Determine 10-Q/A 2009 Q3 Quarterly report (amended)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q/A

Amendment No. 1

(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, 2008

OR

¨ 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.)

1740 Technology Drive, Suite 450, San Jose, CA 95110-2111

(Address of Principal Executive Offices)

(408) 570-9700

(Registrant’s Telephone Number, Including Area Code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES  ¨  NO  ¨

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

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

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

The number of shares outstanding of the registrant’s common stock, par value $0.0001 per share, as of February 6, 2009, was 55,532,082.

FORM 10-Q

SELECTICA, INC.

INDEX

PART I FINANCIAL INFORMATION	4
ITEM 1: Financial Statements	4
Condensed Consolidated Balance Sheets	4
Condensed Consolidated Statements of Operations	5
Condensed Consolidated Statements of Cash Flows	6
Notes to Condensed Consolidated Financial Statements	7
ITEM 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
ITEM 3: Quantitative and Qualitative Disclosures about Market Risk	20
ITEM 4: Controls and Procedures	21
PART II OTHER INFORMATION	22
ITEM 1: Legal Proceedings	22
ITEM 1A: Risk Factors	22
ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds	30
ITEM 3: Defaults Upon Senior Securities	30
ITEM 4: Submission of Matters to a Vote of Security Holders	30
ITEM 5: Other Information	30
ITEM 6: Exhibits	30
Signatures	31

2

EXPLANATORY NOTE:

This Amendment No. 1 to Registrant’s quarterly report on Form 10-Q for the quarter ended December 31, 2008 (the “Form 10-Q”) is being filed solely to file exhibits 31.2, 31.3, 32.2 and 32.3. Except as so indicated, Registrant has made no other material changes in the amendment to the Form 10-Q.

Investors should no longer rely on any forward-looking statements contained in the Form 10-Q regarding Registrant’s financial condition and results of operations, including Registrant’s financial results for the fiscal year ended March 31, 2009 (“Fiscal 2009” ). Instead, investors should rely on Registrant’s disclosures in its annual report on Form 10-K (the “Form 10-K”) filed with the Securities and Exchange Commission on July 9, 2009, relating to (i) Registrants actual financial results for Fiscal 2009, (ii) management’s discussion and analysis of the financial condition and results of operations contained in Registrant’s Form 10-K and (iii) any forward-looking statements contained in the Form 10-K.

This amendment to the Form 10-Q speaks as of the filing date of the original Form 10-Q, except for the certifications, which speak as of their respective dates and the filing date of this amendment to the Form 10-Q. For the convenience of the reader, the Company is re-filing the entire Form 10-Q, but the Form 10-Q has not been updated to reflect events occurring or trends arising after the original filing date.”

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

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

3

PART I: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

SELECTICA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS)

	December 31, 2008			March 31, 2008
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	21,177		$	22,137
Restricted cash		601			—
Short-term investments		5,636			13,076
Accounts receivable, net of allowance for doubtful accounts of $197 and $0, respectively		4,594			1,330
Prepaid expenses and other current assets		635			919
Total current assets		32,643			37,462
Property and equipment, net		1,763			2,185
Other assets		736			593
Total assets	$	35,142		$	40,240
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of note payable to Versata	$	786		$	786
Accounts payable		1,395			518
Current portion of accrual for restructuring liability		1,957			1,937
Accrued payroll and related liabilities		784			740
Other accrued liabilities		1,211			735
Deferred revenues		3,464			1,984
Total current liabilities		9,597			6,700
Accrual for restructuring liability, net of current portion		8			924
Note payable to Versata, net of current portion		4,721			5,113
Other long-term liabilities		250			245
Total liabilities		14,576			12,982
Contingencies (See Note 6)
Stockholders’ equity:
Common stock		4			4
Additional paid-in capital		301,155			300,939
Accumulated deficit		(247,686	)		(240,783	)
Accumulated other comprehensive income (loss)		(1	)		4
Treasury stock		(32,906	)		(32,906	)
Total stockholders’ equity		20,566			27,258
Total liabilities and stockholders’ equity	$	35,142		$	40,240

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

4

SELECTICA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)

	Three Months Ended December 31,						Nine Months Ended December 31,
	2008			2007			2008			2007
Revenues:
License	$	1,024		$	1,680		$	1,936		$	4,482
Services		3,149			3,014			9,139			8,535
Total revenues		4,173			4,694			11,075			13,017
Cost of revenues:
License		46			71			148			183
Services		1,531			966			3,876			2,869
Total cost of revenues		1,577			1,037			4,024			3,052
Gross profit		2,596			3,657			7,051			9,965
Operating expenses:
Research and development		994			1,425			3,111			3,742
Sales and marketing		1,497			1,806			4,611			4,867
General and administrative		1,381			1,249			4,356			3,987
Legal settlement		33			85			80			16,203
Restructuring		14			503			687			1,165
Professional fees related to stock option investigation		3			380			38			3,528
Total operating expenses		3,922			5,448			12,883			33,492
Loss from operations		(1,326	)		(1,791	)		(5,832	)		(23,527	)
Interest and other income (expense), net		(391	)		618			(989	)		2,486
Loss before provision for income taxes		(1,717	)		(1,173	)		(6,821	)		(21,041	)
Provision for income taxes		45			67			82			311
Net loss	$	(1,762	)	$	(1,240	)	$	(6,903	)	$	(21,352	)
Basic and diluted net loss per share	$	(0.06	)	$	(0.04	)	$	(0.24	)	$	(0.75	)
Weighted-average shares of common stock used in computing basic and diluted net loss per share		28,723			28,430			28,710			28,415

