Determine 10Q 2006 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended December 31, 2005


o		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 000-29637

SELECTICA, INC.

(Exact Name of Registrant as Specified in Its Charter)


DELAWARE				77-0432030

(State of Incorporation)				(IRS Employer Identification No.)

3 WEST PLUMERIA DRIVE, SAN JOSE, CA 95134

(Address of Principal Executive Offices)

(408) 570-9700

(Registrant’s Telephone Number, Including Area Code)

Indicate by a check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yesþ NOo

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

Large accelerated filer o Accelerated filer þ Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act. YESo NOþ

The number of shares outstanding of the registrant’s common stock, par value $0.0001 per share, as of January 31, 2006, was 32,630,760.

FORM 10-Q
SELECTICA, INC.
INDEX


PART I FINANCIAL INFORMATION

ITEM 1: Financial Statements (unaudited)

Condensed Consolidated Balance Sheets as of December 31, 2005 and March 31, 2005			3

Condensed Consolidated Statements of Operations for the three and nine months ended December 31, 2005 and 2004			4

Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 2005 and 2004			5

Notes to Condensed Consolidated Financial Statements			6

ITEM 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations			18

ITEM 3: Quantitative and Qualitative Disclosures about Market Risk			27

ITEM 4 Controls and Procedures			28

PART II OTHER INFORMATION

ITEM 1: Legal Proceedings			29

ITEM 1A: Risk Factors			31

ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds			43

ITEM 3: Defaults Upon Senior Securities			44

ITEM 4: Submission of Matters to a Vote of Security Holders			44

ITEM 5: Other Information			44

ITEM 6: Exhibits			44

Signatures			46

EXHIBIT 10.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

PART I: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

SELECTICA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)


	December 31,			March 31,
	2005			2005 *
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	16,553		$	29,360
Short-term investments		69,793			63,903
Accounts receivable, net of allowance for doubtful accounts of $117 and $149, respectively		2,363			2,811
Prepaid expenses and other current assets		1,915			2,093
Investments, restricted—short term		—			182

Total current assets		90,623			98,349

Property and equipment, net		2,542			3,158
Other assets		1,134			511
Long-term investments		4,887			5,606

Total assets	$	99,186		$	107,624


Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	2,599		$	2,261
Accrued payroll and related liabilities		1,294			1,935
Other accrued liabilities		1,878			1,472
Other accrued liabilities — litigation settlement		7,500			—
Deferred revenues		2,323			2,802

Total current liabilities		15,594			8,470


Other long term liabilities		1,164			1,434


Contingencies (see Note 8)

Stockholders’ equity:

Common stock		4			4
Additional paid-in capital		293,224			292,616
Deferred compensation		(23	)		(91	)
Accumulated deficit		(188,542	)		(172,613	)
Accumulated other comprehensive income (loss)		(151	)		(448	)
Treasury stock		(22,084	)		(21,748	)

Total stockholders’ equity		82,761			97,720

Total liabilities and stockholders’ equity	$	99,186		$	107,624

* Derived from audited consolidated financial statements

See accompanying notes.

SELECTICA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)


	Three Months Ended						Nine Months Ended
	December 31,						December 31,
	2005			2004			2005			2004
Revenues:
License	$	520		$	2,301		$	3,593		$	6,633
Services		4,737			6,613			14,822			17,217

Total revenues		5,257			8,914			18,415			23,850
Cost of revenues:
License		164			217			502			630
Services		2,255			3,088			6,780			9,307

Total cost of revenues		2,419			3,305			7,282			9,937

Gross profit		2,838			5,609			11,134			13,913
Operating expenses:
Research and development		1,943			3,049			6,720			9,505
Sales and marketing		1,592			2,939			5,014			9,094
General and administrative		3,204			1,931			17,087			6,027
Litigation settlement		7,500			—			—			—

Total operating expenses		14,239			7,919			28,821			24,626

Loss from operations		(11,402	)		(2,310	)		(17,688	)		(10,713	)
Other income		—			95			—			95
Interest income		647			703			1,832			1,441

Loss before provision for income taxes		(10,755	)		(1,512	)		(15,856	)		(9,177	)

Provision for income taxes		25			—			73			—

Net loss	$	(10,780	)	$	(1,512	)	$	(15,929	)	$	(9,177	)

Basic and diluted net loss per share	$	(0.33	)	$	(0.05	)	$	(0.48	)	$	(0.28	)

Weighted-average shares of common stock used in computing basic and diluted net loss per share		32,958			32,450			32,894			32,600

See accompanying notes.

SELECTICA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)
(UNAUDITED)


	Nine Months Ended
	December 31,
	2005			2004
Operating activities
Net loss	$	(15,929	)	$	(9,177	)
Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization		887			914
Gain on disposal of fixed assets		(28	)		(14	)
Amortization of deferred compensation		53			105
Net gain on sales of eInsurance assets					95
Charge related to stock option modification		64			16
Changes in assets and liabilities:
Accounts receivable		523			(1,899	)
Prepaid expenses and other current assets		179			163

Accounts payable		339			576
Accrued payroll and related liabilities		(641	)		114
Other accrued liabilities and other long term liabilities		136			(1,008	)
Other accrued liabilities – litigation settlement		7,500			—
Deferred revenues		(479	)		(4,024	)

Net cash used in operating activities		(7,396	)		(14,139	)


Investing activities
Capital expenditures		(26	)		(588	)
Proceeds from restricted investments		182			(1	)
Purchase of short term investments		(14,969	)		(23,353	)
Net proceeds on sales of eInsurance assets		—			(95	)
Proceeds from maturities of short-term investments		9,274			44,063
Purchase of long term investments		(42,657	)		(38,087	)
Proceeds from maturities of long-term investments		43,376			19,676
Acquisition cost paid		(892	)		—
Proceeds from disposal of fixed assets		29			14

Net cash used in investing activities		(5,683	)		1,629


Financing activities
Cost of common stock repurchase		(336	)		(798	)
Proceeds from issuance of common stock		608			1,182

Net cash provided by financing activities		272			384


Net decrease in cash and cash equivalents		(12,807	)		(12,126	)
Cash and cash equivalents at beginning of the period		29,360			31,349

Cash and cash equivalents at end of the period	$	16,553		$	19,223

See accompanying notes.

SELECTICA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. Basis of Presentation

The condensed consolidated balance sheet as of December 31, 2005, the condensed consolidated statements of operations for the three and nine months ended December 31, 2005 and 2004, and the condensed consolidated statement of cash flows for the nine months ended December 31, 2005 have been prepared by the Company and are unaudited. In the opinion of management, all necessary adjustments (which include normal recurring adjustments) have been made to present fairly the financial position at December 31, 2005, and the results of operations for the three and nine months ended December 31, 2005 and 2004 and cash flows for the nine months ended December 31, 2005 and 2004. Interim results are not necessarily indicative of the results for a full fiscal year. The consolidated balance sheet as of March 31, 2005 has been derived from the audited consolidated financial statements at that date.

Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2005.

2. Summary of Significant Accounting Policies

Principles of Consolidation

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

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States 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.

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 into U.S. dollars 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 a transaction. The effects of foreign currency remeasurement are reported in current operations and were immaterial for all periods presented.

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, long-term investments, restricted investments, and accounts receivable. The Company places its short-term, long-term and restricted investments in high-credit quality financial institutions. The Company is exposed to credit risk in the event of default by these institutions to the extent of the amount recorded on the balance sheet. As of December 31, 2005, the Company has invested in short-term and long-term investments including commercial paper, corporate notes/bonds, and government agency notes/bonds. Restricted investments include corporate bonds and term deposits. 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.

Cash Equivalents and Investments

Cash equivalents consist of short-term, highly liquid financial instruments that are principally money market funds, commercial paper, corporate notes and government agency notes with insignificant interest rate risk; cash equivalents are readily convertible to cash and have maturities of three months or less from the date of purchase. The fair value, based on quoted market prices, of cash equivalents is substantially equal to their carrying value at December 31, 2005 and March 31, 2005. The Company considers all investment securities with original maturities of more than three months but less than one year to be short-term investments. Investments with maturities of more than one year are considered to be long-term investments.

The Company classifies investments as available-for-sale at the time of purchase. Unrealized gains or losses on available-for-sale securities are included in accumulated other comprehensive income 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 and other income. The cost of securities sold is based on the specific-identification method. The Company monitors its investments for impairment on a quarterly basis and determines whether a decline in fair value is other-than-temporary by considering factors such as current economic and market conditions, the credit rating of the issuers, the length of time an investment has been below our carrying value and our ability and intent to hold the investment to maturity. If a decline in fair value, caused by factors other than changes in interest rates, is determined to be other-than-temporary, an adjustment is recorded and charged to operations.

Allowance for Doubtful Accounts

The Company evaluates the collectibility of its accounts receivable based on a combination of factors. When the Company believes a collectibility issue exists with respect to a specific receivable, it records an allowance to reduce that receivable to the amount that it believes to be collectible.

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed using the straight-line method based on estimated useful lives. The estimated useful lives for computer software and equipment is three years, furniture and fixtures is five years, and leasehold improvements is the shorter of the applicable lease term or estimated useful life. The estimated life for the building is 25 years and land is not depreciated.

Revenue Recognition

The Company enters into arrangements for the sale of 1) licenses of software products and related maintenance contracts; 2) bundled license, maintenance, and services; and 3) consulting services. 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 fees are fixed or determinable, and collection is probable. If any of these criteria are not met, revenue recognition is deferred until such time as all of the criteria are met.

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 Software Revenue Recognition, with Respect to Certain Transactions.” The Company recognizes maintenance revenues over the term of the maintenance contract because vendor-specific objective evidence of fair value for maintenance exists. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue. If vendor specific objective evidence does not exist to allocate the total fee to all undelivered elements of the arrangement, revenue is deferred until the earlier of the time at which (1) such evidence does exist for the undelivered elements, or (2) all elements are delivered. If unspecified future products are given over a specified term, the Company recognizes license revenue ratably over the applicable period. The Company recognizes license fees from resellers as revenue when the above criteria have been met and the reseller has sold the subject licenses through to the end-user.

Arrangements consisting of license, maintenance and other services.Services revenues 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 under the percentage of completion contract method in accordance with the provisions of SOP 81-1, “Accounting for Performance of Construction Type and Certain Production Type Contracts"(SOP 81-1). The Company follows the percentage of completion method if reasonably dependable estimates of progress toward completion of a contract can be made. The Company estimates the percentage of completion on contracts utilizing hours and costs incurred to date as a percentage of the total estimated hours and costs to complete the project. Recognized revenues and profits are subject to revisions as the contract progresses to completion. Revisions in profit estimates are charged to income in the period in which the facts that give rise to the revision become known. The Company also accounts for certain arrangements under the completed contract method, when the terms of acceptance and warranty commitments preclude revenue recognition until all uncertainties expire. To date, when the Company has been primarily responsible for the implementation of the software, services have been considered essential to the functionality of the software products, and therefore related license and services revenues have been recognized pursuant to SOP 81-1.

For those contracts that include contract milestones or acceptance criteria, the Company recognizes revenue as such milestones are achieved or as such acceptance occurs.

For those contracts with unspecified future products and services which are not essential to the functionality of the other elements of the arrangement, license revenue is recognized by the subscription method over the length of time that the unspecified future product is available to the customer.

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

Arrangements consisting of consulting services.Consulting services consist of 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 the customized environments. Consulting services may be recognized based on customer acceptance in the form of customer-signed timesheets, invoices, cash received, or customer-signed acceptance as defined in the master service agreement. When estimates of costs to complete consulting contracts exceed the revenues to be recognized, the expected loss is recorded when it becomes evident.

