range of Internet-enabled devices. Our ACE Enterprise Servers
use our engine to process the user request from an HTML session, using the
knowledge base and legacy data as needed, to enforce rules, eliminate incorrect
choices and make calculations and then suggest choices by generating the next
HTML screen dynamically. Our servers can also be accessed by custom applications
using our thin-client application programming interfaces. Our ACE Enterprise
Server can communicate with our ACE Quoter or one or more database servers from
other vendors, and other enterprise resources, including legacy resources using
ACE Connectors.

SALES AND MARKETING

Our sales and marketing objective is to achieve broad market penetration
through targeted sales and increased brand name recognition. As of December 31,
1999, our sales and marketing team consisted of 66 persons, with sales and field
support personnel in Atlanta, Chicago, Dallas, New York, San Jose, Seattle,
Canada, England and Germany and 23 marketing personnel located in San Jose.

We sell our ACE products primarily through a direct sales force supported
by telesales, system engineering and integration support. We believe that the
integration of these support networks assists in both the establishment and
enhancement of customer relationships. We have developed programs to attract and
retain high quality, motivated sales representatives that have the necessary
technical skills and consultative sales experience.

Our marketing department is engaged in a wide variety of activities, such
as awareness and lead generation programs and product management. These
activities include public relations, speaking programs, seminars, direct mail,
trade shows and advertising.

STRATEGIC RELATIONSHIPS

Our business development group focuses on developing strategic
relationships with vendors who will help us rapidly penetrate key markets with
our comprehensive Internet selling system solution. We have developed strong
working relationships with system integrators, such as Andersen Consulting,
Arthur Andersen, EDS, KPMG and PricewaterhouseCoopers, with independent software
vendors such as BroadVision, InterWorld, Netscape/AOL and Tibco, and with
application service providers such as Asera and Corio.

STRATEGIC INVESTORS

One of our investors is the Intel 64 Fund. The Intel 64 Fund is a quarter
billion dollar equity fund that invests in emerging technologies for
next-generation servers and workstations utilizing Intel's IA-64 architecture.
The Fund is coordinated by Intel and Compaq, Dell, HP, Intel, NEC, and

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SGI as co-investors. The Fund's other investors, managed by Morgan Stanley Dean
Witter, include Bank of America, The Boeing Company, Circuit City, Enron, Ford
Motor Company, General Electric, McKessonHBOC, Morgan Stanley Dean Witter,
Reuters, Sabre, SmithKline Beecham, Sumitomo Corp., SunAmerica and Telmex. In
October 1999, the Intel 64 Fund purchased shares of our preferred stock as part
of a private sale of our securities.

In October 1999 we entered into a license and one-year maintenance
agreement with a customer. In connection with this agreement, we issued a
warrant to purchase 800,000 shares of our common stock. The fair value of the
warrant is approximately $12.0 million. The value of the warrant, less the
warrant purchase price of $800,000, is greater than the revenues under the
related license and service agreement, and accordingly, we will record a loss of
approximately $8.3 million in the fourth quarter of fiscal 2000.

In September 1999 we entered into a development agreement with an investor.
At the same time we issued shares of convertible preferred stock to this
investor for less than the deemed fair value. The excess of fair value over
purchase prices of these shares of $3.8 million will be expensed over the life
of the development agreement, approximately 2 years. As well, in connection with
this agreement we issued warrants to purchase 57,000 shares of our common stock.
The fair value of these warrants of $381,000 will also be expensed over the life
of the agreement.

RESEARCH AND DEVELOPMENT

To date we have invested substantial resources in research and development.
At December 31, 1999, we had approximately 62 full-time engineers and technical
writing specialists that primarily work on product development, documentation,
quality assurance and testing.

We expect that most of our new products and enhancements to existing
products will be developed internally. However, we will evaluate on an ongoing
basis externally developed technologies for integration into our suite of
products. Enhancements to our existing products are released periodically to add
new features, improve functionality and incorporate feedback and suggestions
from our current customer base. These updates are usually provided as part of
separate maintenance agreement sold with the product license.

COMPETITION

Although we are a leading provider of Internet selling system software and
services, the market for software products that enable electronic commerce is
intensely competitive, and we expect competition in the Internet selling system
software and services market to increase substantially. We encounter competition
from a number of different sources, including in-house and customized
Internet-development companies, companies focused on Internet selling systems
and other enterprise software companies. 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 Calico Commerce,
FirePond and Trilogy Software. BAAN, Oracle Corporation, SAP and Siebel Systems
offer integrated solutions for electronic commerce incorporating some of the
functionality of an Internet selling system and may intensify their efforts in
our market. In addition, other enterprise software companies may offer
competitive products in the future.

Competitors vary in size and in the scope and breadth of the products and
services offered. Although we believe we have advantages over our competitors
including the comprehensiveness of our

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solution, our use of Java technology and our multi-threaded architecture, many
of our competitors and potential competitors have a number of significant
advantages over us, including:

- a longer operating history;

- a 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.

PROPRIETARY RIGHTS

We rely on a combination of trademark, trade secret and copyright law and
contractual restrictions to protect the proprietary aspects of our technology.
These legal protections afford only limited protection for our technology. We
currently have three pending U.S. patent applications. In addition, we have
three trademarks and have applied to register two of them in the United States.
Our trademark and patent applications might not result in the issuance of any
trademarks or patents. If any patent or trademark is issued, it 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 signed license agreements, which impose certain
restrictions on the licensee's ability to utilize the software. We also seek to
avoid disclosure of our intellectual property by requiring employees and
consultants with access to our proprietary information to execute
confidentiality agreements. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy aspects of our products or to
obtain and use information that we regard as proprietary. In addition, the laws
of many countries do not protect our proprietary rights to as great an extent as
do the laws of the United States. Litigation may be necessary in the future to
enforce our intellectual property rights, to protect our trade secrets and to
determine the validity and scope of the proprietary rights of others. Our
failure to adequately protect our intellectual property could have a material
adverse effect on our business and operating results.

Our success and ability to compete are dependent on our ability to operate
without infringing upon the proprietary rights of others. Any intellectual
property litigation could result in substantial costs and diversion of resources
and could significantly harm our business and operating results. In the past, we
received correspondence from two patent holders recommending that we license
their respective patents. After review of these patents, we informed these
patent holders that in our opinion, it would not be necessary to license these
patents. However, we may be required to license either or both patents or incur
legal fees to defend our position that such licenses are not necessary. We may
not be able to obtain a license to use either patent on commercially reasonable
terms, or at all. In January 2000 we received correspondence from Celestica,
Inc. alleging that our use of the mark SELECTICA infringes upon their registered
mark of CELESTICA. We are currently evaluating the validity of their claim. We
may be required to incur legal fees and enter into litigation with respect to
defending our mark.

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<PAGE> 55

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

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

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

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

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

EMPLOYEES

At December 31, 1999, we had a total of 269 employees, 101 of whom were
based in India. Of the total, 169 were in engineering, consulting and research
and development, 66 were engaged in sales, marketing and business development
and 34 were in administration and finance. None of our employees is represented
by a labor union and we consider our relations with our employees to be good.

FACILITIES

Our principal administrative, sales, marketing and research and development
facility occupies approximately 80,000 square feet of office space at 3 West
Plumeria Drive, San Jose, California 95134. The lease extends through November
2009. We believe the office space in the new facility will be adequate to meet
our needs for the next 12 months. We also have regional offices in Chicago,
Dallas, New York, Reading, England, Dusseldorf, Germany, and Pune, India.

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<PAGE> 56

MANAGEMENT

Our executive officers and directors and their ages and positions as of
January 31, 2000 are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Rajen Jaswa............................. 47 Chairman of the Board, Chief Executive Officer
and President
Dr. Sanjay Mittal....................... 47 Vice Chairman of the Board, Chief Technical
Officer and Vice President of Engineering
Dr. S.S. Sundarajan..................... 49 Vice President of Indian Operations
Daniel A. Carmel........................ 38 Vice President of Marketing
Stephen Bennion......................... 53 Chief Financial Officer, Vice President of
Finance and Secretary
Ashish Mathur........................... 42 Vice President of Worldwide Professional
Services
Charles Pendell......................... 45 Vice President of Sales, Americas
Mario Cavalli........................... 48 Vice President of International Sales
Betsy Atkins(1)......................... 44 Director
John Fisher(1)(2)....................... 41 Director
Michael Lyons(2)........................ 57 Director
Robin Richards Donohoe.................. 34 Director
Thomas Neustaetter(2)................... 47 Director
</TABLE>

- -------------------------
(1) Member of the Compensation Committee

(2) Member of the Audit Committee

Rajen Jaswa, a co-founder of Selectica, has served as our Chairman,
President and Chief Executive Officer since our inception. Prior to Selectica,
Mr. Jaswa co-founded and served as President of OPTi, a supplier of PC
compatible chipsets from January 1995 to January 1996 and as Vice President of
Sales and Marketing from August 1989 to December 1994. Mr. Jaswa received his
B.Tech in Electrical Engineering from the Indian Institute of Technology, his
M.S.E.E. in Electrical Engineering from the University of Toronto and his M.B.A.
from Stetson University.

Dr. Sanjay Mittal, a co-founder of Selectica, has served as our Chief
Technical Officer, Vice President of Engineering and a Director since our
inception. In January 2000 Dr. Mittal was elected Vice Chairman of the Board of
Directors. Prior to co-founding Selectica, from April 1992 to July 1996, Dr.
Mittal was the founder and President of Catalogics Software, a configuration
software company acquired by Selectica in July 1996. From 1990 to April 1992,
Dr. Mittal managed a development team at Metaphor, a business software company.
Prior to that, Dr. Mittal was a senior research scientist at Xerox's Palo Alto
Research Center (PARC) from 1982 to 1990. Dr. Mittal received his B.Tech in
Electrical Engineering from the Indian Institute of Technology and his M.S. and
Ph.D. in Computer Science from Ohio State University.

Dr. S.S. Sundarajan has served as our Vice President of Indian Operations
since June 1998. Prior to joining Selectica, Dr. Sundarajan served as Chief
Executive of Datapro Electronics, a software company focusing on real time
systems, in Pune, India, from April 1986 to June 1998. Dr. Sundarajan received
his B.S. in Engineering from Pune University and his M.S. in Electrical
Engineering and Ph.D. from Ohio State University.

Daniel A. Carmel has served as our Vice President of Marketing and Business
Development since July 1999. Prior to joining Selectica, Mr. Carmel served as
Executive Vice President for Sonnet

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<PAGE> 57

Financial, an Internet financial services company, from August 1994 to July
1999. Mr. Carmel received his B.S. and M.S. in Engineering at the University of
Pennsylvania and his M.B.A. from Stanford University.

Stephen Bennion has served as our Chief Financial Officer and Vice
President of Finance since September 1999. In January 2000 Mr. Bennion was
elected our Secretary. From April 1998 to September 1999, Mr. Bennion served in
various capacities for Cohesive Technology Solutions, a technology consulting
company, including Vice President and Chief Financial Officer and Western Region
Managing Partner. From April 1995 to April 1998, Mr. Bennion served as Executive
Vice President and Chief Financial Officer for Worldtalk Communications, an
Internet e-mail software company. Mr. Bennion received his B.S. in accounting
from Weber State University and is a Certified Public Accountant.

Ashish Mathur has served as our Vice President of Worldwide Professional
Services since April 1997. Prior to joining Selectica, Mr. Mathur served as Vice
President of Worldwide Professional Services for Pure Atria from June 1992 to
April 1997. Mr. Mathur received his B.Tech in Electrical Engineering from the
Indian Institute of Technology and his M.S. in Computer Science from the
University of Southern California.

Charles Pendell joined as our Vice President of Sales, Americas in October
1998. Prior to joining Selectica, Mr. Pendell served as Vice President of
Worldwide Sales and Field Operations for Action Technologies, an Internet-based
workflow software company, from December 1994 to September 1998. Mr. Pendell
received his B.S. in Business Administration from Washington State University.

Mario Cavalli has served as our Vice President of International Sales since
February 2000. From January 1999 to January 2000, Mr. Cavalli served as our
Director of International Sales. Prior to joining Selectica, Mr. Cavalli served
as the President of Business Development International, a European business
development company. Mr. Cavalli received his B.S.E.E. in electrical engineering
from C. Ferreni College in Italy.

Betsy Atkins has served as a director since February 1997. Since 1995, Ms.
Atkins has served as Chief Executive Officer of Baja Corporation, a consulting
firm. Prior to joining Baja, Ms. Atkins was the Chief Executive Officer of NCI,
a manufacturing company. Ms. Atkins is both a founder and serves on the board of
directors of Ascend, a Lucent Network Solutions company. She also serves on the
board of directors of Paradyne, a digital subscriber line networking company,
and Polycom, a video-teleconferencing company. Ms. Atkins received her B.A. in
History from the University of Massachusetts and her B.A. from Trinity College
at Oxford.

John Fisher has served as a director since July 1997. Since 1991, Mr.
Fisher has served as a Managing Director of Draper Fisher Jurvetson, a venture
capital firm. Mr. Fisher serves on the boards of directors of Brodia Group,
Entegrity Solutions, Praxon, RealNames, Sonnet Financial and WIT Capital Group.
Mr. Fisher received his B.A., Magna Cum Laude, in History of Science and his
M.B.A. from Harvard University.

Michael Lyons has served as a director since July 1998. Since 1997, Mr.
Lyons has served as the General Partner of Zilkha Venture Partners, a venture
capital firm. Since June 1992, Mr. Lyons has served as the General Partner of
Potrero Management, a venture capital firm. Since 1989, Mr. Lyons has been a
Consulting Associate Professor at the Stanford University Department of
Management Science and Engineering. Mr. Lyons is a member of the board of
directors of Informed Diagnostics, a sensor technology company and Advanced
Interactive Systems, a firearms training simulation company. Mr. Lyons received
his B.S.E.P. in Engineering Physics from Cornell University, M.S. in Electrical
Engineering from Stanford and M.B.A. with distinction from the Pepperdine
Presidential/ Key Executive Program.

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<PAGE> 58

Robin Richards Donohoe has served as a director since January 1997. Since
1995, Ms. Donohoe has served as General Partner of Draper International India,
L.P., a venture capital firm. Ms. Donohoe is also a General Partner of Draper
Richards L.P., a venture capital firm. Ms. Donohoe received her B.A. Phi Beta
Kappa in International Studies from the University of North Carolina and her
M.B.A. from Stanford University.

Thomas Neustaetter has served as a director since July 1999. Since March
1999, Mr. Neustaetter has been an Executive Member of JK&B Capital, a venture
capital firm. Prior to joining JK&B Capital, Mr. Neustaetter was a Partner of
the Chatterjee Group, an affiliate of Soros Fund Management, from January 1996
to February 1999. Prior to working at the Chatterjee Group, Mr. Neustaetter was
the President and founder of Bancroft Capital, a general consulting firm, from
December 1994 to December 1995. Mr. Neustaetter serves on the boards of
directors of MGC Communications, 21st Century Telecom Group, Gloss.com, emWare,
Inc. and Vertex Holdings. Mr. Neustaetter earned his B.A. Phi Beta Kappa in
Philosophy from the University of California, Berkeley, and his M.B.A. and M.S.
in Information Science from University of California, Los Angeles.

BOARD OF DIRECTORS

We currently have authorized seven directors. Upon the completion of the
offering, the terms of the office of the board of directors will be divided into
three classes: Class A, whose term will expire at the annual meeting of the
stockholders to be held in 2000; Class B, whose term will expire at the annual
meeting of stockholders to be held in 2001; and Class C, whose term will expire
at the annual meeting of stockholders to be held in 2002. The Class A directors
will be Robin Richards Donohoe and Betsy Atkins; the Class B directors will be
John Fisher, Michael Lyons and Rajen Jaswa; and the Class C directors will be
Thomas Neustaetter and Sanjay Mittal. At each annual meeting of stockholders
after the initial classification, each elected director will serve from the time
of his election and qualification until the third annual meeting following his
or her election. This classification of the board of directors may have the
effect of delaying or preventing changes in control or management. All of our
officers serve at the discretion of the board of directors. There are no family
relationships among our directors and officers.

Board Committees

The board of directors has a compensation committee and an audit committee.

Compensation Committee. The compensation committee of the board of
directors reviews and makes recommendations to the board regarding all forms of
compensation provided to our executive officers and directors and our subsidiary
including stock compensation and loans. In addition, the compensation committee
reviews and makes recommendations on bonus and stock compensation arrangements
for all of our employees. As part of these responsibilities, the compensation
committee also administers our 1996 Stock Plan, 1999 Equity Incentive Plan and
1999 Employee Stock Purchase Plan. The current members of the compensation
committee are Ms. Atkins and Mr. Fisher.

Audit Committee. The audit committee of the board of directors reviews and
monitors our corporate financial reporting and our internal and external audits,
including our internal audit and control functions, the results and scope of the
annual audit and other services provided by our independent auditors and our
compliance with legal matters that have a significant impact on our financial
reports. The audit committee also consults with management and our independent
auditors before the presentation of financial statements to stockholders and, as
appropriate, initiates inquiries into aspects of our financial affairs. In
addition, the audit committee is responsible for considering and

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<PAGE> 59

recommending the appointment of, and reviewing fee arrangements with, our
independent auditors. The current members of the audit committee are Messrs.
Neustaetter, Lyons and Fisher.

Director Compensation

Ms. Atkins received an option for 30,000 shares of common stock on February
4, 1997 at an exercise price of $0.025 per share and an option for 20,000 shares
of our common stock on November 18, 1999 at an exercise price of $4.38 per
share. Under our 1999 Equity Incentive Plan, each non-employee director who
first becomes a board member following this offering will receive an automatic
option grant of 30,000 shares of our common stock on the date when he or she
initially becomes a board member. Each non-employee director who will continue
to be a board member following an annual meeting of stockholders will receive an
annual automatic option grant of 7,500 shares at each annual meeting under our
1999 Equity Incentive Plan, beginning at the 2001 annual meeting. Please see
"Employee Benefit Plans -- 1999 Equity Incentive Plan" for more details.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The compensation committee of the board of directors currently consists of
Ms. Atkins and Mr. Fisher. No interlocking relationship exists between any
member of our board of directors or our compensation committee and any member of
the board of directors or compensation committee of any other company, and no
interlocking relationship has existed in the past. For disclosure of any related
party transactions between the members of the compensation committee and
Selectica, please see the section below entitled "Related Party Transactions."

INDEMNIFICATION

Our Second Amended and Restated Certificate of Incorporation, to be
effective after the closing of this offering, includes a provision that
eliminates the personal liability of our directors and officers for monetary
damages for breach of fiduciary duty as a director or officer, except for
liability:

- for any breach of the director's or officer's duty of loyalty to us or
our stockholders;

- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;

- under Section 174 of the Delaware General Corporation Law regarding
unlawful dividends and stock purchases; or

- for any transaction from which the director or officer derived an
improper personal benefit.

These provisions are permitted under Delaware law.

Our bylaws provide that:

- we must indemnify our directors and officers to the fullest extent
permitted by Delaware law, subject to very limited exceptions;

- we may indemnify our other employees and agents to the same extent that
we indemnified our officers and directors; and

- we must advance expenses, as incurred, to our directors and officers in
connection with a legal proceeding to the fullest extent permitted by
Delaware law, subject to very limited exceptions.

We have also entered into indemnification agreements with our officers and
directors containing provisions that may require us to indemnify our officers
and directors against liabilities that may arise

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<PAGE> 60

by reason of their status or service as directors or officers, other than
liabilities arising from willful misconduct of a culpable nature, to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified, and to obtain directors' and officers' insurance if
available on reasonable terms.

EXECUTIVE COMPENSATION

Summary Compensation Table

The following table presents compensation information for fiscal year 1999
paid by us for services by our chief executive officer and our four other
highest-paid executive officers whose total salary and bonus for the fiscal year
exceeded $100,000:

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
------------------- UNDERLYING
NAME AND PRINCIPAL POSITION(1) SALARY BONUS OPTIONS
------------------------------ -------- ------- ------------
<S> <C> <C> <C>
Rajen Jaswa................................................. $139,583 $ -- --
Chief Executive Officer and President
Dr. Sanjay Mittal........................................... 139,583 -- --
Chief Technical Officer, Vice President of Engineering and
Secretary
Ashish Mathur............................................... 139,583 -- --
Vice President of Worldwide Professional Services
Charles Pendell(2).......................................... 146,250 -- 300,000
Vice President of Sales, Americas
Vasudev Bhandarkar(3)....................................... 143,621 5,000 --
Vice President, Business Development and Marketing
</TABLE>

- -------------------------
(1) Mr. Daniel A. Carmel commenced service with us as Vice President of
Marketing and Business Development in September 1999, and his annual base
salary is currently $175,000. Mr. Stephen Bennion commenced service with us
as Vice President and Chief Financial Officer in September 1999, and his
annual base salary is currently $175,000.