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

5

SELECTICA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

	Nine Months Ended December 31,
	2008			2007
Operating activities
Net loss	$	(6,903	)	$	(21,352	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		296			336
Amortization		74			156
Loss on disposition of property and equipment		81			1
Stock-based compensation		378			693
Changes in assets and liabilities:
Restricted cash		(601	)		—
Accounts receivable, net		(3,264	)		(1,076	)
Prepaid expenses and other current assets		283			(776	)
Other assets		(216	)		39
Accounts payable		877			(2,205	)
Accrual for restructuring liabilities		(896	)		(2,534	)
Accrued payroll and related liabilities		44			322
Other accrued liabilities and long-term liabilities		500			6,161
Deferred revenues		1,481			(724	)
Net cash used in operating activities		(7,866	)		(20,959	)
Investing activities
Purchase of capital assets		(173	)		(308	)
Proceeds from disposal of fixed assets		19			6
Purchase of short-term investments		(7,235	)		(45,518	)
Proceeds and investment in restricted investments		—			150
Proceeds from maturities of short-term investments		14,183			53,795
Proceeds from maturities of long-term investments		—			1,009
Net cash provided by investing activities		6,794			9,134
Financing activities
Principal payments on note payable to Versata		(600	)		—
Proceeds from issuance of common stock		26			—
Purchase of treasury stock		—			(21	)
Net cash used in financing activities		(574	)		(21	)
Effect of exchange rate changes on cash		686			(417	)
Net decrease in cash and cash equivalents		(960	)		(12,263	)
Cash and cash equivalents at beginning of the period		22,137			30,165
Cash and cash equivalents at end of the period		21,177			17,902

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

6

SELECTICA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Basis of Presentation

The condensed consolidated balance sheet as of December 31, 2008, the condensed consolidated statements of operations for the three and nine months ended December 31, 2008 and 2007, and the condensed consolidated statements of cash flows for the nine months ended December 31, 2008 and 2007 have been prepared by the Company and are unaudited. In the opinion of management, all necessary adjustments (including normal recurring adjustments) have been made to present fairly the financial position at December 31, 2008, and the results of operations and cash flows for the three and nine months ended December 31, 2008 and 2007, respectively. Interim results are not necessarily indicative of the results for a full fiscal year. The condensed consolidated balance sheet as of March 31, 2008 has been derived from the audited consolidated financial statements at that date.

Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-KSB for the year ended March 31, 2008.

2. Summary of Significant Accounting Policies

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

Customer Concentration

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 December 31,				Nine Months Ended December 31,
	2008		2007		2008		2007
Customer A	19	%	19	%	22	%	26	%
Customer B	*		14	%	*		12	%
Customer C	*		11	%	*		*
Customer D	15	%	*		*		*

* 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, 2008		March 31, 2008
Customer A	16	%	15	%
Customer B	*		15	%
Customer C	10	%	15	%
Customer D	*		12	%
Customer E	*		10	%
Customer F	17	%	*

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

7

Fair Value Measurements

The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis in accordance with SFAS No. 157,Fair Value Measurements, as of December 31, 2008 (in thousands):

Description	Balance as of December 31, 2008		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Assets
Cash equivalents:
Money market funds	$	19,647	$	19,647	$	—
Short-term investments:
Corporate bonds		1,398		—		1,398
Certificates of deposit		4,238		—		4,238
Total assets	$	25,283	$	19,647	$	5,636
Liabilities
Foreign currency derivative contracts		289		—		289
Total liabilities	$	289	$	—	$	289

The Company’s financial assets and liabilities are valued using market prices on both active markets (Level 1) and less active markets (Level 2). Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 instrument valuations are obtained from readily-available pricing sources for comparable instruments. As of December 31, 2008, the Company did not have any assets or liabilities without observable market values that would require a high level of judgment to determine fair value (Level 3 assets).

Comprehensive Loss

Comprehensive loss includes net loss and net unrealized gains and (losses) on available-for-sale-securities. The components of comprehensive loss for the three and nine months ended December 31, 2008 and 2007 are as follows:

	Three Months Ended December 31,						Nine Months Ended December 31,
	2008			2007			2008			2007
	(In thousands)
Net loss	$	(1,762	)	$	(1,240	)	$	(6,903	)	$	(21,352	)
Change in unrealized gain (loss) on securities		23			—			(5	)		24
Comprehensive loss	$	(1,739	)	$	(1,240	)	$	(6,908	)	$	(21,328	)

Derivative Financial Instruments

Near the end of the third quarter of fiscal 2009, the Company launched a new foreign currency hedging program where it enters into forward foreign exchange contracts with a financial institution to reduce the risk that its cash flows and earnings will be adversely affected by foreign currency exchange rate fluctuations. Gains and losses on the contracts offset foreign exchange gains and losses from the revaluation of intercompany balances or other current assets, investments, or liabilities denominated in currencies other than the functional currency of the reporting entity. This program is not designed for trading or speculative purposes.

In accordance with SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, the Company recognizes derivative instruments as either assets or liabilities on the balance sheet at fair value. These forward exchange contracts are not accounted for as hedges and, therefore, changes in the fair value of these instruments are recorded in interest and other income (expense), net. During the three months ended December 31, 2008, the Company recognized expenses of $0.1 million related to these contracts.

8

Segment Information

The following is a summary of the Company’s net revenues, cost of sales, gross profit and income (loss) from operations by segment and consolidated totals for the periods presented below (in thousands):

	Three Months Ended December 31,						Nine Months Ended December 31,
	2008			2007			2008			2007
	(in thousands)
Sales Configuration Solutions:
Net Revenues	$	1,410		$	2,376		$	5,044		$	8,391
Cost of Sales		372			560			1,244			1,806
Gross Profit		1,038			1,816			3,800			6,585
Income from Operations		489			869			1,596			4,362
Contract Management Solutions:
Net Revenues		2,763			2,318			6,031			4,626
Cost of Sales		1,205			477			2,780			1,246
Gross Profit		1,558			1,841			3,251			3,380
Loss from Operations		(384	)		(443	)		(2,267	)		(3,006	)
Unallocated Corporate Expenses		(1,431	)		(2,217	)		(5,161	)		(24,883	)
Consolidated:
Net Revenues		4,173			4,694			11,075			13,017
Cost of Sales		1,577			1,037			4,024			3,052
Gross Profit		2,596			3,657			7,051			9,965
Loss from Operations	$	(1,326	)	$	(1,791	)	$	(5,832	)	$	(23,527	)

3. Income Taxes

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

On September 30, 2008, California enacted Assembly Bill 1452 which among other provisions, suspends net operating loss deductions for 2008 and 2009 and extends the carryforward period of any net operating losses not utilized due to such suspension; adopts the federal 20-year net operating loss carryforward period; phases-in the federal two-year net operating loss carryback periods beginning in 2011 and limits the utilization of tax credit to 50% of a taxpayer’s taxable income. This new law does not impact the Company’s income tax provision during the third quarter of fiscal year 2009.