Customer Concentrations

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

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


	Three Months Ended						Nine Months Ended
	December 31,						December 31,
	2005			2004			2005			2004
Customer A		26	%		18	%		26	%		11	%
Customer B		22	%			*		22	%		22	%
Customer C			*		35	%			*		14	%
Customer D			*		14	%			*		13	%
Customer E			*			*			*		10	%


•		Customer account was less than 10% of total revenues.

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


	December 31,			March 31,
	2005			2005
Customer A		26	%			*
Customer B		25	%			*
Customer C		17	%		45	%
Customer D			*		26	%
Customer E			*		10	%


*		Customer account was less than 10% of net accounts receivable.

Warranties and Indemnifications

The Company generally provides a warranty for its software products to its customers and accounts for its warranties under SFAS No. 5, “Accounting for Contingencies”. The Company’s products are generally warranted to perform substantially in accordance with the functional specifications set forth in the associated product documentation for a period of 90 days. In the event there is a failure of a product under such warranties, the Company generally is obligated to correct the product to conform to the product documentation or, if the Company is unable to do so, the customer is entitled to seek a refund of the purchase price of the product. The Company has not provided for a warranty accrual or incurred any warranty costs as of December 31, 2005 and March 31, 2005. To date, the Company has not refunded any amounts in relation to any such warranty.

The Company generally agrees to indemnify its customers against legal claims that the Company’s software infringes certain third-party intellectual property rights and accounts for its indemnification under SFAS 5. In the event of such a claim, the Company is obligated to defend its customer against the claim and to either settle the claim at the Company’s expense or pay damages that the customer is legally required to pay to the third-party claimant. In addition, in the event of the infringement, the Company agrees to modify or replace the infringing product, or, if those options are not reasonably possible, to refund the cost of the software. To date, the Company has no knowledge of any claims being filed nor has the Company been required to make any payment resulting from infringement claims asserted against our customers. As such, the Company has not provided for an infringement accrual as of December 31, 2005.

Development Costs

Software development costs incurred prior to the establishment of technological feasibility are included in research and development expenses. The Company defines establishment of technological feasibility as the completion of a working model. Software development costs incurred subsequent to the establishment of technological feasibility through the period of general market availability of the products are capitalized, if material, after consideration of various factors, including net realizable value. To date, software development costs that are eligible for capitalization have not been material and have been expensed.

Intangible Assets

The Company purchased intangible assets at fair value as determined by a third party as part of its acquisition of the assets of Determine Software, Inc. (see Note 9). The original cost is amortized on a straight-line basis over the estimated life of each asset as determined by management. The Company regularly performs reviews to determine if the carrying value of the intangible asset is impaired. If and when indicators of impairment exist, the Company assesses the need to record an impairment loss. Intangible assets represent acquired customer backlog, customer relationships as well as developed technology. The intangible assets are being amortized using the straight-line basis over their estimated useful lives, which range from 1-4 years.

Accumulated and Other Comprehensive Income (Loss)

Statement of Financial Accounting No. 130, “Reporting Comprehensive Income” (SFAS 130), establishes standards for reporting and displaying comprehensive net income and its components in stockholders’ equity. However, it has no impact on our net loss as presented in our financial statements. Accumulated other comprehensive income/loss is comprised of net unrealized gains/loss on available for sale securities of net unrealized losses of approximately $150,000 and approximately $448,000 at December 31, 2005 and March 31, 2005, respectively.

The components of comprehensive loss, net of related income tax, for the three and nine months ended December 31, 2005 and 2004 are as follows:


	Three Months Ended						Nine Months Ended
	December 31,						December 31,
	2005			2004			2005			2004
	(In thousands)						(In thousands)
Net loss	$	(10,780	)	$	(1,512	)	$	(15,929	)	$	(9,177	)
Change in unrealized gain (loss) on securities		61						297			(430	)

Comprehensive loss	$	(10,719	)	$	(1,647	)	$	(15,632	)	$	(9,607	)

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 25), and complies with the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS 123) (see Note 11) and SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure” (SFAS 148). Under APB 25, compensation expense

for fixed stock options is based on the difference between the fair market value of the Company’s stock and the exercise price of the option on the date of grant (Intrinsic Value Method), if any.

Pro Forma Disclosure of the Effect of Stock-Based Compensation

The Company uses the intrinsic value method in accounting for its employee stock options because, as discussed below, the alternative fair value accounting method requires use of option valuation models that were not developed for use in valuing employee stock options. Under the intrinsic value method, when the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of grant, there is no compensation expense recognized.

Pro forma information regarding net loss as if the Company had accounted for its employee stock purchase plan during the three and nine months ended December 31, 2005 and 2004 under the fair value method was estimated at the date of grant using the Black-Scholes option-pricing model for the three and nine months ended December 31, 2005 and 2004 with the following weighted average assumptions:


	Three Months Ended						Nine Months Ended
	December 31,						December 31,
	2005			2004			2005			2004
Risk-free interest rate		4.38	%		2.45	%		3.98	%		2.62	%
Dividend yield		0	%		0	%		0	%		0	%
Expected volatility		60.94	%		66.77	%		62.22	%		65.95	%
Expected option life in years		1.25			1.89			1.25			1.92

Pro forma information regarding net loss as if the Company had accounted for its employee stock options granted during the three and nine months ended December 31, 2005 and 2004 under the fair value method was estimated at the date of grant using the Black-Scholes option-pricing model for the three and nine months ended December 31, 2005 and 2004 with the following weighted average assumptions:


	Three Months						Nine Months
	Ended						Ended
	December 31,						December 31,
	2005			2004			2005			2004
Risk-free interest rate		4.38	%		2.63	%		3.77	%		3.40	%
Dividend yield		—			—			—			—
Expected volatility		60.94	%		66.77	%		64.61	%		78.93	%
Expected option life in years		3.98			3.70			3.89			3.83

The option valuation models were developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected life of the option.


	Three Months Ended						Nine Months Ended
	December 31,						December 31,
	(in thousands, except per						(in thousands, except per
	share amounts)						share amounts)
	2005			2004			2005			2004
Net loss, as reported	$	(10,780	)	$	(1,512	)	$	(15,929	)	$	(9,177	)
Add: Stock based employee compensation expense Included in reported net loss		15			23			117			121
Deduct: Total stock based employee compensation determined under fair value based method for all awards		(642	)		(793	)		(2,254	)		(2,786	)

Pro forma net loss	$	(11,407	)	$	(2,282	)	$	(18,066	)	$	(11,842	)

Basic and diluted net loss per share, as reported	$	(0.33	)	$	(0.05	)	$	(0.48	)	$	(0.28	)

Basic and diluted pro forma net loss per share	$	(0.35	)	$	(0.07	)	$	(0.55	)	$	(0.36	)

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, software products, for configuration, pricing management, quoting and contract management solutions. The Company primarily markets its products in the United States.

International revenues are attributable to countries based on the location of the customers. During the three and nine months ended December 31, 2005, sales to international locations were derived primarily from Canada, France, India, Japan, New Zealand, Sweden, and the United Kingdom. During the three and nine months ended December 31, 2004, sales to international locations were derived primarily from Canada and the United Kingdom.


	Three Months Ended						Nine Months Ended
	December 31,						December 31,
	2005			2004			2005			2004
International revenues		8	%		25	%		19	%		39	%
Domestic revenues		92	%		75	%		81	%		61	%
Total revenues		100	%		100	%		100	%		100	%

As of December 31, 2005 and March 31, 2005, the Company held long-lived assets outside of the United States with a net book value of approximately $1.1 million and approximately $1.2 million respectively, which were in India. No other country besides the US and India held a significant amount of long-lived assets.

3. Concurrent Transaction

The Company, from time to time, purchases professional services from a value-added reseller. The Company records the cost of the professional services purchased as a reduction of license or services revenue recorded from the reseller. For the three and nine months ended December 31, 2005, the Company recognized approximately $585,000 of revenue from the value-added reseller and did not purchase any professional services from the value- added reseller. For the three months ending December 31, 2004, the Company did not purchase professional services from the value-added reseller. For the nine months ended December 31, 2004, the Company recognized approximately $515,000 of revenue, which is net of approximately $100,000 of professional services purchased by the Company.

4. Related Party Transaction

In connection with the resignation of Dr. Sanjay Mittal in September 2003 as the Company’s Chief Executive Officer, the Company agreed to have him continue as Chief Technical Advisor (“CTA”). Pursuant to this arrangement, Dr. Mittal received $20,000 per month for his services. During the three and nine months ending December 31, 2004, the Company recorded approximately $60,000 and $180,000 as outside services expense in research and development in connection with Dr. Mittal’s role as CTA. In March 2005, Dr. Mittal’s role as CTA was terminated and he received a lump sum severance of $412,500. In July 2005, Dr. Mittal agreed to provide hourly consulting services relating to the Company’s patent litigation. Dr. Mittal has been paid $11,700 and $21,450 in consulting services for the three and nine months ended December 31, 2005. Dr. Mittal is a member of the Board of Directors of the Company.

5. Stockholders’ Equity

Deferred Compensation

During the three and nine months ending December 31, 2005, no options were granted to employees with exercise prices that were less than fair value. During the three and nine months ending December 31, 2004, 20,250 and 101,000 options were granted to employees with exercise prices that were less than fair value. Such compensation is being amortized over the vesting period of the options, which is typically four years. For the three and nine months ended December 31, 2005, the Company amortized approximately $15,000 and $117,000 of deferred compensation, respectively. During the three months and nine months ended December 31, 2004, the Company recorded total compensation expense of approximately $23,000 and $121,000, which was recorded as cost of goods sold.

Stock Repurchase

On November 9, 2005, the Company announced that the Board of Directors had authorized a new $25 million stock repurchase program which was implemented in December 2005 pursuant to the provisions of Rule 10b-18 of the Exchange Act. This new program replaced the prior repurchase plan previously announced on May 6, 2003. Pursuant to the plan, the Company expects to repurchase shares in the open market from time to time based on market conditions. The Company repurchased 125,839 shares for an aggregate expenditure of $336,000 for the three and nine months ended December 31, 2005.

6. Income Taxes

The Company recorded a provision for income taxes of approximately $25,000 and $73,000 for the three and nine months ended December 31, 2005, respectively. The Company did not record any provision for income taxes for the three and nine months ended December 31, 2004, respectively. The provision related to state franchise taxes in the U.S. and foreign taxes on interest income in India.

Statement of Financial Accounting Standards 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 our net deferred tax assets. We evaluate the realizability of the deferred tax assets on a quarterly basis.

7. Computation of Basic and Diluted 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.

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


	Three Months							Nine Months
	Ended							Ended
	December 31,							December 31,
	2005				2004			2005			2004
	(In thousands)							(In thousands)
Net loss	$	(10,780	)		$	(1,512	)	$	(15,929	)	$	(9,177	)

Basic and diluted:				��
Weighted-average shares of common stock outstanding		32,966				32,450			32,897			32,600
Less weighted-average shares subject to repurchase		(8	)			—			(3	)		—

Weighted-average shares used in computing basic and diluted, net loss per share		32,958				32,450			32,894			32,600

Basic and diluted, net loss per share	$	(0.33	)		$	(0.05	)	$	(0.48	)	$	(0.28	)

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


	Three Months Ended				Nine Months Ended
	December 31,				December 31,
	2005		2004		2005		2004
	(In thousands)				(In thousands)
Options excluded due to the exercise price exceeding the average fair market value of the Company’s common stock during the period		5,538		3,700		5,538		3,405
Options excluded for which the exercise price was less than the average fair market value of the Company’s common stock during the period but were excluded as inclusion would decrease the Company’s net loss per share		1,574		2,871		1,574		3,174

Total common stock equivalents excluded from diluted net loss per common share		7,112		6,571		7,112		6,579

8. Litigation

The Company is subject to certain routine legal proceedings, as well as demands, claims and threatened litigation, that arise in the normal course of our business. The Company believes that the ultimate amount of liability, if any, for any pending claims of any type, except for the items mentioned below, (either alone or combined) will not materially affect our financial position, results of operations or liquidity. Regardless of the outcome, litigation can have an adverse impact.