(2) Mr. Pendell commenced service with us as Vice President of Sales, Americas
in October 1998, and his annual base salary is currently $150,000.

(3) Mr. Bhandarkar ceased service as Vice President, Business Development and
Marketing as of March 19, 1999.

Option Grants in Last Fiscal Year

The following table designates each grant of stock options during fiscal
year 1999 to our chief executive officer and our four other highest-paid
executive officers.

The figures representing percentages of total options granted to employees
in the last fiscal year are based on a total of 1,315,500 option shares granted
to our employees under our 1996 Stock Plan during fiscal year 1999.

The exercise price of each option granted is equal to the fair value of our
common stock as valued by our board of directors on the date of grant. The
exercise price may be paid in cash, in shares of our common stock valued at fair
value on the exercise date or through a cashless exercise procedure involving a
same-day sale of the purchased shares. We may also finance the option exercise

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<PAGE> 61

by lending the optionee sufficient funds to pay the exercise price for the
purchased shares. See "Related Party Transactions -- Loans."

The calculation of the potential realizable value is based on the ten-year
term of the option at the time of grant. We assumed stock price appreciation of
5% and 10% over the assumed initial public offering price of $24.00 per share;
this does not represent our prediction of our stock price performance.

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
---------------------------------------------------------- ANNUAL RATES OF
NUMBER OF PERCENT OF TOTAL STOCK PRICE
SECURITIES OPTIONS GRANTED APPRECIATION FOR
UNDERLYING TO EMPLOYEES EXERCISE OPTION TERM
OPTIONS IN THE FISCAL PRICE EXPIRATION -------------------------
NAME GRANTED YEAR(%) ($/SHARE) DATE 5% 10%
---- ---------- ------------------ ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Rajen Jaswa................. -- -- -- -- -- --
Dr. Sanjay Mittal........... -- -- -- -- -- --
Ashish Mathur............... -- -- -- -- -- --
Charles Pendell............. 300,000 22.81 $0.25 9/22/08 $4,528,041 $11,474,946
Vasudev Bhandarkar.......... -- -- -- -- -- --
</TABLE>

Mr. Mathur was granted an option to purchase 100,000 shares of our common
stock on April 20, 1999 at an exercise price of $1.50 per share. Mr. Pendell was
granted options to purchase a total of 75,000 shares of our common stock on
October 1, 1999 at an exercise price of $2.50 per share. Mr. Daniel Carmel was
granted options to purchase a total of 400,000 shares of our common stock on
September 22, 1999 at an exercise price of $2.50 per share. Mr. Stephen Bennion
was granted options to purchase a total of 300,000 shares of our common stock on
September 22, 1999 at an exercise price of $2.50 per share. Mr. Jaswa was
granted options to purchase a total of 250,000 shares of our common stock on
December 15, 1999 at an exercise price of $10.00 per share. Dr. Mittal was
granted options to purchase a total of 250,000 shares of our common stock on
December 15, 1999 at an exercise price of $10.00 per share.

Aggregate Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values

The following table presents all unexercised options held by our chief
executive officer and our four highest-paid executive officers during fiscal
year 1999.

The options listed in the table become vested as follows: upon the
completion of 12 months of service, 25% of the option shares vest and upon the
completion of each of the next 36 months of service, 1/48 of the option shares
vest.

The amounts under "Value of Unexercised in-the-Money Options" were
calculated by determining the difference between the exercise price and the
assumed initial public offering price of $24.00 per share.

<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED
OPTIONS AT VALUE OF UNEXERCISED
FISCAL YEAR END IN-THE-MONEY
------------------ OPTIONS AT
NAME UNVESTED VESTED FISCAL YEAR END
---- -------- ------ --------------------
<S> <C> <C> <C>
Rajen Jaswa................................................. -- --
Dr. Sanjay Mittal........................................... -- --
Ashish Mathur............................................... -- --
Charles Pendell............................................. 300,000 0 $7,125,000
Vasudev Bhandarkar.......................................... -- --
</TABLE>

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<PAGE> 62

EMPLOYEE BENEFIT PLANS

1996 Stock Plan.

As of December 31, 1999, options to purchase 2,180,815 shares of common
stock were outstanding under the 1996 Stock Plan and options to purchase
3,767,494 shares had been exercised and 126,435 shares of stock have been
granted for services. Options granted under the 1996 Stock Plan are subject to
terms substantially similar to those described below with respect to options
granted under the 1999 Equity Incentive Plan, except that upon an involuntary
termination following a change in control, the options granted under the 1996
Stock Plan do not accelerate.

1999 Equity Incentive Plan.

Our board of directors adopted our 1999 Equity Incentive Plan on November
18, 1999. We will also seek stockholder approval of this plan. We have reserved
2,200,000 shares of our common stock for issuance under the 1999 Equity
Incentive Plan. As of January 1 of each year, starting in 2001, the number of
shares reserved for issuance under our 1999 Equity Incentive Plan will be
increased automatically by 5% of the total number of shares of common stock then
outstanding or, if less, 1,800,000 shares. No options have yet been granted
under the 1999 Equity Incentive Plan.

Under the 1999 Equity Incentive Plan, the persons eligible to receive
awards are:

- employees;

- non-employee members of the board of directors; and

- consultants.

The types of awards that may be made under the 1999 Equity Incentive Plan
are:

- options to purchase shares of common stock;

- stock appreciation rights;

- restricted shares; and

- stock units.

Options may be incentive stock options that qualify for favorable tax
treatment for the optionee under Section 422 of the Internal Revenue Code of
1986 or nonstatutory stock options not designed to qualify for favorable tax
treatment. With limited restrictions, if shares awarded under the 1999 Equity
Incentive Plan are forfeited, those shares will again become available for new
awards under the 1999 Equity Incentive Plan.

The compensation committee of our board of directors administers the 1999
Equity Incentive Plan. The committee has complete discretion to make all
decisions relating to the interpretation and operation of our 1999 Equity
Incentive Plan. The committee has the discretion to determine which eligible
individuals are to receive an award, and to determine the type, number, vesting
requirements and other features and conditions of each award.

The exercise price for incentive stock options granted under the 1999
Equity Incentive Plan may not be less than 100% of the fair market value of our
common stock on the option grant date. The exercise price for non-statutory
options granted under the 1999 Equity Incentive Plan may not be less than 85% of
the fair market value of our common stock on the option grant date.

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<PAGE> 63

Our 1999 Equity Incentive Plan provides that no participant may receive
options or stock appreciation rights covering more than 330,000 shares in the
same year, except that a newly hired employee may receive options or stock
appreciation rights covering up to 660,000 shares in the first year of
employment.

The exercise price may be paid with:

- cash;

- outstanding shares of common stock;

- the cashless exercise method through a designated broker;

- a pledge of shares to a broker; or

- a promissory note.

The purchase price for newly issued restricted shares awarded under the
1999 Equity Incentive Plan may be paid with:

- cash;

- a promissory note; or

- the rendering of past services.

The committee may reprice options and may modify, extend or assume
outstanding options and stock appreciation rights. The committee may accept the
cancellation of outstanding options or stock appreciation rights in return for
the grant of new options or stock appreciation rights. The new option or right
may have the same or a different number of shares and the same or a different
exercise price.

Each individual who first joins our board of directors as a non-employee
director after the effective date of this offering will receive at that time an
option for 30,000 shares of our common stock. This option becomes vested as to
25% of the option shares upon the completion of 12 months of service and as to
1/48 of the option shares upon the completion of each month of service
thereafter. In addition, at each of our annual stockholders' meetings, beginning
in 2001, each non-employee director who will continue to be a director after
that meeting will automatically be granted at that meeting an option for 7,500
shares of our common stock. However, any non-employee director who receives an
option for 30,000 shares under this plan will first become eligible to receive
the annual option for 7,500 shares at the annual meeting that occurs during the
calendar year following the year in which he or she received the option for
30,000 shares. The option for 7,500 shares becomes vested upon the completion of
12 months of service from the grant date. If there is a change in control, or a
termination as a result of death, disability or retirement after reaching age
65, the options granted to non-employee directors will become fully vested.

If a change in control occurs, an option or other award under the 1999
Equity Incentive Plan will become fully exercisable and fully vested if the
option or award is not assumed by the surviving corporation or its parent or
subsidiary or if the surviving corporation or its parent or subsidiary does not
substitute comparable awards for the awards granted under the 1999 Equity
Incentive Plan. If a change in control occurs and an optionee is involuntarily
terminated within 12 months following this change in control, then the vesting
of options held by the optionee will accelerate, as if the optionee provided
another 12 months of service. This vesting acceleration will not occur if it
prevents us from completing a transaction that is a "pooling of interest"
transaction.

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<PAGE> 64

A change in control includes:

- a merger or consolidation after which our then-current stockholders own
less than 50% of the surviving corporation;

- a sale of all or substantially all of our assets;

- a proxy contest that results in replacement of more than one-half of our
directors over a 24-month period; or

- an acquisition of 50% or more of our outstanding stock by a person other
than a person related to us, including a corporation owned by our
stockholders.

If a merger or other reorganization occurs, the agreement of merger or
reorganization may provide that outstanding options and other awards under the
1999 Equity Incentive Plan shall be assumed by the surviving corporation or its
parent, shall be continued by us if we are the surviving corporation, shall have
accelerated vesting and then expire early or shall be cancelled for a cash
payment.

Our board of directors may amend or terminate the 1999 Equity Incentive
Plan at any time. If our board amends the plan, stockholder approval of the
amendment will be sought only if required by applicable law. The 1999 Equity
Incentive Plan will continue in effect indefinitely unless the board decides to
terminate the plan earlier.

1999 Employee Stock Purchase Plan

Our 1999 Employee Stock Purchase Plan was adopted by our board of directors
on November 18, 1999. We will also seek stockholder approval of this plan. We
have reserved 1,000,000 shares of our common stock for issuance under our 1999
Employee Stock Purchase Plan. As of May 1 each year, starting in 2001, the
number of shares reserved for issuance under our 1999 Employee Stock Purchase
Plan will be increased automatically by 2% of the total number of shares of
common stock then outstanding or, if less, 1,000,000 shares. Our 1999 Employee
Stock Purchase Plan is intended to qualify under Section 423 of the Internal
Revenue Code.

Eligible employees may begin participating in the 1999 Employee Stock
Purchase Plan at the start of an offering period. Each offering period lasts 24
months. Two overlapping offering periods will start on May 1 and November 1 of
each calendar year. However, the first offering period will start on the
effective date of this offering and end on April 30, 2002. Purchases of our
common stock will occur on approximately April 30 and October 31 of each
calendar year during an offering period.

Our 1999 Employee Stock Purchase Plan will be administered by the
compensation committee of our board of directors. Each of our employees is
eligible to participate if he or she is employed by us for more than 20 hours
per week and for more than five months per year.

Our 1999 Employee Stock Purchase Plan permits each eligible employee to
purchase common stock through payroll deductions. Each employee's payroll
deductions may not exceed 15% of the employee's cash compensation. The initial
purchase period during which payroll deductions may be contributed will begin on
the effective date of this offering and end on October 31, 2000. Each
participant may purchase up to 750 shares on any purchase date.

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<PAGE> 65

The price of each share of common stock purchased under our 1999 Employee
Stock Purchase Plan will be 85% of the lower of:

- the fair market value per share of common stock on the date immediately
before the first date of the applicable offering period; or

- the fair market value per share of common stock on the purchase date.

In the case of the first offering period, the price per share under the
plan will be 85% of the lower of:

- the price offered to the public in this offering; or

- the fair market value per share of common stock on the purchase date.

Employees may end their participation in the 1999 Employee Stock Purchase
Plan at any time. Participation ends automatically upon termination of
employment with us.

If a change in control occurs, our 1999 Employee Stock Purchase Plan will
end and shares will be purchased with the payroll deductions accumulated to date
by participating employees, unless this plan is assumed by the surviving
corporation or its parent. Our board of directors may amend or terminate the
1999 Employee Stock Purchase Plan at any time. If our board increases the number
of shares of common stock reserved for issuance under the 1999 Employee Stock
Purchase Plan, it must seek the approval of our stockholders.

EMPLOYMENT AGREEMENTS, SEVERANCE AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS

Under their respective employment agreements, our Chief Executive Officer,
Rajen Jaswa, and our Chief Technical Officer and Vice President of Engineering,
Dr. Sanjay Mittal, will receive their most recent base salary for 12 months
after their date of termination if they are terminated without cause. In
addition, our repurchase right with respect to the shares of our common stock
that they currently hold will lapse entirely and all of such shares will become
fully vested upon a termination without cause.

Mr. Vasudev Bhandarkar, our former Vice President, Business Development and
Marketing, executed a severance agreement with us on March 19, 1999. Under this
severance agreement, we paid to Mr. Bhandarkar his then base salary and any
COBRA premiums for a 12-month period following his termination date in
consideration for his execution of a release of claims against us. Under the
terms of his offer letter with us, all of the options and shares of our common
stock held by him became fully vested on his termination date.

If a change in control occurs, an option or other award under the 1999
Equity Incentive Plan will become fully exercisable and fully vested if the
option or award is not assumed by the surviving corporation or its parent or
subsidiary or if the surviving corporation or its parent or subsidiary does not
substitute comparable awards for the awards granted under the 1999 Equity
Incentive Plan. In addition, if an optionee is involuntarily terminated within
12 months following a change in control, he or she will become vested in an
additional number of option shares as if he or she completed another 12 months
of service. This vesting acceleration will not occur if it prevents us from
completing a transaction that is a pooling of interest transaction.

Under our 1996 Stock Plan, upon a merger or asset sale, if the options or
stock purchase rights are not assumed by the surviving corporation or its parent
or subsidiary or if the surviving corporation or its parent or subsidiary does
not substitute comparable awards for the options or stock purchase rights, then
the options and stock purchase rights will become fully vested.

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If a change in control occurs and an executive officer or certain of our
key employees are involuntarily terminated within 12 months following this
change in control, then he or she will become vested in an additional number of
option shares equal to the greater of 50% of the then unvested option shares or
the number of option shares the executive officer would become vested in if he
or she completed another 12 months of service.

RELATED PARTY TRANSACTIONS

Equity Financings. Since our inception we have financed our growth
primarily through the sale of Preferred Stock, resulting in the issuance of an
aggregate of 1,700,000 shares of Series A Preferred Stock at an effective
purchase price of $.091667 per share, 3,750,000 shares of Series B Preferred
Stock at a purchase price of $0.2667 per share, 3,253,126 shares of Series C
Preferred Stock at a purchase price of $0.922 per share, 4,863,935 shares of
Series D Preferred Stock at a purchase price of $1.47 per share and 6,143,896
shares of Series E Preferred Stock at a purchase price of $4.382 per share. The
buyers of our Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock included
the following directors, executive officers and 5% stockholders.

<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D SERIES E
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Betsy Atkins....................................... -- 93,750 81,328 -- 40,165
Stephen Bennion.................................... -- -- -- -- 22,820
Daniel A. Carmel................................... -- -- -- -- 57,051
John Fisher........................................ -- -- -- -- 114,103
Rajen Jaswa........................................ 740,000 281,250 -- -- --
Thomas Neustaetter................................. -- -- -- -- 22,820
ENTITIES ASSOCIATED WITH DIRECTORS AND 5%
STOCKHOLDERS
Entities associated with Draper Fisher
Jurvetson(1)..................................... -- -- 2,439,844 714,285 342,308
Draper International India, L.P.(2)................ -- 2,812,500 542,188 510,204 117,103
Entities associated with Zilkha Venture
Partners(3)...................................... -- -- -- 2,448,979 228,206
JK&B Capital III, L.P.(4).......................... -- -- -- -- 1,141,030
Entities associated with Chatterjee Management
Company.......................................... -- -- -- 1,020,407 433,592
</TABLE>

- -------------------------
(1) John Fisher, one of our directors, is a general partner of venture funds
associated with Draper Fisher Jurvetson.

(2) Robin Richards Donohoe, one of our directors, is a general partner of Draper
International India, L.P.

(3) Michael Lyons, one of our directors, is a general partner of venture funds
associated with Zilkha Venture Partners.

(4) Thomas Neustaetter, one of our directors, is a member of JK&B Management
LLC, the general partner of JK&B Capital III, L.P.

Bridge Financing. On May 14, 1999 we entered into a Note and Warrant
Purchase Agreement with Draper International, L.P., Draper Fisher Associates
Fund IV, Draper Fisher Partners IV and Betsy Atkins, collectively, the Bridge
Investors. Pursuant to that Note and Warrant Purchase Agreement, the Bridge
Investors agreed to loan us an aggregate of $1,000,000 accruing interest at a
rate of 1% plus the prime rate, in exchange for a promissory note, which would
either convert into our securities upon our next round of equity financing or be
repaid by June 30, 1999 and warrants to purchase an aggregate of 15,000 shares
of Series E Preferred Stock.

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Selectica Configurators India Pvt. Ltd. Beginning in June 1997, Selectica
Configurators India Pvt. Ltd., Selectica India, an Indian corporation, has
conducted research and development and quality assurance operations in India for
us. This company was owned by the parents of Rajen Jaswa, our President and
Chief Executive Officer. We paid $51,000 and $303,000 in fiscal years 1998 and
1999, respectively for consulting services. On July 1, 1999, we purchased
637,500 previously unissued shares of Selectica India. Following this purchase,
we owned 99.997% of the outstanding shares of SCIPL and Mr. Jaswa's parents own
the remaining .003%.

Employment Agreements and Bonuses. In August 1996, we entered into
employment agreements with Mr. Jaswa and Dr. Mittal. These agreements are
substantially similar in form and provide for employment on an "at will" basis
and severance payments in an amount equal to 12 months salary in the event that
these employees are terminated without cause. In June 1999, we paid Dr. Mittal a
bonus of $544,000 in exchange for services rendered to us since our inception.

Catalogics. In July 1996, we purchased all of the outstanding shares of
Catalogics. Catalogics was founded and was majority owned by Dr. Mittal, our
Chief Technology Officer. We exchanged 2,750,000 shares of our common stock for
3,250,000 shares of Catalogics common stock that was owned by Dr. Mittal. Of the
2,750,000 shares of our common stock issued to Dr. Mittal, 1,250,000 shares were
subject to a repurchase right by us. The repurchase right lapses over 48 months
beginning July 1, 1996. The fair value of the 1,250,000 shares of common stock
subject to repurchase was $12,500. After our purchase of all of the capital
stock of Catalogics from Dr. Mittal and the other Catalogics shareholder, we
owned all the stock of Catalogics, and Catalogics became a wholly owned
subsidiary.

Loans. In connection with our start-up phase, on July 25, 1996, Mr. Jaswa
loaned to us the principal sum of $50,000 which accrued interest at a rate of 2%
plus the prime rate compounded annually. Such loan was repaid in January 1997 in
connection with the issuance of our Series B Preferred Stock. On November 4,
1999, Mr. Carmel exercised his option to purchase 400,000 shares of common
stock. He paid for those shares with full recourse promissory notes for
$1,000,000 bearing 6.02% annual interest, secured by the purchased shares. On
October 15, 1999, Mr. Bennion exercised his option to purchase 300,000 shares of
common stock. He paid for those shares with a full recourse promissory note for
$750,000 bearing 6.02% annual interest, secured by the purchased shares. On
October 25, 1999, Mr. Pendell exercised his option to purchase 375,000 shares of
common stock. He paid for these shares with full recourse promissory notes for
$262,500 bearing 6.02% annual interest, secured by the purchased shares. On
December 15, 1999 Dr. Mittal exercised his options to purchase 240,000 shares of
common stock. He paid for those shares with two full recourse promissory notes
for $2,300,000 and $100,000 respectively each bearing 6.20% annual interest,
secured by the purchased shares. On December 15, 1999 Mr. Jaswa exercised his
options to purchase 240,000 shares of common stock. He paid for those shares
with two full recourse promissory notes for $2,300,000 and $100,000 respectively
each bearing 6.20% annual interest, secured by the purchased shares.

Repurchase of Common Stock. In June 1999, we purchased 228,200 shares of
our common stock from Dr. Mittal at a price of $2.00 per share.

Indemnification. We have entered into an indemnification agreement with
each of our officers and directors. See "Management -- Indemnification" for a
description of the indemnification available to our officers and directors under
our Second Amended and Restated Certificate of Incorporation, to be effective
after the closing of this offering and our bylaws.

