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

Overview

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

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

Quarterly Financial Overview

For the three months ended June 30, 2008, our revenues were approximately $3.8 million with license revenues representing 20% and services revenues representing 80% of total revenues. In addition, approximately 42% of our quarterly revenue came from three customers. License margins for the quarter were 93% and services margins were 61%. Net loss for the quarter was approximately $2.2 million or $(0.08) per share. For the three months ended June 30, 2007, our revenues were approximately $4.3 million with license revenues representing 39% and services revenues representing 61% of total revenues. In addition, approximately 70% of our quarterly revenue came from four customers. License margins for the quarter were 96% and services margins were 61%. Net loss for the quarter was approximately $2.3 million or $(0.08) per share.

Critical Accounting Policies and Estimates

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

Factors Affecting Operating Results

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



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

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

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

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

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

Results of Operations:

Revenues



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

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

Services. Services revenues are comprised of fees from consulting, maintenance, training, subscription revenue and out-of pocket reimbursement. During the three months ending June 30, 2008, services revenues increased $0.4 million compared to the period ending June 30, 2007. The increase primarily related to more service opportunities provided by new license agreements in CM business unit. Maintenance revenues represented 46% and 65% of total services revenues for the three months ended June 30, 2008 and June 30, 2007, respectively.

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

Cost of revenues

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

Cost of License Revenues. Cost of license revenues consists of a fixed allocation of our research and development costs, the costs of the product media, duplication, packaging and delivery of our software products to our customers, which may include documentation, shipping, and other data transmission costs. We expect cost of license revenues to maintain a relatively consistent level in absolute dollars in fiscal 2009.

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

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

Gross Margins

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



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

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

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

We expect that our overall gross margins will continue to fluctuate due to the timing of services and license revenue recognition and will continue to be adversely affected by lower margins associated with services revenues. The impact on our gross margin will depend on the mix of services we provide, whether the services are performed by our in-house staff or third party consultants, and the overall utilization rates of our professional services organization.

Operating Expenses

Research and Development Expenses



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

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

Sales and Marketing



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

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

General and Administrative and Professional fees related to stock option investigation

                                                                        Three Months Ended
                                                                             June 30,
                                                              2008              2007            Change
                                                                (in thousands, except percentages)
General and administrative                                 $     1,065       $     1,372       $   (307 )
Percentage of total revenues                                        28 %              32 %           (4 )%
Professional fees related to stock option investigation    $        19       $     1,851       $ (1,832 )
Percentage of total revenues                                         1 %              43 %          (99 )%

General and administrative expenses consist mainly of personnel and related costs for general corporate functions, including finance, accounting, legal, human resources, bad debt expense and certain allocated expenses. General and administrative expenses decreased in the three months ended June 30, 2008 compared to the same period in 2007 primarily due to the $0.4 million forfeiture of restricted stock previously granted to one of our executives upon termination of his employment. We incurred approximately $1.9 million in professional fees related to the stock option investigation in the first quarter of fiscal 2007.

Interest and Other Income, Net

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

Provision for Income Taxes

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

Liquidity and Capital Resources



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




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

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

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

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

Contractual Obligations

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

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

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

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