In addition, the Housing and Economic Recovery Act of 2008 (“Act”), signed into law in July 2008, allows taxpayers to claim refundable AMT or research and development credit carryovers if they forego bonus depreciation on certain qualified fixed assets placed in service from the period between April and December 2008. The Company estimated and recognized the credit based on fixed assets placed into service through the nine months ended December 31, 2008. During the nine months ended December 31, 2008, the Company recorded a net income tax benefit of $15,998 for U.S. Federal refundable credit as provided by the Act.

As of March 31, 2008, the Company has accrued $130,000 of income tax expense and $20,000 of interest and penalties as a result of Selectica India Private Ltd.’s branch operations within the U.S. increasing the Company’s effective tax rate. In addition, at March 31, 2008, the Company had $1.41 million of unrecognized tax benefits which was netted against deferred tax assets with a full valuation allowance or other fully reserved amounts, and if recognized, there will be no effect on the Company’s effective tax rate.

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

9

4. Stock-Based Compensation

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

Equity Incentive Program

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

There were 200,000 and 678,456 units of restricted stock issued during the three and nine months ended December 31, 2008, respectively.

Valuation Assumptions

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

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

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

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

10

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

	Three Months Ended December 31,				Nine Months Ended December 31,
	2008		2007		2008		2007
Risk-free interest rate	1.05	%	3.88	%	2.06	%	3.88	%
Dividend yield	0.00	%	0.00	%	0.00	%	0.00	%
Expected volatility	52.68	%	34.33	%	42.43	%	34.33	%
Expected option life in years	3.17		3.90		3.34		3.90

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

	Shares available for grant		Options Outstanding
			Number of shares		Weighted-average exercise price per share
	(in thousands)
Outstanding at September 30, 2008	11,498		1,211		$	2.73
Options granted	(260	)	60		$	1.00
Options cancelled	60		(61	)	$	2.19
Outstanding at December 31, 2008	11,298		1,210		$	2.67

The weighted average term for exercisable options is 6.10 years. The intrinsic value is calculated as the difference between the market value as of December 31, 2008 and the exercise price of the shares. The market value of the Company’s common stock as of December 31, 2008 was $0.84 as reported by The NASDAQ Global Stock Market. The aggregate intrinsic value of stock options outstanding at December 31, 2008 was $0. The aggregate intrinsic value of stock options outstanding at December 31, 2007 was $12,897 of which $2,236 was related to exercisable options.

The options outstanding and exercisable at December 31, 2008 were in the following exercise price ranges:

	Options Outstanding		Options Vested
Range of Exercise Prices per share	Number of Outstanding Shares as of December 31, 2008	Weighted- Average Remaining Contractual Life (in years)	Options Vested at December 31, 2008	Weighted- Average Exercise Price per share
	(in thousands except for per share amount)
$1.12 - $ 1.81	370	8.17	88	$	1.75
$1.89 - $ 2.45	305	8.66	103	$	1.94
$2.52 - $ 3.40	304	6.41	272	$	3.19
$3.44 - $52.70	231	3.72	231	$	4.98
	1,210	7.00	694	$	3.42

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

	Three Months Ended December 31,		Nine Months Ended December 31,
	2008	2007	2008	2007
Weighted average options with strike price below FMV	0	124	0	124
Weighted average options with strike price at FMV	0	0	0	0
Weighted average options with strike price above FMV	1,210	3,762	1,210	3,762

During the three months ended December 31, 2008, the Company granted 60,000 shares of stock options. The weighted average remaining contractual term of all options exercisable at December 31, 2008 is 6.1 years. SFAS No. 123R requires forfeitures to be estimated at the time of grant and revised if necessary in subsequent periods if actual forfeitures differ from those estimates. Based on the Company’s estimates of future forfeiture rates, the Company has assumed an annualized forfeiture rate of 22.87% for its options.

11

1999 Employee Stock Purchase Plan (“ESPP”)

The price paid for the Company’s common stock purchased under the ESPP is equal to 85% of the lower of the fair market value of the Company’s common stock at the beginning of each offering period or at the end of each offering period. The compensation cost in connection with the ESPP for the three and nine months ended December 31, 2008 was $9,708 and $27,846, respectively. The compensation expense in connection with the ESPP for the three and nine months ended December 31, 2007 was $2,885 and $17,790, respectively. During the three months ended December 31, 2008, there were no shares issued under the ESPP. During the nine months ended December 31, 2008, there were 28,035 shares issued under the ESPP with a weighted average purchase price of $0.94 per share. During the three and nine months ended December 31, 2007, there were no shares issued under the ESPP due to the ongoing stock option investigation.

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

	Nine Months Ended December 31,
	2008			2007
Risk-free interest rate		2.81	%		5.14	%
Dividend yield		0.00	%		0.00	%
Expected volatility		34.35	%		43.66	%
Expected life in years		1.25			1.25
Weighted average fair value at grant date	$	0.54		$	1.02

5. Computation of Basic and Diluted Net Loss per Share

Basic and diluted net loss per common share is presented in conformity with SFAS No. 128, “Earnings per Share” (“SFAS 128”), for all periods presented. In accordance with SFAS 128, basic and diluted net loss per share has been computed using the weighted-average number of shares of common stock outstanding during the period. The diluted net loss per share is equivalent to the basic net loss per share because the Company has experienced losses in all periods presented and thus no potential common shares from the exercise of stock options have been included in the net loss per share calculation.

6. Litigation and Contingencies

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

7. Restructuring

On June 30, 2008, the Company entered into a Separation Arrangement (“Separation Agreement”) with its former CEO, Robert Jurkowski. Pursuant to the terms of the Separation Agreement, Mr. Jurkowski’s employment with the Company terminated on June 30, 2008. Mr. Jurkowski also resigned as a member of the Company’s Board of Directors effective June 30, 2008. Under the Separation Agreement, Mr. Jurkowski received a payment of $45,000 representing his target bonus for the first quarter of fiscal 2009 and also a payment of $180,000 equal to six months of his base salary on July 10, 2008. The Company will also continue to pay Mr. Jurkowski payments equal to six months of his base salary and health insurance premiums for himself and his dependents until June 30, 2009. These amounts have been accrued for as of June 30, 2008. Mr. Jurkowski’s outstanding issuances of restricted stock were cancelled and a $400,823 non-cash stock-based compensation expense reduction was recorded in the Company’s statements of operations for the quarter ended June 30, 2008.