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<PAGE> 68

PRINCIPAL STOCKHOLDERS

The following table presents selected information regarding beneficial
ownership of our outstanding common stock as of December 31, 1999, and as
adjusted to reflect the sale of the common stock being sold in this offering and
the private placement for:

- each of our directors, our chief executive officer and our four other
highest-paid executive officers;

- all of our directors and executive officers as a group; and

- each other person known by us to own beneficially more than 5% of our
common stock.

Except as otherwise indicated, we believe that the beneficial owners of the
common stock listed below, on the information furnished by such owners, have
sole voting power and investment power with respect to such shares. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission. In computing the number of shares beneficially owned by a
person and the percent ownership of that person, shares of common stock subject
to options or warrants held by that person that are currently exercisable or
will become exercisable within 60 days after December 31, 1999 are deemed
outstanding, while such shares are not deemed outstanding for purposes of
computing percent ownership of any other person. Percent of beneficial ownership
is based upon 28,156,334 shares of our common stock outstanding as of December
31, 1999, as adjusted to reflect the conversion of all outstanding shares of
preferred stock into common stock upon the closing of this offering.

The numbers shown in the table below assume no exercise by the underwriters
of their over-allotment option. We and Dr. Sanjay Mittal, our Chief Technical
Officer, have granted the underwriters an option to purchase up to 600,000
shares to cover over-allotments, if any.

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<PAGE> 69

Unless otherwise indicated, the address for each listed stockholder is: c/o
Selectica, Inc., 3 West Plumeria Drive, San Jose, California 95134. To our
knowledge, except as indicated in the footnotes to this table and under
applicable community property laws, the persons or entities identified in this
table have sole voting and investment power with respect to all shares of common
stock shown as beneficially owned by them. The percentages contained in the
"After Offering" column reflects the shares sold in the private placement and
assumes that the underwriters do not exercise their over-allotment option for up
to 600,000 additional shares.

<TABLE>
<CAPTION>
PERCENT OF SHARES
OUTSTANDING
SHARES -------------------
BENEFICIALLY OWNED PRIOR TO AFTER
NAME OF BENEFICIAL OWNER PRIOR TO OFFERING OFFERING OFFERING
------------------------ ------------------ -------- --------
<S> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Rajen Jaswa(1).......................................... 2,551,250 9.06% 7.38%
Dr. Sanjay Mittal(2).................................... 3,053,050 10.84% 8.83%
Dr. S.S. Sundarajan(3).................................. 125,000 * *
Ashish Mathur(4)........................................ 550,000 1.93% 1.58%
Stephen Bennion(5)...................................... 372,820 1.31% 1.08%
Daniel A. Carmel(6)..................................... 457,051 1.60% 1.32%
Charles Pendell(7)...................................... 425,000 1.49% 1.23%
Mario Cavalli(8)........................................ 75,000 * *
Betsy Atkins(9)......................................... 257,493 * *
Robin Richards Donohoe(10).............................. 3,981,995 14.14% 11.52%
John Fisher(11)......................................... 3,620,290 12.85% 10.47%
Michael Lyons(12)....................................... 2,677,185 9.51% 7.79%
Thomas Neustaetter(13).................................. 1,163,851 4.13% 3.37%
5% SHAREHOLDERS
Draper International India, L.P......................... 3,981,995 14.14% 11.52%
Entities associated with Draper Fisher Jurvetson(14).... 3,690,283 13.10% 10.68%
Entities associated with Zilkha Venture Partners(15).... 2,677,185 9.51% 7.75%
Entities associated with Chatterjee Management
Company(16)........................................... 1,453,999 5.16% 4.21%
All executive officers and directors as a group (13
persons)(17).......................................... 19,379,978 67.63% 55.22%
</TABLE>

- -------------------------
* Less than 1% of the outstanding shares of common stock.

(1) Includes 10,000 shares of common stock issuable pursuant to options
exercisable within 60 days of December 31, 1999. As of December 31, 1999,
we had the right to repurchase 250,000 of Mr. Jaswa's shares and options to
purchase shares.

(2) Includes 300,000 shares of common stock held by Smita Mittal and Shikha
Mittal, Dr. Mittal's daughters and 10,000 shares of common stock issuable
pursuant to options exercisable within 60 days of December 31, 1999. Dr.
Mittal has granted the underwriters a 30-day option to purchase up to
150,000 shares to cover over-allotments, if any. If such option is
exercised in full, following completion of the offering. Dr. Mittal will
beneficially own 2,903,050 or 8.40% of our common stock. As of December 31,
1999, we had the right to repurchase 250,000 of Dr. Mittal's shares and
options to purchase shares.

(3) Includes 125,000 shares of common stock issuable pursuant to options
exercisable within 60 days of December 31, 1999.

(4) Includes 100,000 shares of common stock issuable pursuant to options
exercisable within 60 days of December 31, 1999. Includes 50,000 shares of
common stock issuable pursuant to options that we intend to grant prior to
the initial public offering of our common stock.

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<PAGE> 70

(5) Includes 50,000 shares of common stock issuable pursuant to options that we
intend to grant prior to the initial public offering of our common stock.

(6) Includes 4,500 shares of our common stock held by the Samuel Isaac Carmel
1999 Irrevocable Trust, 4,500 shares of our common stock held by the
Jennifer Sara Carmel 1999 Irrevocable Trust, 4,500 shares of our common
stock held by the Madeline Rose Carmel 1999 Irrevocable Trust. Mr. Carmel's
children are the beneficiaries of the trusts in the foregoing sentence.

(7) Includes 50,000 shares of common stock issuable pursuant to options that we
intend to grant prior to the initial public offering of our common stock.

(8) Includes 75,000 shares of common stock issuable pursuant to options
exercisable within 60 days of December 31, 1999.

(9) Includes 2,250 shares of common stock issuable pursuant to a warrant
exercisable within 60 days of December 31, 1999. Ms. Atkins address is 10
Edgewater Drive, Penthouse F, Coral Gables, Florida 33133.

(10) Includes 3,978,995 shares held by Draper International India, L.P., located
at 50 California Street, Suite 2925, San Francisco, California 94025. Ms.
Richards Donohoe and Mr. William Draper have power to vote and dispose of
shares held by Draper International India, L.P. Ms. Richards Donohoe, a
general partner of Draper International India, L.P., disclaims beneficial
ownership of such shares except to the extent of her pecuniary interests
therein.

(11) This number includes:

- 3,251,687 shares and a warrant to purchase 9,068 shares of common stock
issuable pursuant to a warrant exercisable within 60 days of December 31,
1999 held by Draper Fisher Associates IV, L.P.;

- 244,750 shares and a warrant to purchase 682 shares of common stock
issuable pursuant to a warrant exercisable within 60 days of December 31,
1999 held by Draper Fisher Partners IV L.L.C.; and

- 114,103 shares held by Mr. John Fisher. Mr. Fisher is either a managing
member of the entities listed above or a managing member of the general
partner of the entities listed above.

Timothy Draper, John Fisher and Steve Jurvetson have the power to vote and
dispose of shares held by Draper Fisher Associates IV L.P. and Draper
Fisher Partners IV L.L.C. Mr. Fisher disclaims beneficial ownership of such
shares except to the extent of his pecuniary interests therein. The address
of these individuals and entities is Draper Fisher Jurvetson, 400 Seaport
Court, Suite 250, Redwood City, California 94063.

(12) Includes 2,448,979 shares held by Selectica L.P. and 228,206 shares held by
Zilkha Venture Partners L.P. John P. Rigas, Donald Zilkha and Michael Lyons
have the power to vote and dispose of shares held by Selectica L.P. and
Zilkha Venture Partners. Mr. Lyons, a member of Zilkha Venture Investments,
LLC, the General Partner of both of the entities in the preceding sentence,
disclaims beneficial ownership of such shares except to the extent of his
pecuniary interests therein. Mr. Lyons address is Zilkha Ventures, 1510
Page Mill Road, Palo Alto, California 94304.

(13) Includes 1,141,031 shares held by JK&B Capital III, L.P., David Kronfeld,
Thomas Neustaetter and Albert DaValle have the power to vote and dispose of
shares held by JK&B Capital III, L.P. Mr. Neustaetter, a member of JK&B
Capital Management LLC, the general Partner of JK&B Capital III, L.P.,
disclaims beneficial ownership of such shares except to the extent of his
pecuniary interest therein. Mr. Neustaetter's address is JK&B Capital, 205
North Michigan Avenue, Suite 808, Chicago, Illinois 60601.

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<PAGE> 71

(14) This number includes:

- 3,251,687 shares and a warrant to purchase 9,068 shares of common stock
issuable pursuant to a warrant exercisable within 60 days of December 31,
1999 held by Draper Fisher Associates IV, L.P.;

- 244,750 shares and a warrant to purchase 682 shares of common stock
issuable pursuant to a warrant exercisable within 60 days of December 31,
1999 held by Draper Fisher Partners IV L.L.C.;

- 114,103 shares held by Mr. John Fisher. Mr. Fisher is either a managing
member of the entities listed above or a managing member of the general
partner of the entities listed above;

- 45,461 shares held by Ms. Polly Draper. Ms. Draper is the sister of Tim
Draper. Mr. Draper is either a managing member of the entities listed
above or a managing member of the general partner of the entities listed
above;

- 22,821 shares held by Mr. Steve Jurvetson. Mr. Jurvetson is either a
managing member of the entities listed above or a managing member of the
general partner of the entities listed above;

- 1,141 shares held by the Fonstad Living Trust Dated March 26, 1999. Ms.
Fonstad is either a member of the entities listed above or a member of
the general partner of the entities listed above; and

- 570 shares held by Mr. Warren Packard. Mr. Packard is either a member of
the entities listed above or a member of the general partner of the
entities listed above.

Mr. Fisher disclaims beneficial ownership of such shares except to the
extent of his pecuniary interests therein. The address of these individuals
and entities is Draper Fisher Jurvetson, 400 Seaport Court, Suite 250,
Redwood City, California 94063.

(15) This number includes the shares beneficially owned by the persons and
entities described in footnote 10.

(16) Includes 624,959 shares held by Winston Partners II, LLC and 829,040 shares
held by Winston Partners, L.P. Dr. Purnendu Chatterjee has the power to
vote and dispose of shares held by Winston Partners II, LLC and Winston
Partners L.P. Dr. Chatterjee disclaims beneficial ownership of such shares
except to the extent of his pecuniary interests therein.

(17) This number includes the shares beneficially owned by the persons and
entities described in the footnotes above and includes (a) warrants to
purchase an aggregate of 9,750 shares of common stock issuable pursuant to
warrants exercisable within 60 days of December 31, 1999 and (b) 215,000
shares of common stock issuable pursuant to options exercisable within 60
days of December 31, 1999.

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<PAGE> 72

DESCRIPTION OF CAPITAL STOCK

Upon the consummation of this offering, we will be authorized to issue
150,000,000 shares of common stock, and 10,000,000 shares of undesignated
preferred stock. The following is a summary description of our capital stock.
Our bylaws and our Second Amended and Restated Certificate of Incorporation, to
be effective after the closing of this offering, provide further information
about our capital stock.

COMMON STOCK

As of December 31, 1999, there were 28,156,334 shares of common stock
outstanding, as adjusted to reflect the conversion of all outstanding shares of
preferred stock into common stock upon the closing of this offering and the
exercise of warrants to purchase 253,879 shares of common stock that will
terminate upon the consummation of this offering, that were held of record by
approximately 196 stockholders. After giving effect to the sale of the shares of
common stock to the public offered in this prospectus and in the private
placement, there will be 34,556,334 shares of common stock outstanding, assuming
no exercise of the underwriters' over-allotment option and assuming no exercise
after December 31, 1999 of outstanding options or warrants.

The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive dividends, if any, as may be declared from time to time by
the board of directors out of funds legally available. See "Dividend Policy." In
the event of our liquidation, dissolution or winding up, the holders of common
stock are entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior distribution rights of preferred stock, if any,
then outstanding. The common stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are fully
paid and nonassessable, and the shares of common stock to be issued upon
completion of this offering will be fully paid and nonassessable.

PREFERRED STOCK

The board of directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to fix the rights, preferences, privileges and related restrictions, including
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of shares
constituting any series or the designation of the series. The issuance of
preferred stock may have the effect of delaying, deferring or preventing a
change in control of us without further action by the stockholders and may
adversely affect the voting and other rights of the holders of common stock. The
issuance of preferred stock with voting and conversion rights may adversely
affect the voting power of the holders of common stock, including the loss of
voting control to others. At present, we have no plans to issue any of our
preferred stock.

WARRANTS

Immediately following the closing of this offering there will be
outstanding warrants to purchase a total of 820,408 shares of common stock at a
weighted average exercise price of $12.71 per share assuming an exercise price
of $13.00 per share for one warrant to purchase 800,000 shares of common stock.
20,408 of the warrants expire in April 2005, and 800,000 of the warrants expire
in January 2002.

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PRIVATE PLACEMENT WITH SAMSUNG SDS CO., LTD. AND DELL USA, L.P.

On January 31, 2000, we entered into a stock purchase agreement with
Samsung SDS Co., Ltd. under which, contingent upon and immediately following
consummation of the sale of shares in this offering and subject to the filing
and termination of the waiting period under the Hart-Scott-Rodino Act, if
applicable, Samsung agreed to purchase 1,200,000 shares of our common stock in a
private placement at a price per share equal to 96% of the "Price to Public"
appearing on the cover page of this prospectus. Samsung has agreed not to sell,
including any short sale, grant any option to purchase or otherwise transfer or
dispose of any of our securities held by it for a period of one year following
the closing of the private placement, other than hedging transactions entered
into beginning six months following the closing of the private placement.

On February 14, 2000, we entered into a stock purchase agreement with Dell
USA, L.P., under which, contingent upon and immediately following consummation
of the sale of shares in this offering and subject to the filing and termination
of the waiting period under the Hart-Scott-Rodino Act, if applicable, Dell
agreed to purchase 1,200,000 shares of our common stock in a private placement
at a price per share equal to 93% of the "Price to Public" appearing on the
cover page of this prospectus. Dell has agreed not to sell, including any short
sale, grant any option to purchase or otherwise transfer or dispose of any of
our securities held by it for a period of one year following the closing of the
private placement, other than hedging transactions entered into beginning six
months following the closing of this private placement.

REGISTRATION RIGHTS

After this offering and the private placement, the holders of approximately
20,410,957 shares of common stock will be entitled to rights with respect to the
registration of these shares under the Securities Act. Under the terms of the
agreement between us and the holders of these registrable securities, if we
propose to register any of our securities under the Securities Act, either for
our own account or for the account of other security holders exercising
registration rights, these holders are entitled to notice of registration and
are entitled to include their shares of common stock in the registration.
Holders of 18,010,957 shares of the registrable securities are also entitled to
specified demand registration rights under which they may require us to file a
registration statement under the Securities Act at our expense with respect to
our shares of common stock, and we are required to use our best efforts to
effect this registration. Further, the holders of these demand rights may
require us to file additional registration statements on Form S-3. All of these
registration rights are subject to conditions and limitations, among them the
right of the underwriters of an offering to limit the number of shares included
in the registration and our right not to effect a requested registration within
six months following the initial offering of our securities, including this
offering.

ANTI-TAKEOVER PROVISIONS

Selected provisions of Delaware law, and our certificate of incorporation
and bylaws, effective upon the closing of this offering, could make more
difficult the acquisition of us by means of a tender offer or a proxy contest
and the removal of incumbent officers and directors. These provisions,
summarized below, are expected to discourage particular types of coercive
takeover practices and inadequate takeover bids and to encourage persons seeking
to acquire control of us to first negotiate with us. We believe that the
benefits of increased protection of our potential ability to negotiate with the
proponent of an unfriendly or unsolicited proposal to acquire or restructure us
outweigh the disadvantages of discouraging these proposals because, among other
things, negotiation of these proposals could result in an improvement of their
terms. However, these provisions could have the effect of discouraging others
from making tender offers for our shares and, as a consequence, they

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may also inhibit fluctuations in the market price of our shares that could
result from actual or rumored takeover attempts.

Stockholder Meetings. Under our bylaws, only our board of directors, the
Chairman of the Board and the Chief Executive Officer may call special meetings
of stockholders.

Requirements for Advance Notification of Stockholder Nominations and
Proposals. Our bylaws establish advance notice procedures with respect to
stockholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of our board of
directors or a related committee.

Delaware Anti-Takeover Law. We are subject to Section 203 of the Delaware
General Corporation Law, an anti-takeover law. Generally, Section 203 of the
Delaware General Corporation Law prohibits a publicly held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless:

- before the date of the business combination, the transaction is approved
by the board of directors of the corporation;

- upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owns at
least 85% of the outstanding stock; or

- on or after the date the transaction is approved by the board and by the
affirmative vote of at least 66 2/3% of the outstanding voting stock
which is not owned by the interested stockholder.

A "business combination" includes mergers, asset sales and other
transactions resulting in a financial benefit to the stockholder. An "interested
stockholder" is a person who, together with affiliates and associates, owns (or
within three years, did own) 15% or more of the corporation's voting stock. The
existence of this provision would be expected to have an anti-takeover effect
with respect to transactions not approved in advance by our board of directors,
including discouraging attempts that might result in a premium over the market
price for the shares of common stock held by stockholders.

Classified Board of Directors. Our certificate of incorporation provides
that our board of directors will be divided into three classes of directors
serving staggered three-year terms. As a result, only one of the three classes
of our board of directors will be elected each year. The classification system
of electing directors may tend to discourage a third party from making a tender
offer or otherwise attempting to obtain control of us and may maintain the
incumbency of our board of directors by increasing the difficulty of replacing a
majority of the directors.

Elimination of Stockholder Action by Written Consent. Our certificate of
incorporation eliminates the right of stockholders to act by written consent
without a meeting.

Undesignated Preferred Stock. The authorization of undesignated preferred
stock makes it possible for our board of directors to issue preferred stock with
voting or other rights or preferences that could impede the success of any
attempt to obtain control of us.

Amendment of Restated Charter. The amendment of any of the above provisions
would require approval by holders of at least 66 2/3% of our outstanding common
stock.

Stockholder Rights Plan. We are considering the adoption of a stockholder
rights plan. Such a plan would allow for the issuance of a dividend to
stockholders of rights to acquire our shares or, under certain circumstances, an
acquiring corporation, at less than their fair market value. These

72
<PAGE> 75

rights would have certain anti-takeover effects by potentially causing
substantial dilution to a person or group that attempts to acquire us.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the common stock is U.S. Stock
Transfer Corporation.

NASDAQ NATIONAL MARKET LISTING

We have applied to list our common stock on The Nasdaq Stock Market's
National Market under the symbol "SLTC."

73
<PAGE> 76

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering and the private placement, we will have
34,556,234 shares of common stock outstanding, assuming no exercise of options
or warrants after December 31, 1999. Of these shares, the 4,000,000 shares sold
in this offering will be freely tradable without restriction or further
registration under the Securities Act, except that any shares held by persons
that directly or indirectly control, or are controlled by, or are under common
control with us, may generally only be sold in compliance with the limitations
of Rule 144 described below.

SALES OF RESTRICTED SHARES

The remaining 30,556,334 shares of common stock are deemed restricted
shares under Rule 144. The number of shares of common stock available for sale
in the public market is limited by restrictions under the Securities Act and
lock-up agreements under which the holders of the shares have agreed not to sell
or dispose of any of their shares for a period of 180 days after the date of
this prospectus without the prior written consent of Credit Suisse First Boston
Corporation. On the date of this prospectus, no shares other than the 4,000,000
shares being sold in this offering will be eligible for sale. Beginning 180 days
after the date of this prospectus, or earlier with the consent of Credit Suisse
First Boston Corporation, 25,216,753 restricted shares will become available for
sale in the public market subject to the limitations of Rule 144 of the
Securities Act.

In general, under Rule 144 of the Securities Act as currently in effect,
beginning 90 days after this offering, a person, or persons whose shares are
aggregated, who has beneficially owned restricted shares for at least one year,
including a person who may be deemed an affiliate, is entitled to sell within
any three-month period a number of shares of common stock that does not exceed
the greater of 1% of the then-outstanding shares of our common stock,
approximately 343,563 shares after giving effect to this offering, and the
average weekly trading volume of our common stock on the Nasdaq National Market
during the four calendar weeks preceding this sale. Sales under Rule 144 of the
Securities Act are subject to restrictions relating to manner of sale, notice
and the availability of current public information about us. A person who is not
our affiliate at any time during the 90 days preceding a sale, and who has
beneficially owned shares for at least two years, would be entitled to sell
these shares immediately following this offering without regard to the volume
limitations, manner of sale provisions or notice or other requirements of Rule
144 of the Securities Act. However, the transfer agent may require an opinion of
counsel that a proposed sale of shares comes within the terms of Rule 144 of the
Securities Act before effecting a transfer of these shares.