Patent Infringement

On April 22, 2004, Trilogy Group (“Trilogy”) filed a complaint in the United States District Court for the Eastern District of Texas Marshall Division alleging patent infringement against the Company. On September 2, 2004, the Company filed counterclaims in the Eastern District of Texas Marshall Division action against Trilogy for infringement of the Company’s U.S. Patent Nos. 6,405,308, 6,675,294, 5,878,400 and 6,553,350 for willfully infringing, directly and indirectly, by making, using, licensing, selling, offering for sale, or importing products including configuration and ordering software.

In January 2006, Trilogy and the Company reached a settlement resolving the patent dispute. Trilogy and the Company agreed to grant each other cross-licenses to the asserted patents for the life of the patents, entered into mutual releases and dismissed with prejudice all outstanding patent infringement claims against each other. Under the terms of the settlement, the Company will also pay Trilogy a one-time sum of $7.5 million. The Company has accrued $7.5 million for the period ending December 31, 2005. The Company is required to make payment on or before February 21, 2006.

Class Action

Between June 5, 2001 and June 22, 2001, four securities class action complaints were filed against the Company, certain of its officers and directors, and Credit Suisse First Boston Corporation (“CSFB”), as the underwriters of our March 13, 2000 initial public offering (“IPO”), in the United States District Court for the Southern District of New York. On August 9, 2001, these actions were consolidated before a single judge along with cases brought against numerous other issuers, their officers and directors and their underwriters, that make similar allegations involving the allocation of shares in the IPOs of those issuers. The consolidation was for purposes of pretrial motions and discovery only. On April 19, 2002, plaintiffs filed a consolidated amended complaint asserting essentially the same claims as the original complaints.

The amended complaint alleges that the officer and director defendants, CSFB and Selectica, Inc. violated federal securities laws by making material false and misleading statements in the prospectus incorporated in the Company’s registration statement on Form S-1 filed with the SEC in March 2000 in connection with the Company’s IPO. Specifically, the complaint alleges, among other things, that CSFB solicited and received excessive and undisclosed commissions from several investors in exchange for which CSFB allocated to those investors material portions of the restricted number of shares of common stock issued in the Company’s IPO. The complaint further alleges that CSFB entered into agreements with its customers in which it agreed to allocate the common stock sold in the Company’s IPO to certain customers in exchange for which such customers agreed to purchase additional shares of the Company’s common stock in the after-market at pre-determined prices. The complaint also alleges that the underwriters offered to provide positive market analyst coverage for us after the IPO, which had the effect of manipulating the market for the Company’s stock.

motion to dismiss, on October 8, 2002, the individual officers and directors entered into a stipulation of dismissal and tolling agreement with plaintiffs. As part of that agreement, plaintiffs dismissed the case without prejudice against the individual defendants. The Court ordered the dismissal of the officers and directors without prejudice on October 9, 2002. The Court rendered its decision on the motion to dismiss on February 19, 2003, denying dismissal of the Company.

On June 25, 2003, a Special Committee of the Board of Directors of the Company approved a Memorandum of Understanding (the “MOU”) reflecting a settlement in which the plaintiffs agreed to dismiss the case against the Company with prejudice in return for the Company’s assignment of certain claims that the Company might have against its underwriters. The same offer of settlement was made to all the issuer defendants involved in the litigation. No payment to the plaintiffs by the Company is required under the MOU. After further negotiations, the essential terms of the MOU were formalized in a Stipulation and Agreement of Settlement (“Settlement”), which has been executed on behalf of the Company. The settling parties presented the proposed Settlement papers to the Court on June 14, 2004 and filed formal motions seeking preliminary approval on June 25, 2004. The underwriter defendants, who are not parties to the proposed Settlement, filed a brief objecting to its terms on July 14, 2004. On February 15, 2005, the Court granted preliminary approval of the settlement conditioned on the agreement of the parties to narrow one of a number of the provisions intended to protect the issuers against possible future claims by the underwriters. The Company re-approved the Settlement with the proposed modifications that were outlined by the Court in its February 15, 2005 Order granting preliminary approval. Approval of any settlement involves a three-step process in the district court: (i) a preliminary approval, (ii) determination of the appropriate notice of the settlement to be provided to the settlement class, and (iii) a final fairness hearing. On August 31, 2005, the Court entered a preliminary order approving, with only minor modifications, the modified proposed settlement agreement. The court ordered that the mailing of the notices of pendency and proposed settlement of the class actions be completed by January 15, 2006. The court scheduled the final fairness hearing for Monday, April 24, 2006 as the date for the final fairness hearing. The deadline for class members to request exclusion from the settlement classes is Friday, March 24, 2006. Despite the preliminary approval, there can be no assurance that the Court will ultimately approve the settlement.

In the meantime, the plaintiffs and underwriters have continued to litigate the consolidated action. The litigation is proceeding through the class certification phase by focusing on six cases chosen by the plaintiffs and underwriters (“focus cases”). The Company is not a focus case. On October 13, 2004, the Court certified classes in each of the six focus cases. The underwriter defendants have sought review of that decision. Along with the other non-focus case issuer defendants, the Company has not participated in the class certification phase.

9. Determine Asset Acquisition

On May 3, 2005, the Company acquired certain business assets of Determine Software, Inc. (“Determine”) for approximately $892,000 in cash. Determine is a provider of enterprise contract management software. Determine’s solutions include: the ability to aggregate and analyze enterprise-wide contract information, automate and accelerate contract related business processes, enforce contract and relationship compliance and automate the contract process from request to signature.

In accordance with SFAS 141 “Business Combinations” (“FAS 141”), the Company allocated the purchase price of the acquisition to tangible and intangible assets acquired based on their estimated fair values. No liabilities were assumed in the acquisition. The fair value assigned to the intangible assets acquired was based on several factors, including valuations, estimates and assumptions. The purchase price for accounting purposes may be adjusted for a period of one year from the transaction close date for any higher than expected acquisition costs.

The purchase price was comprised of the following (in thousands of dollars):


Cash consideration	$	799
Acquisition costs		93

Total Purchase Price	$	892

The total purchase price is allocated as follows (in thousands of dollars):


	Amount		Amortization
	(‘000s)		life (years)
Accounts Receivable	$	74		—
Fixed Assets		17		—
Intangible assets:
Developed technology		367		3
Customer relationship		338		4
Customer backlog		96		1

Total purchase price	$	892

The results of Determine’s operations effective May 3, 2005 has been included in the condensed consolidated financial statements.

As of December 31, 2005, the intangible assets associated with Determine are included in Other Assets as follows:


Cost	$	801
Accumulated amortization		(207	)

Net	$	594

These intangible assets will be amortized on a straight-line basis over their estimated lives:


	Q4		2007		2008		2009		2010
Amortization by fiscal year	$	78	$	207	$	207	$	95	$	7

10. Restructuring

The Company made a reduction in staff of 42 employees in May 2005, which represented 16% of the total workforce. Headcount reductions consisted of 11 in professional services, 8 in research and development, 12 in sales and marketing and 11 in general administration and finance, all in the U.S. These headcount reductions resulted in charges of approximately $688,000, consisting principally of severance payments and benefits, of which $115,000 was included in cost of revenues, $131,000 included in research and development expense, $126,000 included in sales and marketing expense, and $316,000 included in general and administrative expense. The charges for this latest reduction in staff have been accounted for in accordance with SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities.” All amounts associated with this reduction have been paid except for approximately $74,000. The remaining payments are to be paid by the end of fiscal 2006.

11. Recent Accounting Pronouncements

In December 2004, the FASB issued Statement No. 123 R, “Share-Based Payment”, as an amendment to SFAS No. 123. SFAS 123 R requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award—the requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service. SFAS 123 R will be effective for the Company as of the first quarter of fiscal 2007, beginning April 1, 2006. The Company is in the process of determining what method of valuing stock-based compensation as prescribed under SFAS 123 R will be applied to stock based awards after the effective date and the impact the recognition of compensation expense related to such awards will have on its operating results.

change in accounting principle. The statement applies to all voluntary changes in accounting principle. The statement requires retrospective application to prior period’s financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. The Company will begin to apply SFAS No. 154 in the fiscal year beginning April 1, 2006.

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

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

Overview

We develop, market, sell and support software that helps companies with multiple product lines and channels of distribution to effectively configure, price, quote new business and manage the contracting process for their products and services. Our products enable customers to increase revenue and profit margins and reduce costs through seamless, web-enabled automation of the “quote to contract” business processes, which reside between legacy CRM and ERP systems. Over the past number of years, Selectica solutions have been successfully implemented at a number of companies such as IBM, Cisco Systems, Dell, Rockwell and GE Healthcare. However, these types of large system sales have declined significantly over the past several quarters due, we believe, to reduced IT spending, reluctance of customers to undertake large, custom project implementations, our target customers’ growing preference for smaller scale, more focused system implementations and increased competition from suite vendors such as Oracle, SAP and Siebel and point application software vendors like Comergent Technologies, Firepond and Trilogy.

In response to this development over the past year, we developed and introduced a “next generation” of application offerings including the On Demand/hosted software as a service product called Fastraq. These products utilize our state-of-the-art configuration and pricing technologies. These applications incorporate industry specific domain knowledge and offer high levels of capability in more flexible ways. We have also been focused on expanding our product footprint and value proposition by extending into the growing contract management and compliance market. We began to achieve this objective shortly after the close of fiscal 2005 with the acquisition of certain of the assets of Determine Software Inc. Determine contract management products along with Fastraq extend our business model by permitting us to offer a complete range of on-demand solutions for our customers. Our new Telecom, Financial Services and Insurance products, developed with a partner, are targeted at large and mid-sized customers. The Fastraq and Contract Management products are targeted at both large and medium-sized interested in using application software to manage complex product and service offering data, pricing management, contract management, compliance and speed new product or brand launches. Concurrent with the development, marketing and sales of these new products, we will continue to sell and support our existing platform products.

Also in response to these business developments, we have worked to reduce our operating costs through the reduction of personnel and other costs. During fiscal 2005, we faced significant challenges as bookings of platform products underperformed and sales of the new products were minimal, as they were not released until the latter part of the calendar year. However, bookings of our contract management products were significantly higher than the prior quarter. We expect our new bookings to continue to be challenged for at least the next two quarters as we transition to these new products, enter new markets and retool our sales force to sell our new products in new markets.

Quarterly Financial Overview

For the three months ended December 31, 2005, our revenues were approximately $5.3 million with license revenues representing 10% and services revenues representing 90% of total revenues. In addition, approximately 48% of our quarterly revenue came from two customers. License margins for the quarter were 68% and services margins were 53%`. While the Company anticipates entering into more time and material based services contracts, we still have some existing contracts, which have fixed fee terms and may lower services margins in the future. Net loss for the quarter was approximately $10.8 million or $0.33 per share, which includes a $7.5 million settlement for the patent litigation with Trilogy or $0.23 per share. The Company is required to make payment on or before February 21, 2006.

