SELECTICA INC, 10-K405, 2000-06-28

SELECTICA INC
10-K405, 2000-06-28
PREPACKAGED SOFTWARE

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

FORM 10-K

(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED MARCH 31, 2000

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

FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .

COMMISSION FILE NUMBER: 0-26130

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

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DELAWARE 77-0432030
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

3 WEST PLUMERIA DRIVE, SAN JOSE, CALIFORNIA 95134-2111
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 570-9700

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK,
$0.0001 PAR VALUE
(TITLE OF CLASS)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

The aggregate market value of the voting stock held by non-affiliates of
the registrant as of May 31, 2000 was approximately $734,965,818.80. Shares of
Common Stock held by each officer and director have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes..

The number of shares outstanding of the registrant's common stock as of May
31, 2000 was 35,942,588.

DOCUMENTS INCORPORATED BY REFERENCE

Part III -- Portions of the registrant's definitive Proxy Statement to be
issued in conjunction with the registrant's Annual Meeting of Stockholders to be
held on September 13, 2000

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SELECTICA, INC.

FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED MARCH 31, 2000

TABLE OF CONTENTS

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PAGE
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PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 11
Item 3. Legal Proceedings........................................... 11
Item 4. Submission of Matters to a Vote of Security Holders......... 11

PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 22
Item 6. Selected Consolidated Financial Data........................ 23
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 24
Item 7A. Quantitative and Qualitative Disclosure about Market Risk... 30
Item 8. Consolidated Financial Statements and Supplementary Data.... 30
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 32

PART III
Item 10. Directors and Executive Officers of the Registrant.......... 33
Item 11. Executive Compensation...................................... 33
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 33
Item 13. Certain Relationships and Related Transactions.............. 33

PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form
8-K......................................................... 34

Signatures............................................................
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In addition to historical information, this Annual Report on Form 10-K
contains forward-looking statements that involve risks and uncertainties that
could cause actual results to differ materially from those projected. Factors
that might cause or contribute to such differences include, but are not limited
to, those discussed in the section entitled "Management's Discussion and
Analysis of Consolidated Financial Condition and Results of Operations" and
"Certain Factors That May Affect Future Results of Operations." You should
carefully review the risks described in other documents the Company files from
time to time with the Securities and Exchange Commission, including the
quarterly reports on Form 10-Q to be filed by the Company in 2000. Readers are
cautioned not to place undue reliance on the forward-looking statements,
including statements regarding the Company's expectations, beliefs, intentions
or strategies regarding the future, which speak only as of the date of this
annual report on Form 10-K. The Company undertakes no obligation to release
publicly any updates to the forward-looking statements included herein after the
date of this document.

PART I

ITEM 1. BUSINESS

BUSINESS OVERVIEW

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 selling applications 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, BMW, Communications, Centigram, Cisco, Cooper Cameron, Dell, Fireman's
Fund, Fujitsu, Hewlett-Packard, Highmark Blue Cross Blue Shield, Louis Vuitton
Moet & Hennessy, Redback Networks, RTS Software, Samsung and Sun Microsystems.

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

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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.

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. We believe that such a system must also be able to take
advantage of the emergence of the Internet as an application platform.

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 Enterprise Resource Planning (ERP), customer relationship
management (CRM) or sales force automation (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 a result are
not easily deployed across a broad range of Internet-enabled devices;

- require significant custom programming for deployment and maintenance;

- 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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SELECTICA SOLUTIONS

Our ACE suite of products is a comprehensive Internet selling system
solution that is designed to enable 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
including PDAs and cellular phones, while offering customers, partners and
employees an interface customized to meet their specific needs. ACE is built
using Java technology and utilizes a unique knowledge base business logic
engine, repository, and a multi-threaded architecture. This design enable the
ACE server to reduce the amount of memory used to support new user sessions, and
to rapidly deploy without custom programming, a cost-effective, robust and
highly scalable, Internet-enhanced sales channel.

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

Provides Comprehensive Solution

ACE provides 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, real-time
information.

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 results in 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 the opportunity to capture a greater percentage of their
customers' business.

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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 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, which may result 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.

SELECTICA PRODUCTS

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

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PRODUCT FEATURES BENEFITS
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ACE Enterprise Electronic commerce configuration Enables customized, one-to-one
Server............... engine selling on the Internet
Highly scalable Designed to support millions of
Internet-architecture simultaneous users by simply
installing more servers
Java-based Platform independence
Supports open standard Integrates with other Internet
integration interfaces based applications and legacy
systems
Dynamic information update Can update product information
without stopping selling process
Easy-to-use, dynamically Maximizes sales for productivity
generated, customized interface by reducing sales training time
Supports devices with limited Can be deployed on a broad range
processing power of devices
HTML-based client Designed to Run 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 Enables mobile users to access
system that runs on laptop our customers' Internet selling
computers systems with the same user
interface as a connected system
Automatically synchronizes Enables updated product and
knowledge bases and quotes pricing information and orders
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PRODUCT FEATURES BENEFITS
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ACE Enterprise Administers multiple ACE Add and remove ACE Enterprise
Manager.............. Enterprise Servers and ACE Mobile Servers without stopping the
selling process
Dynamically scales the load Optimizes available CPU, or
distribution as more servers are central processing unit,
added resources
ACE Quoter............. Central server and storage Enables users to generate, save
facility for customer orders, and revise quotes online
configurations and pricing
information
Provides easy access from remote Enables accurate quotes and
devices to quote archives orders
ACE Studio............. Model, test and debug using a Simplifies development process
single tool
Graphical knowledge base and user Enables application deployment
interface development tools and maintenance by non-technical
personnel
ACE Repository......... Database that stores knowledge Provides an audit trail for the
base in readable, queryable maintenance of large knowledge
format bases
ACE Connector.......... Provides access to other Enables easy integration and
enterprise applications reduces costs and deployment time
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SELECTICA'S TECHNOLOGY

We have developed an innovative 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 requires significant reprogramming to
reflect simple product changes. In contrast, our Internet selling system
solution utilizes a constraint-based engine that is separate from the data
describing the product attributes. This allows businesses to 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.

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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 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 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 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 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.

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. 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 solution, our use of

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Java technology and our multi-threaded architecture, some of our competitors and
potential competitors have 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.

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.

OPERATIONS

SALES AND MARKETING

Our sales and marketing objective is to achieve broad market penetration
through targeted sales and increased brand name recognition. As of March 31,
2000, our sales and marketing team consisted of 133 persons, with sales and
field support personnel in California, Colorado, Delaware, Georgia, Illinois,
Maryland, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey,
Oklahoma, Pennsylvania, Texas, Virginia, Washington, Wisconsin, Canada, England,
Germany, Australia, Mexico, and Sweden. We had 114 sales and marketing personnel
located in San Jose, California.

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.

PROFESSIONAL SERVICES

Consulting 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 151 people as of March 31, 2000, 46 of which are based in San Jose,
California, 102 of which are based in India and 3 of which are based in the
United Kingdom. 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.

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Customer Support

In addition to professional services, we offer various levels of product
maintenance to our customers. We have generally provided maintenance services
under an annual, renewable contract and our services have generally been 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 a service
called Select Onsite, which consists of specialized services provided at our
customers' locations.

RESEARCH AND DEVELOPMENT

To date we have invested substantial resources in research and development.
At March 31, 2000, we had approximately 102 full-time engineers and technical
writing specialists that primarily work on product development, documentation,
quality assurance and testing. Research and development expenses were $7.3
million, $3.9 million, and $2.0 million for the years ended March 31, 2000,
1999, and 1998, respectively.

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.

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

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;

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- 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.

EMPLOYEES

At March 31, 2000, we had a total of 439 employees, of which 139 were in
India. Of the total, 253 were in engineering, consulting and research and
development, 133 were engaged in sales, marketing and business development and
53 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.

ITEM 2. PROPERTIES

FACILITIES

United States. Our principal administrative, sales, marketing, consulting,
and research and development facility occupies approximately 80,000 square feet
of office space in San Jose, California. The lease extends through November
2009. We believe the office space in the new facility will be adequate to meet
our needs through the end of calendar 2000.

India. We have offices in Pune and Chennai primarily for consulting and
quality assurance. These facilities occupy approximately 22,500 and 1,200 square
feet respectively.

ITEM 3. LEGAL PROCEEDINGS

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE SECURITY HOLDERS

During the quarter ended March 31, 2000, the Company submitted the
following matters to its stockholders by written consent:

Pursuant to a written consent of the stockholders of the Company on January
11, 2000, the Company's shareholders approved an Agreement and Plan of Merger
the effect of which was to reincorporate the Company in Delaware. Holders of
approximately 77% of the Company's common stock and 88% of the Company's
preferred stock consented to the above actions and no stockholders voted against
such actions.