Before this offering, there has been no public market for our common stock
and no predictions can be made of the effect, if any, that the sale or
availability for sale of shares of additional common stock will have on the
market price of our common stock. Nevertheless, sales of substantial amounts of
these shares in the public market, or the perception that these sales could
occur, could adversely affect the market price of the common stock and could
impair our future ability to raise capital through an offering of our equity
securities.

OPTIONS

As of December 31, 1999, options to purchase a total of 2,180,815 shares of
common stock, all of which were issued under the 1996 Stock Plan, were
outstanding and exercisable. All of the shares subject to options are subject to
lock-up agreements. An additional 371,077 shares of common stock were available
as December 31, 1999 for future option grants or direct issuances under the 1996
Stock Plan. In addition, in November 1999, 1,000,000 shares were reserved for
issuance under our 1999 Equity Incentive Plan and 2,200,000 shares were reserved
for issuance under our 1999 Employee Stock Purchase Plan. See
"Management -- Employee Benefit Plans -- 1996 Stock Plan,"

74
<PAGE> 77

"-- 1999 Equity Incentive Plan" and "-- 1999 Employee Stock Purchase Plan" and
Note 10 of Notes to Consolidated Financial Statements.

Rule 701 under the Securities Act provides that shares of common stock
acquired on the exercise of outstanding options may be resold by persons other
than our affiliates, beginning 90 days after the date of this prospectus,
subject only to the manner of sale provisions of Rule 144, and by affiliates,
beginning 90 days after the date of this prospectus, subject to all provisions
of Rule 144 except its one-year minimum holding period. We intend to file one or
more registration statements on Form S-8 under the Securities Act to register
all shares of common stock subject to outstanding stock options and common stock
issued or issuable under our 1999 Stock Plan.

We expect to file the registration statement covering shares offered under
the 1996 Stock Plan, the 1999 Employee Stock Purchase Plan and the 1999 Equity
Incentive Plan approximately 30 days after the closing of this offering. These
registration statements are expected to become effective upon filing. Shares
covered by these registration statements will then be eligible for sale in the
public markets, subject to the lock-up agreements.

WARRANTS

As of December 31, 1999, we had outstanding warrants to purchase 1,074,287
shares of common stock. When these warrants are exercised and the exercise price
is paid in cash, the shares must be held for one year before they can be sold
under Rule 144. All warrants to purchase shares of common stock contain "net
exercise provisions." These provisions allow a holder to exercise a warrant for
a lesser number of shares of common stock in lieu of paying cash. The number of
shares which would be issued in this case would be based upon the market price
of the common stock at the time of the net exercise. If the warrant had been
held for at least one year, the shares of common stock could be publicly sold
under Rules 144 and 145. After the lock-up agreements described above expire,
warrants to purchase 20,408 shares of our common stock, which also contain net
exercise provisions, will have been outstanding for at least one year.

75
<PAGE> 78

UNDERWRITING

Under the terms and subject to the conditions contained in an underwriting
agreement dated , 2000, we have agreed to sell to the
underwriters named below, for whom Credit Suisse First Boston Corporation,
Thomas Weisel Partners LLC, U.S. Bancorp Piper Jaffray Inc. and E*OFFERING Corp.
are acting as representatives, the following respective number of shares of
common stock:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation......................
Thomas Weisel Partners LLC..................................
U.S. Bancorp Piper Jaffray Inc..............................
E*OFFERING Corp.............................................
---------
Total............................................. 4,000,000
=========
</TABLE>

The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.

We and the selling stockholder have granted to the underwriters a 30-day
option to purchase on a pro rata basis up to 450,000 additional shares from us
and 150,000 outstanding shares from the selling stockholder at the initial
public offering price less the underwriting discounts and commissions. This
option may be exercised only to cover any over-allotments of common stock.

The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.

The following table summarizes the compensation and estimated expenses we
and the selling stockholder will pay.

<TABLE>
<CAPTION>
PER SHARE TOTAL
------------------------------- -------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting Discounts and Commissions
paid by us............................ $ $ $ $
Expenses payable by us.................. $ $ $ $
Underwriting Discounts and
Commissions paid by selling
stockholder........................... $-- $ $-- $
Expenses payable by the selling
stockholder........................... $-- $ $-- $
</TABLE>

76
<PAGE> 79

In addition, Credit Suisse First Boston Corporation will receive from us an
aggregate fee equal to 3% of the gross proceeds from the common stock offered to
Samsung SDS Co. Ltd. in a private placement, which is scheduled to close
immediately following the consummation of this offering.

The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.

We, our officers and directors and substantially all of our stockholders
have agreed that we and they will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act relating
to, any additional shares of our common stock or securities convertible into or
exchangeable or exercisable for any of our common stock, or publicly disclose
the intention to make any such offer, sale, pledge, disposition or filing,
without the prior written consent of Credit Suisse First Boston Corporation for
a period of 180 days after the date of this prospectus, except, in our case,
issuances pursuant to the exercise of employee stock options outstanding on the
date hereof.

The underwriters have reserved for sale, at the initial public offering
price, up to 200,000 shares of common stock, to be distributed by E*OFFERING,
for employees, directors and other persons associated with us who have expressed
an interest in purchasing common stock in the offering. The number of shares
available for sale to the general public in the offering will be reduced to the
extent such persons purchase such reserved shares. Any reserved shares not so
purchased will be offered by the underwriters to the general public on the same
terms as the other shares.

We and the selling stockholder have agreed to indemnify the underwriters
against liabilities under the Securities Act, or contribute to payments which
the underwriters may be required to make in that respect.

We have made application to list our shares of common stock on The Nasdaq
Stock Market's National Market under the symbol "SLTC."

Before this offering, there has been no public market for our common stock.
The initial public offering price will be determined by negotiation between us
and the underwriters. The principal factors to be considered in determining the
public offering price include:

- the information set forth in this prospectus and otherwise available to
the underwriters;

- the history and the prospects for the industry in which we will compete;

- the ability of our management;

- the prospects for our future earnings;

- the present state of our development and our current financial condition;

- the general condition of the securities markets at the time of this
offering; and

- the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies.

Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker/dealer in December 1998. Since December
1998, Thomas Weisel Partners has acted as a lead or co-manager on numerous
public offerings of equity securities. Thomas Weisel Partners does not have any
material relationship with us or any of our officers, directors or other
controlling persons, except with respect to its contractual relationship with us
under the underwriting agreement entered into in connection with this offering.

77
<PAGE> 80

The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Exchange Act.

- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.

- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.

- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.

- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a syndicate covering transaction to
cover syndicate short positions.

These stabilizing transactions, syndicate covering transactions and penalty bids
may cause the price of the common stock to be higher than it would otherwise be
in the absence of these transactions. These transactions may be effected on The
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.

A prospectus in electronic format will be made available on the web sites
maintained by one or more of the underwriters participating in this offering.
The underwriters may agree to allocate a number of shares to underwriters for
sale to their online brokerage account holders. Distribution will be allocated
by the representatives of the underwriters to underwriters that may make
Internet distributions on the same basis as other allocations. Other than the
prospectus in electronic format, the information on the web sites maintained by
the underwriters is not part of the prospectus or the registration statement of
which this prospectus forms a part, has not been approved and/or endorsed by
Selectica or any underwriter in its capacity as underwriter and should not be
relied upon by investors.

78
<PAGE> 81

NOTICE TO CANADIAN RESIDENTS

RESALE RESTRICTIONS

The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common stock
in Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the common stock.

REPRESENTATIONS OF PURCHASERS

Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom the
purchase confirmation is received that (i) the purchaser is entitled under
applicable provincial securities laws to purchase the common stock without the
benefit of a prospectus qualified under the securities laws, (ii) where required
by law, that the purchaser is purchasing as principal and not as agent, and
(iii) the purchaser has reviewed the text above under "Resale Restrictions."

RIGHTS OF ACTION (ONTARIO PURCHASERS)

The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or recession or rights of action under the civil liability provisions of
the U.S. federal securities laws.

ENFORCEMENT OF LEGAL RIGHTS

All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or these persons. All or a substantial portion of the assets of the
issuer and these persons may be located outside of Canada and, as a result, it
may not be possible to satisfy a judgment against the issuer or these persons in
Canada or to enforce a judgment obtained in Canadian courts against the issuer
or these persons outside of Canada.

NOTICE TO BRITISH COLUMBIA RESIDENTS

A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by the purchaser in this offering. Such report must be in
the form attached to British Columbia Securities Commission Blanket Order BOR
#95/17, a copy of which may be obtained from us. Only one report must be filed
in respect of common stock acquired on the same date and under the same
prospectus exemption.

79
<PAGE> 82

TAXATION AND ELIGIBILITY FOR INVESTMENT

Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.

80
<PAGE> 83

LEGAL MATTERS

The validity of the common stock being offered will be passed upon for
Selectica by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP,
Menlo Park, California. The underwriters have been represented by Wilson Sonsini
Goodrich & Rosati, Palo Alto, California. As of the date of this prospectus,
some members and employees of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP beneficially owned an aggregate of 28,631 shares of our stock.

EXPERTS

Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule at March 31, 1998 and 1999 and December 31,
1999 and for the period from June 6, 1996 (inception) through March 31, 1997,
and for each of the two years in the period ended March 31, 1999, and for the
nine months ended December 31, 1999 as described in their report. We have
included our financial statements and schedule in the prospectus and elsewhere
in the registration statement in reliance on Ernst & Young LLP's report, given
upon their authority as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common stock
being offered. This prospectus does not contain all of the information presented
in the registration statement and the exhibits to the registration statement.
For further information with respect to Selectica and our common stock we are
offering, reference is made to the registration statement and the exhibits filed
as a part of the registration statement. Statements contained in this prospectus
concerning the contents of any contract or any other document referred to may be
only summaries of these documents. The exhibits to this registration statement
should be referenced for the complete contents of these contracts and documents.
Each statement is qualified in all respects by reference to the exhibit. The
registration statement, including the exhibits, may be inspected without charge
at the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of
all or any part may be obtained from this office after payment of fees
prescribed by the Commission. The Commission maintains a World Wide Web site
that contains reports, proxy and information statements and other information
regarding registrants, including us, that file electronically with the
Commission. The address of the site is www.sec.gov.

81
<PAGE> 84

SELECTICA, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>

F-1
<PAGE> 85

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Selectica, Inc.

We have audited the accompanying consolidated balance sheets of Selectica,
Inc. as of March 31, 1998 and 1999 and December 31, 1999, and the related
statements of operations, stockholders' equity, and cash flows for the period
from June 6, 1996 (inception) through March 31, 1997 and for each of the two
years in the period ended March 31, 1999, and for the nine months ended December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Selectica, Inc.
at March 31, 1998 and 1999, and December 31, 1999, and the consolidated results
of its operations and its cash flows for the period from June 6, 1996
(inception) through March 31, 1997 and for each of the two years in the period
ended March 31, 1999, and for the nine months ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.

/s/ ERNST & YOUNG LLP

San Jose, California
January 26, 2000, except for

the eleventh paragraph of

Note 10, and Note 14,

as to which the date is March 8, 2000

F-2
<PAGE> 86

SELECTICA, INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
MARCH 31, EQUITY
-------------------------- DECEMBER 31, DECEMBER 31,
1998 1999 1999 1999
----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 206,040 $ -- $ 14,123,645
Short-term investments.................................... 297,539 -- --
Accounts receivable, net of allowance for doubtful
accounts of $29,750 at March 31, 1998, $104,000 at March
31, 1999, and $254,000 at December 31, 1999............. 387,944 1,634,577 3,539,220
Advances to related party................................. 1,620 17,730 58,519
Prepaid expenses and other current assets................. 30,400 166,454 601,494
----------- ------------ ------------
Total current assets...................................... 923,543 1,818,761 18,322,878
Property and equipment, net................................. 292,583 1,012,469 3,649,373
Goodwill, net of amortization of $58,975 at March 31, 1998,
$92,675 at March 31, 1999, and $112,950 at December 31,
1999...................................................... 77,025 53,325 35,550
Advances to related party, noncurrent....................... -- 155,000 --
Other assets................................................ 63,926 53,926 1,316,924
Investments, restricted..................................... -- 99,845 99,845
Development agreement, net of amortization of none at March
31, 1998 and 1999 and $472,242 at December 31, 1999....... -- -- 3,695,026
----------- ------------ ------------
Total assets................................................ $ 1,357,077 $ 3,193,326 $ 27,119,596
=========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 101,780 $ 585,610 $ 515,183
Accrued payroll and related liabilities................... 365 258,105 956,838
Other accrued liabilities................................. -- 328,609 2,038,859
Deferred revenues......................................... 383,182 1,285,144 4,261,265
Advances from officers.................................... 16,023 332 --
----------- ------------ ------------
Total current liabilities................................... 501,350 2,457,800 7,772,145
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $0.0001 par value:
Authorized shares -- 25,000,000 at March 31, 1998 and
1999, 25,500,000 at December 31, 1999 and pro forma.
Issued and outstanding shares -- 8,703,126 at March 31,
1998, 13,567,061 at March 31, 1999 and 19,710,957 at
December 31, 1999 and none pro forma (liquidation
preference of $38,800,367 at December 31, 1999)........... 870 1,356 1,971 $ --
Common stock, $0.0001 par value:
Authorized shares -- 40,000,000 at December 31, 1999 and
75,000,000 pro forma Issued and outstanding -- 5,520,561
at March 31, 1998, 6,237,877 at March 31, 1999,
8,191,498 at December 31, 1999, and 27,902,455 pro
forma................................................... 552 624 819 2,790
Additional paid-in capital.................................. 4,211,023 11,878,365 57,057,135 57,057,135
Deferred compensation....................................... (4,386) (255,586) (6,011,456) (6,011,456)
Stockholder notes receivable................................ -- -- (7,015,750) (7,015,750)
Accumulated deficit......................................... (3,352,332) (10,889,233) (24,685,268) (24,685,268)
----------- ------------ ------------ ------------
Total stockholders' equity.................................. 855,727 735,526 19,347,451 $ 19,347,451
----------- ------------ ------------ ============
Total liabilities and stockholders' equity.................. $ 1,357,077 $ 3,193,326 $ 27,119,596
=========== ============ ============
</TABLE>

See accompanying notes.
F-3
<PAGE> 87

SELECTICA, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
PERIOD
FROM
JUNE 6, 1996
(INCEPTION) NINE MONTHS ENDED
THROUGH YEARS ENDED MARCH 31, DECEMBER 31,
MARCH 31, ------------------------- --------------------------
1997 1998 1999 1998 1999
------------ ----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
License....................... $ 50,000 $ 169,505 $ 1,656,015 $ 970,007 $ 5,180,625
Services...................... 4,500 -- 1,788,467 1,010,832 3,958,957
--------- ----------- ----------- ----------- ------------
Total revenues........... 54,500 169,505 3,444,482 1,980,839 9,139,582
Cost of revenues:
License....................... 2,500 9,000 183,715 117,877 258,828
Services...................... -- -- 881,017 483,401 5,105,159
Services -- related party..... -- 51,200 302,511 152,511 135,000
--------- ----------- ----------- ----------- ------------
Total cost of revenues... 2,500 60,200 1,367,243 753,789 5,498,987
--------- ----------- ----------- ----------- ------------
Gross profit.................... 52,000 109,305 2,077,239 1,227,050 3,640,595
Research and development...... 169,307 1,950,101 3,893,750 2,497,828 4,132,374
Sales and marketing........... 61,873 1,054,798 4,429,368 2,682,549 9,270,724
General and administrative.... 76,623 292,494 1,389,554 861,250 2,923,539
--------- ----------- ----------- ----------- ------------
Total operating expenses........ 307,803 3,297,393 9,712,672 6,041,627 16,326,637
--------- ----------- ----------- ----------- ------------
Loss from operations............ (255,803) (3,188,088) (7,635,433) (4,814,577) (12,686,042)
Other income (expense), net..... (1,600) 5,091 -- -- (1,765)
Interest income................. 6,520 81,548 127,388 116,038 381,060
Interest expense................ -- -- (28,856) (22,419) (59,856)
--------- ----------- ----------- ----------- ------------
Loss before provision for income
taxes......................... (250,883) (3,101,449) (7,536,901) (4,720,958) (12,366,603)
Provision for income taxes...... -- -- -- -- 50,000
--------- ----------- ----------- ----------- ------------
Net loss........................ (250,883) (3,101,449) (7,536,901) (4,720,958) (12,416,603)
Deemed dividend on Series E
convertible preferred stock... -- -- -- -- 925,314
--------- ----------- ----------- ----------- ------------
Net loss applicable to common
stockholders.................. $(250,883) $(3,101,449) $(7,536,901) $(4,720,958) $(13,341,917)
========= =========== =========== =========== ============
Basic and diluted, net loss per
share applicable to common
stockholders.................. $ (0.15) $ (0.91) $ (1.58) $ (1.05) $ (2.53)
Weighted-average shares of
common stock outstanding used
in computing basic and
diluted, net loss per share
applicable to common
stockholders.................. 1,633,988 3,425,395 4,782,235 4,479,472 5,270,056
Pro forma basic and diluted, net
loss per share applicable to
common stockholders........... $ (0.44) $ (0.59)
Weighted-average shares used in
computing pro forma basic and
diluted, net loss per share... 17,281,930 22,454,553
</TABLE>

See accompanying notes.

F-4
<PAGE> 88

SELECTICA, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED
STOCK COMMON STOCK ADDITIONAL
--------------------- ------------------ PAID-IN DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION
----------- ------- --------- ------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock to founder for cash at
$0.01 per share............................... -- $ -- 1,250,000 $125 $ 12,375 $ --
Issuance of common stock to founder in exchange
for services.................................. -- -- 1,250,000 125 12,375 --
Issuance of common stock in exchange for
Catalogics.................................... -- -- 1,500,000 150 14,850 --
Issuance of common and convertible preferred
stock in exchange for the assets of Alma
Enterprises................................... 200,000 20 100,000 10 19,193 --
Exercise of stock options by employees and
consultants................................... -- -- 562,500 56 5,544 --
Issuance of common stock to consultants in
exchange for services......................... -- -- 35,061 4 392 --
Issuance of stock to employees................. -- -- 473,000 47 3,853 --
Issuance of Series A convertible preferred
stock in July 1996 for cash at $0.091667 per
share......................................... 1,500,000 150 -- -- 137,350 --
Issuance of Series B convertible preferred
stock in January 1997 for cash at $0.26667 per
share (net of issuance costs of $5,000)....... 3,750,000 375 -- -- 994,625 --
Deferred compensation related to options
granted at less than fair value............... -- -- -- -- 14,183 (14,183)
Amortization of deferred compensation.......... -- -- -- -- -- 6,256
Net loss....................................... -- -- -- -- -- --
---------- ------ --------- ---- ----------- -----------
Balance at March 31, 1997...................... 5,450,000 545 5,170,561 517 1,214,740 (7,927)
Issuance of Series C convertible preferred
stock in October 1997 for cash at $0.922 per
share (net of issuance costs of $11,000)...... 3,253,126 325 -- -- 2,988,058 --
Exercise of stock options by employees and
consultants................................... -- -- 338,000 34 7,306 --
Issuance of common stock to consultants in
exchange for services......................... -- -- 12,000 1 919 --
Amortization of deferred compensation.......... -- -- -- -- -- 3,541
Net loss....................................... -- -- -- -- -- --
---------- ------ --------- ---- ----------- -----------
Balance at March 31, 1998...................... 8,703,126 870 5,520,561 552 4,211,023 (4,386)
Issuance of Series D convertible preferred
stock in June, July, and August 1998 for cash
at $1.47 per share (net of issuance costs of
$57,658)...................................... 4,863,935 486 -- -- 7,091,856 --
Exercise of stock options by employees and
consultants, net of repurchases............... -- -- 671,012 67 38,507 --
Issuance of common stock to consultants in
exchange for services......................... -- -- 46,304 5 42,565 --
Warrants issued in conjunction with credit
agreement..................................... -- -- -- -- 25,714 --
Deferred compensation related to options
granted at less than fair value............... -- -- -- -- 298,700 (298,700)
Compensation expense related to acceleration of
stock options................................. -- -- -- -- 170,000 --
Amortization of deferred compensation.......... -- -- -- -- -- 47,500
Net loss....................................... -- -- -- -- -- --
---------- ------ --------- ---- ----------- -----------
Balance at March 31, 1999...................... 13,567,061 1,356 6,237,877 624 11,878,365 (255,586)

STOCKHOLDER TOTAL
NOTES ACCUMULATED STOCKHOLDERS'
RECEIVABLE DEFICIT EQUITY
----------- ------------ -------------
<S> <C> <C> <C>
Issuance of common stock to founder for cash at
$0.01 per share............................... $ -- $ -- $ 12,500
Issuance of common stock to founder in exchange
for services.................................. -- -- 12,500
Issuance of common stock in exchange for
Catalogics.................................... -- -- 15,000
Issuance of common and convertible preferred
stock in exchange for the assets of Alma
Enterprises................................... -- -- 19,223
Exercise of stock options by employees and
consultants................................... -- -- 5,600
Issuance of common stock to consultants in
exchange for services......................... -- -- 396
Issuance of stock to employees................. -- -- 3,900
Issuance of Series A convertible preferred
stock in July 1996 for cash at $0.091667 per
share......................................... -- -- 137,500
Issuance of Series B convertible preferred
stock in January 1997 for cash at $0.26667 per
share (net of issuance costs of $5,000)....... -- -- 995,000
Deferred compensation related to options
granted at less than fair value............... -- -- --
Amortization of deferred compensation.......... -- -- 6,256
Net loss....................................... -- (250,883) (250,883)
---------- ------------ -----------
Balance at March 31, 1997...................... -- (250,883) 956,992
Issuance of Series C convertible preferred
stock in October 1997 for cash at $0.922 per
share (net of issuance costs of $11,000)...... -- -- 2,988,383
Exercise of stock options by employees and
consultants................................... -- -- 7,340
Issuance of common stock to consultants in
exchange for services......................... -- -- 920
Amortization of deferred compensation.......... -- -- 3,541
Net loss....................................... -- (3,101,449) (3,101,449)
---------- ------------ -----------
Balance at March 31, 1998...................... -- (3,352,332) 855,727
Issuance of Series D convertible preferred
stock in June, July, and August 1998 for cash
at $1.47 per share (net of issuance costs of
$57,658)...................................... -- -- 7,092,342
Exercise of stock options by employees and
consultants, net of repurchases............... -- -- 38,574
Issuance of common stock to consultants in
exchange for services......................... -- -- 42,570
Warrants issued in conjunction with credit
agreement..................................... -- -- 25,714
Deferred compensation related to options
granted at less than fair value............... -- -- --
Compensation expense related to acceleration of
stock options................................. -- -- 170,000
Amortization of deferred compensation.......... -- -- 47,500
Net loss....................................... -- (7,536,901) (7,536,901)
---------- ------------ -----------
Balance at March 31, 1999...................... -- (10,889,233) 735,526
</TABLE>

See accompanying notes.