Our bookings this quarter declined in comparison to the prior quarter, except for contract management products as discussed above, which reflects the transition from our older legacy products to our next generation application and on-demand products along with cautious IT spending patterns. Because there is a timing difference between bookings and revenue recognition, the decline in bookings in prior quarters will cause our revenues to decrease in the next quarter. In addition, we will need to continue to increase our level of bookings on a quarterly basis in order to increase our reported revenues. We may reduce quarterly operating expense levels depending on the level of bookings achieved during the quarter.

Critical Accounting Policies and Estimates

We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States. These accounting principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. Our management is also required to make certain judgments that affect the reported amounts of revenues and expenses during the reporting period. We periodically evaluate our estimates including those relating to revenue recognition, allowance for doubtful accounts, litigation and other contingencies. The methods, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the results we report in our consolidated financial statements. We evaluate our estimates and judgments on an on-going basis. We base our estimates on historical experience and on assumptions that we believe to be reasonable under the circumstances. Our experience and assumptions form the basis for our judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may vary from what we anticipate and different assumptions or estimates about the future could change our reported results. We believe the following accounting policies are the most critical to us because they are important to the portrayal of our financial statements and they require our most difficult, subjective or complex judgments in the preparation of our consolidated financial statements:

Revenue Recognition

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

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

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 as prescribed by Statement of Position 98-9 “Modification of SOP No. 97-2 Software Revenue Recognition, with Respect to Certain Transactions.” We recognize maintenance revenues over the term of the maintenance contract because vendor-specific objective evidence of fair value for maintenance exists. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue. If vendor specific objective evidence does not exist to allocate the total fee to all undelivered elements of the arrangement, revenue is deferred until the earlier of the time at which (1) such evidence does exist for the undelivered elements, or (2) all elements are delivered. If unspecified future products are given over a specified term, we recognize license revenue ratably over the applicable period. We

recognize license fees from resellers as revenue when the above criteria have been met and the reseller has sold the subject licenses through to the end-user.

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 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 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 the likelihood of 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 under the percentage of completion contract method in accordance with the provisions of SOP 81-1, “Accounting for Performance of Construction Type and Certain Production Type Contracts” (SOP 81-1). We follow the percentage of completion method if reasonably dependable estimates of progress toward completion of a contract can be made. We estimate the percentage of completion on contracts utilizing hours and costs incurred to date as a percentage of the total estimated hours and costs to complete the project. Recognized revenues and profits are subject to revisions as the contract progresses to completion. Revisions in profit estimates are charged to income in the period in which the facts that give rise to the revision become known. We also account for certain arrangements under the completed contract method when we do not have the ability to reasonably estimate progress toward completion. To date, when we have been primarily responsible for the implementation of the software, services have been considered essential to the functionality of the software products, and therefore license and services revenues have been recognized pursuant to SOP 81-1.

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 require 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 services qualify for separate accounting, we use 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, 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 of fair value in multiple element arrangements.

Arrangements consisting of consulting services.Consulting services consists of 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. Consulting services may be recognized based on customer acceptance in the form of customer-signed timesheets, invoices, cash received, or customer-signed acceptance as defined in the master service agreement. Where the Company provides a hosted application solution, subscription fees are recognized as revenue ratably over the subscription period, typically 12 to 24 months.

The following table shows how our revenues has been recognized:


	Three Months Ended						Nine Months Ended
	December 31,						December 31,
	2005			2004			2005			2004
Contract Accounting		69	%		65	%		67	%		64	%
Residual Method		—			7	%		—			8	%
Subscription Method (includes Maintenance)		31	%		28	%		33	%		28	%

Total Revenues		100	%		100	%		100	%		100	%

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. The majority of our contracts have been accounted for on completed contract method upon achievement of milestones or final acceptance from the customer. When estimates of costs to complete contracts exceed the revenues to be recognized, the expected loss is recorded when it becomes evident.

Allowance for Doubtful Accounts

We evaluate the collectibility of our accounts receivable based on a combination of factors. When we believe a collectibility issue exists with respect to a specific receivable, we record an allowance to reduce that receivable to the amount that we believe to be collectible.

Contingencies and Litigation

We are subject to various proceedings, lawsuits and claims relating to product, technology, labor, shareholder and other matters. We are required to assess the likelihood of any adverse outcomes and the potential range of probable losses in these matters. The amount of loss accrual, if any, is determined after careful analysis based on legal advice of each matter and is subject to adjustment if warranted by new developments or revised strategies.

Factors Affecting Operating Results

A relatively small number of customers account for a significant portion of our total revenues. We expect that revenue will continue to depend upon a limited number of customers. If we were to lose a customer, it would have a significant impact upon future revenue. Customers who accounted for at least 10% of total revenues were as follows:


	Three Months Ended						Nine Months Ended
	December 31,						December 31,
	2005			2004			2005			2004
Customer A		26	%		18	%		26	%		11	%
Customer B		22	%			*		22	%		22	%
Customer C			*		35	%			*		14	%
Customer D			*		14	%			*		13	%
Customer E			*			*			*		10	%

To date, we have foreign activities in India, Canada and some European and Asian countries because we believe international markets represent a significant growth opportunity. We anticipate that our exposure to foreign currency fluctuations will continue since we have not adopted a hedging program to protect us from risks associated with foreign currency fluctuations.

We have incurred significant losses since inception and, as of December 31, 2005, we had an accumulated deficit of approximately $188.5 million. We believe our success depends on the growth of our customer base and the development of the emerging configuration, pricing management and quoting solutions, contract management and compliance market.

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 operating history makes it difficult to forecast future operating results.

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

Results of Operations:

Revenues


	Three Months Ended									Nine Months Ended
	December 31,									December 31,
	2005			2004			Change			2005			2004			Change
				(in thousands, except percentages)
License	$	520		$	2,301			(77	)%	$	3,593		$	6,633			(46	)%
Percentage of total revenues		10	%		26	%					20	%		28	%
Services	$	4,737		$	6,613			(28	)%	$	14,822		$	17,217			(14	)%
Percentage of total revenues		90	%		74	%					80	%		72	%
Total revenues	$	5,257		$	8,914			(41	)%	$	18,415		$	23,850			(23	)%

License.For the three months ending December 31, 2005 license revenues decreased on a quarterly basis by approximately $1.8 million compared to the three months ending December 31, 2004 primarily due to one significant contract for approximately $2.1 million that was recognized in the three months ending December 31, 2004.

For the nine months ending December 31, 2005, license revenues decreased by approximately $3.0 million compared to the nine months ending December 31, 2004 primarily due to the same significant contract mentioned above and due to the fact that we experienced much lower bookings in 2005.

Our failure to increase bookings in the previous quarters was a significant factor in the decline of our revenues this quarter. We expect license revenues to continue to fluctuate in future periods as a percentage of total revenues and in absolute dollars depending on the number and size of new license contracts.

Services.Services revenues are comprised of fees from consulting, maintenance, training and out-of pocket reimbursement. During the three months ending December 31, 2005, services revenues decreased versus the period ending December 31, 2004. The decrease primarily related to the fewer opportunities provided by new license agreements offset by our clients’ demand for additional services to expand their initial customized application. Maintenance revenues represented 46% and 36% of total services revenues for the three months ending December 31, 2005 and 2004, respectively. Maintenance revenues represented 40% and 36% of total services revenues for the nine months ending December 31, 2005 and 2004, respectively.

Maintenance revenues for the third fiscal quarter of 2006 increased by approximately $588,000 due to one significant customer when compared to the same three months in fiscal 2005. This increase was also due to the cash collection on maintenance services provided in previous quarters but recognized in the current quarter. With fewer new license agreements during the past year and relatively flat demand for other services, maintenance revenues may fluctuate in the future.

During the three and nine months ending December 31, 2005, consulting services revenues decreased on a quarterly and year to date basis by approximately $1.4 million and $1.5 million, respectively, compared to the same periods ending December 31, 2004. The decrease primarily relates to fewer opportunities provided by new license agreements offset by our clients’ demand for additional services to expand their initial customized application.

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

Cost of revenues


	Three Months Ended									Nine Months Ended
	December 31,									December 31,
	2005			2004			Change			2005			2004			Change
				(in thousands, except percentages)
Cost of license revenues	$	164		$	217			(24	)%	$	502		$	630			(20	)%
Percentage of license revenues		32	%		9	%					14	%		9	%
Cost of services revenues	$	2,255		$	3,088			(27	)%	$	6,780		$	9,307			(27	)%
Percentage of services revenues		47	%		47	%					44	%		54	%

Cost of License Revenues.The cost of license revenues consists of royalty fees associated with third-party software, the costs of the product media, duplication and packaging and delivery of our software products to our customers, which may include documentation, shipping and other data transmission costs. The year over year decrease in costs of license revenue during the three and nine months ending December 31, 2005 from the three months ending December 31, 2004 was primarily due to decreased license revenue, which resulted in a decrease in the amount of royalty fees associated with third-party software and other sales associated costs. In addition, costs of licenses have a component of fixed costs that are not dependent upon sales volume. We anticipate that the cost of license revenues will remain at a relatively consistent level in absolute dollars and that the cost of license revenues in the near future will continue to fluctuate as a percentage of license revenues.

Cost of Services Revenues.The cost of services revenues is comprised mainly of salaries and related expenses of our services organization plus certain allocated expenses. The reduction of the cost of services revenues in the nine months ended December 31, 2005 was primarily due to a significant headcount reduction in the professional services organization from 97 to 55. This was offset by a loss of $263,000 on a project where the estimated costs to complete exceeded the anticipated revenues.

Cost of services revenues for the three months ending December 31, 2005 decreased by approximately $833,000 compared to the three months ending December 31, 2004. The decrease reflects the decrease in the number of customer projects and the continued reduction in force of professional services staff in fiscal 2005. Approximately $540,000 of the decrease was in professional service salaries and benefits. The balance of the reduction was attributable to reduced non-billable travel expenses of approximately $89,000, and reduced billable travel expenses of approximately $243,000.

Cost of services revenues for the nine months ending December 31, 2005 decreased by approximately $2.5 million compared to the nine months ending December 31, 2004. The decrease reflects the reduction in the number of customer projects and the continued reduction in force of professional services staff in fiscal 2005. Approximately $1.6 million of the decrease was in professional service salaries and benefits. The balance of the reduction was attributable to reduced billable travel of approximately $663,000 and non-billable travel expenses of approximately $138,000. The aforementioned decreases were offset by restructuring charges of approximately $116,000 incurred in the three months ending June 30, 2005.

During the three months ending December 31, 2005 and 2004, we amortized approximately $15,000 and approximately $23,000, respectively, for deferred compensation related to stock options.

Gross Margins

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


	Three Months Ended						Nine Months Ended
	December 31,						December 31,
	2005			2004			2005			2004
License		68	%		91	%		86	%		91	%
Services		53	%		53	%		56	%		46	%

We experienced a decrease in license margins during the three and nine months ending December 31, 2005 from the three and nine months ending December 31, 2004 due to lower license revenues. Costs of licenses have a component of fixed costs that are not dependent upon sales volume. Some of our software has embedded third-party software for which royalties need to be paid. When our software products are licensed with royalty bearing software, margins are lower than when our software products are licensed without such third party software products. We also have certain fixed costs that are not dependent upon sales volume. Accordingly, margins will vary based on gross license revenue and product mix.