Pursuant to a written consent of the stockholders of the Company on January
26, 2000 the stockholders of the Company approved an amendment to the 1996 Stock
Plan to increase the number of shares of Common Stock authorized by 1,000,000
shares from 6,398,590 shares to 7,398,590 shares. Holders of approximately 51%
of the Company's common stock and 63% of the Company's preferred stock consented
to the above actions and no stockholders voted against such actions.

Pursuant to a written consent of the stockholders of the Company on
February 11, 2000 the stockholders of the Company approved the Second Amended
and Restated Certificate of Incorporation of the Company, which was filed in
substantially the same form with Secretary of State of Delaware after the
closing of the Company's initial public offering. The stockholders also approved
the Company's 1999 Equity Incentive Plan and the 1999 Employee Stock Purchase
Plan which were implemented upon the closing of the Company's initial public
offering. In addition, the stockholders approved the form of Indemnification
Agreement for the

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Company's current and future directors and executive officers and approved an
amendment to the 1996 Stock Option Plan to increase the number of shares of
Common Stock authorized by 750,000 shares from 7,398,590 shares to 8,148,590
shares. Holders of approximately 74% of the Company's common stock and 84% of
the Company's preferred stock consented to the above actions and no stockholders
voted against such actions.

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.
Additionally, because we rely on a limited number of customers for our revenue,
the loss or delay of one prospective customer may seriously significantly harm
our operating results.

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

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

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

For those arrangements for which we have concluded that the service element
is not essential to the other elements of the 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 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, December 31, 1999, and March 31, 2000
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

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intend to 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 IN THE
NEAR-TERM.

We have experienced operating losses in each quarterly and annual period
since inception. We incurred net losses applicable to common stockholders of
$3.1 million for the fiscal year ended March 31, 1998, $7.5 million for the
fiscal year ended March 31, 1999 and $31.8 million for the fiscal year ended
March 31, 2000. As of March 31, 2000, we had an accumulated deficit of $43.1
million. We expect to increase our research and development, sales and
marketing, and general and administrative expenses, and consequently our losses
will continue in the future. 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 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 have in the past and expect in the future to incur a significant amount
of amortization of charges related to securities issuances in future periods,
which will negatively affect our operating results. We have deferred
compensation charges of $12.9 million for stock-based compensation and have
related amortization of $1.3 million for the year ended March 31, 2000. We
expect to amortize approximately $3.3 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. In January 2000, in connection with a license and maintenance agreement,
we issued a warrant to purchase 800,000 shares of common stock for $800,000. The
fair value of the warrant was $16.4 million. In the quarter ended March 31,
2000, we incurred a charge of $9.7 million, of which $4.1 million was charged to
cost of license revenues and $5.6 million was charged to costs of services
revenues, in relation to the issuance of these warrants. For the year ended
March 31, 2001, we expect to amortize approximately $5.9 million, as an offset
to revenue, in relation to the issuance of these warrants. See Note 10 of the
Notes to Consolidated Financial Statements.

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, it is difficult to
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<PAGE> 14

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. Some of our competitors and potential competitors have
significant advantages over us, including:

- a longer operating history;

- preferred vendor status with our customers;

- more extensive name recognition and marketing power; and

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

OUR 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.

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<PAGE> 15

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

Our industry is characterized by rapid technological change, changes in
customer requirements, frequent new product and service introductions and
enhancements and emerging industry standards. In order to achieve broad customer
acceptance, our products must be compatible with major software and hardware
platforms used by our customers. Our products currently operate on the Microsoft
Windows NT, Microsoft Windows 2000, Sun Solaris, IBM AIX, Linux, and HP/UX. 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 53% and 85% of
our revenues for the fiscal years ended March 31, 2000 and 1999, respectively,
and our ten largest customers accounted for 76% and 96% of our revenues for the
fiscal years ended March 31, 2000 and 1999 respectively. Revenues from
significant customers as a percentage of total revenues are as follows:

<TABLE>
<S> <C>
FISCAL YEAR ENDED MARCH 31, 2000
LVMH...................................................... 12%
Samsung, SDS.............................................. 12%
3Com Corporation.......................................... 10%
Fireman's Fund Insurance.................................. 10%
</TABLE>

<TABLE>
<S> <C>
FISCAL YEAR ENDED MARCH 31, 1999
BMW of North America...................................... 60%
Olicom.................................................... 10%
</TABLE>

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<PAGE> 16

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.

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
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 43% and 52% of total revenues for the years ended March
31, 2000 and 1999, respectively services revenues have lower gross margins than
license revenues. Gross margins for services revenues were negative 113% and 34%
for the years ended March 31, 2000 and 1999, respectively, compared to gross
margins for license revenues of 51% and 89% for the respective periods.

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
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<PAGE> 17

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.

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 March 31, 2000, we
expanded from 68 to 439 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.

We will be required to manage an increasing number of relationships with
customers, suppliers and employees, and an increasing number of complex
contracts. If we are unable to initiate procedures and
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<PAGE> 18

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.

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 March 31, 2000, there were 139 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.

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.

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<PAGE> 19

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

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

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

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

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

- incur debt;

- assume liabilities;

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

- incur large and immediate write-offs.

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

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

- unanticipated costs;

- diversion of management's attention from our core business;

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

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

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

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

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

these patents. However, we may be required to license either or both patents or
incur legal fees to defend our position that such licenses are not necessary. We
cannot assure you that if required to do so, we would be able to obtain a
license to use either patent on commercially reasonable terms, or at all.

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

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

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

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

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

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

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

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

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

- longer accounts receivable collection cycles;

- expenses associated with localizing products for foreign markets;

- difficulties in managing operations across disparate geographic areas;

- difficulties in hiring qualified local personnel;

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

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

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

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<PAGE> 21

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.

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.

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<PAGE> 22

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

Our common stock is traded over the counter on the Nasdaq National Market
under the symbol "SLTC." The range of reported last sale prices on the Nasdaq
National Market for our common stock for the period between March 10, 2000, our
initial public offering date, and March 31, 2000 was a high of $141.23 and a low
of $75.27.

The trading price of the Company's Common Stock could be subject to wide
fluctuations in response to quarterly variations in operating results,
announcements of technological innovations or new products by the Company or its
competitors, changes in financial estimates or purchase recommendations by
securities analysts and other events or factors. In addition, the stock market
has experienced volatility that has affected the market prices of equity
securities of many high technology companies and that often has been unrelated
to the operating performance of such companies. These broad market fluctuations
may adversely affect the market price of the Company's Common Stock.

As of May 31, 2000, there were approximately 329 holders of record of our
common stock. Brokers and other institutions hold many of such shares on behalf
of stockholders.

DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock. We
currently anticipate that we will retain future earnings, if any, to fund the
development and growth of our business. Therefore, we do not expect to pay any
cash dividends in the foreseeable future.

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<PAGE> 23

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
PERIOD FROM
JUNE 6, 1996
YEARS ENDED (INCEPTION)
MARCH 31, THROUGH
------------------------------ MARCH 31,
2000 1999 1998 1997
-------- ------- ------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
License....................................... $ 9,181 $ 1,656 $ 170 $ 50
Services...................................... 6,907 1,788 -- 5
-------- ------- ------- ------
Total revenues........................ 16,088 3,444 170 55
Cost of revenues:
License....................................... 4,520 184 9 3
Services...................................... 14,551 881 -- --
Services -- related party..................... 135 303 51 --
-------- ------- ------- ------
Total cost of revenues................ 19,206 1,368 60 3
-------- ------- ------- ------
Gross profit.................................... (3,118) 2,076 110 52
Operating expenses:
Research and development...................... 7,347 3,893 1,950 169
Sales and marketing........................... 17,026 4,430 1,055 62
General and administrative.................... 4,554 1,389 293 77
-------- ------- ------- ------
Total operating expenses.............. 28,927 9,712 3,298 308
-------- ------- ------- ------
Loss from operations............................ (32,045) (7,636) (3,188) (256)
Interest and other income, net.................. 1,241 99 87 5
-------- ------- ------- ------
Net loss before taxes........................... (30,804) (7,537) (3,101) (251)
Provision for income taxes...................... 50 -- -- --
-------- ------- ------- ------
Net loss........................................ (30,854) $(7,537) $(3,101) (251)
Deemed dividend on Series E convertible
preferred stock............................... 925 -- -- --
-------- ------- ------- ------
Net loss applicable to common stockholders...... $(31,779) $(7,537) $(3,101) $ (251)
======== ======= ======= ======
Basic and diluted net loss per share applicable
to common stockholders........................ $ (4.54) $ (1.58) $ (0.91) $(0.15)
Shares used in computing basic and diluted net
loss per share applicable to common
stockholders.................................. 6,999 4,782 3,425 1,634
</TABLE>

<TABLE>
<CAPTION>
MARCH 31,
------------------------------------
2000 1999 1998 1997
-------- ------ ------ ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments...... $215,818 $ -- $ 504 $788
Working capital (deficit).............................. 202,611 (639) 422 770
Total assets........................................... 242,452 3,193 1,357 983
Total stockholders' equity............................. 214,078 736 856 957
</TABLE>

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<PAGE> 24

ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The statements contained in this section that are not historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Act of 1934, including statements
regarding the Company's expectations, beliefs, intentions or strategies
regarding the future. All forward-looking statements included in this document
are based on information available to the Company as of the date hereof, and the
Company assumes no obligation to update any such forward-looking statements. It
is important to note that the Company's actual results could differ materially
from those in such forward-looking statements.