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During the nine months ended December 31, 2008, the Company continued with cost reduction efforts. The restructuring accrual and the related utilization for the fiscal years ended March 31, 2008, 2007, and for the nine months ended December 31, 2008 were as follows (in thousands):

	Severance and Benefits			Excess Facilities			Total
Balance, March 31, 2006		—			—			—
Additional accruals	$	488		$	6,392		$	6,880
Amounts paid in cash		(385	)		(652	)		(1,037	)
Balance, March 31, 2007		103			5,740			5,843
Additional accruals		300			436			736
Amounts paid in cash		(277	)		(2,974	)		(3,251	)
Loan to Sublessee		—			(497	)		(497	)
Balance, March 31, 2008		126			2,705			2,831
Additional accruals		678			30			708
Amounts paid in cash		(680	)		(1,357	)		(2,037	)
Loan to Sublessee		—			463			463
Balance, December 31, 2008	$	124		$	1,841		$	1,965

8. Recent Accounting Pronouncements

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

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

9. Subsequent Event

On November 16, 2008, the Company’s Board of Directors amended its Shareholder Rights Agreement adopted in February 2003 (the “Agreement”) to lower the threshold percentage of beneficial ownership of the Company’s common stock by any person (together with its “affiliates” and “associates”) that would trigger the rights under the Agreement from 15% to 4.99% (an “Acquiring Person”), with the exception that shareholders beneficially owning 4.99% or more of the common stock at that time would not be deemed to be an “Acquiring Person” under the Agreement so long as they acquired no more than an additional 0.5% of the common stock, up to a maximum of 15%. This amendment was adopted to reduce the likelihood that the substantial value of the Company’s net operating loss carryforwards would be limited as a result of the application of Section 382 of the Internal Revenue Code. On December 19, 2008, the Company was informed that one shareholder Versata Enterprises, Inc. had become an “Acquiring Person” under the Agreement.

On January 3, 2009, the Company announced that a committee of the Board of Directors of the Company (the "Committee") ordered the exchange of each outstanding right under the Agreement, as in effect as of the close of business on January 2, 2009, for one share of the Company’s common stock. The exchange would not apply to rights formerly held by Versata Enterprises, Inc., Trilogy, Inc. and Joseph A. Liemandt (collectively, with their affiliates and associates, “Versata”) which became void under the Agreement at the time that Versata became an “Acquiring Person” under the Agreement on December 19, 2008.

Prior to the exchange, each stockholder other than Versata held one right for each share of the Company’s common stock owned by such shareholder. As a result of the exchange, all previously outstanding rights terminated.

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The exchange doubled the number of shares of the Company’s common stock owned by each stockholder of record as of the close of business on January 2, 2009, other than Versata.

The Company also announced that it has amended and restated the Agreement, and that the Committee has declared a dividend of one preferred share purchase right for each outstanding share of its common stock after the exchange. The dividend is payable to stockholders of record as of the close of business on January 2, 2009 after giving effect to the exchange. As with the Company’s previous rights, the new rights are designed to protect the interests of all stockholders by helping preserve the value of the Company’s net operating loss carryforwards and tax credits. They may also have an anti-takeover effect and will be an impediment to a proposed takeover which is not approved by the Board.

As a result of declaring the new rights on January 2, 2009, if any person or group that together with related persons becomes the beneficial owner of 4.99% or more of the outstanding shares of the Company’s common stock (an “acquiring person”), there would be a triggering event causing significant dilution in the voting power and equity interest of such person or group. Stockholders that beneficially own 4.99% or more of the outstanding shares of the Company’s common stock on January 2, 2009, after giving effect to the exchange, will not be an acquiring person (and accordingly will not trigger a dilutive event) unless they become the beneficial owner of additional shares representing one-half of one percent (0.5%) or more of the outstanding shares of common stock (unless as a result they would beneficially own fifteen percent (15%) or more of the outstanding shares). The Agreement grants the Board the authority to determine that any person or group that would otherwise be an acquiring person shall be an “exempt person,” subject to certain conditions and provided that the Board may thereafter make a contrary determination, or to exempt specified transactions from triggering the new rights. The Agreement also grants the Board the authority to terminate or redeem the rights at any time prior to their being triggered.

The Agreement as amended and restated will expire on January 2, 2012, unless the expiration date is advanced or extended or unless the new rights are exchanged or redeemed earlier by the Board.

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

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

Overview

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

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

Quarterly Financial Overview

For the three months ended December 31, 2008, our revenues were approximately $4.2 million with license revenues representing 25% and service revenues representing 75% of total revenues. In addition, approximately 41% of our quarterly revenues came from three customers. License margins for the quarter were 96% and service margins were 51%. Net loss for the quarter was approximately $1.8 million or $(0.06) per share. For the three months ended December 31, 2007, our revenues were approximately $4.7 million with license revenues representing 36% and service revenues representing 64% of total revenues. In addition, approximately 43% of our quarterly revenues came from three customers. License margins for the quarter were 96% and service margins were 68%. Net loss for the quarter was approximately $1.2 million or $(0.04) per share.

Critical Accounting Policies and Estimates

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

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Factors Affecting Operating Results

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

	Three Months Ended December 31,				Nine Months Ended December 31,
	2008		2007		2008		2007
Customer A	19	%	19	%	22	%	26	%
Customer B	*		14	%	*		12	%
Customer C	*		11	%	*		*
Customer D	15	%	*		*		*

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

We have incurred significant losses since inception and, as of December 31, 2008, we had an accumulated deficit of approximately $248 million. We believe our success depends on the growth of our customer base, maintenance of existing SC revenues, expansion of our CM revenues and the continued development of the contract management and compliance market. Our success also depends on our ongoing cost reduction efforts and the cost and outcome of ongoing litigation in Delaware relating to our shareholder rights plan.

In view of the rapidly changing nature of our business, we believe that period-to-period comparisons of revenues and operating results are not necessarily meaningful and should not be relied upon as indications of future performance. Our operating history has been volatile and makes it difficult to forecast future operating results. This was evidenced by the decline in revenues in the first two quarters of fiscal 2009, fiscal 2008 and 2007.