The increase in service margins during the nine months ending December 31, 2005 from the nine months ending December 31, 2004 were attributable to the decreased costs associated with a significant headcount reduction, a decrease in non-cash charges associated with the acceleration of stock options, and related costs for facilities, equipment and outside services.

Operating Expenses


	Three Months Ended									Nine Months Ended
	December 31,									December 31,
	2005			2004			Change			2005			2004			Change
							(in thousands, except percentages)
Research and development	$	1,943		$	3,049			(36	)%	$	6,720		$	9,505			(29	)%
Percentage of total revenues		37	%		34	%					36	%		40	%
Sales and marketing	$	1,592		$	2,939			(46	)%	$	5,014		$	9,094			(45	)%
Percentage of total revenues		30	%		33	%					27	%		38	%
General and administrative	$	10,704		$	1,931			454	%		17,087		$	6,027			184	%
Percentage of total revenues		202	%		22	%					93	%		25	%

Research and Development.Research and development expenses consist mainly of salaries and related costs of our engineering, quality assurance, technical publications efforts and certain allocated expenses. The decrease of approximately $1.1 million in research and development expenses during the three months ending December 31, 2005 compared to the three months ending December 31, 2004 was due to the reduction in staff of 69.

Salaries and benefits decreased by approximately $930,000 and amortization of the developed technology acquired from Determine was approximately $31,000.

The decrease of approximately $2.8 million in research and development expenses during the nine months ended December 31, 2005 compared to the nine months ended December 31, 2004 was due primarily to the staff reduction mentioned above. Salaries and benefits decreased by approximately $2.5 million and facilities allocation by approximately $182,000. These reductions were offset by increases in restructuring costs and severance benefits of approximately $131,000. Amortization of the developed technology acquired from Determine was approximately $82,000.

Sales and Marketing.Sales and marketing expenses consist mainly of salaries and related costs for our sales and marketing organization, sales commissions, expenses for travel and entertainment, trade shows, public relations, collateral sales materials, advertising and certain allocated expenses. The decrease in sales and marketing expense of approximately $1.3 million during the three months ending December 31, 2005 from the three months ending December 31, 2004 was due primarily to a reduction in spending on marketing programs, decrease of sales commissions and salaries and reduction in the allocation of fixed overhead costs as a result of the reduced headcount in these areas.

The year over year decrease in expense was attributable to a reduction in staff of 16 sales staff and 9 marketing staff with approximately $697,000 in reduced salaries and benefits expenses. The reduction in headcount also reduced support and overhead costs by approximately $169,000. Travel expenses were also reduced by approximately $147,000. These reductions were offset by increases in amortization of Determine intangible assets for customer relationships and backlog of approximately $47,000.

During the nine months ending December 31, 2005 compared to the nine months ending December 31, 2004, sales and marketing expenses decreased by approximately $4.1 million. The decrease was attributable to a reduction in staff with approximately $2.6 million in reduced salaries and benefits expenses. The reduction in headcount also reduced travel expense by approximately $191,000 and support and overhead costs by approximately $470,000. These reductions were offset by increases in severance and restructuring charges of approximately $126,000 and amortization of Determine intangible assets for customer relationships and backlog of approximately $126,000.

General and Administrative.General and administrative expenses consist mainly of personnel and related costs for general corporate functions, including finance, accounting, legal, human resources, bad debt expense and certain allocated expenses. The increase of approximately $8.8 million in general and administrative expense during the three months ending December 31, 2005 from the three months ending December 31, 2004 was due primarily to the $7.5 million settlement of the patent infringement lawsuit with Trilogy and increases of approximately $1.8 million in legal and professional fees associated with ongoing patent litigation and various corporate matters, offset by a reduction of outside services related to Sarbanes Oxley. Headcount was reduced by 18, which resulted in approximately $337,000 reduction in salary in benefits for the three months ending December 31, 2005 from the three months ending December 31, 2004.

General and administrative expense during the nine months ending December 31, 2005 compared to the nine months ending December 31, 2004 increased by approximately $11.1 million. This increase was due primarily to the approximately $7.5 million settlement discussed above and approximately $3.0 million increase in legal and professional services, primarily related to the legal expenses associated with the aforementioned patent litigation.

During the nine months ending December 31, 2005, we amortized approximately $94,000 for compensation related to stock option modifications. During the nine months ended December 31, 2004, we did not amortize any deferred compensation related to stock options.

Interest and Other Income, Net

Interest income consists primarily of interest earned on cash balances and short-term and long-term investments. During the three and nine months ending December 31, 2005, interest income totaled approximately $647,000 and $1.8 million, respectively. During the three and nine months ending December 31, 2004, interest income totaled approximately $703,000 and $1.4 million respectively. The increase was due primarily to higher interest rates in

2005 on the cash and investments balances and offset by the reduction of cash and investments balance due to these amounts being used for the operation of our business.

Provision for Income Taxes

During the three and nine months ending December 31, 2005, the Company recorded income tax provisions of approximately $25,000 and $73,000, respectively. These amounts related to taxable interest income in India and state franchise taxes in the U.S. The Company did not record any income tax provision for the three and nine months ending December 31, 2004.

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 our net deferred tax assets. We evaluate the realizability of the deferred tax assets on a quarterly basis.

Recent Accounting Pronouncements

In December 2004, the FASB issued Statement No. 123 R, “Share-Based Payment”, as an amendment to SFAS No. 123. SFAS 123 R requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award—the requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service. SFAS 123 R will be effective for us as of the first quarter of fiscal 2007, beginning April 1, 2006. The Company is in the process of determining how the method of valuing stock-based compensation as prescribed under SFAS 123 R will be applied to stock based awards after the effective date and the impact the recognition of compensation expense related to such awards will have on its operating results.

In May 2005, the FASB issued Statement No. 154, “Accounting Changes and Error Corrections”, as an amendment to APB Opinion No. 20 and FASB No. 3. SFAS 154 R changes the accounting for and reporting of a change in accounting principle. The statement applies to all voluntary changes in accounting principle. The statement requires retrospective application to prior period’s financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. The Company will begin to apply SFAS No. 154 in the fiscal year beginning April 1, 2006.

Liquidity and Capital Resources


	December 31,		March 31,
	2005		2005		Change
	(in thousands, except percentages)
Cash, cash equivalents and short-term investments	$	86,346	$	93,263		(7	)%
Working capital	$	75,029	$	89,879		(17	)%


	Nine Months Ended
	December 31,
	2005			2004			Change
	(in thousands, except percentages)
Net cash used in operating activities	$	(7,396	)	$	(14,139	)		48	%
Net cash provided by (used in) investing activities	$	(5,683	)	$	(1,629	)		(249	)%
Net cash provided by financing activities	$	272		$	384			29	%

Our primary sources of liquidity consisted of approximately $86.3 million in cash, cash equivalents and short-term investments and approximately $4.9 million in long-term investments for a total of approximately $91.2 million as of December 31, 2005 compared to approximately $93.3 million in cash, cash equivalents and short-term investments and approximately $5.6 million in long-term investments for a total of approximately $98.9 million as of March 31, 2005. During the nine months ending December 31, 2005, the decrease in cash and cash equivalents

was primarily related to approximately $7.4 million of cash used in operations and by approximately $4.7 million in net purchases of short and long-term investments and $892,000 of Determine acquisition costs and the repurchase of stock by the Company of approximately $336,000, offset by the issuance of common stock of approximately $608,000. During the nine months ending December 31, 2004, the decrease in cash and cash equivalents was primarily related to approximately $14.1 million of cash used in operations and approximately $2.2 million net purchases of short and long-term investments and by the issuance of common stock of approximately $1.2 million offset by the repurchase of stock by the Company of approximately $798,000. We experienced a net decrease in working capital at December 31, 2005 as compared to March 31, 2005 primarily due to the cash used in operations and purchases in excess of proceeds from short-term and long-term investments.

The net cash used in operating activities for the nine months ending December 31, 2005 was due primarily to approximately $15.9 million in net loss, and an approximately $641,000 decrease in accrued payroll and other liabilities offset by an approximately $7.5 million increase in other liabilities associated with the settlement of the patent infringement lawsuit with Trilogy and approximately $887,000 in depreciation and amortization. The net cash used for operating activities for the nine months ending December 31, 2004 was due primarily to approximately $9.2 million in net loss, approximately $1.9 million increase in accounts receivable and decreases to other liabilities and deferred revenues of approximately $1.0 million and $4.0 million respectively.

The net cash used for investing activities for the nine months ending December 31, 2005 was due primarily to approximately $5.6 million of net purchase of available-for-sale investments as compared to approximately $4.3 million of net purchases of available-for-sale investments for the nine months ending December 31, 2004. During the nine months ending December 31, 2005, we acquired the assets of Determine for approximately $892,000. For the nine months ending December 31, 2005 and 2004, we spent approximately $113,000 and $786,000 for capital expenditures, respectively.

The net cash provided by financing activities was primarily due to the issuance of common stock through the exercise of options and employee stock purchase plans for approximately $608,000 for the nine months ended December 31, 2005, offset by the cost of stock repurchased by the Company for approximately $336,000. The net cash provided by financing activities for the nine months ending December 31, 2004 was due primarily to the proceeds from the issuance of common stock through the exercise of options for approximately $1.2 million offset by approximately $798,000 for stock repurchases in the open market.

We had no significant commitments for capital expenditures as of December 31, 2005. We expect to fund our future capital expenditures and operations from a combination of available cash balances and short-term investments. We have no outside debt and do not have any plans to enter into borrowing arrangements.

We have building lease obligations for approximately $9.8 million and equipment lease obligations of approximately $89,000 as of December 31, 2005. We do not expect to incur any additional building lease obligations or equipment obligations in the near future.

We engage in global business operations and are therefore exposed to foreign currency fluctuations. As of December 31, 2005, the effects of the foreign currency fluctuations were immaterial, and we are not engaged in any foreign currency hedging activities.

We have adopted a new stock repurchase program, which authorizes us to pay up to approximately $25.0 million.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Foreign Currency Exchange Rate Risk

We develop products in the United States and India and sell them worldwide. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in

foreign markets. Since our sales are currently priced in U.S. dollars and are translated to local currency amounts, a strengthening of the dollar could make our products less competitive in foreign markets.

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

Interest Rate Risk

We established policies and business practices regarding our investment portfolio to preserve principal while obtaining reasonable rates of return without significantly increasing risk. This is accomplished by investing in widely diversified short-term and long-term investments, consisting primarily of investment grade securities. Our interest income is sensitive to changes in the general level of U.S. interest rates.

During the nine months ending December 31, 2005, a hypothetical 50 basis point increase in interest rates would have resulted in a reduction of approximately $83,000 (less than 0.09%) in the fair market value of our cash equivalents and investments. This potential change is based upon a sensitivity analysis performed on our financial positions at December 2005. During the nine months ending December 31, 2004, a hypothetical 50 basis point increase in interest rates would have resulted in a reduction of approximately $241,000 (less than 0.23%) in the fair market value of our cash equivalents and investments. This potential change is based upon a sensitivity analysis performed on our financial positions at December 31, 2004.

Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted because of a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations because of changes in interest rates or we may suffer losses in principal if forced to sell securities that have seen a decline in market value because of changes in interest rates. Our investments are made in accordance with an investment policy approved by the Board of Directors. In general, our investment policy requires that our securities purchases be rated A1/P1, AA/Aa3 or better. No securities may have a maturity that exceeds 18 months, and the average duration of our investment portfolio may not exceed 9 months. At any time, no more than 15% of the investment portfolio may be insured by a single insurer and no more than 25% of investments may be invested in any one industry other than the US government bonds, commercial paper and money market funds.

