UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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Form 10-Q

|(Mark One)                                               |  |                                                                                         
|-------------------------------------------------------- |  | ----------------------------------------------------------------------------------------
|ý                                                        |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 
|For the Quarterly Period Ended June 30, 2004            
|o                                                        |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
from                        to

Commission File Number 0-30881

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CLICK COMMERCE, INC.(Exact name of registrant as specified in its charter)

Delaware

36-4088644(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer Identification Number)


200 East Randolph Drive, 52 Floor
Chicago, Illinois 60601(Address of principal executive offices)

(312) 482-9006(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes
o No ý

As of August 13, 2004, there were 9,025,862 shares of the registrant's common shares outstanding.



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CLICK COMMERCE, INC.  INDEX

|                                 |  |                                                                                                                                                                |  | Page No.
|-------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------
|PART I.    FINANCIAL INFORMATION |  | 3                                                                                                                                                             
|Item 1.                          |  | Financial Statements                                                                                                                                           |  | 3       
|                                 |  | Condensed Consolidated Balance Sheets as of June 30, 2004 (unaudited) and December 31, 2003                                                                    |  | 3       
|                                 |  | Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2004 and June 30, 2003 (unaudited) |  | 4       
|                                 |  | Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003 (unaudited)                                                    |  | 5       
|                                 |  | Notes to Condensed Consolidated Financial Statements (unaudited)                                                                                               |  | 6       
|Item 2.                          |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                                                                          |  | 14      
|Item 3.                          |  | Quantitative and Qualitative Disclosures About Market Risk                                                                                                     |  | 22      
|Item 4.                          |  | Controls and Procedures                                                                                                                                        |  | 22      
|PART II.    OTHER INFORMATION    |  | 23                                                                                                                                                            
|Item 4.                          |  | Submission of Matters to a Vote of Security Holders                                                                                                            |  | 23      
|Item 6.                          |  | Exhibits and Reports on Form 8-K                                                                                                                               |  | 24      
|SIGNATURES                       |  | 25                                                                                                                                                            
|CERTIFICATIONS                   |  |                                                                                                                                                               

2

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CLICK COMMERCE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)

|                                                                                                                                                                                                                                                                |                                                                | June 30,
2004 |         | December 31,
2003 | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------- | ------------- | ------- | ----------------- | 
|
|ASSETS                                                                                                                                                                                                                                                          |                                                                |               |         |                   | 
|Current assets:                                                                                                                                                                                                                                                 |                                                                |               |         |                   | 
|                                                                                                                                                                                                                                                                | Cash, cash equivalents and short-term investments              |               | $       | 12,458            | 
|                                                                                                                                                                                                                                                                | Trade accounts receivable, net                                 |               |         | 6,387             | 
|                                                                                                                                                                                                                                                                | Prepaids and other current assets                              |               |         | 1,414             | 
|                                                                                                                                                                                                                                                                |                                                                |               |         |                   | 
|                                                                                                                                                                                                                                                                | Total current assets                                           |               |         | 20,259            | 
|Property and equipment, net                                                                                                                                                                                                                                     |                                                                |               | 830     |                   | 
|Intangible assets, net                                                                                                                                                                                                                                          |                                                                |               | 2,160   |                   | 
|Goodwill                                                                                                                                                                                                                                                        |                                                                |               | 1,519   |                   | 
|Other assets                                                                                                                                                                                                                                                    |                                                                |               | 359     |                   | 
|                                                                                                                                                                                                                                                                |                                                                |               |         |                   | 
|                                                                                                                                                                                                                                                                | Total assets                                                   |               | $       | 25,127            | 
|                                                                                                                                                                                                                                                                |                                                                |               |         |                   | 
|LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                                                                                                                                                            |                                                                |               |         |                   | 
|Current liabilities:                                                                                                                                                                                                                                            |                                                                |               |         |                   | 
|                                                                                                                                                                                                                                                                | Accounts payable                                               |               | $       | 454               | 
|                                                                                                                                                                                                                                                                | Billings in excess of revenues earned on contracts in progress |               |         | 132               | 
|                                                                                                                                                                                                                                                                | Deferred revenue                                               |               |         | 4,274             | 
|                                                                                                                                                                                                                                                                | Accrued compensation                                           |               |         | 1,322             | 
|                                                                                                                                                                                                                                                                | Accrued expenses and other current liabilities                 |               |         | 2,183             | 
|                                                                                                                                                                                                                                                                |                                                                |               |         |                   | 
|                                                                                                                                                                                                                                                                | Total current liabilities                                      |               |         | 8,365             | 
|Other liabilities                                                                                                                                                                                                                                               |                                                                |               | 43      |                   | 
|                                                                                                                                                                                                                                                                |                                                                |               |         |                   | 
|                                                                                                                                                                                                                                                                | Total liabilities                                              |               |         | 8,408             | 
|                                                                                                                                                                                                                                                                |                                                                |               |         |                   | 
|Shareholders' equity:                                                                                                                                                                                                                                           |                                                                |               |         |                   | 
|Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued and outstanding                                                                                                                                                                |                                                                |               |        |                   | 
|Common stock, $0.001 par value, 75,000,000 shares authorized; 9,039,010 and 8,390,432 shares issued as of June 30, 2004 and December 31, 2003, respectively; 9,009,946 and 8,361,368 shares outstanding as of June 30,
2004 and December 31, 2003, respectively |                                                                |               | 9       |                   | 
|Additional paid-in capital                                                                                                                                                                                                                                      |                                                                |               | 66,108  |                   | 
|Accumulated other comprehensive income                                                                                                                                                                                                                          |                                                                |               | 146     |                   | 
|Deferred compensation                                                                                                                                                                                                                                           |                                                                |               |        |                   | 
|Treasury stock, at cost29,064 shares                                                                                                                                                                                                                           |                                                                |               | (117    | )                 | 
|Accumulated deficit                                                                                                                                                                                                                                             |                                                                |               | (49,427 | )                 | 
|                                                                                                                                                                                                                                                                |                                                                |               |         |                   | 
|                                                                                                                                                                                                                                                                | Total shareholders' equity                                     |               |         | 16,719            | 
|                                                                                                                                                                                                                                                                |                                                                |               |         |                   | 
|                                                                                                                                                                                                                                                                | Total liabilities and shareholders' equity                     |               | $       | 25,127            | 
|                                                                                                                                                                                                                                                                |                                                                |               |         |                   | 