The following table sets forth the percentage of total revenues for certain
items in the Company's Consolidated Statements of Income data for the years
ended March 31, 2000, 1999 and 1998.

<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------
2000 1999 1998
---- ---- -----
(IN THOUSANDS)
<S> <C> <C> <C>
AS A PERCENTAGE OF TOTAL REVENUES:
Revenues:
License................................................... 57% 48% 100%
Services.................................................. 43% 52% --%
---- ---- -----
Total revenues.................................... 100% 100% 100%
Cost of revenues:
License................................................... 28% 5% 6%
Services.................................................. 90% 26% --%
Services -- related party................................. 1% 9% 30%
---- ---- -----
Total cost of revenues............................ 119% 40% 36%
---- ---- -----
Gross profit (loss)............................... (19)% 60% 64%
Operating expenses:
Research and development.................................. 46% 113% 1150%
Sales and marketing....................................... 106% 129% 622%
General and administrative................................ 28% 40% 173%
---- ---- -----
Total operating expenses.......................... 180% 282% 1945%
---- ---- -----
Loss from operations........................................ (199)% (222)% (1881)%
Interest and other income (expense), net.................... 8% 3% 51%
---- ---- -----
Net loss before taxes....................................... (191)% (219)% (1830)%
Provision for income taxes.................................. 1% --% --%
---- ---- -----
Net loss.................................................... (192)% (219)% (1830)%
Deemed dividend related to Series E convertible preferred
stock..................................................... 6% --% --%
---- ---- -----
Net loss applicable to common stockholders.................. (198)% (219)% (1830)%
==== ==== =====
</TABLE>

RESULTS OF OPERATIONS

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.

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<PAGE> 25

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.

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 accounted for using contract account 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.

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
expertise in providing the service to be able to separately account for this
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.
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<PAGE> 26

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 four maintenance contracts come up for renewal for which the four customers
elected to renew such maintenance contracts. 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 year ended March 31, 2000 we recognized 45% of license and services
revenues under the residual method, 28% under the percentage-of-completion
method, and 23% using completed contract method. 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.

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, December 31, 1999, and
March 31, 2000 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 year ended March 31, 2000, revenue from Samsung SDS,
LVMH Group, 3Com Corporation, and Fireman's Fund accounted for 12%, 12%, 10%,
and 10% of our revenues, respectively. For the fiscal year ended March 31, 1999,
revenue from BMW of North American and Olicom accounted for 60% and 10% of our
revenues, respectively. 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. We
expect that revenues from a limited number of customers will continue to account
for a large percentage of total revenues in future quarters.

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

We have a limited operating history upon which we may be evaluated. We have
incurred significant losses since inception and, as of March 31, 2000, we had an
accumulated deficit of approximately $43.1 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

26
<PAGE> 27

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.

REVENUES

Our revenues increased to $16.1 million in 2000 from $3.4 million in 1999
from $170,000 in 1998, representing increases of 367% and 1932%, respectively.
We believe that the future percentage increase in revenues will be significantly
less than what has been achieved in prior years.

License. License revenues increased to $9.2 million in 2000 from $1.7
million in 1999 from $170,000 in 1998, representing increases of 454% and 877%,
respectively. The increase in license revenues was primarily due to the addition
of new customers as a result of expanded marketing activities, growth in our
sales force, and greater demand for and the acceptance of our ACE suite of
products. We intend to generate additional license revenues from our existing
customers and anticipate that this number will increase in absolute dollars in
future periods, although it will fluctuate as a percentage of total revenues as
our customers and size of transactions change.

Services. Services revenues increased to $6.9 million in 2000 from $1.8
million in 1999 from none in 1998, representing an increase of 286% from 1999 to
2000. Our services revenues are comprised of fees from consulting, maintenance
and training services. The increases in both 1999 and 2000 were due primarily to
the increase in maintenance and maintenance renewals, consulting, and training
services associated with increased sales of our products. 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.

COST OF REVENUES

Cost of License Revenues. Cost of license revenues consists of the costs of
the product media, duplication, packaging and delivery of our software products
to our customers, which may include documentation, shipping and other data
transmission costs. Cost of license revenues increased to $4.5 million in 2000,
from $184,000 in 1999 from $9,000 in 1998, representing 49%, 11%, and 5% of
license revenues, respectively. The increase in fiscal 2000 was primarily due to
a non-recurring $4.1 million warrant charge associated with a license agreement
entered into in November 1999. We expect cost of license revenues to decrease in
future periods and to maintain a consistent level as a percentage of license
revenues.

Cost of Services Revenues, including Related Party. Cost of services
revenue is comprised mainly of salaries and related expenses of our services
organization. For the fiscal years 1999 and 1998 and through the three months
ended 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. Cost of services revenues including cost
of services from a related party, increased to $14.7 million in 2000 from $1.2
million in 1999 from $51,000 in 1998, representing 213% and 66% of services
revenues for the years ended March 31, 2000 and 1999, respectively. Of the $13.5
million increase in cost of services revenues for 2000, $5.6 million was
attributable to a non-recurring warrant charge associated with a license
agreement entered into in November 1999. $2.6 million was due to increased
personnel and related expenses 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 in 2000 was also attributable to $2.1
million to support our subsidiary in India and $1.8 million in increased travel
and accommodations expenses to client locations as well as consulting fees to
system integrators. We anticipate that cost of services revenues will increase
in absolute dollars in future periods as our number of customers increases. In
addition, with respect to the warrants associated with the

27
<PAGE> 28

revenue contracts, we expect to amortize $5.9 million as an offset to revenue
for the year ended March 31, 2001. 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 year ended March 31, 2000, we experienced negative gross
margins for services revenues due to a $5.6 million warrant charge associated
with a license agreement entered into in November 1999 and due to the timing of
services revenues recognition. We expect that our overall gross margins will
continue to fluctuate due to the timing of services revenue recognition and will
continue to be adversely affected by the lower margins 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 to $7.3 million in 2000 from $3.9 million in 1999
from $2.0 million in 1998, representing increases of 89% and 100%, respectively.
In fiscal 2000, the increase of $3.5 million was attributable to $2.8 million in
increased personnel and related expenses, including $116,000 in amortization of
deferred compensation, from the hiring of additional technical personnel to
support the development of ACE 4.0. The remaining $600,000 consists of $1.0
million of amortization from the development agreement entered into with Intel
offset by a reduction in the allocation of overhead costs. The $1.9 million
increase in research and development costs in 1999 was primarily due to our
increased personnel and related expenses of $1.3 million. We believe our
investment in research and development will increase in absolute dollars 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 relations, collateral sales
materials, advertising and an allocation of facilities, overhead and
depreciation costs. Sales and marketing expenses increased to $17.0 million in
2000 from $4.4 million in 1999 from $1.1 million in 1998, representing increases
of 284% and 320%, respectively. The $12.6 million increase in fiscal 2000 is
primarily due to $7.5 million from the hiring of additional sales and marketing
personnel, including increased sales commissions resulting from higher revenues,
and $737,000 of amortization of deferred compensation. Also in 2000, we incurred
$2.9 million in increased expenses in the areas of marketing programs and sales
related travel. The $3.4 million increase in sales and marketing expenses in
1999 is primarily attributable to increases in payroll expenses of $1.9 million
from the hiring of additional sales and marketing personnel and $742,000
relating to increased marketing activities. We expect that sales and marketing
expenses will increase in absolute dollars 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 to $4.6 million in 2000 from $1.4 million in 1999 from
$293,000 in 1998, representing increases of 228% and 375%, respectively. In
fiscal 2000, we experienced an increase of $3.2 million primarily due to an
increase of $1.7 million in payroll and payroll related expenses, including
$247,000 in amortization of deferred compensation. We also incurred $930,000 for
other legal and professional fees associated with enhancing our infrastructure
to support expansion of our operations and to a lesser extent, an increase in
the provision for the allowance for doubtful accounts. The $1.1 million increase
in general and administrative expenses in 1999 primarily resulted from a
$495,000 increase in payroll expenses due to hiring additional administrative
and support personnel and $370,000 in increased legal and accounting fees to
support our overall growth. We expect that general and administrative expenses
will increase in absolute dollars over the next year as we assume the
responsibilities of a public company and as we hire additional general and
administrative personnel.