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

Results of Operations:

Revenues

	Three Months Ended December 31,									Nine Months Ended December 31,
	2008			2007			Change			2008			2007			Change
	(in thousands, except percentages)
License	$	1,024		$	1,680		$	(656	)	$	1,936		$	4,482		$	(2,546	)
Percentage of total revenues		25	%		36	%		(39	%)		17	%		34	%		(57	%)
Services		3,149			3,014			135			9,139			8,535			604
Percentage of total revenues		75	%		64	%		4	%		83	%		66	%		7	%
Total revenues	$	4,173		$	4,694		$	(521	)	$	11,075		$	13,017		$	(1,942	)

License.For the three and nine months ending December 31, 2008, license revenues decreased by approximately $0.7 million and $2.5 million, respectively, compared to the three and nine months ending December 31, 2007. These declines were due primarily to declines in license revenues from our sales configuration business as we changed our focus to a more channel-driven model. In addition, we recently increased our emphasis and investment in the CM business, thus producing a relative decline quarter over quarter and year over year of license revenue in the configuration business. 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.Service revenues are comprised of fees from consulting, maintenance, training, subscription revenues and out-of pocket reimbursements. During the three and nine months ending December 31, 2008, service revenues increased $0.1 million and $0.6 million, respectively, compared to the three and nine months ending December 31, 2007. The increases primarily related to more consulting revenues provided by new and existing customer agreements in the CM business unit. Maintenance revenues represented 43% and 63% of total service revenues for the three months ended December 31, 2008, and 2007, respectively. Maintenance revenues represented 45% and 63% of total service revenues for the nine months ended December 31, 2008 and 2007, respectively. From within our existing customer base, we had 100% maintenance renewals during the three months ended December 31, 2008.

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

Cost of revenues

	Three Months Ended December 31,									Nine Months Ended December 31,
	2008			2007			Change			2008			2007			Change
	(in thousands, except percentages)
Cost of license revenues	$	46		$	71		$	(25	)	$	148		$	183		$	(35	)
Percentage of license revenues		4	%		4	%		(35	%)		8	%		4	%		(19	%)
Cost of service revenues	$	1,531		$	966		$	565		$	3,876		$	2,869		$	1,007
Percentage of service revenues		49	%		32	%		58	%		42	%		34	%		35	%

Cost of License Revenues.Cost of license revenues primarily consists of a fixed allocation of our research and development costs. During the three and nine months ended December 31, 2008, these costs decreased 35% and 19%, respectively, compared to the same periods in 2007 primarily due to corresponding decreases in research and development costs in our CM and SC business units.

We expect cost of license revenues to maintain a relatively consistent level as a percentage of total research and development costs in fiscal 2009.

Cost of Service Revenues.Cost of service revenues is comprised mainly of salaries and related expenses of our services organization plus certain allocated expenses. During the three and nine months ended December 31, 2008, these costs increased 58% and 35%, respectively, compared to the same periods in 2007 primarily due to an increase of approximately $0.6 million and $1.2 million, respectively, in the CM business unit due to the addition of headcount and increased use of third-party consultants.

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

Gross Margins

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

	Three Months Ended December 31,				Nine Months Ended December 31,
	2008		2007		2008		2007
License	96	%	96	%	92	%	96	%
Services	51	%	68	%	58	%	66	%

Gross Margin - Licenses.Gross margin remained flat at 96% for the three months ended December 31, 2008 and 2007, respectively. Even though license revenues decreased by 39% quarter over quarter, cost of license revenues decreased 35% quarter over quarter, resulting in an unchanged gross margin. For the nine months ended December 31, 2008 and 2007, gross margin decreased from 96% to 92%, respectively. This was primarily due to a 57% decrease in license revenues year over year, which was partially offset by a 17% decrease in research and development costs allocated to cost of license revenues.

Gross Margin - Services.Gross margin decreased to 51% and 58% for the three and nine months ended December 31, 2008, respectively, compared to 68% and 66% for the three and nine months ended December 31, 2007, respectively, primarily due to an increase in cost of services of approximately $0.6 million and $1.2 million, respectively, in the CM business unit due to the addition of headcount and increased use of third-party consultants. These lower overall margins correspond to an increase in our CM service revenues, which historically have lower margins than our SC revenues.

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We expect that our overall gross margins will continue to fluctuate due to the timing of service and license revenue recognition and will continue to be adversely affected by lower margins associated with service revenues. The impact on our gross margin will depend on the mix of services we provide, whether the services are performed by our in-house staff or third party consultants, and the overall utilization rates of our professional services organization. In addition, gross margins may be lower as a result of the shift and increased investment we have made to our CM business which is expected to have lower gross margins than our SC business.

Operating Expenses

Research and Development Expenses

	Three Months Ended December 31,									Nine Months Ended December 31,
	2008			2007			Change			2008			2007			Change
	(in thousands, except percentages)
Research and development	$	994		$	1,425		$	(431	)	$	3,111		$	3,742		$	(631	)
Percentage of total revenues		24	%		30	%		(30	%)		28	%		29	%		(17	%)

Research and development expenses consist primarily of salaries and related costs of our engineering, quality assurance, technical publications efforts and certain allocated expenses. Research and development expenses decreased significantly during the three and nine months ended December 31, 2008 compared to the three and nine months ended December 31, 2007 and these decreases were primarily attributable to reductions in headcount and decreases in costs for facilities, overhead and benefits.

Sales and Marketing

	Three Months Ended December 31,									Nine Months Ended December 31,
	2008			2007			Change			2008			2007			Change
	(in thousands, except percentages)
Sales and marketing	$	1,497		$	1,806		$	(309	)	$	4,611		$	4,867		$	(256	)
Percentage of total revenues		36	%		38	%		(17	%)		42	%		37	%		(5	%)

Sales and marketing expenses consist primarily of salaries and related costs for our sales and marketing organization, sales commissions, expenses for travel and entertainment, trade shows, public relations, collateral sales materials, advertising and certain allocated expenses. For the three and nine months ended December 31, 2008, sales and marketing expenses decreased compared to the same period in 2007, largely due to decreases in staff in our CM unit.