F-5
<PAGE> 89

SELECTICA, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED
STOCK COMMON STOCK ADDITIONAL
--------------------- ------------------ PAID-IN DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION
----------- ------- --------- ------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of Series E convertible preferred
stock in June, July, August, and October 1999
for cash at $4.382 per share (net of issuance
costs of $930,921)........................... 5,908,770 $ 591 $ -- $ -- $24,345,272 $ --
Issuance of Series E convertible preferred
stock in June 1999 at $4.382 per share in
exchange for convertible notes payable (net
of issuance costs of $48,173)................ 229,876 23 -- -- 944,447 --
Repurchase of common stock held by founder.... (228,200) (23) (2,259) --
Warrants issued in connection with Series E
convertible preferred stock Financing........ -- -- -- -- 615,654 --
Warrants issued in connection with convertible
notes payable................................ -- -- -- -- 49,781 --
Compensation expense related to acceleration
of stock options............................. -- -- -- -- 65,625 --
Exercise of warrants issued in connection with
Series E preferred stock financing........... 5,250 1 -- -- 23,005 --
Warrants issued in connection with development
agreement.................................... -- -- -- -- 381,330 --
Exercise of stock options by employees, net of
repurchase................................... -- -- 510,751 51 312,200 --
Exercise of stock by employees for notes...... -- -- 1,638,000 163 7,015,587 --
Issuance of common stock for services......... -- -- 33,070 4 106,404 --
Issuance of Series E convertible stock for
less than fair value in October 1999......... -- -- -- -- 4,976,264 --
Deferred compensation related to options
granted at less than fair value.............. -- -- -- -- 6,345,460 (6,345,460)
Amortization of deferred compensation......... -- -- -- -- -- 589,590
Net loss...................................... -- -- -- -- -- --
---------- ------ --------- ---- ----------- -----------
Balance at December 31, 1999.................. 19,710,957 $1,971 8,191,498 $819 $57,057,135 $(6,011,456)
========== ====== ========= ==== =========== ===========

STOCKHOLDER TOTAL
NOTES ACCUMULATED STOCKHOLDERS'
RECEIVABLE DEFICIT EQUITY
----------- ------------ -------------
<S> <C> <C> <C>
Issuance of Series E convertible preferred
stock in June, July, August, and October 1999
for cash at $4.382 per share (net of issuance
costs of $930,921)........................... $ -- $ -- 24,345,863
Issuance of Series E convertible preferred
stock in June 1999 at $4.382 per share in
exchange for convertible notes payable (net
of issuance costs of $48,173)................ -- -- 944,470
Repurchase of common stock held by founder.... -- (454,118) (456,400)
Warrants issued in connection with Series E
convertible preferred stock Financing........ -- -- 615,654
Warrants issued in connection with convertible
notes payable................................ -- -- 49,781
Compensation expense related to acceleration
of stock options............................. -- -- 65,625
Exercise of warrants issued in connection with
Series E preferred stock financing........... -- -- 23,006
Warrants issued in connection with development
agreement.................................... -- -- 381,330
Exercise of stock options by employees, net of
repurchase................................... -- -- 312,251
Exercise of stock by employees for notes...... (7,015,750) -- --
Issuance of common stock for services......... -- -- 106,408
Issuance of Series E convertible stock for
less than fair value in October 1999......... -- (925,314) 4,050,950
Deferred compensation related to options
granted at less than fair value.............. -- -- --
Amortization of deferred compensation......... -- -- 589,590
Net loss...................................... -- (12,416,603) (12,416,603)
----------- ------------ -----------
Balance at December 31, 1999.................. $(7,015,750) $(24,685,268) $19,347,451
=========== ============ ===========
</TABLE>

See accompanying notes.

F-6
<PAGE> 90

SELECTICA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
PERIOD FROM
JUNE 6, 1996 YEARS ENDED NINE MONTHS ENDED
(INCEPTION) MARCH 31, DECEMBER 31,
THROUGH ------------------------- --------------------------
MARCH 31, 1997 1998 1999 1998 1999
-------------- ----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................................ $ (250,883) $(3,101,449) $(7,536,901) $(4,720,958) $(12,416,603)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation.......................................... 8,563 59,359 208,947 110,371 713,230
Amortization.......................................... 25,275 33,700 33,700 17,775 17,775
Issuance of stock in exchange for services............ 22,396 920 42,570 42,570 371,420
Amortization of development agreement................. -- -- -- -- 472,242
Amortization of deferred compensation................. 6,256 3,541 47,500 22,591 589,590
Accrued interest on convertible notes converted to
convertible preferred stock......................... -- -- -- -- 7,317
In-process research and development................... 16,500 -- -- -- --
Warrants issued in conjunction with credit
agreement........................................... -- -- 25,714 25,714 --
Warrants issued in conjunction with debt financing.... -- -- -- -- 35,107
Accelerated vesting of stock options to employees..... -- -- 170,000 -- 65,625
Changes in assets and liabilities:
Accounts receivable................................. -- (387,944) (1,246,633) (843,258) (1,904,643)
Advances to related party........................... -- (1,620) (171,110) 420 264,211
Prepaid expenses and other current assets........... (7,765) (22,635) (136,054) (65,911) (435,040)
Other assets........................................ -- (51,427) -- 7,501 (1,262,998)
Accounts payable.................................... 25,870 75,910 483,830 57,335 (70,427)
Accrued payroll and related liabilities............. 164 202 257,740 116,076 698,733
Other accrued liabilities........................... -- -- 328,609 47,421 1,710,250
Deferred revenues................................... -- 383,182 901,962 868,508 2,976,121
Advances from officers.............................. 200 15,823 (15,691) (14,165) (332)
---------- ----------- ----------- ----------- ------------
Net cash used in operating activities................... (153,424) (2,992,438) (6,605,817) (4,328,010) (8,168,422)
INVESTING ACTIVITIES
Capital expenditures.................................... (53,405) (287,877) (928,833) (560,088) (3,350,134)
Purchases of available-for-sale investments............. (790,735) (8,569,135) (5,576,918) (5,576,918) --
Sales of available-for-sale investments................. 100,000 8,962,331 5,774,612 5,620,777 --
Acquisition of Catalogics, Inc.......................... (150,000) -- -- -- --
Acquisition of Selectica, India......................... -- -- -- -- (150,000)
---------- ----------- ----------- ----------- ------------
Net cash provided by (used in) investing activities..... (894,140) 105,319 (731,139) (516,229) (3,500,134)
FINANCING ACTIVITIES
Net proceeds from issuance of convertible preferred
stock................................................. 1,132,500 2,988,383 7,092,342 7,092,342 24,913,344
Exercise of warrants in exchange for preferred stock.... -- -- -- -- 23,006
Repurchase of common stock.............................. -- -- -- -- (456,400)
Proceeds from issuance of convertible notes............. -- -- -- -- 1,000,000
Proceeds from issuance of common stock.................. 12,500 7,340 38,574 31,753 312,251
---------- ----------- ----------- ----------- ------------
Net cash provided by financing activities............... 1,145,000 2,995,723 7,130,916 7,124,095 25,792,201
---------- ----------- ----------- ----------- ------------
Net increase (decrease) in cash and cash equivalents.... 97,436 108,604 (206,040) 2,279,856 14,123,645
Cash and cash equivalents at beginning of the period.... -- 97,436 206,040 206,040 --
---------- ----------- ----------- ----------- ------------
Cash and cash equivalents at end of the period.......... $ 97,436 $ 206,040 $ -- $ 2,485,896 $ 14,123,645
========== =========== =========== =========== ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest.................................. $ -- $ -- $ 3,142 $ 15,102 $ 52,539
Issuance of stock in exchange for Catalogics, Inc....... $ 15,000 $ -- $ -- $ -- $ --
Issuance of stock in exchange for fixed assets.......... $ 19,223 $ -- $ -- $ -- $ --
Deferred compensation related to stock options.......... $ 14,183 $ -- $ 298,700 $ 285,849 $ 6,345,460
Convertible notes payable and accrued interest converted
to convertible preferred stock........................ $ -- $ -- $ -- $ -- $ 944,470
Warrants issued in conjunction with convertible notes
payable............................................... $ -- $ -- $ -- $ -- $ 49,781
Warrants issued in conjunction with convertible
preferred stock financing............................. $ -- $ -- $ -- $ -- $ 615,654
Warrants issued in connection with development
agreement............................................. $ -- $ -- $ -- $ -- $ 381,330
Issuance of stock in exchange for notes................. $ -- $ -- $ -- $ -- $ 7,015,750
</TABLE>

See accompanying notes.

F-7
<PAGE> 91

SELECTICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Business

Selectica, Inc. (the Company or Selectica) was incorporated in the state of
California on June 6, 1996. The Company was organized to develop and market
Internet selling system software for electronic commerce, sales force
automation, and build-to-order applications.

Unaudited Interim Consolidated Financial Statements

The accompanying unaudited interim consolidated financial statements for
the nine-month period ended December 31, 1998 have been prepared in accordance
with generally accepted accounting principles for interim financial information.
In the opinion of management, the accompanying unaudited consolidated financial
statements have been prepared on the same basis as the audited consolidated
financial statements and include all adjustments, consisting only of normal
recurring adjustments, necessary for the fair presentation of the Company's
results of its operations for the nine months ended December 31, 1998.

Principles of Consolidation

The consolidated financial statements include all the accounts of the
Company and those of its wholly-owned subsidiary. All significant intercompany
accounts and transactions have been eliminated.

Foreign Currency Transactions

Foreign currency transactions at foreign operations are measured using the
U.S. dollar as the functional currency. Accordingly, monetary accounts
(principally cash and cash equivalents, accounts receivable, accounts payable,
and accrued liabilities) are remeasured using the foreign exchange rate at the
balance sheet date. Operations accounts and non-monetary balance sheet accounts
are remeasured at the rate in effect at the date of transaction. The effects of
foreign currency remeasurement are reported in current operations and were
immaterial for all periods presented.

Use of Estimates

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

Concentrations of Credit Risk

F-8
<PAGE> 92
SELECTICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)

in the United States. The Company performs ongoing credit evaluations of its
customers' financial condition and generally does not require collateral. The
Company maintains reserves for potential credit losses, and historically, such
losses have been immaterial.

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:

<TABLE>
<CAPTION>
PERIOD FROM
JUNE 6, 1996 YEARS ENDED NINE MONTHS ENDED
(INCEPTION) MARCH 31, DECEMBER 31,
THROUGH ----------------- --------------------
MARCH 31, 1997 1998 1999 1998 1999
-------------- --------- ---- ------------ ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
BMW of North America............... * * 60% 69% *
Olicom, Inc. ...................... * * 10% 14% *
Hewlett Packard of Germany......... * 45% * * *
Ascend Communications, Inc. ....... * 27% * * *
InterVoice, Inc. .................. * 16% * * *
Insight Enterprises, Inc. ......... * 12% * * *
V*Mall Corporation................. 100% * * * *
Aspect Communications.............. * * * * 15%
3Com Corporation................... * * * * 14%
Fireman's Fund Insurance........... * * * * 14%
</TABLE>

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

Cash Equivalents and Short-Term Investments

Cash equivalents consist of short-term, highly liquid financial
instruments, principally money markets funds and commercial paper with
insignificant interest rate risk that are readily convertible to cash and have
maturities of three months or less from the date of purchase. Short-term
investments consist of money market funds and commercial paper that are readily
convertible to cash. As of December 31, 1999 all money market funds are invested
in a single fund. The fair market value, based on quoted market prices, of cash
equivalents and short-term investments is substantially equal to their carrying
value at March 31, 1998 and 1999, and at December 31, 1999.

Under the Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," management classifies investments as available-for-sale at
the time of purchase and periodically reevaluates such designation. Unrecognized
gains or losses on available-for-sale securities are included, net of tax, in
stockholders' equity until their disposition. Realized gains and losses and
declines in value judged to be other than temporary on available-for-sale
securities are included in interest income. The cost of securities sold is based
on the specific-identification method.

F-9
<PAGE> 93
SELECTICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)

Property and Equipment

Property and equipment are stated at cost. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives of
the assets, generally the shorter of the lease term or three to five years.

Goodwill and Other Intangible Assets

Goodwill represents the excess of the purchase price of acquired companies
over estimated fair values of tangible and intangible net assets acquired.
Goodwill is amortized on a straight-line basis over the estimated useful life,
generally five years. The carrying values of long-term assets and intangibles
are reviewed if facts and circumstances suggest that they may be impaired. If
this review indicates that carrying values of long-term assets, other
intangibles, and associated goodwill will not be recoverable based on projected
undiscounted future cash flows, carrying values are reduced to estimated fair
values by first reducing goodwill and second by reducing long-term assets and
other intangibles.

Revenue Recognition

The Company enters into arrangements for the sale of 1) licenses of
software products and related maintenance contract; 2) bundled license,
maintenance, and services; and 3) services on a time and material basis. In
instances where maintenance is bundled with a license of software products, such
maintenance term is typically one year.

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

ARRANGEMENTS CONSISTING OF LICENSE AND MAINTENANCE ONLY. For those
contracts that consist solely of license and maintenance the Company recognizes
license revenues based upon the residual method after all elements other than
maintenance have been delivered as prescribed by Statement of Position 98-9
"Modification of SOP No. 97-2 with Respect to Certain Transactions." The Company
recognizes maintenance revenues over the term of the maintenance contract as
vendor specific objective evidence of fair value for maintenance exists.

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

In all cases, the Company assesses whether the service element of the
arrangement is essential to the functionality of the other elements of the
arrangement. In this determination the Company focuses on whether the software
is off-the-shelf software, whether the services include significant alterations
to the features and functionality of the software, whether the services involve
the building of complex interfaces, the timing of payments and the existence of
milestones. Often the installation of the software requires the building of
interfaces to the customer's existing applications or customization of the
software for specific applications. As a result, judgement is required in the

F-10
<PAGE> 94
SELECTICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)

determination of whether such services constitute "complex" interfaces. In
making this determination the Company considers the following: (1) the relative
fair value of the services compared to the software, (2) the amount of time and
effort subsequent to delivery of the software until the interfaces or other
modifications are completed, (3) the degree of technical difficulty in building
of the interface and uniqueness of the application, (4) the degree of
involvement of customer personnel, and (5) any contractual cancellation,
acceptance, or termination provisions for failure to complete the interfaces.
The Company also considers refunds, forfeitures and concessions when determining
the significance of such services.

In those instances where the Company determines that the service elements
are essential to the other elements of the arrangement, the Company accounts for
the entire arrangement using contract accounting.

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

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

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

Vendor-specific objective evidence of fair value of services is based upon
hourly rates. As previously noted, the Company enters into contracts for
services alone and such contracts are based upon time and material basis. Such
hourly rates are used to assess the vendor specific objective evidence of fair
value in multiple element arrangements.

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

Through the nine months ended December 31, 1999 the Company has not entered
into arrangements solely for license of its products and, therefore, the Company
has not demonstrated vendor specific objective evidence of fair value for the
license element. In all cases revenues are

F-11
<PAGE> 95
SELECTICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)

classified for these arrangements as license revenues and services revenues
based on the estimates of fair value for each element.

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

Advertising Expense

The cost of advertising is expensed as incurred. Advertising expense for
the nine-month period ended December 31, 1999 was $193,024. Advertising expenses
were immaterial for all other periods presented.

Development Costs

Costs incurred in the research and development of new software products and
enhancements to existing software products are expensed as incurred until
technological feasibility has been established. The Company believes its current
process for developing software is essentially completed concurrently with the
establishment of technological feasibility; accordingly, software costs incurred
after the establishment of technological feasibility have not been material and,
therefore, have been expensed.

Comprehensive Loss

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS
130). FAS 130 establishes standards for the reporting and displaying of
comprehensive income and its components in a full set of general purpose
financial statements and is effective for fiscal years beginning after December
15, 1997. The Company adopted FAS 130 in the year ended March 31, 1999. The
Company had no items of other comprehensive income to report in any of the
periods presented.

Net Loss Per Share

Basic and diluted net loss per common share is presented in conformity with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (FAS
128), for all periods presented. Pursuant to the Securities and Exchange
Commission Staff Accounting Bulletin No. 98, common stock and convertible
preferred stock issued or granted for nominal consideration prior to the
anticipated effective date of the Company's initial public offering must be
included in the calculation of basic and diluted net loss per common share as if
they had been outstanding for all periods presented. (see Note 14)

In accordance with FAS 128, basic and diluted net loss per share have been
computed using the weighted-average number of shares of common stock outstanding
during the period, less shares subject to repurchase. Pro forma basic and
diluted net loss per share, as presented in the statements of operations, have
been computed as described above and also gives effect, under Securities and

F-12
<PAGE> 96
SELECTICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)

Exchange Commission guidance, to the conversion of the convertible preferred
stock (using the if-converted method) from the original date of issuance.