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<PAGE> 29

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 to $1.2
million in 2000 from $99,000 in 1999 from $87,000 in 1998. The significant
increase of $1.1 million in fiscal 2000 resulted primarily from interest income
on our initial public offering net proceeds of $194.2 million, which was
completed on March 10, 2000.

PROVISION FOR INCOME TAXES

We have recorded a tax provision of $50,000 for the year ended March 31,
2000. 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.

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. The adoption of SOP No. 98-1 does not have a
material impact on our financial position, results of operations or cash flows.
We 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. The adoption of SOP No. 98-5 does not have a material impact on our
financial position, results of operations or cash flows. We 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.

In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation -- an Interpretation of APB Opinion No. 25." FIN 44 clarifies
the application of APB Opinion No. 25 and, among other issues, clarifies the
following: the definition of an employee for purposes of applying APB Opinion
No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to the
terms of the previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. We do not
expect the application of FIN 44 to have a material impact on our financial
position or results of operations.

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2000, cash and cash equivalents totaled $215.8 million,
compared to no cash at March 31, 1999. We currently have no significant capital
commitments other than obligations under operating leases.

We have funded our operations with proceeds from the sale of preferred
stock, private placement, and public offering. Our initial public offering and
simultaneous private placement during March 2000 netted
29
<PAGE> 30

proceeds of $194.2 million. Cash used by operating activities for the years
ended March 31, 2000 and 1999 was $1.5 million and $6.6 million, respectively.
Cash used in operations for fiscal 2000 was primarily a result of our net loss
offset by a $17.2 million increase in deferred revenues and a $9.7 million
non-recurring warrant charge associated with a license agreement entered into in
November 1999.

Cash used for investing activities for the years ended March 31, 2000 and
1999 was $6.2 million and $731,000, respectively. Investing activities consisted
primarily of capital expenditures.

Cash provided by financing activities for the years ended March 31, 2000
and 1999 was $223.5 million and $7.1 million, respectively. Financing activities
consisted primarily of proceeds from the issuance of stock, and to a lesser
extent, proceeds from borrowings.

We expect to experience growth in our operating expenses in absolute
dollars 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 increase in absolute dollars 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 increase in absolute dollars
as we assume the responsibilities of a public company and as we hire additional
general and administrative personnel.

In June 2000, the board approved the purchase of 22,500 square feet of
office space in Pune, India for approximately $1.4 million,

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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

We established policies and business practices regarding our investment
portfolio to preserve principal while obtaining reasonable rates of return
without significantly increasing risk. We place investments with high credit
quality issuers according to our investment policy. We do not use derivative
financial instruments in our investment portfolio. All investments are carried
at cost, which approximates market value. Due to the short-term nature of our
investments and the immaterial amount of our debt obligation, we believe that
there is no material exposure to interest fluctuation. Therefore, no
accompanying table has been provided.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ANNUAL FINANCIAL STATEMENTS

Our financial statements required by this item are submitted as a separate
section of the Form 10-K. See Item 14(a) for a listing of financial statements
provided in the section titled "Financial Statements."

30
<PAGE> 31

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, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1999 1999 1999 2000
-------- ------------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
License.................................... $ 708 $ 2,125 $ 2,348 $ 4,000
Services................................... 493 1,309 2,157 2,948
------- ------- ------- --------
Total revenues..................... 1,201 3,434 4,505 6,948
Cost of revenues:
License.................................... 52 90 117 4,261
Services................................... 1,069 2,082 1,954 9,446
Services -- related party.................. 135 -- -- --
------- ------- ------- --------
Total cost of revenues............. 1,256 2,172 2,071 13,707
------- ------- ------- --------
Gross profit (loss)................ (55) 1,262 2,434 (6,759)
Operating expenses:
Research and development................... 1,479 761 1,892 3,215
Sales and marketing........................ 1,885 2,978 4,408 7,755
General and administrative................. 498 1,229 1,197 1,630
------- ------- ------- --------
Total operating expenses........... 3,862 4,968 7,497 12,600
------- ------- ------- --------
Loss from operations......................... (3,917) (3,706) (5,063) (19,359)
Interest and other income (expense), net..... (47) 145 221 922
------- ------- ------- --------
Net loss before taxes........................ (3,964) (3,561) (4,842) (18,437)
Provision for income taxes................... 26 24 -- --
------- ------- ------- --------
Net loss..................................... (3,990) (3,585) (4,842) (18,437)
Deemed dividend related to Series E
convertible preferred stock................ -- -- 925 --
------- ------- ------- --------
Net loss applicable to common stockholders... $(3,990) $(3,585) $(5,767) $(18,437)
======= ======= ======= ========
</TABLE>

31
<PAGE> 32

<TABLE>
<CAPTION>
QUARTERS ENDED
------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1998 1998 1998 1999
-------- ------------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
License.................................... $ 164 $ 243 $ 563 $ 686
Services................................... 219 108 683 778
------- ------- ------- -------
Total revenues..................... 383 351 1,246 1,464
Cost of revenues:
License.................................... 28 39 51 66
Services................................... 93 118 272 398
Services -- related party.................. 50 50 53 150
------- ------- ------- -------
Total cost of revenues............. 171 207 376 614
------- ------- ------- -------
Gross profit (loss)................ 212 144 870 850
Operating expenses:
Research and development................... 594 827 1,077 1,395
Sales and marketing........................ 781 776 1,126 1,747
General and administrative................. 212 293 356 528
------- ------- ------- -------
Total operating expenses........... 1,587 1,896 2,559 3,670
------- ------- ------- -------
Loss from operations......................... (1,375) (1,752) (1,689) (2,820)
Interest and other income (expense), net..... 3 60 31 5
------- ------- ------- -------
Net loss before taxes........................ (1,372) (1,692) (1,658) (2,815)
Provision for income taxes................... -- -- -- --
------- ------- ------- -------
Net loss..................................... (1,372) (1,692) (1,658) (2,815)
Deemed dividend related to Series E
convertible preferred stock................ -- -- -- --
------- ------- ------- -------
Net loss applicable to common stockholders... $(1,372) $(1,692) $(1,658) $(2,815)
======= ======= ======= =======
</TABLE>

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.

ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE

Not applicable.

32
<PAGE> 33

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS

Information with respect to directors may be found in the section caption
"Election of Directors" appearing in the definitive proxy statement to be
delivered to stockholders in connection with the 2000 Annual Meeting of
Stockholders. Such information is incorporated herein by reference.

EXECUTIVE OFFICERS

Information with respect to executive officers may be found in the section
caption "Executive Officers" appearing in the definitive proxy statement to be
delivered to stockholders in connection with the 2000 Annual Meeting of
Stockholders. Such information is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

Information with respect to directors may be found in the section caption
"Executive Compensation" appearing in the definitive proxy statement to be
delivered to stockholders in connection with the 2000 Annual Meeting of
Stockholders. Such information is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information with this item may be found in the section caption "Security
Ownership of Certain Beneficial Owners and Management" appearing in the
definitive proxy statement to be delivered to stockholders in connection with
the 2000 Annual Meeting of Stockholders. Such information is incorporated herein
by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information with respect to this item may be found in the section caption
"Certain Relationships and Related Transactions" appearing in the definitive
proxy statement to be delivered to stockholders in connection with the 2000
Annual Meeting of Stockholders. Such information is incorporated herein by
reference.