General and Administrative

	Three Months Ended December 31,									Nine Months Ended December 31,
	2008			2007			Change			2008			2007			Change
	(in thousands, except percentages)
General and administrative	$	1,381		$	1,249		$	132		$	4,356		$	3,987		$	369
Percentage of total revenues		33	%		27	%		11	%		39	%		31	%		9	%

General and administrative expenses consist mainly of personnel and related costs for general corporate functions, including finance, accounting, legal, human resources, bad debt expense and certain allocated expenses. General and administrative expenses increased in the three and nine months ended December 31, 2008 compared to the same periods in 2007 primarily due to higher utilization of outside services in the areas of accounting, legal and costs resulting from the restructuring of management effected on June 30 and July 1, 2008. We expect to incur significant litigation expenses in the quarter ending March 31, 2009 and perhaps beyond as a result of ongoing litigation in Delaware relating to our shareholder rights plan.

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Interest and Other Income (Expense), Net

Interest and other income (expense), net consists primarily of interest earned on cash balances and short-term investments along with the impact of currency fluctuations due to valuation adjustments, primarily from our Indian subsidiary. During the three months ended December 31, 2008 and December 31, 2007, interest and other income (expense), net totaled approximately $(0.4) million and $0.6 million, respectively. During the nine months ended December 31, 2008 and December 31, 2007, interest and other income (expense), net totaled approximately $(1.0) million and $2.5 million, respectively. The decreases were due primarily to lower cash balances, lower interest rates on our cash, cash equivalents and short-term investment balances and unfavorable foreign exchange rate movements against the U.S. dollar.

Near the end of the third quarter of fiscal 2009, we launched a new foreign currency hedging program where we enter into forward foreign exchange contracts with a financial institution to reduce the risk that our cash flows and earnings will be adversely affected by foreign currency exchange rate fluctuations. Gains and losses on the contracts offset foreign exchange gains and losses from the revaluation of our Indian Rupee intercompany balances and other current assets, investments, and liabilities. During the three months ended December 31, 2008, we recognized expenses of $0.1 million related to these contracts.

Provision for Income Taxes

During the nine months ended December 31, 2008 and 2007, we recorded income tax provisions of approximately $82,000 and $311,000, respectively. These amounts related to taxes due in foreign jurisdictions and nominal tax amounts for federal and state taxes in the U.S.

Liquidity and Capital Resources

	December 31, 2008		March 31, 2008		Change
	(in thousands)
Cash, cash equivalents and short-term investments (excluding $601 of restricted cash)	$	26,813	$	35,213	$	(8,400	)
Working capital	$	23,046	$	30,762	$	(7,716	)

	Nine Months Ended December 31,
	2008			2007
	(in thousands)
Net cash used in operating activities	$	(7,866	)	$	(20,959	)
Net cash provided by investing activities	$	6,794		$	9,134
Net cash used in financing activities	$	(574	)	$	(21	)

Net cash used in operating activities was $7.9 million for the nine months ended December 31, 2008, resulting primarily from our net loss of $6.9 million and a $3.3 million increase in accounts receivable. These decreases in cash flows from operating activities were partially offset by a $1.5 million increase in deferred revenues and a $0.9 million increase in accounts payable.

Net cash used in operating activities was $20.9 million for the nine months ended December 31, 2007, resulting primarily from our net loss of $21.4 million, a $1.1 million increase in accounts receivable, net, a $2.2 million decrease in accounts payable, and a $2.5 million decrease in our restructuring accrual. These decreases in cash flows from operating activities were partially offset by a $6.2 million increase in other accrued liabilities and long-term liabilities.

Net cash provided by investing activities was $6.8 million for the nine months ended December 31, 2008, which largely consisted of $6.9 million of net proceeds of short-term investments. Net cash provided by investing activities was $9.1 million for the nine months ended December 31, 2007, which largely consisted of $8.3 million of net proceeds of short-term investments, and $1.0 million of proceeds of long-term investments.

As a result of current adverse financial market conditions, investments in some financial instruments may pose risks arising from liquidity and credit concerns. Although we believe our current investment portfolio has very little risk of impairment, we cannot predict future market conditions or market liquidity and can provide no assurance that our investment portfolio will remain unimpaired.

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Net cash used in financing activities was $0.6 million for the nine months ended December 31, 2008, which primarily consisted of principal payments on our note payable to Versata. Net cash used in financing activities was immaterial for the nine months ended December 31, 2007.

Contractual Obligations

We had no significant commitments for capital expenditures as of December 31, 2008. We expect to fund our future capital expenditures, liquidity and strategic operating programs from a combination of available cash balances and internally generated funds.

We have no outside debt and do not have any plans to enter into borrowing arrangements. Our cash, cash equivalents, and short-term investment balances as of December 31, 2008 are adequate to fund our operations through at least the next twelve months.

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

As of December 31, 2008, there were no other material changes to our contractual obligations outside the ordinary course of business from those disclosed in our Annual Report on Form 10-KSB for the year ended March 31, 2008.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For quantitative and qualitative disclosures about market risk affecting us, See Item 3, “Quantitative and Qualitative Disclosures About Market Risk,” in our Quarterly Report on Form 10-Q for the three months ended June 30, 2008, which is incorporated herein by reference. Our exposure to market risk has not changed materially since June 30, 2008.

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ITEM 4: CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit to the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms, and that information is accumulated and communicated to our management, including our principal executive and principal financial officers (whom we refer to in this periodic report as our Certifying Officers), as appropriate to allow timely decisions regarding required disclosure.

On September 9, 2008, Richard Heaps was elected to be our Chief Financial Officer, replacing our former interim Chief Financial Officer, who served in that capacity following the resignation of our former Chief Financial Officer in June, 2008. Following his appointment, we initiated a review of our internal control over financial reporting.