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

3

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CLICK COMMERCE, INC.  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND  COMPREHENSIVE INCOME (LOSS)  (Dollars in thousands, except per share data)  (Unaudited)

|                                                   |                                          | Three months
ended
June 30,            |           | Six months
ended
June 30, |      
|-------------------------------------------------- | ---------------------------------------- | -------------------------------------- | --------- | ------------------------- | -----
|
|Revenues                                           |                                          |                                        |           |                           |      
|                                                   | Product:                                 |                                        |           |                           |      
|                                                   |                                          | Product license                        |           | $                         | 1,215
|                                                   |                                          | Subscription                           |           |                           | 220  
|                                                   |                                          |                                        |           |                           |      
|                                                   |                                          | Total product                          |           |                           | 1,435
|                                                   |                                          |                                        |           |                           |      
|                                                   | Service:                                 |                                        |           |                           |      
|                                                   |                                          | Maintenance and hosting                |           |                           | 1,987
|                                                   |                                          | Consulting and implementation services |           |                           | 2,786
|                                                   |                                          |                                        |           |                           |      
|                                                   |                                          | Total service                          |           |                           | 4,773
|                                                   |                                          |                                        |           |                           |      
|                                                   | Total revenues                           |                                        |           | 6,208                     |      
|                                                   |                                          |                                        |           |                           |      
|Cost of revenues:                                  |                                          |                                        |           |                           |      
|                                                   | Product                                  |                                        |           | 42                        |      
|                                                   | Service                                  |                                        |           | 2,258                     |      
|                                                   |                                          |                                        |           |                           |      
|                                                   | Total cost of revenues                   |                                        |           | 2,300                     |      
|                                                   |                                          |                                        |           |                           |      
|Gross profit                                       |                                          |                                        | 3,908     |                           |      
|                                                   |                                          |                                        |           |                           |      
|Operating expenses:                                |                                          |                                        |           |                           |      
|                                                   | Sales and marketing                      |                                        |           | 680                       |      
|                                                   | Research and development                 |                                        |           | 654                       |      
|                                                   | General and administrative               |                                        |           | 1,200                     |      
|                                                   | Amortization of stock-based compensation |                                        |           | 13                        |      
|                                                   | Amortization of intangible assets        |                                        |           | 129                       |      
|                                                   | Restructuring and other charges          |                                        |           |                          |      
|                                                   |                                          |                                        |           |                           |      
|                                                   | Total operating expenses                 |                                        |           | 2,676                     |      
|                                                   |                                          |                                        |           |                           |      
|Operating income (loss)                            |                                          |                                        | 1,232     |                           |      
|                                                   |                                          |                                        |           |                           |      
|Other income (expense), net                        |                                          |                                        | (54       | )                         |      
|                                                   |                                          |                                        |           |                           |      
|Income (loss) before income taxes                  |                                          |                                        | 1,178     |                           |      
|Income tax expense                                 |                                          |                                        |          |                           |      
|                                                   |                                          |                                        |           |                           |      
|Net income (loss)                                  |                                          | $                                      | 1,178     |                           | $    
|                                                   |                                          |                                        |           |                           |      
|Basic net income (loss) per common share           |                                          | $                                      | 0.13      |                           | $    
|                                                   |                                          |                                        |           |                           |      
|Diluted net income (loss) per common share         |                                          | $                                      | 0.13      |                           | $    
|                                                   |                                          |                                        |           |                           |      
|Weighted average common shares outstandingbasic   |                                          |                                        | 8,866,268 |                           |      
|Weighted average common shares outstandingdiluted |                                          |                                        | 9,276,191 |                           |      
|Comprehensive income (loss):                       |                                          |                                        |           |                           |      
|                                                   | Net income (loss)                        |                                        | $         | 1,178                     |      
|                                                   | Unrealized loss on marketable securities |                                        |           | (5                        | )    
|                                                   | Foreign currency translation adjustment  |                                        |           | 10                        |      
|                                                   |                                          |                                        |           |                           |      
|                                                   | Comprehensive income (loss)              |                                        | $         | 1,183                     |      
|                                                   |                                          |                                        |           |                           |      