33
<PAGE> 34

PART IV

ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K

a) The following documents are filed as part of this report:

1. FINANCIAL STATEMENTS

The following are included in item 8 and are filed as part of this Annual
Report on Form 10-K:

- Consolidated Balance Sheets as of March 31, 2000 and 1999

- Consolidated Statement of Operations for the years ended March 31, 2000,
1999 and 1998

- Consolidated Statement of Stockholders' Equity for the years ended March
31, 2000, 1999 and 1998

- Consolidated Statements of Cash Flows for the years ended March 31, 2000,
1999 and 1998

- Notes of Consolidated Financial Statements

- Report of Ernst & Young LLP, Independent Auditors

2. FINANCIAL STATEMENT SCHEDULES

The following financial statement schedule for the years ended March 31,
2000, 1999 and 1998 should be read in conjunction with the consolidated
financial statements of Selectica, Inc. filed as part of this Annual Report on
Form 10-K:

- Schedule II -- Valuation and Qualifying Accounts

Schedules other than that listed above have been omitted since they are
either not required, not applicable, or because the information required is
included in the consolidated financial statements or the notes thereto.

3. EXHIBITS

34
<PAGE> 35

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
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.
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.
27.1 Financial Data Schedule.
</TABLE>

---------------
* Previously filed in the Company's Registration Statement (No. 333-92545)
declared effective on March 9, 2000.

(B) REPORTS ON FORM 8-K

No reports on Form 8-K have been filed with the Securities and Exchange
Commission during the quarter ending March 31, 2000.

35
<PAGE> 36

FINANCIAL STATEMENTS

As required under Item 8. Financial Statements and Supplementary Data, the
consolidated financial statements of the Company are provided in this separate
section. The consolidated financial statements included in this section are as
follows

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Balance Sheets as of March 31, 2000 and
1999...................................................... F-2
Consolidated Statements of Operations -- Years ended March
31, 2000, 1999, and 1998.................................. F-3
Consolidated Statements of Stockholders' Equity -- Years
ended March 31, 2000, 1999, and 1998...................... F-4
Consolidated Statements of Cash Flows -- Years ended March
31, 2000, 1999, and 1998.................................. F-6
Notes to Consolidated Financial Statements.................. F-7
Report of Ernst & Young LLP, Independent Auditors........... F-22
</TABLE>

F-1
<PAGE> 37

SELECTICA, INC.

CONSOLIDATED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
MARCH 31,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $215,818,250 $ --
Accounts receivable, net of allowance for doubtful
accounts of $414,548 at March 31, 2000, and $104,000 at
March 31, 1999......................................... 5,731,122 1,634,577
Advances to related party................................. 17,822 17,730
Prepaid expenses and other current assets................. 9,417,602 166,454
------------ ------------
Total current assets...................................... 230,984,796 1,818,761
Property and equipment, net................................. 6,127,401 1,012,469
Goodwill, net of amortization of $116,375 at March 31, 2000,
and $92,675 at March 31, 1999............................. 29,625 53,325
Advances to related party, noncurrent....................... -- 155,000
Other assets................................................ 2,053,818 53,926
Investments, restricted..................................... 99,845 99,845
Development agreement, net of amortization of $1,011,194 at
March 31, 2000 and none at March 31, 1999................. 3,156,073 --
------------ ------------
Total assets................................................ $242,451,558 $ 3,193,326
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 4,257,718 $ 585,610
Accrued payroll and related liabilities................... 1,879,523 258,105
Other accrued liabilities................................. 3,754,937 328,609
Deferred revenues......................................... 18,481,542 1,285,144
Advances from officers.................................... -- 332
------------ ------------
Total current liabilities................................. 28,373,720 2,457,800
Commitments
Stockholders' equity:
Preferred stock, $0.0001 par value:
Authorized shares -- 25,000,000 at March 31, 2000; none
issued and
outstanding............................................... -- --
Convertible preferred stock, $0.0001 par value, issuable in
series Authorized shares -- None at March 31, 2000 and
25,000,000 at March 31, 1999
Issued and outstanding -- None at March 31, 2000 and
13,567,061 at
March 31, 1999............................................ -- 1,356
Common stock, $0.0001 par value:
Authorized shares -- 75,000,000 at March 31, 2000
Issued and outstanding -- 35,740,291 at March 31, 2000,
and 6,237,877
at March 31, 1999......................................... 3,574 624
Additional paid-in capital.................................. 281,772,647 11,878,365
Deferred compensation....................................... (11,860,133) (255,586)
Stockholder notes receivable................................ (12,715,887) --
Accumulated deficit......................................... (43,122,363) (10,889,233)
------------ ------------
Total stockholders' equity.................................. 214,077,838 735,526
------------ ------------
Total liabilities and stockholders' equity.................. $242,451,558 $ 3,193,326
============ ============
</TABLE>

See accompanying notes.

F-2
<PAGE> 38

SELECTICA, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
------------------------------------------
2000 1999 1998
------------ ----------- -----------
<S> <C> <C> <C>
Revenues:
License.......................................... $ 9,181,213 $ 1,656,015 $ 169,505
Services......................................... 6,906,781 1,788,467 --
------------ ----------- -----------
Total revenues........................... 16,087,994 3,444,482 169,505

Cost of revenues:
License.......................................... 4,519,809 183,715 9,000
Services......................................... 14,551,558 881,017 --
Services -- related party........................ 135,000 302,511 51,200
------------ ----------- -----------
Total cost of revenues................... 19,206,367 1,367,243 60,200
------------ ----------- -----------
Gross profit (loss)................................ (3,118,373) 2,077,239 109,305
Research and development......................... 7,347,037 3,893,750 1,950,101
Sales and marketing.............................. 17,025,515 4,429,368 1,054,798
General and administrative....................... 4,554,111 1,389,554 292,494
------------ ----------- -----------
Total operating expenses........................... 28,926,663 9,712,672 3,297,393
------------ ----------- -----------
Loss from operations............................... (32,045,036) (7,635,433) (3,188,088)
Other income (expense), net........................ (1,765) -- 5,091
Interest income.................................... 1,302,959 127,388 81,548
Interest expense................................... (59,856) (28,856) --
------------ ----------- -----------
Loss before provision for income taxes............. (30,803,698) (7,536,901) (3,101,449)
Provision for income taxes......................... 50,000 -- --
------------ ----------- -----------
Net loss........................................... (30,853,698) (7,536,901) (3,101,449)
Deemed dividend on Series E convertible preferred
stock............................................ 925,314 -- --
------------ ----------- -----------
Net loss applicable to common Stockholders......... $(31,779,012) $(7,536,901) $(3,101,449)
============ =========== ===========
Basic and diluted, net loss per share applicable to
common stockholders.............................. $ (4.54) $ (1.58) $ (0.91)
Weighted-average shares of common stock used in
computing basic and diluted, net loss per share
applicable to common stockholders................ 6,999,061 4,782,235 3,425,395
</TABLE>

See accompanying notes.
F-3
<PAGE> 39

SELECTICA, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCKHOLDER
--------------------- ------------------- PAID-IN DEFERRED NOTES
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION RECEIVABLE
------------ ------ ---------- ------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
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 (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 and comprehensive 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 (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 and comprehensive loss.......... -- -- -- -- -- -- --
------------ ------ ---------- ------ ------------ ------------ ------------
Balance at March 31, 1999........... 13,567,061 1,356 6,237,877 624 11,878,365 (255,586) --
Issuance of Series E convertible
preferred (net of issuance costs
of $930,921)...................... 4,403,068 440 -- -- 24,345,272 -- --
Issuance of Series E convertible
preferred Stock 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
accelerated stock options......... -- -- -- -- 65,625 -- --
Exercise of warrants issued in
connection with Series E preferred
stock financing................... 72,000 8 -- -- 315,477 -- --

TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
------------ -------------
<S> <C> <C>
Balance at March 31, 1997........... $ (250,883) $ 956,992
Issuance of Series C convertible
preferred stock (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 and comprehensive loss.......... (3,101,449) (3,101,449)
------------ ------------
Balance at March 31, 1998........... (3,352,332) 855,727
Issuance of Series D convertible
preferred stock (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 and comprehensive loss.......... (7,536,901) (7,536,901)
------------ ------------
Balance at March 31, 1999........... (10,889,233) 735,526
Issuance of Series E convertible
preferred (net of issuance costs
of $930,921)...................... -- 24,345,863
Issuance of Series E convertible
preferred Stock 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
accelerated stock options......... -- 65,625
Exercise of warrants issued in
connection with Series E preferred
stock financing................... -- 315,485
</TABLE>