The following summarizes short-term and long-term investments at fair value, weighted average yields and expected maturity dates as of December 31, 2005 through the fiscal years ending:


	2006			2007			2008			2009			Total
	(in thousands)
Investment CD	$	460		$	1,889		$	1,383		$	1		$	3,733
Weighted Average yield		3.87	%		5.35	%		6.07	%		5.75	%		5.43	%
Commercial Paper		—			1,256			—			—			1,256
Weighted Average yield		—			4.65	%		—			—			4.65	%
Auction rate securities		28,650			1,000			—			—			29,650
Weighted Average yield		4.32	%		4.04	%		—			—			4.31	%
Corporate notes & bonds		3,199			2,038			—			—			5,237
Weighted Average yield		3.45	%		4.13	%		—			—			3.72	%
Government agencies		14,728			18,580			1,496			—			34,804
Weighted Average yield		2.77	%		3.66	%		4.66	%		—			3.33	%

Total investments	$	47,037		$	24,763		$	2,879		$	1		$	74,680

ITEM 4: CONTROLS AND PROCEDURES

(a)

Evaluation of Disclosure Controls and Procedures.Our Chief Executive Officer and our Chief Financial Officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 (Exchange Act) Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this quarterly report, have concluded that our disclosure controls and procedures are not effective because of the material weaknesses described below.


*(b)*		*Changes in Internal Control over Financial Reporting.*As previously disclosed in Item 9A of our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on June 29, 2005, for the year ended March 31, 2005, we determined that five material weaknesses existed in the Company’s internal control over financial reporting related to controls maintained by the Company. We have undertaken efforts in fiscal 2005 and during the three quarters of fiscal 2006 to establish a framework to improve internal controls over financial reporting. We have committed resources to the design, implementation, documentation and testing of our internal controls. Additional resources have been assigned to remediate and re-test certain internal control deficiencies, such as the material weaknesses described in our Annual Report on Form 10-K, identified during our first annual assessment of our internal controls. We have either performed or are in process of implementing our remediation plan to address the deficiencies in our internal controls. These involve CFO and VP Finance accounting review and approval processes over non-routine transactions, including implementation of additional checklists, more timely review and accounting for non-routine transactions and timely identification of non-routine issues with our auditors. We are also evaluating appropriate staffing and experience levels in our corporate controllership function.

		Because of the insufficient controls described in the preceding paragraphs, the Company concluded that its internal controls over financial reporting was not effective as of March 31, 2005. While management implemented new controls in the last three quarters as described in its remediation plan, we maintained our assessment as of March 31, 2005 to allow sufficient time to monitor our new controls and determine whether the new controls are effective and that our remediation plans are sufficient. We will continue to assess the effectiveness of our internal controls, including the controls implemented to correct the five material weaknesses disclosed above. Except for the remediation process implemented by management, there has been no change in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the quarter ended December 31, 2005, which materially affected, or is reasonably likely to affect, our internal controls over financial reporting.

PART II: OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

Patent Infringement

On April 22, 2004, Trilogy filed a complaint in the United States District Court for the Eastern District of Texas Marshall Division alleging patent infringement against the Company. On September 2, 2004, the Company filed counterclaims in the Eastern District of Texas Marshall Division action against Trilogy for infringement of the Company’s U.S. Patent Nos. 6,405,308, 6,675,294, 5,878,400 and 6,553,350 for willfully infringing, directly and indirectly, by making, using, licensing, selling, offering for sale, or importing products including configuration and ordering software.

In January 2006, Trilogy and the Company reached a settlement resolving the patent dispute. Trilogy and the Company agreed to grant each other cross-licenses to the asserted patents for the life of the patents, entered into mutual releases and dismissed with prejudice all outstanding patent infringement claims against each other. Under the terms of the settlement, Selectica will also pay Trilogy a one-time sum of $7.5 million in Q4 2006.

Class Action

Between June 5, 2001 and June 22, 2001, four securities class action complaints were filed against us, certain of our officers and directors, and Credit Suisse First Boston Corporation (“CSFB”), as the underwriters of our March 13, 2000 initial public offering (“IPO”), in the United States District Court for the Southern District of New York. On August 9, 2001, these actions were consolidated before a single judge along with cases brought against numerous other issuers, their officers and directors and their underwriters, that make similar allegations involving the allocation of shares in the IPOs of those issuers. The consolidation was for purposes of pretrial motions and discovery only. On April 19, 2002, plaintiffs filed a consolidated amended complaint asserting essentially the same claims as the original complaints.

The amended complaint alleges that the officer and director defendants, CSFB and Selectica, Inc. violated federal securities laws by making material false and misleading statements in the prospectus incorporated in our registration statement on Form S-1 filed with the SEC in March 2000 in connection with our IPO. Specifically, the complaint alleges, among other things, that CSFB solicited and received excessive and undisclosed commissions from several investors in exchange for which CSFB allocated to those investors’ material portions of the restricted number of shares of common stock issued in our IPO. The complaint further alleges that CSFB entered into agreements with its customers in which it agreed to allocate the common stock sold in our IPO to certain customers in exchange for which such customers agreed to purchase additional shares of our common stock in the after-market at pre-determined prices. The complaint also alleges that the underwriters offered to provide positive market analyst coverage for us after the IPO, which had the effect of manipulating the market for the Company’s stock.

On July 15, 2002, the Company and the officer and director defendants, along with other issuers and their related officer and director defendants, filed a joint motion to dismiss based on common issues. Opposition and reply papers were filed and the Court heard oral argument. Prior to the ruling on the motion to dismiss, on October 8, 2002, the individual officers and directors entered into a stipulation of dismissal and tolling agreement with plaintiffs. As part of that agreement, plaintiffs dismissed the case without prejudice against the individual defendants. The Court ordered the dismissal of the officers and directors without prejudice on October 9, 2002. The Court rendered its decision on the motion to dismiss on February 19, 2003, denying dismissal of the Company.

On June 25, 2003, a Special Committee of the Board of Directors of the Company approved a Memorandum of Understanding (the “MOU”) reflecting a settlement in which the plaintiffs agreed to dismiss the case against us with prejudice in return for the assignment by us of certain claims that we might have against its underwriters. The same offer of settlement was made to all the issuer defendants involved in the litigation. No payment to the plaintiffs by us is required under the MOU. After further negotiations, the essential terms of the MOU were formalized in a Stipulation and Agreement of Settlement (“Settlement”), which has been executed on behalf of us. The settling parties presented the proposed Settlement papers to the Court on June 14, 2004 and filed formal motions seeking preliminary approval on June 25, 2004. The underwriter defendants, who are not parties to the proposed Settlement, filed a brief objecting to its terms on July 14, 2004. On February 15, 2005, the Court granted preliminary approval of the settlement conditioned on the agreement of the parties to narrow one of a number of the provisions intended to protect the issuers against possible future claims by the underwriters. We re-approved the Settlement with the proposed modifications that were outlined by the Court in its February 15, 2005 Order granting preliminary approval. Approval of any settlement involves a three-step process in the district court: (i) a preliminary approval, (ii) determination of the appropriate notice of the settlement to be provided to the settlement class, and (iii) a final fairness hearing. On August 31, 2005, the Court entered a preliminary order approving, with only minor modifications, the modified proposed settlement agreement. The court ordered that the mailing of the notices of pendency and proposed settlement of the class actions be completed by January 15, 2006. The court scheduled the final fairness hearing for Monday, April 24, 2006 as the date for the final fairness hearing. The deadline for class members to request exclusion from the settlement classes is Friday, March 24, 2006. Despite the preliminary approval, there can be no assurance that the Court will ultimately approve the settlement.

In the meantime, the plaintiffs and underwriters have continued to litigate the consolidated action. The litigation is proceeding through the class certification phase by focusing on six cases chosen by the plaintiffs and underwriters (“focus cases”). The Company is not a focus case. On October 13, 2004, the Court certified classes in each of the six focus cases. The underwriter defendants have sought review of that decision. Along with the other non-focus case issuer defendants, we have not participated in the class certification phase.

The plaintiffs’ money damage claims include prejudgment and post-judgment interest, attorneys’ and experts’ witness fees and other costs, as well as other relief to which the plaintiffs may be entitled should they prevail. We believe that the securities class action allegations against us and our officers and directors are without merit and, if settlement of the action is not finalized, we intend to contest the allegations vigorously. However, the patent infringement litigation is in its preliminary stages, and we cannot predict its outcome. The litigation process is inherently uncertain. If the outcome of the litigation is adverse to us and if, in addition, we are required to pay significant monetary damages, then our business would be significantly harmed. At a minimum, the class action litigation could result in substantial costs and divert our management’s attention and resources, which could seriously harm our business.

ITEM 1A: RISK FACTORS

In addition to other information in thisForm 10-Q, the following risk factors should be carefully considered in evaluating Selectica and its business because such factors currently may have a significant impact on Selectica’s business, operating results and financial condition. As a result of the risk factors set forth below and elsewhere in thisForm 10-Q, and the risks discussed in Selectica’s other Securities and Exchange Commission filings including ourForm 10-K for our fiscal year ended March 31, 2005, actual results could differ materially from those projected in any forward-looking statements.

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 of approximately $14.7 million, $8.8 million, and $29.7 million for the fiscal years ended March 31, 2005, 2004, and 2003, respectively. We have incurred net losses of approximately $15.6 million for the nine months ending December 31, 2005 and have an accumulated deficit of approximately $188.2 million as of December 31, 2005. We plan to reduce our investment in research and development, sales and marketing, and general and administrative expenses in absolute dollars over the next year as necessary to balance expense levels with projected revenues. We will need to generate significant increases in our revenues to achieve and maintain profitability. If our revenue fails to grow or grows more slowly than we anticipate or our operating expenses exceed our expectations, our losses will significantly increase which would significantly harm our business and operating results.

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.

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

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

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

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

Because we rely on a limited number of customers, the timing of customer acceptance or milestone achievement, or the amount of services we provide to a single customer can significantly affect our operating results or the failure to replace a significant customer. Because expenses are relatively fixed in the near term, any shortfall from anticipated revenues could cause our quarterly operating results to fall below anticipated levels.

As we pursue our contract management business, we may also experience challenges associated with an emerging market such as hosted on-demand solutions. Uncertainties with the level of services, pricing, and support requirements could affect our ability to achieve our revenue and profit goals for our contract management business.

We have entered into a Joint Venture Agreement with a partner, SalesTech Pty., Limited based in New Zealand (“SalesTech”) to develop and market products targeted at the Telecom, Financial Services and Insurance markets in EMEA and North America. Any failure of SalesTech to perform under the terms of the Agreement could result in loss of market momentum and potential sales.

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.

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

In any given period our revenues are dependent on customer contracts booked during earlier periods. Because we typically recognize revenue in periods after contracts are entered into, a decline in the number of contracts booked during any particular period or the value of such contracts would cause a decrease in revenue in future periods. The number and value of our bookings has been lower than management expectations. Our failure to increase bookings in the previous quarters was a significant factor in the decline of our revenues in more recent quarters. If our bookings remain at current levels or if the value of such bookings decreases further, it will cause our revenues to decline in future periods and could significantly harm our business and operating results.

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

We believe that our success will depend on the continued employment of our management team and key technical personnel, including Vincent Ostrosky, our President and Chief Executive Officer, and Stephen Bennion, our Chief Financial Officer, who have employment agreements 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 and 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.

Any mergers, acquisitions or joint ventures that we may make could disrupt our business and harm our operating results.