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

<TABLE>
<CAPTION>
PERIOD FROM NINE MONTHS ENDED
JUNE 6, 1996 YEARS ENDED MARCH 31, DECEMBER 31,
(INCEPTION) THROUGH ------------------------- --------------------------
MARCH 31, 1997 1998 1999 1998 1999
------------------- ----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss applicable to common
stockholders..................... $ (250,883) $(3,101,449) $(7,536,901) $(4,720,958) $(13,341,917)
=========== =========== =========== =========== ============
Basic and diluted:
Weighted-average shares of common
stock outstanding.............. 3,933,538 5,243,255 5,987,019 5,918,686 6,606,041
Less weighted-average shares
subject to repurchase.......... (2,299,550) (1,817,860) (1,204,784) (1,439,214) (1,335,985)
----------- ----------- ----------- ----------- ------------
Weighted-average shares used in
computing basic and diluted,
net loss per share applicable
to common stockholders......... 1,633,988 3,425,395 4,782,235 4,479,472 5,270,056
=========== =========== =========== =========== ============
Basic and diluted, net loss per
share applicable to common
stockholders..................... $ (0.15) $ (0.91) $ (1.58) $ (1.05) $ (2.53)
=========== =========== =========== =========== ============
Pro forma:
Shares used above.............. 4,782,235 5,270,056
Pro forma adjustment to reflect
weighted-average effect of
the assumed conversion of
convertible preferred
stock........................ 12,499,695 17,184,497
----------- ------------
Shares used in computing pro
forma basic and diluted, net
loss per share applicable to
common stockholders.......... 17,281,930 22,454,553
=========== ============
Pro forma basic and diluted,
net loss per share applicable
to common stockholders....... $ (0.44) $ (0.59)
=========== ============
</TABLE>

The Company has excluded all outstanding stock options and shares subject
to repurchase by the Company from the calculation of basic and diluted net loss
per share because these securities are antidilutive for all periods presented.
Options and warrants to purchase 655,000, 1,279,600, 1,444,058, 1,354,059, and
2,455,102 shares of common stock for the period from June 6, 1996 (inception)
through March 31, 1997, for the years ended March 31, 1998 and 1999, and for the
nine-month periods ended December 31, 1998 and 1999, respectively, were not
included in the computation of diluted net loss per share applicable to common
stockholders because the effect would be antidilutive. Such securities, had they
been dilutive, would have been included in the computation of diluted net loss
per share using the treasury stock method.

F-13
<PAGE> 97
SELECTICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)

Stock-Based Compensation

The Company accounts for employee stock-based compensation under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
Opinion No. 25), and related interpretations. Pro forma net loss, as presented
in Note 10, is a disclosure required by Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" (FAS 123).

Segment Information

The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (FAS 131),
in fiscal 1998. FAS 131 supersedes FAS 14, "Financial Reporting for Segments of
a Business Enterprise," and establishes standards for reporting information
about operating segments. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker or group in deciding
how to allocate resources and in assessing performance. The Company operates in
one segment, Internet selling system software for electronic commerce. The
Company primarily markets its products in the United States. For the fiscal year
ended March 31, 1998, sales to international locations, principally Europe,
represented 46% of total revenues. Foreign sales were less than 10% for all
other periods presented. Export revenues are attributable to countries based on
the location of the customers.

The Company holds long-lived assets in India with a net book value of
$263,219 at December 31, 1999.

Unaudited Pro Forma Stockholders' Equity

If the offering contemplated by this prospectus is consummated, each share
of convertible preferred stock outstanding will automatically be converted into
one share of common stock. Unaudited pro forma stockholders' equity at December
31, 1999, as adjusted for the assumed conversion of convertible preferred stock
based on the shares of convertible preferred stock outstanding at December 31,
1999, is disclosed on the balance sheet.

Unaudited basic and diluted pro forma net loss per share, as presented in
the consolidated statements of operations, has been computed using the
weighted-average number of common shares outstanding, adjusted to include the
pro forma effects of the conversion of the preferred stock to common stock as if
such conversion had occurred on April 1, 1998 for the year ended March 31, 1999
and on April 1, 1999 for the nine-month period ended December 31, 1999, or at
the date of original issuance, if later.

New Accounting Pronouncements

In March 1998, the AICPA issued Statement of Position No. 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use" (SOP
98-1). SOP 98-1 requires entities to capitalize certain costs related to
internal-use software once certain criteria have been met. SOP 98-1 is effective
for years beginning after December 15, 1998. The Company adopted SOP 98-1

F-14
<PAGE> 98
SELECTICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)

for the fiscal year ending March 31, 2000. The adoption of SOP 98-1 did not have
a material impact on the Company's financial position or results of operations.

In April 1998, the AICPA issued Statement of Position No. 98-5, "Reporting
on the Costs of Start-Up Activities" (SOP 98-5). SOP 98-5 requires that all
start-up costs related to new operations must be expensed as incurred. In
addition, all start-up costs that were capitalized in the past must be written
off when SOP 98-5 is adopted. The Company implemented SOP 98-5 on January 1,
1999. The adoption of SOP 98-5 did not have a material impact on its financial
position or results of operations.

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (FAS 133). FAS 133 establishes accounting methods for
derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities. The Company will be required to
implement FAS 133 for the fiscal year ending March 31, 2002. Because the Company
does not currently hold any derivative instruments and does not engage in
hedging activities, the Company does not expect that the adoption of FAS 133
will have a material impact on its financial position or results of operations.

2. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

All cash equivalents and short-term investments as of March 31, 1998, 1999,
and December 31, 1999 are classified as available-for-sale securities and
consist of the following:

<TABLE>
<CAPTION>
MARCH 31,
------------------- DECEMBER 31,
1998 1999 1999
-------- ------- ------------
<S> <C> <C> <C>
Cash equivalents:
Money market fund.......................... $ 7,277 $ -- $13,849,255
Commercial paper........................... 198,763 -- --
-------- ------- -----------
Total................................... $206,040 $ -- $13,849,255
======== ======= ===========
Short-term investments:
Commercial paper........................... $297,539 $99,845 $ 99,845
======== ======= ===========
</TABLE>

The Company has an operating lease that requires a security deposit to be
maintained at a financial institution for the term of the lease. The security
deposit in the amount of $99,845 is classified as a restricted long-term
investment and is held in commercial paper. The interest earned on the
investment can be used in operations.

Unrealized holding gains and losses on available-for-sale securities at
March 31, 1998, 1999, and December 31, 1999 and gross realized gains and losses
on sales of available-for-sale securities during the period from June 6, 1996
(inception) through March 31, 1997, the years ended March 31, 1998 and 1999, and
for the nine-month periods ended December 31, 1998 and 1999 were not
significant.

F-15
<PAGE> 99
SELECTICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)

3. PROPERTY AND EQUIPMENT

Property and equipment, at cost, consist of the following:

<TABLE>
<CAPTION>
MARCH 31,
--------------------- DECEMBER 31,
1998 1999 1999
-------- ---------- ------------
<S> <C> <C> <C>
Furniture and equipment...................... $105,019 $ 191,681 $ 897,824
Computers and software....................... 255,486 1,097,657 3,269,287
Leasehold improvements....................... -- -- 472,361
-------- ---------- ----------
360,505 1,289,338 4,639,472
Less accumulated depreciation and
amortization............................... (67,922) (276,869) (990,099)
-------- ---------- ----------
Total net fixed assets..................... $292,583 $1,012,469 $3,649,373
======== ========== ==========
</TABLE>

4. NOTES RECEIVABLE

In consideration for the issuance of the Company's common stock, various
key employees executed promissory notes in the principal amount of $7,015,750.
The notes bear interest at the rates between 6.02% to 6.20% per annum and are
due and payable four years from the date of the issuance. The notes are full
recourse, and in addition, each of the employees has pledged the common stock,
1,638,000 shares of common stock in aggregate, as collateral to secure the
obligations under the notes.

5. OPERATING LEASE COMMITMENTS

The Company leases office space under operating lease agreements that
expire at various dates through 2004. In October 1999, the Company entered into
a lease agreement for new headquarter facilities in San Jose, California. The
lease terminates in January 2010. Amounts due under the terms of this lease are
included in the lease commitment below and total $21.6 million. The Company
vacated the premises at 2890 Zanker Road in January 2000 and entered into a
sublet agreement. Rental receipts under the sublet agreement are materially
consistent with future payments.

Aggregate future minimum annual payments under these lease agreements,
which have non-cancelable lease terms, as of December 31, 1999, are as follows:

<TABLE>
<S> <C>
2000............................................... $ 1,866,682
2001............................................... 2,294,726
2002............................................... 2,414,294
2003............................................... 2,188,026
2004............................................... 2,189,635
Thereafter......................................... 12,861,051
-----------
Total............................................ $23,814,414
===========
</TABLE>

Rent expense was $14,752, $147,710, and $489,649 for the period from June
6, 1996 (inception) through March 31, 1997, and for the years ended March 31,
1998 and 1999 and $321,708 and $726,765 for the nine months ended December 31,
1998 and 1999, respectively.

F-16
<PAGE> 100
SELECTICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)

6. LITIGATION

The Company is a party to various litigation and claims in the ordinary
course of business. Although the results of litigation and claims cannot be
predicted with certainty, the Company believes that the final outcome of such
matters will not have a material adverse effect on the Company's financial
position, results of operations, or cash flows.

7. LINE OF CREDIT

The Company's credit agreement with a bank expired in June 1999.

The Company also has a $100,000 available letter of credit in connection
with the Company's lease agreement. No amounts were committed under this letter
of credit at December 31, 1999.

8. CONVERTIBLE PROMISSORY NOTES

In May 1999, the Company issued convertible promissory notes in the
principal amount of $1,000,000 that earned interest at a rate of prime plus 1%.
During June 1999, the convertible promissory notes and related accrued but
unpaid interest of $7,317 were converted into 228,206 shares of Series E
convertible preferred stock.

9. ACQUISITIONS

Catalogics Acquisition

In July 1996, the Company acquired the assets of Catalogics Software
Corporation (Catalogics), a development stage software company in the business
of internet software development. In exchange for the assets of Catalogics, the
Company paid $150,000 and issued 2,750,000 shares of the Company's common stock.
Of the 2,750,000 shares of the Company's common stock, issued to Dr. Mittal,
1,250,000 shares were subject to a repurchase right by the Company. The
repurchase right lapses over 48 months beginning July 1, 1996. (see Note 10).
Through this acquisition, the Company received an assembled workforce consisting
solely of the founder of Catalogics, and the rights to software in the
development stage. The acquisition was accounted for as a purchase, and the
total purchase price was allocated as described below. The assembled workforce
intangible is being amortized over three years, and the related goodwill is
being amortized over five years, their estimated useful lives.

<TABLE>
<S> <C>
Workforce intangible........................................ $ 30,000
In-process research and development......................... 16,500
Goodwill.................................................... 118,500
--------
$165,000
========
</TABLE>

As of March 31, 1998 and 1999, and December 31, 1999, accumulated
amortization of intangible assets was approximately $58,975, $92,675, and
$112,950 respectively.

F-17
<PAGE> 101
SELECTICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)

Alma Acquisition

In October 1996, the Company acquired the assets of Alma Enterprises, a
development stage software company in the business of software consulting, in
exchange for 200,000 shares of Series A convertible preferred stock and 100,000
shares of the Company's common stock. The transaction was accounted for as a
purchase. The cost of the transaction was allocated to the various fixed assets
acquired in the transaction. The amount of consideration given, $19,223,
approximated the fair value of the fixed assets obtained.

Selectica India Acquisition

In July 1999, the Company converted $150,000 of advances to Selectica
Configurators India Pvt. Ltd. (Selectica India) into 637,500 shares of common
stock of Selectica India, representing 99.9% of total outstanding shares.
Through this acquisition, the Company received various fixed assets and an
assembled workforce and assumed various liabilities. The acquisition was
accounted for as a purchase, and the total purchase price was allocated to net
tangible assets.

10. STOCKHOLDERS' EQUITY

Common Stock

In July 1996, the Company issued 2,500,000 shares of common stock to the
founders of the Company in exchange for $12,500, the then estimated fair value
of common stock. Such shares vest ratably over 48 months. As of March 31, 1998
and 1999, and December 31, 1999, 1,406,250, 781,250, and 312,500 shares are
subject to repurchase at $0.01 per share, respectively.

Common Stock Reserved for Future Issuance

At December 31, 1999, common stock reserved for future issuance was as
follows:

<TABLE>
<S> <C>
Stock option plans:
Outstanding............................................... 2,180,815
Reserved for future grants................................ 2,571,077
Employee Stock Purchase Plan................................ 1,000,000
Warrants to purchase Series D convertible preferred stock... 20,408
Warrants to purchase Series E convertible preferred stock... 253,879
Warrants to purchase common stock........................... 800,000
Conversion of preferred stock............................... 19,710,957
----------
Total common stock reserved for future issuance........... 26,537,136
==========
</TABLE>

F-18
<PAGE> 102
SELECTICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)

Convertible Preferred Stock

Convertible preferred stock at March 31, 1997, 1998 and 1999 and December
31, 1999 is as follows:

<TABLE>
<CAPTION>
SHARES
AUTHORIZED MARCH 31,
LIQUIDATION DECEMBER 31, ---------------------------------- DECEMBER 31,
PREFERENCE 1999 1997 1998 1999 1999
----------- ------------ --------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Series A................ $0.091667 1,800,000 1,700,000 1,700,000 1,700,000 1,700,000
Series B................ $0.266666 4,000,000 3,750,000 3,750,000 3,750,000 3,750,000
Series C................ $0.922190 3,300,000 -- 3,253,126 3,253,126 3,253,126
Series D................ $ 1.5876 5,000,000 -- -- 4,863,935 4,863,935
Series E................ $ 4.382 6,500,000 -- -- -- 6,143,896
Undesignated............ 4,900,000 -- -- -- --
---------- --------- --------- ---------- ----------
25,500,000 5,450,000 8,703,126 13,567,061 19,710,957
========== ========= ========= ========== ==========
</TABLE>

Series E convertible preferred stockholders are entitled to receive, prior
and in preference to any distribution to other preferred or common stockholders,
$4.382 per share plus any declared but unpaid dividends. Series A, B, C, and D
convertible preferred stock have a liquidation preference of $0.091667,
$0.266666, $0.922190, and $1.5876 per share, respectively, plus declared but
unpaid dividends prior and in preference to distribution to common stockholders.
Any remaining assets of the Company are to be distributed between Series E
convertible preferred stockholders and common stockholders on a pro rata, if
converted, basis until such point as holders of Series E convertible preferred
stock have received total distributions of $8.764. Any amounts in excess of this
amount will be distributed to common stockholders. Each share of Series E
convertible preferred stock shall automatically convert into shares of common
stock upon a liquidation in which holders of Series E convertible preferred
stock would receive aggregate proceeds of more than $10.955 per share, if
converted. Series A, B, C, and D convertible preferred stockholders are entitled
to noncumulative dividends at the rate of $0.0055, $0.0213, $0.0736, $.1176, and
$0.3506 per share, per annum, respectively, or if greater on an as converted
basis, an amount equal to that paid on common stock when and if declared by the
Board of Directors and in preference to common stock dividends. No dividends
have been declared or paid by the Company as of any year presented.

The holders of each share of Series A, B, C, D, and E convertible preferred
stock are entitled to one vote for each share of common stock into which such
convertible preferred share may be converted. The shares are convertible at any
time at the option of the holder and will automatically convert on a one-for-one
basis in the event of an underwritten public offering of the Company's common
stock in which the aggregate proceeds are at least $25,000,000, provided that
such automatic conversion shall only occur with respect to Series E convertible
preferred stock if the per share offering price of such offering is not less
than $6.573, as adjusted. Such conversion can occur for Series A, B, and C
convertible preferred stock upon the consent of the holders of a majority of the
then outstanding shares of convertible preferred stock with Series A, B, and C
voting as a single class. Such conversion can occur for Series D convertible
preferred stock upon the consent of a majority of the then outstanding shares of
Series D convertible preferred stock, and for Series E convertible preferred
stock upon the consent of two-thirds of the then outstanding shares of Series E
convertible preferred stock, The conversion rate of the Series A, B, C, D, and E
convertible preferred

F-19
<PAGE> 103
SELECTICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)

stock is subject to adjustment in the event of, among other things, certain
dilutive issuances of stock, business combinations, stock splits, and stock
dividends.

During October 1999, the Company issued a total of 1,505,702 shares of
Series E convertible preferred stock to various investors, including 261,981
shares to related parties and a member of the board of directors, of which 5,250
shares were a result of exercise of warrants to purchase stock, 79,871 shares to
officers of the Company, and 22,820 shares to unrelated parties. Also included
in the issuance were 1,141,030 shares to an investor whereby the investor and
the Company will work to port the current suite of ACE products to additional
platforms. Gross proceeds from these issuances were $6,597,986. These shares
excluding those related to warrant exercises, were issued at $4.382 per share
while the deemed fair value of our preferred stock at that date approximated
$7.70, 110% of the deemed fair value of common stock on the date of the closing
of Series E convertible preferred stock. The Company recorded approximately $5.0
million of charges related to cheap stock valuation in the third quarter of
fiscal 2000. Of this amount approximately $925,000 was accounted for as a
dividend to stockholders, approximately $190,000 as sales and marketing
compensation expense, and approximately $76,000 as general and administrative
compensation expense in the third quarter. The remaining amount of $3.8 million
will be amortized over a two year period in connection with a development
agreement with one of the investors. Amortization of the development agreement
of $472,000 was recorded in the nine months ended December 31, 1999 and is
consistent with the level of efforts in the area of research and development.

Warrants

In association with a credit agreement entered into with a financial
institution (see Note 7), the Company issued a warrant that entitles the holder
to purchase 20,408 shares of Series D convertible preferred stock at an exercise
price of $1.47 per share. The warrant expires April 17, 2005. The fair value of
the warrant, $25,714, was amortized over the life of the credit agreement. The
Company determined the fair value of the warrants using the Black-Scholes
valuation model assuming a fair value of the Company's Series D convertible
preferred stock of $1.47, a risk-free interest rate of 6.0%, a volatility factor
of 147%, and a life of five years.

In connection with the convertible promissory notes issued in May 1999, the
Company issued warrants to purchase 15,000 shares of Series E convertible
preferred stock at $4.382 per share. This transaction resulted in the valuation
of warrants of $49,781 of which $35,107 was amortized as interest expense prior
to the conversion of the convertible debt into Series E convertible preferred
stock on June 16, 1999. The Company determined the fair value of the warrants
using the Black-Scholes valuation model assuming a fair value of the Company's
Series E convertible preferred stock of $4.382, risk free interest rate of 5.9%,
volatility factor of 96.1%, and a life of five years. The warrants expire in May
2004 or upon the completion of the Company's initial public offering, whichever
occurs first. In October 1999, warrant to purchase 5,250 shares of Series E
convertible preferred stock were exercised.

In connection with the issuance of shares of the Company's Series E
convertible preferred stock, the Company issued warrants to purchase 187,129
shares of the Company's Series E convertible preferred stock at $4.382 per
share. The warrants expire on May 14, 2004 or upon the completion of the
Company's initial public offering, whichever occurs first. The Company
determined the fair value of the warrants using the Black-Scholes valuation
model assuming a fair value of the Company's

F-20
<PAGE> 104
SELECTICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)

Series E convertible preferred stock of $4.382, risk free interest rate of
5.78%, volatility factor of 96.1%, and a life of five years.

In September 1999, the Company entered into a development agreement with an
investor whereby the investor and the Company will work to port the current
suite of ACE products to additional platforms. In connection with the
development agreement, the Company issued warrants to purchase 57,000 shares of
Series E convertible preferred stock at $4.382 per share. The warrants were
issued in December 1999 are immediately exercisable, and expire on the earlier
of September 23, 2001 or the closing of the Company's initial public offering.
The holder of the warrant may elect to net exercise this warrant. The Company
determined the fair value of the warrants using the Black-Scholes valuation
model assuming a fair value of the Company's Series E convertible preferred
stock of $10.00, risk free interest rate of 5.5%, volatility factor of 80% and a
life of 22 months. The fair value of $381,000 will be amortized over the
remaining life of the development agreement.

In November 1999, the Company entered into a license agreement and one year
maintenance contract in the amount of $3.0 million with a customer and in
connection with the agreement committed to the issuance of a warrant to purchase
800,000 shares of common stock. In January 2000 the warrant was issued with an
exercise price of the lesser of $13.00 or the initial public offering price of
the Company. The holder of the warrant may elect to net exercise this warrant.
The warrants are immediately exercisable and expire in January 2002. The value
of the warrants was estimated to be $12.0 million and was based upon a
Black-Scholes valuation model with the following assumptions: risk free interest
rate of 5.5%, dividend yield of 0%, volatility of 80%, expected life of 2 years,
exercise price of $13.00 and fair value of $24.00. As the warrant value less the
warrant purchase price of $800,000, exceeds the related license and maintenance
revenue under the agreement, the Company will record a $8.3 million loss on the
contract in the fourth quarter of fiscal 2000.

Stock Option Plan

The Company's 1996 Stock Plan (the Plan) was adopted by the Board of
Directors on August 26, 1996. The Plan provides for granting of incentive stock
options to employees and nonstatutory stock options to outside directors and
consultants. Incentive stock options are granted at an exercise price of not
less than the fair value per share of the common stock on the date of grant as
determined by the Board of Directors. Nonstatutory stock options are granted at
an exercise price of not less than 85% of the fair value per share on the date
of grant as determined by the Board of Directors. Vesting and exercise
provisions are determined by the Board of Directors at the time of grant.
Options generally vest with respect to 25% of the shares one year after the
options' vesting commencement date and the remainder ratably over the following
three years. Options granted under the Plan have a maximum term of ten years.
Options can be exercised at any time and stock issued under the Plan may be, as
determined by the Board of Directors, subject to repurchase by the Company. This
right to repurchase generally lapses over four years from the original date of
issuance or grant.