F-4
<PAGE> 40
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCKHOLDER
--------------------- ------------------- PAID-IN DEFERRED NOTES
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION RECEIVABLE
------------ ------ ---------- ------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Warrants issued in connection with
development agreement............. -- -- -- -- 381,330 -- --
Warrants issued in connection with
license and services agreement.... -- -- -- -- 16,400,000 -- --
Exercise of stock options by
employees, net of repurchase...... -- -- 1,035,587 103 1,706,058 -- --
Exercise of stock by employees for
notes............................. -- -- 2,034,250 203 12,715,684 -- (12,715,887)
Issuance of common stock for
services.......................... -- -- 33,070 4 106,404 -- --
Issuance of Series E convertible
stock for less than fair value.... 1,505,702 151 -- -- 4,976,264 -- --
Issuance of common stock in public
offering, (net of issuance costs
of $11,280,774)................... -- -- 4,450,000 445 122,218,781 -- --
Issuance of common stock in private
placement......................... -- -- 2,400,000 240 71,999,760 -- --
Conversion of convertible preferred
stock in connection with initial
public offering................... (19,777,707) (1,978) 19,777,707 1,978 -- -- --
Deferred compensation related to
options granted at less than fair
value............................. -- -- -- -- 12,866,004 (12,866,004) --
Amortization of deferred
compensation...................... -- -- -- -- -- 1,261,457 --
Compensation expense related to
issuance of common stock options
to consultant..................... -- -- -- -- 190,000 -- --
Net and comprehensive loss.......... -- -- -- -- -- -- --
------------ ------ ---------- ------ ------------ ------------ ------------
Balance at March 31, 2000........... $ -- $ -- 35,740,291 $3,574 $281,772,647 $(11,860,133) $(12,715,887)
============ ====== ========== ====== ============ ============ ============

TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
------------ -------------
<S> <C> <C>
Warrants issued in connection with
development agreement............. -- 381,330
Warrants issued in connection with
license and services agreement.... -- 16,400,000
Exercise of stock options by
employees, net of repurchase...... -- 1,706,161
Exercise of stock by employees for
notes............................. -- --
Issuance of common stock for
services.......................... -- 106,408
Issuance of Series E convertible
stock for less than fair value.... (925,314) 4,050,950
Issuance of common stock in public
offering, (net of issuance costs
of $11,280,774)................... -- 122,219,226
Issuance of common stock in private
placement......................... -- 72,000,000
Conversion of convertible preferred
stock in connection with initial
public offering................... -- --
Deferred compensation related to
options granted at less than fair
value............................. -- --
Amortization of deferred
compensation...................... -- 1,261,457
Compensation expense related to
issuance of common stock options
to consultant..................... -- 190,000
Net and comprehensive loss.......... (30,853,698) (30,853,698)
------------ ------------
Balance at March 31, 2000........... $(43,122,363) $214,077,838
============ ============
</TABLE>

See accompanying notes.

F-5
<PAGE> 41

SELECTICA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED
MARCH 31,
----------------------------------------
2000 1999 1998
------------ ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $(30,853,698) $(7,536,901) $(3,101,449)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation.............................................. 863,688 208,947 59,359
Amortization.............................................. 23,700 33,700 33,700
Issuance of stock in exchange for services................ 106,408 42,570 920
Increase of fair value in Series E shares................. 265,012 -- --
Amortization of development agreement..................... 1,011,195 -- --
Amortization of deferred compensation..................... 1,261,457 47,500 3,541
Issuance of common stock options to consultant............ 190,000 -- --
Value of warrants in excess of contract................... 9,657,487 -- --
Accrued interest on convertible notes converted to
convertible preferred stock............................. 7,317 -- --
Warrants issued in conjunction with credit agreement...... -- 25,714 --
Warrants issued in conjunction with debt financing........ 35,107 -- --
Accelerated vesting of stock options to employees......... 65,625 170,000 --
Loss on disposal of property and equipment................ 73,565 -- --
Changes in assets and liabilities:
Accounts receivable..................................... (4,096,545) (1,246,633) (387,944)
Advances to related party............................... 304,908 (171,110) (1,620)
Prepaid expenses and other current assets............... (4,341,968) (136,054) (22,635)
Other assets............................................ (1,999,892) -- (51,427)
Accounts payable........................................ 3,672,108 483,830 75,910
Accrued payroll and related liabilities................. 1,621,418 257,740 202
Other accrued liabilities............................... 3,426,328 328,609 --
Deferred revenues....................................... 17,196,398 901,962 383,182
Advances from officers.................................. (332) (15,691) 15,823
------------ ----------- -----------
Net cash used in operating activities............... (1,510,714) (6,605,817) (2,992,438)
INVESTING ACTIVITIES
Capital expenditures........................................ (6,131,935) (928,833) (287,877)
Proceeds from disposition of property and equipment......... 79,750 -- --
Purchases of available-for-sale investments................. -- (5,576,918) (8,569,135)
Sales of available-for-sale investments..................... -- 5,774,612 8,962,331
Acquisition of Selectica, India............................. (150,000) -- --
------------ ----------- -----------
Net cash provided by (used in) investing activities......... (6,202,185) (731,139) 105,319
FINANCING ACTIVITIES
Net proceeds from initial public offering................... 122,219,226 -- --
Net proceeds from private placement......................... 72,000,000
Net proceeds from issuance of convertible preferred stock... 24,913,344 7,092,342 2,988,383
Exercise of warrants in exchange for preferred stock........ 315,485 -- --
Repurchase of common stock.................................. (456,400) -- --
Proceeds from issuance of convertible notes................. 1,000,000 -- --
Proceeds from issuance of warrants.......................... 800,000 -- --
Proceeds from issuance of common stock...................... 1,706,161 38,574 7,340
Proceeds from revenue contract.............................. 1,033,333
------------ ----------- -----------
Net cash provided by financing activities................... 223,531,149 7,130,916 2,995,723
------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents........ 215,818,250 (206,040) 108,604
Cash and cash equivalents at beginning of the period........ -- 206,040 97,436
------------ ----------- -----------
Cash and cash equivalents at end of the period.............. $215,818,250 $ -- $ 206,040
============ =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest...................................... $ 52,539 $ 3,142 $ --
Conversion of preferred stock in common stock............... $ 1,978 $ -- $ --
Deferred compensation related to stock options.............. $ 12,866,004 $ 298,700 $ --
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 $ -- $ --
Warrant issued in conjunction with revenue contract......... $ 16,400,000 $ -- $ --
Issuance of stock in exchange for notes..................... $ 12,715,887 $ -- $ --
Deferred charge on development agreement.................... $ 4,711,252 $ -- $ --
</TABLE>

See accompanying notes.

F-6
<PAGE> 42

SELECTICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 and subsequently reincorporated in the State of
Delaware on January 19, 2000. The Company was organized to develop and market
Internet selling system software for electronic commerce, sales force
automation, and build-to-order applications.

Principles of Consolidation

The consolidated financial statements include all the accounts of the
Company and those of its wholly-owned subsidiaries. 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

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 March 31, 2000
all money market funds are invested in two funds, the Monarch Fund and The
Dreyfus Institutional Preferred Money Market Fund. Accounts receivable are
derived from revenue earned from customers primarily located 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.

F-7
<PAGE> 43
SELECTICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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>
MARCH 31,
--------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Samsung SDS................................................. 12% * *
LVMH Group.................................................. 12% * *
3Com Corporation............................................ 10% * *
Fireman's Fund Insurance.................................... 10% * *
BMW of North America........................................ * 60% *
Olicom, Inc................................................. * 10% *
Hewlett Packard of Germany.................................. * * 45%
Ascend Communications, Inc.................................. * * 27%
InterVoice, Inc............................................. * * 16%
Insight Enterprises, Inc. .................................. * * 12%
</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. As of March 31,
2000 all money market funds are invested in two funds, the Monarch Fund and The
Dreyfus Institutional Preferred Money Market Fund. The fair value, based on
quoted market prices, of cash equivalents is substantially equal to their
carrying value at March 31, 2000 and 1999.

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.

Property and Equipment

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

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.

F-8
<PAGE> 44
SELECTICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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, judgment is required in the
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 the likelihood of 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 require
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

F-9
<PAGE> 45
SELECTICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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.

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 year ended March 31, 2000 was $891,364. Advertising expenses were immaterial
for all other years 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

The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" 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. 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.