As a result of this review, management has concluded that remediation efforts undertaken to address previously noted material weaknesses in internal controls over financial reporting were successful. Management therefore concludes that for the quarter ending December 31, 2008 that its disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

Except as described above, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rule 13a-15 that was conducted during the quarter ended December 31, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

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

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PART II: OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

Rights Agreement

On December 22, 2008, we filed suit in the Court of Chancery of the State of Delaware seeking declaratory relief that our Rights Agreement as amended on November 16, 2008 was an appropriate measure to protect a valuable asset of ours—our net operating loss carryforwards and related tax credits—from being limited as to utilization as provided under Section 382 of the Internal Revenue Code which would in turn substantially reduce their value to all of our shareholders. On January 16, 2009, the defendants in this action, Trilogy/Versata, filed an answer to our complaint and a counterclaim alleging that we, through our Board of Directors, had breached our fiduciary duty in amending the Rights Agreement and that such action favored one group of shareholders over another. We and our Board of Directors believe that the action taken on November 16, 2008 was appropriate under the circumstances and in the interest of all our shareholders and therefore the allegations of the counterclaim are without merit. The counterclaim asks for various measures of equitable relief and also includes a claim for punitive or exemplary damages, which are not available in the Court in which the matter is pending. We believe that the result of this action will not have a material adverse affect on our financial position.

There can be no assurance that we will prevail in our current litigation with Trilogy/Versata, and, in the event that we are not successful in that litigation and Trilogy/Versata or any other investor substantially increases its ownership of our common stock, our ability to use our NOLs could be substantially and irrevocably limited by application of the restrictions of Section 382 of the IRC.

Other

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

ITEM 1A: RISK FACTORS

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

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

We incurred net losses of approximately $1.8 million and $6.9 million for the three and nine months ended December 31, 2008. We had an accumulated deficit of approximately $248 million as of December 31, 2008. We may continue to incur significant losses in the future for a number of reasons including the uncertainties around our ability to and the timing of the impact of our efforts to increase revenues and the timing around the impact of our cost reduction efforts. We continue to pursue opportunities to align research and development, sales and marketing, and general and administrative expenses in absolute dollars over the next year in order to better balance expense levels with projected revenues. We will need to generate significant increases in our revenues to achieve and maintain profitability. If our revenue fails to grow or grows more slowly than we currently anticipate or our operating expenses exceed our expectations, our losses will significantly increase which would significantly harm our business and operating results.

We do not know the impact of current economic conditions on our customers and our business.

The United States and world economies currently face a number of economic challenges, including the availability of credit for businesses and consumers. The financial markets have been dramatically and adversely affected and many companies are either cutting back expenditures or delaying plans to add additional personnel or systems. If these conditions continue or worsen, the ability of our customers to pay for or obtain funding to pay for our products and services may be adversely affected which would then have a significant adverse impact on our ability to generate revenues and cash flow and may cause us to sustain further losses.

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Recent personnel changes may have a material adverse effect on our business.

We have recently experienced a number of management changes, including the departures of our Chief Executive Officer and Chief Financial Officer in June 2008 and the departures of the General Managers of our CM and SC businesses in July 2008 as well as the recent appointment of our new CFO. We believe these management changes will help to better align expenses and revenues and position us for improved operating results in the future, however, over the short term and potentially longer, these changes may have a material adverse effect on our financial condition and results of operations and during the transition have adversely impacted our disclosure and financial controls and procedures.

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

Our revenues are dependent on orders from a relatively small number of customers. Our three largest customers accounted for approximately 41% and 30% of our revenues for the three and nine months ended December 31, 2008, respectively. We expect that we will continue to depend upon a relatively small number of customers for a substantial portion of our revenues for the foreseeable future. As a result, if we fail to successfully sell our products and services to one or more large customers in any particular period or a large customer purchases fewer of our products or services, defers or cancels orders, or terminates its relationship with us, our business and operating results would be harmed. In addition, many of our orders are realized at the end of the quarter. As a result of this concentration and timing, our quarterly operating results, including average selling prices, may fluctuate significantly if we are unable to complete one or more substantial sales in any given quarter.

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

We enter into arrangements for the sale of: (1) licenses of software products and related maintenance contracts; (2) services; (3) subscription for on-demand services; and (4) bundled license, maintenance, and services. In instances where maintenance is bundled with a license of software products, such maintenance term is typically one year. For each arrangement, we determine whether evidence of an arrangement exists, delivery has occurred, the fees are fixed or determinable, and collection is probable. If any of these criteria are not met, revenue recognition is deferred until such time as all of the criteria are met.

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

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

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

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

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

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Management identified a material weakness in our internal control over financial reporting in the quarters ending June 30, 2008 and September 30, 2008. Failure to maintain effective internal control over financial reporting could result in our failure to accurately report our financial results.

In the quarters ending June 30, 2008 and September 30, 2008, management identified several significant deficiencies in our internal control over financial reporting that collectively constituted a material weakness in internal control over financial reporting. Management has implemented new controls and procedures which have remediated these significant deficiencies. If we experience additional significant deficiencies or material weaknesses in the future, we may be required to record material audit adjustments. As a result, investors may lose confidence in our ability to operate our business, any of which could materially affect our stock price.

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

We have recently revised our product marketing focus. We have historically sold primarily Sales Configuration (SC) software. However, we are now investing a significant portion of our internal resources into our Contract Management products. If the market for these products is smaller than we anticipated or if our products fail to gain widespread acceptance in this market, our results of operations would be adversely affected. In addition, if there is a delay in bringing our new products to market, it would delay our ability to derive revenues from such products and our business and operating results could be significantly harmed.

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

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

In addition, we have in the past been subject to claims of third parties that our products and services infringe their intellectual property rights. For example, in October 2007 we agreed to settle a patent infringement lawsuit brought by Versata Enterprises, Inc. and a related party for a $10 million payment in October 2007 and an additional amount of not more than $7.5 million in quarterly payments. It is possible that in the future, other third parties may claim that our current or potential future products infringe their intellectual property rights. Any claims, with or without merit, could be time-consuming, result in costly litigation, divert management’s time from developing our business, cause product shipment delays, require us to enter into royalty or licensing agreements or require us to satisfy indemnification obligations to our customers. Royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all, which could seriously harm our business.

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

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

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

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

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

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

The market for software and services that enable electronic commerce is intensely competitive and rapidly changing. We expect competition to persist and intensify, which could result in price reductions, reduced gross margins and loss of market share. Our principal competitors include publicly-traded companies such as Oracle Corporation, Ariba, Open Text, I-Many and AT&T (through its acquisition of Comergent Technologies) as well as privately held companies such as Firepond, Upside Software, Nextance, Model N, DiCarta/Emptoris and Trilogy/Versata, all of which offer integrated solutions for electronic commerce incorporating some of the functionality of our configuration, pricing, contract management and quoting software.