F-21
<PAGE> 105
SELECTICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)

Activity under the stock option plan is as follows:

<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS
------------------------------------------------------------
SHARES NUMBER OF WEIGHTED-AVERAGE
AVAILABLE SHARES EXERCISE PRICE EXERCISE PRICE
----------- ---------- --------------- ----------------
<S> <C> <C> <C> <C>
Beginning authorized.............. 1,650,000 -- $-- $ --
Options granted................... (1,217,500) 1,217,500 $0.010 - $0.030 $0.02
Options exercised............... -- (562,500) $0.010 - $0.030 $0.01
Stock grant for services........ (35,061) -- $0.011 $0.01
----------- ----------
Balance at March 31, 1997......... 397,439 655,000 $0.010 - $0.030 $0.02
Increase in shares reserved..... 1,339,500 -- $-- $ --
Options granted................. (970,100) 970,100 $0.030 - $0.100 $0.07
Options exercised............... -- (338,000) $0.010 - $0.100 $0.02
Options canceled................ 7,500 (7,500) $0.100 $0.10
Stock grant for services........ (12,000) -- $0.077 $0.08
----------- ----------
Balance at March 31, 1998......... 762,339 1,279,600 $0.030 - $0.100 $0.06
Increase in shares reserved..... 750,000 -- $-- $ --
Options granted................. (1,315,500) 1,315,500 $0.100 - $1.250 $0.37
Options exercised............... -- (702,262) $0.030 - $0.500 $0.05
Options canceled................ 469,188 (469,188) $0.030 - $0.500 $0.10
Shares repurchased.............. 31,250 -- $0.010 $0.01
Stock grant for services........ (46,304) -- $0.020 - $0.300 $0.26
----------- ----------
Balance at March 31, 1999......... 650,973 1,423,650 $0.030 - $2.500 $0.35
Increase in shares reserved..... 2,659,090 -- $-- $ --
Options granted................. (3,068,750) 3,068,750 $1.500 - $10.00 $4.38
Options exercised............... -- (2,164,732) $0.030 - $10.00 $3.39
Options canceled................ 146,853 (146,853) $0.100 - $8.500 $1.18
Shares repurchased.............. 15,981 -- $0.100 - $0.500 $ .22
Stock grant for services........ (33,070) -- $1.500 - $4.380 $2.37
----------- ----------
Balance at December 31, 1999...... 371,077 2,180,815 $0.030 - $10.00 $2.97
=========== ==========
</TABLE>

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS VESTED
-------------------------------------- ------------------------
NUMBER OF WEIGHTED- WEIGHTED-
OUTSTANDING AVERAGE WEIGHTED- OPTIONS AVERAGE
SHARES AS OF REMAINING AVERAGE VESTED AT AGGREGATE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, PURCHASE
EXERCISE PRICES 1999 LIFE PRICE 1999 PRICE
--------------- ------------ ----------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
$0.100 - $0.100.................. 168,200 8.05 $0.10 85,361 $ 0.10
$0.200 - $0.500.................. 281,950 8.68 $0.28 55,091 $ 0.31
$1.000 - $1.250.................. 169,918 9.11 $1.09 10,561 $ 1.05
$1.500 - $2.500.................. 937,647 9.54 $1.97 50,327 $ 1.81
$4.380 - $4.380.................. 317,850 9.84 $4.38 15,566 $ 4.38
$8.500 - $10.00.................. 305,250 9.95 $9.71 301 $10.00
--------- -------
$0.100 - $10.00.................. 2,180,815 9.38 $2.97 217,207 $ 0.92
========= =======
</TABLE>

F-22
<PAGE> 106
SELECTICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)

All shares granted under the Plan are exercisable, however, shares
exercised but not vested are subject to repurchase. At December 31, 1999,
2,016,299 shares were subject to repurchase under the Plan.

1999 Employee Stock Purchase Plan

On November 18, 1999, the Company's Board of Directors approved, subject to
shareholder approval, the adoption of the 1999 Employee Stock Purchase Plan (the
Purchase Plan). A total of 1,000,000 shares of common stock has been reserved
for issuance under the Purchase Plan. On each May 1, starting in 2001, the
number of shares will be automatically increased by the lesser of 2% of then
outstanding shares of common stock or 1,000,000 shares. Each offering period
will consist of four consecutive purchase periods of six months duration. The
initial offering period is expected to begin on the effective date of this
offering and ends on April 30, 2002.

The Purchase Plan permits eligible employees to purchase common stock
through payroll deductions, which may not exceed 15% of an employee's
compensation, at a price equal to the lower of 85% of the fair market value of
the Company's common stock at the beginning of each offering period or at the
end of each purchase period. Employees who work more than five months per year
and more than twenty hours per week are eligible to participate in the Purchase
Plan. Stockholders who own more than 5% of outstanding common stock are excluded
from participating in the Purchase Plan. Each eligible employee is limited to
purchase no more than 750 shares per purchase date (1,500 shares per year) and
no more than $25,000 of stock per calendar year. If not terminated earlier, the
Purchase Plan has a term of twenty years.

1999 Equity Incentive Plan

On November 18, 1999, the Company's Board of Directors approved, subject to
shareholder approval, the 1999 Equity Incentive Plan (the Equity Incentive
Plan). A total of 2,200,000 shares of common stock has been reserved under the
Equity Incentive Plan. On each January 1, starting in 2001, the number of shares
will be automatically increased by the lesser of 5% of then outstanding shares
or 1,800,000. The Equity Incentive Plan includes Incentive Stock Options,
Nonstatutory Stock Options, Stock Appreciation Rights, Shares of Restricted
Stock, and Stock Units. All employees, nonemployee directors, and consultants
are eligible to participate in the Equity Incentive Plan. Each eligible
participant is limited to being granted 330,000 shares per year, except in the
first year of employment where the limit is 660,000 shares. The Equity Incentive
Plan has a term of 10 years.

Stock Issued for Services

Under the terms of the Company's 1996 Stock Plan from time to time the
Company issues shares of common stock in exchange for services. All services
were complete at the date of grant and the value of the services was based upon
the then fair value of the common stock. During fiscal 1997, the Company issued
35,061 shares of common stock at a weighted average fair value of $0.011 per
share in exchange for legal and accounting services. During fiscal 1998 the
Company issued 12,000 shares of common stock at a weighted average fair value of
$0.077 in exchange for accounting services. During fiscal 1999, the Company
issued 46,304 shares of common stock at a weighted average fair value of $0.919
in exchange for various services including legal, marketing, business

F-23
<PAGE> 107
SELECTICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)

development, and recruiting services. During the nine-months ended December 31,
1999 the Company issued 33,070 shares of common stock at a weighted average fair
value of $3.218 in exchange for various services including legal, accounting,
recruiting, and consulting.

Deferred Compensation

During the years ended March 31, 1998 and 1999, and the nine-month period
ended December 31, 1999, the Company recorded aggregate deferred compensation of
$6,644,160 representing the difference between the exercise price of stock
options granted and the then deemed fair value of the Company's common stock.
The amortization of deferred compensation is charged to operations over the
vesting period of the options using the straight-line method, which is typically
four years. For the period from June 6, 1996 (inception) through March 31, 1997,
for the years ended March 31, 1998 and 1999, and for the nine-month periods
ended December 31, 1998 and 1999, the Company amortized $6,256, $3,541, $47,500,
$22,591, and $589,590, respectively.

Accelerated Options

In March 1999, in association with an employee termination agreement, the
Company accelerated 137,000 shares of unvested common stock and recorded
$170,000 of related compensation expense.

Accounting for Stock-Based Compensation

Pro forma information regarding net loss is required by FAS 123 and has
been determined as if the Company has accounted for its employee stock options
granted under the fair value method of FAS 123. The fair value of options
granted was estimated at the date of grant using the minimum-value method and
the following weighted-average assumptions: a risk-free interest rate for the
period from June 6, 1996 (inception) through March 31, 1997, for the years ended
March 31, 1998 and 1999, and for the nine-month periods ended December 31, 1998
and 1999 of 6.67%, 5.94%, 5.05%, 4.87%, and 5.96%, respectively; no dividend
yield or volatility factor; and an expected life of seven years. The
weighted-average fair value of options granted where the exercise price is equal
to the deemed fair value of common stock on the date of grant in the period from
June 6, 1996 (inception) through March 31, 1997, for the years ended March 31,
1998 and 1999, and for the nine-month periods ended December 31, 1998 and 1999
was $0.01, $0.02, $0.11, $0.08 and $2.63, respectively. The weighted-average
fair value of options granted where the exercise price is less than the deemed
fair value of common stock on the date of grant for the year ended March 31,
1999 and for the nine months ended December 31, 1998 and 1999 was $0.56, $0.57
and $3.75, respectively. There were no options where the exercise price was less
than the deemed fair value of common stock on the date of grant in the period
from June 6, 1996 (inception) through March 31, 1997 and for the year ended
March 31, 1998. The Company has accounted for the differential between the
exercise price and deemed fair value as deferred compensation.

The option valuation model was developed for use in estimating the fair
value of nonpublicly traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected life and risk-free
interest rate. Because the Company's options have characteristics significantly
different from those of

F-24
<PAGE> 108
SELECTICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)

traded options and because the changes in the subjective input assumptions can
materially affect the fair value estimate, the existing model do not necessarily
provide a reliable single measure of the fair value of its options.

Had compensation cost for the Company's stock-based compensation plan been
determined based on the fair value at the grant date for awards under those
plans consistent with the method of FAS 123, the Company's net loss and net loss
per share would have increased to the pro forma amounts indicated below:

11. INCOME TAXES

The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
DECEMBER 31,
1999
------------
<S> <C>
Current provision:
State.................................................... $20,000
Foreign.................................................. 30,000
-------
$50,000
=======
</TABLE>

F-25
<PAGE> 109
SELECTICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)

The difference between the provision for income taxes and the amount
computed by applying the federal statutory income tax rate (35%) to income
before taxes is explained below:

<TABLE>
<CAPTION>
PERIOD FROM
JUNE 6,
1996 NINE MONTHS
(INCEPTION) ENDED
THROUGH YEARS ENDED MARCH 31, DECEMBER 31,
MARCH 31, ------------------------- -------------------------
1997 1998 1999 1998 1999
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Tax (benefit) at federal
statutory rate............ $(88,000) $(1,085,000) $(2,637,000) $(1,652,000) $(4,328,000)
Loss for which no tax
benefit is currently
recognizable.............. 88,000 1,085,000 2,637,000 1,652,000 4,328,000
State taxes................. -- -- -- -- 20,000
Foreign taxes............... -- -- -- -- 30,000
-------- ----------- ----------- ----------- -----------
Total provision........ $ -- $ -- $ -- $ -- $ 50,000
======== =========== =========== =========== ===========
</TABLE>

Significant components of the Company's deferred tax assets are as follows:

<TABLE>
<CAPTION>
MARCH 31,
------------------------- DECEMBER 31,
1998 1999 1999
----------- ----------- ------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........... $ 1,188,000 $ 3,967,000 $ 7,717,000
Tax credit carryforwards................. 103,000 296,000 486,000
Deferred revenue......................... 153,000 314,000 664,000
Accruals and reserves not currently
deductible............................ -- 136,000 500,000
Other.................................... -- -- 264,000
----------- ----------- -----------
Total deferred tax assets.................. 1,444,000 4,713,000 9,631,000
Valuation allowance........................ (1,444,000) (4,713,000) (9,631,000)
----------- ----------- -----------
Net deferred tax assets............... $ -- $ -- $ --
=========== =========== ===========
</TABLE>

The Company has recorded a tax provision of $50,000 for the nine months
ended December 31, 1999. The provision for income taxes consists primarily of
state income taxes and foreign taxes. There is no provision for income taxes for
the period from June 6, 1996 (inception) through March 31, 1997, for the years
ended March 31, 1998 and 1999, and for the nine-month period ended December 31,
1998.

Financial Accounting Standards Board Statement No. 109 provides for the
recognition of deferred tax assets if realization of such assets is more likely
than not. Based on the weight of available evidence, which includes the
Company's historical operating performance and the reported cumulative net
losses in all prior years, the Company has provided a full valuation allowance
against its net deferred tax assets.

The valuation allowance increased by $3,269,000 and $4,918,000 during the
year ended March 31, 1999 and the nine-month period ended December 31, 1999,
respectively.

F-26
<PAGE> 110
SELECTICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)

As of December 31, 1999, the Company had federal and state net operating
loss carryforwards of approximately $19,400,000 and $14,600,000, respectively.
As of December 31, 1999, the Company also had federal and state research and
development tax credit carryforwards of approximately $300,000 and $200,000,
respectively.

The net operating loss and tax credit carryforwards will expire at various
dates beginning in 2005 through 2020, if not utilized.

Utilization of the net operating loss and tax credit carryforwards may be
subject to a substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code and similar state provisions.
The annual limitation may result in the expiration of the net operating loss and
credit carryforwards before utilization.

12. RELATED PARTY

During the years ended March 31, 1998 and 1999 and the nine-month period
ended December 31, 1999, certain services were performed by Selectica
Configurators India Pvt. Ltd. (Selectica India), a related party. These efforts
included quality and assurance testing and consulting services. Prior to June
30, 1999, Selectica India was owned by the parents of the chief executive
officer and founder of the Company. Total expenses related to these efforts,
which are included in the Company's statements of operations, by Selectica
India, amounted to $51,200, $302,511, and $135,000 for the years ended March 31,
1998 and 1999 and for the nine-month period ended December 31, 1999,
respectively. The Company also advanced $155,000 to Selectica India during 1999
for future services efforts. No expenses were incurred related to Selectica
India during fiscal 1997. Amounts included in accounts payable were immaterial
for all periods presented. During July 1999, the Company acquired a majority
ownership of Selectica, India. See Note 9 for further details.

In December 1999, the Company acquired approximately 2% of the equity in
LoanMarket Resources, LLC in exchange for a license and consulting service
agreement. As there is no readily determinable fair value for the equity
position in LoanMarket Resources, LLC, because this is a privately held company,
the Company has not ascribed any value to the investment. Revenue recognized on
the agreement was approximately $434,000 for the nine months ended December 31,
1999 and represented the percentage-of-completion to date. Amounts recognized
under the contract were less than total cash received to date. Remaining cash
receipts of approximately $366,000 are included in deferred revenues as of
December 31, 1999.

13. BENEFIT PLAN

Effective February 1998, the Company adopted a tax-deferred savings plan,
the Selectica 401(k) Plan (the 401(k) Plan), for the benefit of qualified
employees. The 401(k) Plan is designed to provide employees with an accumulation
of funds at retirement. Qualified employees may elect to make contributions to
the 401(k) Plan on a monthly basis. The 401(k) Plan does not require the Company
to make any contributions. No contributions were made by the Company for the
years ended March 31, 1998 and 1999 and the nine-month periods ended December
31, 1998 and 1999. Administrative expenses relating to the 401(k) Plan are
insignificant.

F-27
<PAGE> 111
SELECTICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)

14. SUBSEQUENT EVENTS

Reincorporation

In October 1999, the Board of Directors approved the Company's
reincorporation in the state of Delaware, and the designation of common stock
and preferred stock with $0.0001 par value per share. In addition, the Company's
Certificate of Incorporation will be amended to authorize 75,000,000 shares of
common stock, and 25,000,000 shares of undesignated preferred stock upon
reincorporation. The reincorporation was approved by the state of Delaware on
January 19, 2000.

The Board of Directors has the authority, without action by the
stockholders, to designate and issue the preferred stock in one or more series
and to fix the rights, preferences, privileges and related restrictions,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting any series or the designation of the series. The
accompanying consolidated financial statements have been retroactively restated
to give effect to the reincorporation.

Initial Public Offering

In October 1999, the Board of Directors approved the filing of a
Registration Statement with the Securities and Exchange Commission permitting
the Company to sell common stock to the public. Upon completion of the initial
public offering the Company's Certificate of Incorporation will be amended to
authorize 150,000,000 shares of common stock and 10,000,000 shares of preferred
stock.

In connection with the initial public offering the Company will issue
1,200,000 shares of common stock at a price of 93% of the initial public
offering price to Dell USA, L.P., a customer. The 7% discount on this issuance
will be recognized as an offset to revenues as license revenues on the related
license agreement are recognized. In addition, the Company will also issue to
Samsung SDS Co., Ltd. ("Samsung") 1,200,000 shares of its common stock at a
price of 96% of the initial public offering price. Samsung is also a customer
and as such the 4% discount on this issuance will be offset to license revenues
as the related license revenues under the license agreement are recognized.

1996 Stock Plan

In January 2000, the Board of Directors approved the increase of 1,000,000
shares of common stock under the 1996 Stock Plan. The increase in shares is
subject to stockholder approval.

Option Grants

Between January 1, 2000 and March 8, 2000 an aggregate of 1,420,050 options
to purchase common stock. The Company will record aggregate deferred
compensation of approximately $4.5 million representing the difference between
the exercise price of stock options granted and the deemed fair value of the
Company's common stock at the date of grant.

F-28
<PAGE> 112
Inside Back Cover

[DESCRIPTION OF ARTWORK

At the top of the page is the name "Selectica" with the company's logo to
the left of it. The following caption is beneath the name of the company and
its logo: "The Internet Selling System Company."

In the upper middle portion of the page is the following text: "Selectica
Delivers Internet Selling Systems and Services to these Global Companies."
Beneath the text is a broad, shaded arrow pointing downward.

Beneath the arrow are our customers' logos.

Beneath the logos, at the bottom of the page is the following text:
"Selectica is enabling companies in a wide range of industries to adopt
electronic business strategies for selling their complex products and
services."]

<PAGE> 113

[Selectica Logo]
<PAGE> 114

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table presents the costs and expenses, other than
underwriting discounts and commissions, payable by us in connection with the
sale of common stock being registered. All amounts are estimates except the SEC
registration fee and the NASD filing fees.

<TABLE>
<S> <C>
SEC Registration fee........................................ $ 30,360
NASD fee.................................................... 8,000
Nasdaq National Market listing fee.......................... 95,000
Printing and engraving expenses............................. 235,000
Legal fees and expenses..................................... 600,000
Accounting fees and expenses................................ 400,000
Blue sky fees and expenses.................................. 15,000
Custodian and transfer agent fees........................... 10,000
Miscellaneous fees and expenses............................. 106,640
----------
Total............................................. $1,500,000
==========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's board of directors to grant indemnification to
directors and officers in terms sufficiently broad to permit indemnification
under limited circumstances for liabilities, including reimbursement for
expenses incurred, arising under the Securities Act of 1933, as amended (the
"Securities Act"). Article VI, Section 6.1 of our bylaws provides for mandatory
indemnification of our directors, officers and employees to the maximum extent
permitted by the Delaware General Corporation Law. Our Certificate of
Incorporation provides that, under Delaware law, our officers and directors
shall not be liable for monetary damages for breach of the officers' or
directors' fiduciary duty as officers or directors to our stockholders and us.
This provision in the Certificate of Incorporation does not eliminate the
officers' or directors' fiduciary duty, and in appropriate circumstances,
equitable remedies like injunctive or other forms of non-monetary relief will
remain available under Delaware law. In addition, each officer or director will
continue to be subject to liability for breach of the officer's or director's
duty of loyalty to us for acts or omissions not in good faith or involving
intentional misconduct, for knowing violations of law, for actions leading to
improper personal benefit to the officer or director and for payment of
dividends or approval of stock repurchases or redemptions that are unlawful
under Delaware law. The provision also does not affect an officer's or
director's responsibilities under any other law, such as the federal securities
laws or state or federal environmental laws. We have entered into
indemnification agreements with our officers and directors, a form of which is
attached as Exhibit 10.1 and incorporated by reference. The indemnification
agreements provide our officers and directors with further indemnification to
the maximum extent permitted by the Delaware General Corporation Law. Reference
is made to Section 7 of the underwriting agreement contained in Exhibit 1.1 to
this prospectus, indemnifying officers and directors of ours against limited
liabilities.

II-1
<PAGE> 115

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

Since June 1996, we have issued and sold the following securities:

1. We granted direct issuances or stock options to purchase 6,698,285
shares of our common stock at exercise prices ranging from $0.01 to $10.00
per share to employees, consultants, directors and other service providers
under our 1996 Stock Plan.