F-10
<PAGE> 46
SELECTICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
------------------------------------------
2000 1999 1998
------------ ----------- -----------
<S> <C> <C> <C>
Net loss applicable to common
stockholders............................. $(31,779,012) $(7,536,901) $(3,101,449)
============ =========== ===========
Basic and diluted:
Weighted-average shares of common stock
outstanding........................... 8,629,720 5,987,019 5,243,255
Less weighted-average shares subject to
repurchase............................ (1,630,659) (1,204,784) (1,817,860)
------------ ----------- -----------
Weighted-average shares used in computing
basic and diluted, net loss per share
applicable to common stockholders..... 6,999,061 4,782,235 3,425,395
============ =========== ===========
Basic and diluted, net loss per share
applicable to common stockholders..... $ (4.54) $ (1.58) $ (0.91)
============ =========== ===========
Pro forma:
Shares used above..................... 4,782,235
Pro forma adjustment to reflect
weighted-average effect of the
assumed conversion of convertible
preferred stock..................... 12,499,695
-----------
Shares used in computing pro forma
basic and diluted, net loss per
share applicable to common
stockholders........................ 17,281,930
===========
Pro forma basic and diluted, net loss
per share applicable to common
stockholders........................ $ (0.44)
===========
</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 4,267,035, 1,444,058, and 1,279,600 shares of
common stock for the years ended March 31, 2000, 1999, and 1998 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.

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

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, 2000,
sales to international locations, principally Asia, represented 15% of total
revenues. Foreign sales were less than 10% for the fiscal year ended March 31,
1999. For the fiscal year

F-11
<PAGE> 47
SELECTICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

ended March 31, 1998, sales to international locations, principally Europe,
represented 46% of total revenues. 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
$370,145 at March 31, 2000.

New Accounting Pronouncements

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.

In December 1999 the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements." SAB
101 provides guidance on the recognition, presentation, and disclosure of
revenue in financial statements. SAB 101 is effective for years beginning after
December 15, 1999 and is required to be reported beginning in the quarter ended
June 30, 2000. SAB 101 is not expected to have a significant effect on the
Company's consolidated results of operations, financial position, or cash flows.

In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation -- an Interpretation of APB Opinion No. 25". FIN 44 clarifies
the application of APB Opinion No. 25 and, among other issues clarifies the
following: the definition of an employee for purposes of applying APB Opinion
No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to the
terms of the previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The Company
does not expect the application of FIN 44 to have a material impact on the
Company's results of operations, financial position, or cash flows.

2. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

All cash equivalents as of March 31, 2000 and 1999 are classified as
available-for-sale securities and consist of the following:

<TABLE>
<CAPTION>
MARCH 31,
--------------------
2000 1999
------------ ----
<S> <C> <C>
Cash equivalents:
Money market fund.................................... $200,001,514 $--
Commercial paper..................................... 9,963,375 --
------------ --
Total........................................ $209,964,889 $--
============ ==
</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, 2000, 1999, and 1998 and gross realized gains and losses on sales of
available-for-sale securities during the years ended March 31, 2000, 1999 and
1998 were not significant.

F-12
<PAGE> 48
SELECTICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. PROPERTY AND EQUIPMENT

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

<TABLE>
<CAPTION>
MARCH 31,
------------------------
2000 1999
---------- ----------
<S> <C> <C>
Furniture and equipment............................. $1,033,762 $ 191,681
Computers and software.............................. 4,385,321 1,097,657
Leasehold improvements.............................. 1,664,095 --
---------- ----------
7,083,178 1,289,338
Less: accumulated depreciation and amortization..... (955,777) (276,869)
---------- ----------
Total property and equipment, net......... $6,127,401 $1,012,469
========== ==========
</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 $12,715,887.
The notes bear interest at rates from 6.02% to 6.20% per annum, and are due and
payable four years from the date of issuance. The notes are full recourse, and
in addition, each of the employees has pledged the common stock, 2,034,250
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 2010. 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 March 31, 2000, are as follows:

<TABLE>
<S> <C>
2001.................................................... $ 2,433,527
2002.................................................... 2,453,789
2003.................................................... 2,401,892
2004.................................................... 1,575,072
Thereafter.............................................. 14,110,527
-----------
Total future minimum payments................. 22,974,807
Future receipts under sublet agreement.................. (875,067)
-----------
Total net future minimum payments............. $22,099,740
===========
</TABLE>

Rent expense was $1,763,985, $489,649 and $147,710 for the years ended
March 31, 2000, 1999, and 1998, respectively.

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.

F-13
<PAGE> 49
SELECTICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. LINE OF CREDIT

The Company 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 March 31, 2000.

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, 2000 and 1999, accumulated amortization of intangible
assets was approximately $116,375 and $92,675, respectively.

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 property and equipment
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, 2000
and 1999, 156,250, and 781,250 shares are subject to repurchase at $0.01 per
share, respectively.

In March, 2000, the Company completed its initial public offering, of
4,450,000 shares of common stock, which included 450,000 shares purchased by the
underwriters over-allotment option. In addition, 2,400,000

F-14
<PAGE> 50
SELECTICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

shares were issued in a private placement. At the closing of the offering, all
issued and outstanding shares of the Company's preferred stock were converted
into 19,777,707 shares of common stock.

Common Stock Reserved for Future Issuance

At March 31, 2000, common stock reserved for future issuance was as
follows:

<TABLE>
<S> <C>
Stock option plans:
Outstanding............................................... 3,446,627
Reserved for future grants................................ 2,200,000
Employee Stock Purchase Plan................................ 1,000,000
Warrants to purchase common stock........................... 820,408
---------
Total common stock reserved for future issuance... 7,467,035
=========
</TABLE>

Convertible Preferred Stock

Prior to the Company's initial public offering in March 2000, the Company
had 19,777,707 shares of convertible preferred stock authorized. In accordance
with the convertible preferred stock rights, all preferred stock outstanding
automatically converted into 19,777,707 shares of common stock upon closing of
the initial public offering. There was no convertible stock authorized, issued,
or outstanding at March 31, 2000.

Convertible Preferred Stock at March 31, 1999 was as follows:

<TABLE>
<CAPTION>
SHARES ISSUED AND
AUTHORIZED SHARES OUTSTANDING
----------------- -----------------
<S> <C> <C>
Series A....................................... 1,800,000 1,700,000
Series B....................................... 4,000,000 3,750,000
Series C....................................... 3,300,000 3,253,126
Series D....................................... 5,000,000 4,863,935
Undesignated................................... 10,900,000 --
---------- ----------
25,000,000 13,567,061
========== ==========
</TABLE>

Preferred Stock

The Company's Certificate of Incorporation was amended to authorize
25,000,000 shares of preferred stock at a par value of $0.0001 per share upon
reincorporation in Delaware in January 2000. There was no preferred stock issued
and outstanding at March 31, 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.

Warrants

The Company had previously issued convertible preferred stock warrants.
Upon the effectiveness of the Company's initial public offering, all such
warrants became exercisable as common stock.

In association with a credit agreement entered into with a financial
institution, the Company issued a warrant that entitles the holder to purchase
20,408 shares of Series D convertible preferred stock at an exercise

F-15
<PAGE> 51
SELECTICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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, which
expired on June 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 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 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 were
exercised in fiscal 2000.

In connection with the issuance of shares of the Company's Series E
convertible preferred stock in fiscal 2000, 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 were exercised on February 25, 2000. The Company
determined the fair value of the warrants of $3.29 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 5.78%, 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 and were exercised on March 9, 2000. The Company
determined the fair value of the warrants using the Black-Scholes valuation
model assuming a fair value of the Company's Series E convertible preferred
stock of $19.00, risk free interest rate of 5.5%, volatility factor of 80% and a
life of 22 months. The fair value of $381,000 is being amortized over the
remaining life of the development agreement. As March 31, 2000, total
amortization of this warrant was approximately $65,000.

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 $16.4 million and was based upon a
Black-Scholes valuation model with the following assumptions: risk free interest
rate of 5.5%, dividend yield of 0%, volatility of 80%, expected life of 2 years,
exercise price of $13.00 and fair value of $30.00. As the warrant value less the
warrant purchase price of $800,000, exceeds the related license and maintenance
revenue under the agreement and subsequent services agreements, the Company has
recorded a $9.7 million loss on the contract for the year ended March 31, 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

F-16
<PAGE> 52
SELECTICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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.

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 March 10, 2000 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.