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

• a longer operating history;

• preferred vendor status with our customers;

• more extensive name recognition and marketing power; and

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

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

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

Our industry is characterized by rapid technological change, changes in customer requirements, frequent new product and service introductions and enhancements and emerging industry standards. In order to achieve broad customer acceptance, our products must be compatible with major software and hardware platforms used by our customers. Our products currently operate on the Microsoft Windows NT, Sun Solaris, IBM AIX, J2EE, Linux and Microsoft Windows 2000 Operating Systems. In addition, our products are required to interoperate with electronic commerce applications and databases. We must continually modify and enhance our products to keep pace with changes in these operating systems, applications and databases. Our configuration, pricing and quoting products are complex, and new products and product enhancements can require long development and testing periods. If our products were to be incompatible with a popular new operating system, electronic commerce application or database, our business would be significantly harmed. In addition, the development of entirely new technologies to replace existing software could lead to new competitive products that have better performance or lower prices than our products and could render our products obsolete and unmarketable.

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

In the past, a small number of our customers have experienced difficulties or delays in completing implementation of our products. We may experience similar difficulties or delays in the future. Deploying our products typically involves integration with our customers’ legacy systems, such as existing databases and enterprise resource planning software as well adding their data to the system. Failing to meet customer expectations on deployment of our products could result in a loss of customers and negative publicity regarding us and our products, which could adversely affect our ability to attract new customers. In addition, time-consuming deployments may also increase the amount of professional services we must allocate to each customer, thereby increasing our costs and adversely affecting our business and operating results.

If we are unable to maintain our direct sales force, sales of our products and services may not meet our expectations, and our business and operating results will be significantly harmed.

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

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

Services revenues, which generated 75% and 83% of our total revenues during the three and nine months ended December 31, 2008, respectively, are comprised primarily of revenues from consulting fees, maintenance contracts and training and are important to our business. Services revenues have lower gross margins than license revenues. We generally 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.

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

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

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

We conduct development and quality assurance operations in India. As of December 31, 2008, we employed 3 persons in India and outsourced 19 people in India through IBM, our outsource partner. We are dependent on our India-based operations for these aspects of our business. As a result, we are directly influenced by the political and economic conditions affecting India. Operating expenses incurred by our operations in India are denominated in Indian currency, and accordingly, we are exposed to adverse movements in currency exchange rates. This, as well as any other political or economic problems or changes in India, could have a negative impact on our India-based operations, resulting in significant harm to our business and operating results. Furthermore, the intellectual property laws of India may not adequately protect our proprietary rights. We believe that it is particularly difficult to find quality management personnel in India, and we may not be able to timely replace our current India-based management team if any of them were to leave our Company.

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

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

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

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

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

Our planned 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 plan to further reduce our operating expenses, and as a result, this would place increased demands on our managerial, administrative, operational, financial and other resources. Any future growth would require 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.

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

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

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

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

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

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

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

Provisions of our amended and restated certificate of incorporation and amended and restated bylaws, Delaware law and the stockholder rights agreement adopted by us on February 4, 2003, as subsequently amended and restated on January 2, 2009, may make it more difficult for or prevent a third party from acquiring control of us without approval of our directors. These provisions include:

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

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

• prohibiting stockholder action by written consent;

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

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

• issuing shareholders rights to purchase additional shares of stock in the event that any person, together with its affiliates and associates, (i) acquires beneficial ownership of 4.99% or more of our outstanding common stock or (ii) commences a tender offer for our shares if upon consummation of the tender offer such person would beneficially own 4.99% or more of the outstanding common stock, subject, in each case, to certain exceptions.

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

As originally adopted, our stockholder rights agreement imposed significant potential adverse economic consequences on a stockholder that acquired beneficial ownership of 15% or more of our stock without the approval of our Board of Directors. On November 16, 2008, our Board of Directors amended our stockholder rights agreement, primarily to reduce the ownership threshold from 15% to 4.99%, subject to certain exceptions. On December 19, 2008, Versata Enterprises, Inc. (“Versata”), a subsidiary of Trilogy, Inc. (together with Versata and certain related persons, “Trilogy”), increased its beneficial ownership of our stock to 6.7%. As a result of such acquisition, Trilogy became an “Acquiring Person” under the amended plan. On January 2, 2009, our Board determined to, among other things, (i) exchange each outstanding right (other than rights held by Trilogy) for one share of our stock pursuant to the terms of the plan and (ii) declare a dividend of new rights to replace the rights that terminated on the exchange. Trilogy did not receive additional shares of stock pursuant to the exchange, because its rights had become void on December 19, 2008 upon becoming an Acquiring Person.

On December 22, 2008, we filed a lawsuit against Trilogy, Inc. and certain other persons in the Delaware Court of Chancery seeking a declaration of the Court as to the validity of our amended stockholder rights. A trial has been scheduled for March, 2009. See Item 1, “Legal Proceedings,” of Part II of this report.

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

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

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

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

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

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

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

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

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

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

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

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

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

Not applicable.

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

Not applicable.

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

Not applicable.

ITEM 5: OTHER INFORMATION

Not applicable.

ITEM 6: EXHIBITS

10.36	Employment Agreement between the Registrant and Richard Heaps dated September 5, 2008.
10.37	Severance Agreement between the Registrant and Richard Heaps dated September 4, 2008.
31.1**	Certification of Co-Chair Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2**	Certification of Co-Chair Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.3**	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**	Certification of Co-Chair Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**	Certification of Co-Chair Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.3**	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

** This certification is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that Selectica, Inc. specifically incorporates it by reference.

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SIGNATURES

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

Date: July 9, 2009

/s/ RICHARD HEAPS

Richard Heaps

Chief Financial Officer and General Counsel

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EXHIBIT INDEX

Exhibit No.	Description
10.36	Employment Agreement between the Registrant and Richard Heaps dated September 5, 2008.
10.37	Severance Agreement between the Registrant and Richard Heaps dated September 4, 2008.
31.1**	Certification of Co-Chair Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2**	Certification of Co-Chair Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.3**	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**	Certification of Co-Chair Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**	Certification of Co-Chair Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.3**	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

** This certification is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that Selectica, Inc. specifically incorporates it by reference.