2. We issued and sold an aggregate of 3,893,929 shares of our common
stock to employees, consultants, and other service providers for aggregate
consideration of approximately $7,529,809 under direct issuances or
exercises of options granted under our 1996 Stock Plan.

3. In July 1996, we issued and sold 1,500,000 shares of our Series A
Preferred Stock for an aggregate purchase price of approximately $137,501
and 1,250,000 shares of our common stock for an aggregate purchase price of
$12,500 to Rajen Jaswa under a stock purchase agreement.

4. In July 1996, we issued an aggregate of 2,750,000 shares of our
common stock to Dr. Sanjay Mittal in exchange for 3,250,000 shares of
Catalogics. Of the 2,750,000 shares of our common stock Dr. Mittal received
1,250,000 shares were subject to a repurchase right by us. The repurchase
right lapses over 48 months beginning July 1, 1996. The fair value of the
1,250,000 shares of common stock subject to repurchase was $12,500.

5. In October 1996, we issued 200,000 shares of our Series A
Preferred Stock and 89,000 shares of our common stock to Vasudev Bhandarkar
and an additional 11,000 shares of our common stock to a group of employees
of Alma Enterprises in exchange for the fixed assets of Alma Enterprises.

6. In October 1996, we issued and sold 473,000 shares of common stock
for an aggregate purchase price of $4,730 to Vasudev Bhandarkar under a
stock purchase agreement.

7. In January 1997, we issued and sold 3,750,000 shares of our Series
B Preferred Stock for an aggregate purchase price of approximately
$1,001,330 to a group of investors under a stock purchase agreement.

8. From July 24, 1997 through October 1, 1997, we issued and sold
3,253,126 shares of our Series C Preferred Stock for an aggregate purchase
price of approximately $2,999,382 to a group of investors under a stock
purchase agreement.

9. On April 17, 1998 we issued a warrant to purchase 32,609 shares of
our Series C Preferred Stock with an exercise price of $0.92 per share to
Imperial Bank. The warrant was subsequently amended on July 1, 1998 to be
exercisable for 20,408 shares of our Series D Preferred Stock with an
exercise price of $1.47 per share.

10. From June 17, 1998 through July 27, 1998 we issued and sold
4,863,935 shares of our Series D Preferred Stock for an aggregate purchase
price of approximately $7,149,984 to a group of investors under a stock
purchase agreement.

11. On February 11, 1999, we issued a warrant to purchase 187,129
shares of our Series E Preferred Stock with an exercise price of up to
$4.38 per share to Deutsche Bank Securities. Upon consummation of the
initial public offering, we will terminate the warrant unless it is
previously exercised in accordance with its terms.

12. On May 14, 1999, we issued and sold warrants to purchase 15,000
shares of our Series E Preferred Stock with an exercise price of $4.38 per
share to a group of investors under

II-2
<PAGE> 116

a note and warrant purchase agreement for an aggregate purchase price of
$375.00. On November 15, 1999, two holders exercised their respective
warrants to purchase an aggregate of 5,250 shares of Series E Preferred
Stock. Upon consummation of the initial public offering, we will terminate
the remaining warrants unless they are previously exercised in accordance
with their terms.

13. From June 16, 1999 through October 12, 1999 we issued and sold
6,138,646 shares of our Series E Preferred Stock for an aggregate purchase
price of approximately $26,879,546 to a group of investors under a stock
purchase agreement.

14. On December 10, 1999 we issued warrants to purchase 57,000 shares
of our Series E Preferred Stock with an exercise price of $4.38 per share
to Intel Corporation. Upon consummation of the initial public offering, the
warrant will terminate unless it is previously exercised in accordance with
its terms.

15. On January 7, 2000 we issued and sold a warrant to purchase
800,000 shares of our common stock with an exercise price of the lesser of
$13.00 per share or the initial public offering price to Cisco Systems,
Inc. for an aggregate purchase price of approximately $800,000.

16. On January 19, 2000 Selectica, Inc., a California corporation
(Selectica California), was merged with and into its wholly-owned
subsidiary, Selectica, Inc., a Delaware corporation (Selectica Delaware),
for purposes of reincorporating into the State of Delaware. In connection
with the reincorporation, Selectica Delaware issued shares of its common
stock and preferred stock to the holders of common stock and preferred
stock of Selectica California, such that each holder of common stock or
preferred stock of Selectica California received a proportionate interest
in the common stock or preferred stock of Selectica Delaware. The issuance
of shares in the reincorporation was pursuant to an exemption from the
registration requirements of the Securities Act provided by Rule 145
promulgated thereunder.

17. On January 31, 2000 we entered into an agreement with Samsung SDS
Co. Ltd., to issue and sell 1,200,000 shares of our common stock to Samsung
at a per share price equal to 96% of the initial public offering price.

18. On February 14, 2000 we entered into an agreement with Dell USA,
L.P. to issue and sell 1,200,000 shares of our common stock to Dell USA,
L.P. at a price per share equal to 93% of the initial public offering
price.

Except as otherwise stated, the sale of the above securities was deemed to
be exempt from registration under the Securities Act in reliance upon Section
4(2) of the Securities Act or Regulation D promulgated thereunder, or Rule 701
promulgated under Section 3(b) of the Securities Act as transactions by an
issuer not involving any public offering or transactions under compensation
benefit plans and contracts relating to compensation as provided under Rule 701.
The recipients of securities in each transaction represented their intentions to
acquire the securities for investment only and not with a view to or for sale in
connection with any distribution and appropriate legends were affixed to the
share certificates issued in these transactions. All recipients had adequate
access, through their relationships with us, to information about us.

II-3
<PAGE> 117

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1** Form of Underwriting Agreement.
3.1** Amended and Restated Certificate of Incorporation of the
Registrant.
3.2** Form of Second Amended and Restated Certificate of
Incorporation to be filed immediately following the closing
of the offering made under this Registration Statement.
3.3** Amended and Restated Bylaws of the Registrant.
4.1** Reference is made to Exhibits 3.1, 3.2 and 3.3.
4.2 Form of Registrant's Common Stock certificate.
4.3** Amended and Restated Investor Rights Agreement dated June
16, 1999.
4.4** Warrant to Purchase Stock between the Registrant and
Imperial Bank, dated April 17, 1998; First Amendment to
Warrant between the Registrant and Imperial Bank, dated July
1, 1998.
4.5** Warrant to Purchase Stock between the Registrant and Cisco
Systems, Inc., dated January 14, 2000.
5.1** Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP.
10.1** Form of Indemnification Agreement.
10.2** 1996 Stock Plan.
10.3** 1999 Employee Stock Purchase Plan.
10.4** 1999 Equity Incentive Plan.
10.5** Lease between Spieker Properties L.P. and the Registrant,
dated December 8, 1997.
10.6** Lease between John Arrillaga Survivors Trust and the Richard
T. Perry Separate Property Trust as Landlord and the
Registrant as Tenant, dated October 1, 1999.
10.7**+ Major Account License Agreement between the Registrant and
Fujitsu Network Communications, dated November 4, 1998.
10.8**+ Agreement for Web Site Design and Development Service
between the Registrant and BMW of North America, dated July
15, 1998.
10.9**+ Major Account License Agreement between the Registrant and
the Fireman's Fund Insurance Company, dated June 24, 1999.
10.10**+ Major Account License Agreement between the Registrant and
LoanMarket Resources, dated June 30, 1999.
10.11**+ Major Account License Agreement between the Registrant and
Aspect Telecommunications, dated May 17, 1999.
10.12**+ A Consulting Engagement Proposal from the Registrant to
3Com, dated July 29, 1999.
10.13**+ A Consulting Engagement Proposal from the Registrant to
3Com, dated August 10, 1999.
10.14** Employment Agreement between the Registrant and Rajen Jaswa,
dated as of July 1, 1997.
10.15** Employment Agreement between the Registrant and Dr. Sanjay
Mittal, dated as of July 1, 1997.
10.16** Offer letter from the Registrant to Stephen Bennion dated as
of September 16, 1999.
10.17** Offer letter from the Registrant to Daniel A. Carmel dated
as of July 23, 1999.
10.18**+ Major Account License Agreement between the Registrant and
Samsung SDS Co., Ltd., dated January 12, 2000; Amendment #1
to Major Account License Agreement between the Registrant
and Samsung SDS Co., Ltd., dated February 10, 2000.
10.19**+ International Value Added Reseller Agreement between the
Registrant and Samsung SDS Co., Ltd., dated January 12,
2000; Amendment #1 to International Value Added Reseller
Agreement between the Registrant and Samsung SDS Co., Ltd.,
dated February 29, 2000.
</TABLE>

II-4
<PAGE> 118

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.20** Stock Purchase Agreement between the Registrant and Samsung
SDS Co., Ltd., dated January 31, 2000; Amendment #1 to the
Stock Purchase Agreement between the Registrant and Samsung
SDS Co., Ltd., dated February 8, 2000.
10.21** Lease between John Arrillaga Survivors Trust and Richard T.
Perry Separate Property Trust as Landlord and the Registrant
as Tenant, dated October 1, 1999.
10.22** Stock Purchase Agreement between the Registrant and Dell
USA, L.P., dated February 14, 2000.
23.1 Consent of Ernst & Young LLP, independent auditors.
23.2** Consent of Counsel. Reference is made to Exhibit 5.1.
24.1** Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>

- ---------------
* To be filed by amendment.
** Previously filed.
+ Portions of these exhibits have been omitted pursuant to a request for
confidential treatment.

ITEM 17. UNDERTAKINGS

We undertake to provide to the underwriters at the closing specified in the
underwriting agreement, certificates in the denominations and registered in the
names as required by the underwriters to permit prompt delivery to each
purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant under the Delaware General Corporation Law, the Certificate of
Incorporation or our bylaws, the underwriting agreement, or otherwise, we have
been advised that in the opinion of the Securities and Exchange Commission this
indemnification is against public policy as expressed in the Securities Act, and
is, therefore, unenforceable. In the event that a claim for indemnification
against these liabilities, other than the payment by us of expenses incurred or
paid by a director, officer, or controlling person of ours in the successful
defense of any action, suit or proceeding, is asserted by a director, officer or
controlling person in connection with the securities being registered in this
offering, we will, unless in the opinion of our counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question of whether this indemnification by us is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of this issue.

We undertake that:

(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by us under Rule 424(b)(1) or (4) or 497(h) under
the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered, and the offering of these securities at that time shall be deemed
to be the initial bona fide offering.

(b) The following financial schedule is filed with this registration
statement:

Schedule II -- Valuation and Qualifying Accounts

II-5
<PAGE> 119

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 5 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of San Jose, State of California, on this 9th day of March, 2000.

SELECTICA, INC.

By: /s/ RAJEN JASWA
--------------------------------------
Rajen Jaswa
President and Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 5 to the Registration Statement has been signed by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated:

<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
* Chief Executive Officer and
- --------------------------------------------- President (Principal Executive
Rajen Jaswa Officer) and Chairman of the Board

* Chief Technology Officer, Vice
- --------------------------------------------- President, Engineering and Vice
Sanjay Mittal Chairman of the Board

* Chief Financial Officer (Principal
- --------------------------------------------- Financial and Accounting Officer)
Stephen Bennion

* Director
- ---------------------------------------------
Betsy S. Atkins

* Director
- ---------------------------------------------
Robin Richards Donohoe

* Director
- ---------------------------------------------
Michael Lyons

* Director
- ---------------------------------------------
Thomas Neustaetter

* Director
- ---------------------------------------------
John Fisher

*By: /s/ RAJEN JASWA March 9, 2000
- ---------------------------------------------
Rajen Jaswa
Attorney-in-Fact

*By: /s/ STEPHEN BENNION March 9, 2000
- ---------------------------------------------
Stephen Bennion
Attorney-in-Fact
</TABLE>

II-6
<PAGE> 120

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNT

SELECTICA, INC.

DECEMBER 31, 1999

<TABLE>
<CAPTION>
BALANCE ADDITIONS
AS OF CHARGED TO BALANCE AS
BEGINNING COSTS AND OF END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
----------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended March 31, 1997
Deducted from asset accounts:
Allowance for doubtful accounts........... $ -- $ -- $ -- $ --
Year ended March 31, 1998
Deducted from asset accounts:
Allowance for doubtful accounts........... $ -- $ 29,750 $ -- $ 29,750
Year ended March 31, 1999
Deducted from asset accounts:
Allowance for doubtful accounts........... $ 29,750 $ 74,250 $ -- $104,000
Nine months ended December 31, 1999
Deducted from asset accounts:
Allowance for doubtful accounts........... $104,000 $150,000 $ -- $254,000
</TABLE>
<PAGE> 121

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1** Form of Underwriting Agreement.
3.1** Amended and Restated Certificate of Incorporation of the
Registrant.
3.2** Form of Second Amended and Restated Certificate of
Incorporation to be filed immediately following the closing
of the offering made under this Registration Statement.
3.3** Amended and Restated Bylaws of the Registrant.
4.1** Reference is made to Exhibits 3.1, 3.2 and 3.3.
4.2 Form of Registrant's Common Stock certificate.
4.3** Amended and Restated Investor Rights Agreement dated June
16, 1999.
4.4** Warrant to Purchase Stock between the Registrant and
Imperial Bank, dated April 17, 1998; First Amendment to
Warrant between the Registrant and Imperial Bank, dated July
1, 1998.
4.5** Warrant to Purchase Stock between the Registrant and Cisco
Systems, Inc., dated January 14, 2000.
5.1** Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP.
10.1** Form of Indemnification Agreement.
10.2** 1996 Stock Plan.
10.3** 1999 Employee Stock Purchase Plan.
10.4** 1999 Equity Incentive Plan.
10.5** Lease between Spieker Properties L.P. and the Registrant,
dated December 8, 1997.
10.6** Lease between John Arrillaga Survivors Trust and the Richard
T. Perry Separate Property Trust as Landlord and the
Registrant as Tenant, dated October 1, 1999.
10.7**+ Major Account License Agreement between the Registrant and
Fujitsu Network Communications, Inc., dated November 4,
1998.
10.8**+ Agreement for Web Site Design and Development Service
between the Registrant and BMW of North America, Inc., dated
July 15, 1998.
10.9**+ Major Account License Agreement between the Registrant and
the Fireman's Fund Insurance Company, dated June 24, 1999.
10.10**+ Major Account License Agreement between the Registrant and
LoanMarket Resources, LLC., dated June 30, 1999.
10.11**+ Major Account License Agreement between the Registrant and
Aspect Telecommunications, dated May 17, 1999.
10.12**+ A Consulting Engagement Proposal from the Registrant to
3Com, dated July 29, 1999.
10.13**+ A Consulting Engagement Proposal from the Registrant to
3Com, dated August 10, 1999.
10.14** Employment Agreement between the Registrant and Rajen Jaswa,
dated as of July 1, 1997.
10.15** Employment Agreement between the Registrant and Dr. Sanjay
Mittal, dated as of July 1, 1997.
10.16** Offer letter from the Registrant to Stephen Bennion dated as
of September 16, 1999.
10.17** Offer letter from the Registrant to Daniel A. Carmel dated
as of July 23, 1999.
10.18**+ Major Account License Agreement between the Registrant and
Samsung SDS Co., Ltd., dated January 12, 2000; Amendment #1
to Major Account License Agreement between the Registrant
and Samsung SDS Co., Ltd., dated February 10, 2000.
10.19**+ International Value Added Reseller Agreement between the
Registrant and Samsung SDS Co., Ltd., dated January 12,
2000; Amendment #1 to International Value Added Reseller
Agreement between the Registrant and Samsung SDS Co., Ltd.,
dated February 29, 2000.
10.20** Stock Purchase Agreement between the Registrant and Samsung
SDS Co., Ltd., dated January 31, 2000; Amendment #1 to the
Stock Purchase Agreement between the Registrant and Samsung
SDS Co., Ltd., dated February 8, 2000.
10.21** Lease between John Arrillaga Survivors Trust and Richard T.
Perry Separate Property Trust as Landlord and the Registrant
as Tenant, dated October 1, 1999.
</TABLE>

<PAGE> 122

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.22** Stock Purchase Agreement between the Registrant and Dell
USA, L.P., dated February 14, 2000.
23.1 Consent of Ernst & Young LLP, independent auditors.
23.2** Consent of Counsel. Reference is made to Exhibit 5.1.
24.1** Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>

- ---------------
* To be filed by amendment.
** Previously filed.
+ Portions of these exhibits have been omitted pursuant to a request for
confidential treatment.

<PAGE> 1
EXHIBIT 4.2

[SELECTICA CERTIFICATE ARTWORK]

SELECTICA
THE INTERNET SELLING SYSTEMS COMPANY
SELECTICA, INC.

COMMON STOCK
INCORPORATED UNDER THE LAWS CUSIP 816288 10 4
OF THE STATE OF DELAWARE SEE REVERSE FOR CERTAIN DEFINITIONS

fully paid and non-assessable shares, $0.0001 par value, of the COMMON STOCK of

- --------------------------------SELECTICA, INC.--------------------------------

(hereinafter called the "Corporation"), transferable on the books of the
Corporation in person, or by duly authorized attorney, upon surrender of this
certificate properly endorsed. This certificate is not valid until
countersigned by a Transfer Agent and registered by a Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.

Dated:

/s/ STEPHEN BENNION /s/ RAJEN JASWA
- -------------------------- -------------------------------------
SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER

COUNTERSIGNED AND REGISTERED
U.S. STOCK TRANSFER CORPORATION
TRANSFER AGENT AND REGISTRAR
BY

AUTHORIZED SIGNATURE
<PAGE> 2
Exhibit 4.2

The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:

TEN COM - as tenants in common UNIF GIFT MIN ACT-
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of ----------Custodian ----------
survivorship and not as tenants (Cust) (Minor)
in common under Uniform Gifts to Minors
Act
---------------------------
(State)

Additional abbreviations may also be used though not in the above list.

For Value Received, ________________ hereby sell, assign and transfer unto

PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- -----------------------------------
| |
- ----------------------------------- ------------------------------

- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)

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

of the capital stock represented by the within Certificate, and do hereby
irrevocably [MISSING DATA] and appoint

- ----------------------------------------------------------------------- Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.

Dated
--------------------------

-------------------------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH
THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATSOEVER

Signature Guaranteed:

- ------------------------------------------
THE SIGNATURE(S) MUST BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 172d-13.

<PAGE> 1

EXHIBIT 23.1

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated January 26, 2000 (except for the eleventh paragraph of
Note 10, and Note 14, as to which the date is March 8, 2000) in Amendment No. 5
the Registration Statement (Form S-1 No. 333-92545) and related Prospectus of
Selectica, Inc. for the registration of 4,600,000 shares of its common stock.

Our audits also included the financial statement schedule listed in Item 16(b)
of this Registration Statement. Our responsibility is to express an opinion
based on our audits. In our opinion, the financial statement schedule referred
to above, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.

/s/ ERNST & YOUNG LLP

San Jose, California
March 9, 2000

<ARTICLE> 5
<MULTIPLIER> 1

<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> MAR-31-1999 MAR-31-2000
<PERIOD-START> APR-01-1998 APR-01-1999
<PERIOD-END> MAR-31-1999 DEC-31-1999
<CASH> 0 14,123,645
<SECURITIES> 0 0
<RECEIVABLES> 1,756,307 3,851,739
<ALLOWANCES> 104,000 254,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 1,818,761 18,322,878
<PP&E> 1,289,338 4,639,472
<DEPRECIATION> 276,869 990,099
<TOTAL-ASSETS> 3,193,326 27,119,596
<CURRENT-LIABILITIES> 2,457,800 7,772,145
<BONDS> 0 0
0 0
1,356 1,971
<COMMON> 624 819
<OTHER-SE> 733,546 19,344,661
<TOTAL-LIABILITY-AND-EQUITY> 3,193,326 27,119,596
<SALES> 1,656,015 5,180,625
<TOTAL-REVENUES> 3,444,482 9,139,582
<CGS> 183,715 258,828
<TOTAL-COSTS> 1,367,243 5,498,987
<OTHER-EXPENSES> 9,712,672 16,326,637
<LOSS-PROVISION> 74,250 150,000
<INTEREST-EXPENSE> 28,856 59,856
<INCOME-PRETAX> (7,536,901) (12,366,603)
<INCOME-TAX> 0 50,000
<INCOME-CONTINUING> (7,536,901) (12,416,603)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (7,536,901) (13,341,917)
<EPS-BASIC> (1.58) (2.53)
<EPS-DILUTED> (1.58) (2.53)

</TABLE>