Activity under all stock option plans is as follows:

<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS
------------------------------------------------------------
SHARES NUMBER OF WEIGHTED-AVERAGE
AVAILABLE SHARES EXERCISE PRICE EXERCISE PRICE
---------- ---------- --------------- ----------------
<S> <C> <C> <C> <C>
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....... 6,809,090 -- $- $ --
Options granted................... (5,305,200) 5,305,200 $1.500 - $30.00 $10.04
Options exercised................. -- (3,085,818) $0.030 - $30.00 $ 4.71
Options canceled.................. 196,405 (196,405) $0.100 - $25.50 $ 2.60
Shares repurchased................ 15,981 -- $0.100 - $0.500 $ .22
Stock grant for services.......... (33,070) -- $1.500 - $4.380 $ 2.37
---------- ----------
Balance at March 31, 2000........... 2,334,179 3,446,627 $0.100 - $30.00 $11.19
========== ==========
</TABLE>

F-17
<PAGE> 53
SELECTICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<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 MARCH 31, CONTRACTUAL EXERCISE MARCH 31, PURCHASE
EXERCISE PRICES 2000 LIFE PRICE 2000 PRICE
--------------- ------------ ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$0.1000 - $0.1000 66,076 7.84 $0.1000 20,832 $0.1000
$0.2000 - $0.5000 181,117 8.43 $0.2884 32,529 $0.3271
$1.0000 - $1.2500 108,406 8.87 $1.0874 26,964 $1.0548
$1.5000 - $2.5000 659,615 9.32 $2.0901 45,520 $1.9361
$4.3800 - $4.3800 205,350 9.57 $4.3800 6,552 $4.3800
$8.5000 - $10.0000 313,423 9.74 $9.6100 3,402 $8.9414
$11.000 - $11.0000 1,246,990 9.86 $11.000 24,326 $11.000
$25.500 - $30.0000 665,650 9.94 $29.127 -- $0.0000
--------- ---- ------- ------- -------
$0.1000 - $30.0000 3,446,627 9.60 $11.191 160,125 $2.8478
</TABLE>

All shares granted under the Plan are exercisable, however, shares
exercised but not vested are subject to repurchase. At March 31, 2000, 2,612,917
shares were subject to repurchase under the Plan.

1999 Equity Incentive Plan

The Company adopted the 1999 Equity Incentive Plan (the Equity Incentive
Plan) in fiscal 2000. 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 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 development, and
recruiting services. During fiscal 2000, 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, 2000, 1999, and 1998, the Company recorded
aggregate deferred compensation of $13,164,704 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 years ended March
31, 2000, 1999 and 1998, the Company amortized $1,261,457, $47,500, and $3,541,
respectively.

F-18
<PAGE> 54
SELECTICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

As permitted under FAS 123, "Accounting for Stock-Based Compensation", the
Company has elected to continue to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its stock based awarded to employees. Under
APB 25, the Company generally recognizes no compensation expense with respect to
such awards.

Pro forma information regarding net loss is required by FAS 123 and has
been determined as if the Company had 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. The
minimum-value 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 expected life and risk-free interest
rates. Because the Company's options have characteristics significantly
different from those of traded options and because the changes in the subjective
input assumptions can materially affect the fair value estimate, the existing
model does not necessarily provide a reliable single measure of the fair value
of its options.

The Company has not granted stock options subsequent to the initial public
offering on March 10, 2000. The Company will value options granted subsequent to
the initial public offering using the Black-Scholes valuation model.

The fair value of stock options granted in fiscal years 2000, 1999 and 1998
were estimated at the date of grant using the following weighted average
assumptions:

<TABLE>
<CAPTION>
MARCH 31,
--------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate..................................... 5.96% 5.05% 5.94%
Expected dividend yield..................................... 0.00% 0.00% 0.00%
Volatility.................................................. 0.00% 0.00% 0.00%
Expected life of options in years........................... 7.00 7.00 7.00
</TABLE>

The weighted-average fair value where exercise price is equal to the deemed
fair value of common stock on date of grant for the years ended March 31, 2000,
1999 and 1998 was $4.90, $0.11 and $0.02, respectively. The weighted-average
fair value where exercise price is less than the deemed fair value of common
stock on date of grant for the years ended March 31, 2000 and 1999 was $6.75 and
$0.56, respectively. There were no options where the exercise price was less
than the deemed fair value of common stock on the date of grant 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.

F-19
<PAGE> 55
SELECTICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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>
YEAR ENDED
MARCH 31, 2000
--------------
<S> <C>
Current provision:
State..................................................... $20,000
Foreign................................................... 30,000
-------
$50,000
=======
</TABLE>

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>
YEARS ENDED MARCH 31,
------------------------------------------
2000 1999 1998
------------ ----------- -----------
<S> <C> <C> <C>
Tax (benefit) at federal statutory rate.... $(10,781,000) $(2,637,000) $(1,085,000)
Loss for which no tax benefit is currently
recognizable............................. 10,781,000 2,637,000 1,085,000
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,
-------------------------------------------
2000 1999 1998
------------ ------------ -----------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......... $ 4,416,000 $ 3,967,000 $ 1,188,000
Tax credit carryforwards................ 619,000 296,000 103,000
Deferred revenue........................ 7,522,000 314,000 153,000
Accruals and reserves not currently
deductible........................... -- 136,000 --
Nondeductible deferred charge............. 3,952,000 -- --
Other..................................... 723,000 -- --
Total deferred tax assets................. 17,232,000 -- --
Valuation allowance....................... (17,232,000) -- --
------------ ------------ -----------
Net deferred tax assets......... $ -- $ -- $ --
============ ============ ===========
</TABLE>

F-20
<PAGE> 56
SELECTICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company has recorded a tax provision of $50,000 for the year ended
March 31, 2000. The provision for income taxes consists primarily of state
income taxes and foreign taxes. There is no provision for income taxes for the
years ended March 31, 1999 and 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 $12,519,000 and $3,269,000 during the
years ended March 31, 2000 and 1999, respectively.

As of March 31, 2000, the Company had federal and state net operating loss
carryforwards of approximately $10,900,000 and $10,300,000, respectively. As of
March 31, 2000, the Company also had federal and state research and development
tax credit carryforwards of approximately $400,000 and $300,000, 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, 2000, 1999, and 1998, 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 $135,000, $302,511,
and $51,200 for the years ended March 31, 2000, 1999, and 1998, respectively.
The Company also advanced $155,000 to Selectica India during 1999 for future
services efforts. 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 year 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 March 31, 2000.

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, 2000, 1999, and 1998. Administrative expenses relating to
the 401(k) Plan are insignificant.

F-21
<PAGE> 57

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, 2000 and 1999, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended March 31, 2000. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule 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, 2000 and 1999, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended March 31, 2000,
in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.

/s/ ERNST & YOUNG LLP

San Jose, California
May 26, 2000

F-22
<PAGE> 58

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Jose, State of
California, on the 28th day of June, 2000.

SELECTICA, INC.
Registrant

/s/ STEPHEN BENNION
--------------------------------------
Stephen Bennion
Chief Financial Officer and
Vice President of Finance

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

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
PRINCIPAL EXECUTIVE OFFICER AND DIRECTOR:

/s/ RAJEN JASWA President and Chief Executive June 28, 2000
--------------------------------------------------- Officer and Chairman of the Board
Rajen Jaswa

PRINCIPAL FINANCIAL OFFICER AND PRINCIPAL
ACCOUNTING OFFICER:

/s/ STEPHEN BENNION Vice President of Finance and Chief June 28, 2000
--------------------------------------------------- Financial Officer and Secretary
Stephen Bennion

ADDITIONAL DIRECTORS:

/s/ DR. SANJAY MITTAL Vice President of Engineering and June 28, 2000
--------------------------------------------------- Chief Technical Officer and Vice
Dr. Sanjay Mittal Chairman of the Board

/s/ BETSY ATKINS Director June 28, 2000
---------------------------------------------------
Betsy Atkins

/s/ JOHN FISHER Director June 28, 2000
---------------------------------------------------
John Fisher

/s/ MICHAEL LYONS Director June 28, 2000
---------------------------------------------------
Michael Lyons

/s/ ROBIN RICHARDS DONOHOE Director June 28, 2000
---------------------------------------------------
Robin Richards Donohoe

/s/ THOMAS NEUSTAETTER Director June 28, 2000
---------------------------------------------------
Thomas Neustaetter
</TABLE>
<PAGE> 59

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
CHARGED TO
BALANCE AT OPERATING BALANCE AT
BEGINNING OF YEAR EXPENSES DEDUCTIONS(1) END OF YEAR
----------------- -------------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts:
Year ended March 31, 2000. $104 $325 $14 $415
Year ended March 31, 1999. $ 30 $ 74 $-- $104
Year ended March 31, 1998. $ -- $ 30 $-- $ 30
</TABLE>

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

(1) Deductions related to the allowance for doubtful accounts represent amounts
written off against the allowance.
<PAGE> 60

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
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 3.2 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.
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 Arrilliga 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.
</TABLE>
<PAGE> 61

<TABLE>
<CAPTION>
EXHIBIT
NO. 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.
27.1 Financial Data Schedule.
</TABLE>

---------------
* Previously filed in the Company's Registration Statement (No. 333-92545)
declared effective on March 9, 2000.