On December 3, 2004, we announced that we entered into a definitive merger agreement with I-many, Inc., under which we agreed, subject to certain conditions, to pay $1.55 per share in cash for all outstanding shares of I-many common stock, for a total transaction value of $70 million. The transaction was not approved by the I-many stockholders, and the merger agreement was terminated in March 2005. In May 2005, we entered into an agreement to purchase certain assets and products of Determine for $892,000 in cash. The transaction closed in the first quarter of fiscal 2006.

The attempt to acquire and merge I-many required a significant amount of management time, as well as significant consulting, legal and accounting expense, which negatively affected our operating, results. We may engage in acquisitions of other companies, products or technologies, such as the recent acquisition of Determine. If we fail to integrate successfully any future acquisitions (or technologies associated with such), the revenue and operating results of the combined companies could decline. The process of integrating an acquired business may

result in unforeseen difficulties and expenditures. If we fail to complete any acquisitions of any other companies, it may also result in unforeseen difficulties and expenditures. Acquisitions may involve a number of other potential risks to our business and include, but are not limited to the following:

	§		potential adverse effects on our operating results, including unanticipated costs and liabilities, unforeseen accounting charges or fluctuations from failure to accurately forecast the financial impact of an acquisition;

	§		use of cash;

	§		issuance of stock that would dilute our current stockholders’ percentage ownership;

	§		incurring debt;

	§		assumption of liabilities;

	§		amortization expenses related to other intangible assets;

	§		incurring large and immediate write-offs;

	§		incurring legal and professional fees.;

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

	§		unanticipated costs;

	§		diversion of managements’ attention from our core business;

	§		exposure to the judgment and decisions of third parties and lack of control over the operations of our partners and resellers;

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

	§		potential loss of key employees, particularly those of the acquired organizations.

Any acquisitions or joint ventures may cause our financial results to suffer as a result of these risks. Where mergers, acquisitions or joint ventures are intended to enhance revenue and operating results, such revenue opportunities may not materialize, or the cost of integration and reorganization of the new operations may cost more than anticipated.

In April 2005, the Company entered into a Joint Venture Agreement with SalesTech. Pursuant to the Agreement, SalesTech and the Company both contribute products and management to the joint venture and will share the net profit or losses of the Joint Venture. The Company also agreed to provide funding for the first three quarters of operations. Any failure of the joint venture or the inability of SalesTech to perform would be harmful to the Company.

Any unsolicited proposals for the purchase of our Company could disrupt business and harm our operating results.

In January 2005, Trilogy, a privately held company, conditionally proposed to purchase all of our outstanding common stock for $4.00 per share. This unsolicited proposal assumed that the I-many merger was not completed. On February 2, 2005, following consultation with our legal and financial advisors, we issued a press release announcing that our Board of Directors determined that Trilogy’s proposal was not in the best interests of our stockholders. For reasons unrelated to Trilogy’s proposal, I-many and Selectica terminated the I-many merger on March 31, 2005. On April 11, 2005, Trilogy filed a Statement of Beneficial Ownership on Schedule 13D with the Securities and Exchange Commission reporting that it owned 6.9% of our outstanding common stock as of that date.

Uncertainty regarding Trilogy’s intentions toward us may cause disruption in our business, which could result in a material adverse effect on our financial condition and operating results. Additionally, as a consequence of the uncertainty surrounding our future, our key employees may be distracted and could seek other employment opportunities. If key employees leave, there could be a material adverse effect on our business and results of operations. Uncertainty surrounding Trilogy’s intentions could also be disruptive to our relations with our existing and potential customers as the proposal and/or the patent litigation may be viewed negatively by some customers. Responding to any proposals from Trilogy has consumed, and may continue to consume, attention from our management and employees, and may require us to incur significant costs, which could adversely affect our financial and operating results. In addition, we compete with Trilogy in the marketplace and Trilogy owns approximately 6.9% of our outstanding common stock; there can be no assurance that we will not have disputes with Trilogy in the future which could result in significant costs, distraction and uncertainty.

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

Over the past 18 months, the Company has been changing its focus from selling more custom designed Internet Selling Solutions to a new line of products designed to provide significant industry-specific functionality “out-of-box”. Several of these products are available as enterprise products residing behind the customer’s firewall or as hosted, on-demand offerings. Accordingly, we have revised our product marketing focus to reflect these developments. If the market for our new product offerings is smaller than we anticipated or if our products fail to gain widespread acceptance in this market, our results of operations would be adversely affected. In addition, if there is a delay in bringing our new products to market, it would delay our ability to derive revenues from such products and our business and operating results could be significantly harmed. Additionally, the revenue ramp for on-demand offerings may be slower than the company’s traditional enterprise business as revenue is recognized over the life of the contract using subscription accounting.

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 68% and 70% of our revenues for the nine months ended December 31, 2005 and 2004, respectively. Our ten largest customers accounted for 82% and 83% of our revenues for the nine months ended December 31, 2005 and 2004, respectively. Revenues from significant customers as a percentage of total revenues are as follows:


	Three Months Ended						Nine Months Ended
	December 31,						December 31,
	2005			2004			2005			2004
Customer A		24	%		18	%		25	%		11	%
Customer B		22	%			*		22	%		22	%
Customer C			*		35	%			*		14	%
Customer D			*		14	%			*		13	%
Customer E			*			*			*		10	%

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

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 nine to twelve months, and may sometimes be significantly longer. We are generally required to provide a significant level of education regarding the use and benefits of our products, and potential customers tend to engage in extensive internal reviews before making purchase decisions. In addition, the purchase of our products typically involves a significant commitment by our customers of capital and other resources, and is therefore subject to delays that are beyond our control, such as

customers’ internal budgetary procedures and the testing and acceptance of new technologies that affect key operations. In addition, because we target large companies, our sales cycle can be lengthier due to the decision process in large organizations. As a result of our products’ long sales cycles, we face difficulty predicting the quarter in which sales to expected customers may occur. If anticipated sales from a specific customer for a particular quarter are not realized in that quarter, our operating results for that quarter could fall below the expectations of financial analysts and investors, which could cause our stock price to decline.

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

We have reduced our headcount and operations in the last two years and we may further reduce our operating expenses. These reductions have placed, and will continue to place increased demands on our managerial, administrative, operational, financial and other resources.

Additional cost cutting measures would force us to handle our current customer base and operations with a smaller number of employees. If we are unable to initiate procedures and controls to support our future operations in an efficient and timely manner, or if we are unable to otherwise manage these changes effectively, our business would be harmed.

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

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

The rapid change in the marketplace poses a number of concerns. 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. The decrease in technology infrastructure spending may reduce the size of the market for our solutions. Our potential customers may decide to purchase more complete solutions offered by larger competitors instead of individual applications. If the market for our solutions is slow to develop, or if our customers purchase more fully integrated products, our business and operating results would be significantly harmed.

We face intense competition, which could reduce our sales, prevent us from achieving or maintaining profitability and inhibit our future growth.

The market for software and services that enable electronic commerce is intensely competitive and rapidly changing. We expect competition to persist and intensify, which could result in price reductions, reduced gross margins and loss of market share. Our principal competitors include publicly traded companies such as Oracle Corporation and SAP which offer integrated solutions for electronic commerce incorporating some of the functionality of our configuration, pricing and quoting software, as well as private companies such as Comergent Technologies, Trilogy, DiCarta, Nextance and Model N.

Our competitors may intensify their efforts in our market. In addition, other enterprise software companies may offer competitive products in the future. Competitors vary in size 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 Java technology and our multi-threaded architecture, some of our competitors and potential competitors have significant advantages over us, including:

	•		a longer operating history;

	•		preferred vendor status with our customers;

	•		more extensive name recognition and marketing power; and

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

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

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

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

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

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

Our failure to meet customer expectations on deployment of our products could result in negative publicity and reduced sales, both of which would significantly harm our business and operating results.

In the past, our customers have experienced difficulties or delays in completing implementation of our products. We may experience similar difficulties or delays in the future. Our configuration, pricing and quoting products rely on defining a repository of information called the KnowledgeBase 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 KnowledgeBase can be more time consuming than we or our customers anticipate. If our customers do not devote the resources necessary to create the KnowledgeBase, the deployment of our products can be delayed. Deploying our 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 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 most of our current sales, and have recently entered into a Joint Venture arrangement with a business partner in certain markets. Our future growth depends on the ability of both our direct sales force and the Joint Venture to develop customer relationships and increase sales to a level that will allow us to reach and maintain profitability. If we are unable to retain qualified sales personnel or if newly hired personnel fail to develop the necessary skills or to reach productivity when anticipated or if our Joint Venture is not successful, we may not be able to increase sales of our products and services, and our results of operation could be significantly harmed. We continue to have a high rate of turnover in our executive sales positions. If our sales management fails to successfully integrate into the Company or improve the performance of the sales personnel, our business may be harmed.

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

We need to better manage our professional services organization to assist our customers with implementation and maintenance of our products. Because professional services have been expensive to provide, we must improve the management of our professional services organization to improve our results of operations. Improving the efficiency of our consulting services is dependent upon attracting and retaining experienced project managers. In addition, because of market conditions, the pricing of professional services projects has made it difficult to improve operating margins.

Services revenues, which are comprised primarily of revenues from consulting fees, maintenance contracts and training, are important to our business. Services revenues have lower gross margins than license revenues. During the three and nine months ending December 31, 2005 and 2004, gross margins percentages for services revenues and license revenues for the respective periods are as follows:


	Three Months Ended						Nine Months Ended
	December 31,						December 31,
	2005			2004			2005			2004
License		68	%		91	%		86	%		91	%
Services		53	%		53	%		56	%		46	%

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

If new versions and releases of our products contain errors or defects, we could suffer losses and negative publicity, which would adversely affect our business and operating results.

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

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

We conduct development, quality assurance and professional services operations in India. We are dependent on our India-based operations for these aspects of our business. As of December 31, 2005, we had 79 persons employed 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 with India-based employees. We presently rely on a number of visa programs to enable these India-based employees to travel and work internationally. Any change in the immigration policies of India or the countries to which these employees travel and work could cause disruption or force the termination of these programs, which would harm our business.

Demand for our products and services will decline significantly if our software cannot support and manage a substantial number of users.

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

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. 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. Competition for such personnel has markedly intensified in India, where we have a large portion of our workforce. Many multinational corporations have expanded their operations into India, and there is an increased demand for individuals with relevant technology experience.

If we become subject to product liability litigation, it could be costly and time consuming to defend and could distract us from focusing on our business and operations.

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

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

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

Our rapid growth required us to manage a large number of relationships with customers, suppliers and employees, as well as a large number of complex contracts. Additional cost cutting measures would force us to handle these demands with a smaller number of employees. If we are unable to initiate procedures and controls to support our future operations in an efficient and timely manner, or if we are unable to otherwise manage these changes effectively, our business would be harmed.

Our future success depends on our proprietary intellectual property, and if we are unable to protect our intellectual property from potential competitors, our business may be significantly harmed.

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

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

We have in the past and expect in the future to incur a significant amount of amortization of charges related to securities issuances in future periods, which will negatively affect our operating results. Since inception we have recorded approximately $12.1 million in net deferred stock compensation charges. During the three months period ending December 31, 2005 and 2004, we amortized approximately $15,000 and $23,000 of such charges. During the nine months period ending December 31, 2005 and 2004, we recorded approximately $53,000 and $105,000 of such charges. For the nine months ended December 31, 2005 and 2004, we also recognized approximately $64,000 and $16,000 of compensation expense related to option vesting acceleration. We expect to amortize approximately $3,000 of deferred compensation expense for the remaining three months ending March 31, 2006 and we may incur additional charges in the future in connection with grants of stock-based compensation at less than fair market value, charges related to variable plan accounting, and acceleration vesting of stock options to employees.

The table below demonstrates the impact of adopting SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS 123) on the Company’s income statement for the periods ending December 31, 2004 and 2005. See Note 11 for additional information.


	Three Months Ended						Nine Months Ended
	December 31,						December 31,
	(in thousands, except per						(in thousands, except per
	share amounts)						share amounts)
	2005			2004			2005			2004
Net loss, as reported	$	(10,780	)	$	(1,512	)	$	(15,929	)	$	(9,177	)
Add: Stock based employee compensation expense Included in reported net loss		15			23			118			105
Deduct: Total stock based employee compensation determined under fair value based method for all awards		(642	)		(793	)		(2,254	)		(2,786	)

Pro forma net loss	$	(11,407	)	$	(2,282	)	$	(18,020	)	$	(11,858	)

Basic and diluted net loss per share, as reported	$	(0.33	)	$	(0.05	)	$	(0.48	)	$	(0.28	)

Basic and diluted pro forma net loss per share	$	(0.35	)	$	(0.07	)	$	(0.55	)	$	(0.36	)

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

Our strategy has been to rely in part upon systems integrators and consulting firms to recommend our products to their customers and to install and deploy our products. To date, we have had limited success in utilizing these firms as a sales channel or as a provider of professional services. To increase our revenues and implementation capabilities, we must continue to develop and expand our relationships with these systems integrators and consulting firms. If these systems integrators and consulting firms are unwilling to install and deploy our products, we may not have the resources to provide adequate implementation services to our customers, and our business and operating results could be significantly harmed.

We are the target of several securities class action complaints, which could result in substantial costs and divert management attention and resources.

Class Action

Between June 5, 2001 and June 22, 2001, four securities class action complaints were filed against us, certain of our officers and directors, and CSFB, as the underwriters of our March 13, 2000 IPO, in the United States District Court for the Southern District of New York. On August 9, 2001, these actions were consolidated before a single judge along with cases brought against numerous other issuers, their officers and directors and their underwriters, that make similar allegations involving the allocation of shares in the IPOs of those issuers. The consolidation was for purposes of pretrial motions and discovery only. On April 19, 2002, plaintiffs filed a consolidated amended complaint asserting essentially the same claims as the original complaints.

The amended complaint alleges that the Company, the officer and director defendants and CSFB violated federal securities laws by making material false and misleading statements in the prospectus incorporated in our registration statement on Form S-1 filed with the SEC in March 2000 in connection with our IPO. Specifically, the complaint alleges, among other things, that CSFB solicited and received excessive and undisclosed commissions from several investors in exchange for which CSFB allocated to those investors’ material portions of the restricted number of shares of common stock issued in our IPO. The complaint further alleges that CSFB entered into agreements with its customers in which it agreed to allocate the common stock sold in our IPO to certain customers in exchange for which such customers agreed to purchase additional shares of our common stock in the after-market at pre-determined prices. The complaint also alleges that the underwriters offered to provide positive market analyst coverage for us after the IPO, which had the effect of manipulating the market for our stock.

On June 25, 2003, a Special Committee of the Board of Directors approved a Memorandum of Understanding (the “MOU”) reflecting a settlement in which the plaintiffs agreed to dismiss the case against the Company with prejudice in return for our assignment of certain claims that the Company might have against its underwriters. The same offer of settlement was made to all issuer defendants involved in the litigation. No payment to the plaintiffs by the Company is required under the MOU. After further negotiations, the essential terms of the MOU were formalized in a Stipulation and Agreement of Settlement (“Settlement”), which has been executed on behalf of the Company. The settling parties presented the proposed Settlement papers to the Court on June 14, 2004 and filed formal motions seeking preliminary approval on June 25, 2004. The underwriter defendants, who are not parties to the proposed Settlement, filed a brief objecting to its terms on July 14, 2004. On February 15, 2005, the Court granted preliminary approval of the settlement conditioned on the agreement of the parties to narrow one of a number of the provisions intended to protect the issuers against possible future claims by the underwriters. We re-approved the Settlement with the proposed modifications that were outlined by the Court in its February 15, 2005

Order granting preliminary approval. Approval of any settlement involves a three-step process in the district court: (i) a preliminary approval, (ii) determination of the appropriate notice of the settlement to be provided to the settlement class, and (iii) a final fairness hearing. On August 31, 2005, the Court entered a preliminary order approving, with only minor modifications, the modified proposed settlement agreement. The court ordered that the mailing of the notices of pendency and proposed settlement of the class actions be completed by January 15, 2006. The court scheduled the final fairness hearing for Monday, April 24, 2006 as the date for the final fairness hearing. The deadline for class members to request exclusion from the settlement classes is Friday, March 24, 2006. Despite the preliminary approval, there can be no assurance that the Court will ultimately approve the settlement

In the meantime, the plaintiffs and underwriters have continued to litigate the consolidated action. The litigation is proceeding through the class certification phase by focusing on six cases chosen by the plaintiffs and underwriters (“focus cases”). Selectica is not a focus case. On October 13, 2004, the Court certified classes in each of the six focus cases. The underwriter defendants have sought review of that decision. Selectica, along with the other non-focus case issuer defendants, has not participated in the class certification phase.

The plaintiffs’ money damage claims include prejudgment and post-judgment interest, attorneys’ and experts’ witness fees and other costs, as well as other relief to which the plaintiffs may be entitled should they prevail. The Company believes that the securities class action allegations against the Company and our officers and directors are without merit and, if settlement of the action is not finalized, the Company intends to contest the allegations vigorously. However, the litigation is in its preliminary stages, and the Company cannot predict its outcome. The litigation process is inherently uncertain. If the outcome of the litigation is adverse to the Company and if, in addition, the Company is required to pay significant monetary damages, the Company’s business would be significantly harmed. At a minimum, the class action litigation could result in substantial costs and divert our management’s attention and resources, which could seriously harm our business.

In the future we may be subject to other lawsuits. Any litigation, even if not successful against us, could result in substantial costs and divert management’s and other resources away from the operations of our business.

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

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

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

	-		restricting the ability of stockholders to call special meetings of stockholders;

	-		prohibiting stockholder action by written consent;

	-		establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings; and

	-		granting our board of directors the ability to designate the terms of and issue new series of preferred stock without stockholder approval.

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

If we are unable to successfully address the material weaknesses in our disclosure controls and procedures, including our internal control over financial reporting, our ability to report our financial results on a timely and accurate basis may be adversely affected.

We have evaluated our “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as well as our internal control over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002. Our predecessor independent registered public accounting firm performed a similar evaluation of our internal control over financial reporting as of March 31, 2005. Effective controls are necessary for us to provide reliable financial reports and help identify and deter fraud. If we cannot provide reliable financial reports or prevent fraud, our operating results could be harmed. As of March 31, 2005, we concluded that we had

deficiencies in our internal control over financial reporting that constitute five material weaknesses, as further described in Item 9A, Report of Management on Internal Control over Financial Reporting of the Form 10-K for the fiscal year ended March 31, 2005. Our predecessor independent registered public accounting firm at the time reached the same conclusion. We are implementing corrective actions, which we believe will remediate each of these deficiencies. However, we cannot be certain that these measures will result in adequate controls over our financial processes and reporting in the future. If these actions are not successful in addressing these material weaknesses, our ability to report our financial results on a timely and accurate basis may be adversely affected. In addition, if we cannot establish effective internal control over financial reporting and disclosure controls and procedures, investors may lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock. We have performed management testing of the controls designed to remediate our five material weaknesses in the periods ending June 30 and September 30, 2005, and we will also test these controls for the periods ending December 31, 2005 and March 31, 2006. The results of the testing conducted for the periods ending June and September 30, 2005 have demonstrated the controls implemented to remediate the five material weaknesses are performing as designed without exception.

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

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

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

Restrictions on export of encrypted technology could cause us to incur delays in international product sales, which would adversely impact the expansion and growth of our business.

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

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

Our servers are vulnerable to physical or electronic break-ins and similar disruptions, which could lead to loss of data or public release of proprietary information. In addition, unauthorized persons may improperly access our data. We have experienced an unauthorized break-in by a “hacker” who has stated that he could, in the future, damage our systems or take confidential information. These and other types of attacks could harm us. Actions of this sort may be very expensive to remedy and could adversely affect results of operations.

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

We are required to follow accounting standards and financial reporting set by governing bodies in the U.S. and other countries where we do business. From time to time, these governing bodies implement new and revised laws and regulations. These new and revised accounting standards, financial reporting and tax laws may require changes to accounting principles used in preparing our financial statements. These changes may have a material impact on our business and financial results. For example, a change in accounting rules can have a significant effect on our reported

results and may even affect our reporting of transactions completed before the change became effective. As a result, changes to existing rules or reconsideration of current practices caused by such changes may adversely affect our reported financial results or the way we conduct our business.

If use of the Internet does not continue to develop and reliably support the demands placed on it by electronic commerce, the market for our products and services may be adversely affected, and we may not achieve anticipated sales growth.

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

Increasing government regulation of the Internet could limit the market for our products and services, or impose greater tax burdens on us or liability for transmission of protected data.

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

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

ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Items 2(a) and 2(b) are inapplicable.

The following table presents information with respect to purchases of common stock of the Company made during the three months ended December 31, 2005 by the Company or any “affiliated purchaser” of the Company as defined in Rule 10b-18(a)(3) under the Exchange Act.


					(c) Total Number of		(d) Maximum Number (or
	(a) Total				Shares Purchased as		Approximate Dollar Value)
	Number of		(b) Average		Part of Publicly		of Shares that May Yet Be
	Shares		Price Paid		Announced Plans or		Purchased Under the Plans or
Period	Purchased (1)		per Share		Programs (2)		Programs
October 1, 2005 – October 31, 2005		—		—		—		—
November 1, 2005 – November 30, 2005		—		—		—		—
December 1, 2005 – December 31, 2005		125,839	$	2.68		125,839	$	24,650,000
Total		125,839	$	2.68		125,839	$	24,650,000

(1)		On November 9, 2005, Selectica announced that its Board of Directors had authorized a new $25 million stock repurchase program. The new repurchase plan resulted in shares of the Company’s stock being repurchased in the open market from time to time based on market conditions. This new program replaced the prior repurchase plan previously announced on May 6, 2003.

(2)		Shares have only been repurchased through publicly announced programs.

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5: OTHER INFORMATION

(a) None

(b) Not applicable.

ITEM 6: EXHIBITS

Exhibit 10.1

Settlement, Release and Cross-License Agreement among the Company, Trilogy Software, Inc. and Trilogy Development Group, Inc., dated January 17, 2006.

Exhibit 31.1

Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 31.2

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

Exhibit 32.1

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

Exhibit 32.2

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

SIGNATURES

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


Date: February 14, 2006
		SELECTICA, INC.
		Registrant

		/s/ VINCENT G. OSTROSKY

		Vincent G. Ostrosky
		President and Chief Executive Officer

		/s/ STEPHEN BENNION

		Stephen Bennion
		Executive Vice President and
		Chief Financial Officer

Exhibit Index

Exhibit 10.1

Settlement, Release and Cross-License Agreement among the Company, Trilogy Software, Inc. and Trilogy Development Group, Inc., dated January 17, 2006.

Exhibit 31.1

Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 31.2

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

Exhibit 32.1

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

Exhibit 32.2

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

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Constraining
Legalese
Litigious
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Determine Inactive 10-Q2006 Q3 Quarterly report

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