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

4

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CLICK COMMERCE, INC.  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (Dollars in thousands)  (Unaudited)

|                                                              |                                                                                                    | Six months ended
June 30,                        |       
|------------------------------------------------------------- | -------------------------------------------------------------------------------------------------- | ------------------------------------------------ | ------
|
|Cash flows from operating activities:                         |                                                                                                    |                                                  |       
|                                                              | Net income (loss)                                                                                  |                                                  | $     
|                                                              | Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |                                                  |       
|                                                              |                                                                                                    | Amortization of stock-based compensation         |       
|                                                              |                                                                                                    | Depreciation and amortization                    |       
|                                                              |                                                                                                    | Provision for doubtful accounts                  |       
|                                                              |                                                                                                    | Restructuring and other charges, net of payments |       
|                                                              | Changes in operating assets and liabilities, net of effect of acquisitions:                        |                                                  |       
|                                                              |                                                                                                    | Trade accounts receivable                        |       
|                                                              |                                                                                                    | Prepaids and other current assets                |       
|                                                              |                                                                                                    | Accounts payable                                 |       
|                                                              |                                                                                                    | Deferred revenue                                 |       
|                                                              |                                                                                                    | Accrued compensation                             |       
|                                                              |                                                                                                    | Accrued expenses and other current liabilities   |       
|                                                              |                                                                                                    | Other, net                                       |       
|                                                              |                                                                                                    |                                                  |       
|                                                              | Net cash provided by (used in) operating activities                                                |                                                  |       
|Cash flows from investing activities:                         |                                                                                                    |                                                  |       
|                                                              | Purchases of property and equipment                                                                |                                                  |       
|                                                              | Acquisition of Allegis' cash, net of deal costs                                                    |                                                  |       
|                                                              | Deal costs, Webridge acquisition                                                                   |                                                  |       
|                                                              | Redemptions of short-term investments, net                                                         |                                                  |       
|                                                              | Purchase of long-term investments, net                                                             |                                                  |       
|                                                              |                                                                                                    |                                                  |       
|                                                              | Net cash provided by (used in) investing activities                                                |                                                  |       
|Cash flows from financing activities:                         |                                                                                                    |                                                  |       
|                                                              | Proceeds from exercise of stock options                                                            |                                                  |       
|                                                              | Payment of special dividend, return of capital                                                     |                                                  |       
|                                                              | Payments under capital lease obligations                                                           |                                                  |       
|                                                              |                                                                                                    |                                                  |       
|                                                              | Net cash used in financing activities                                                              |                                                  |       
|Effect of foreign exchange rates on cash and cash equivalents |                                                                                                    |                                                  | 1     
|                                                              |                                                                                                    |                                                  |       
|Net increase (decrease) in cash and cash equivalents          |                                                                                                    |                                                  | 595   
|Cash and cash equivalents at beginning of period              |                                                                                                    |                                                  | 11,863
|                                                              |                                                                                                    |                                                  |       
|Cash and cash equivalents at end of period                    |                                                                                                    | $                                                | 12,458
|                                                              |                                                                                                    |                                                  |       
|Supplemental disclosures:                                     |                                                                                                    |                                                  |       
|                                                              | Interest paid                                                                                      |                                                  | $     

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

5

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CLICK COMMERCE, INC.  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Unaudited)

1.     BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements include the accounts of Click Commerce, Inc. and its wholly-owned subsidiaries (the "Company")
and reflect all adjustments (which are normal and recurring in nature) that, in the opinion of management, are necessary for a fair presentation of the interim periods presented. The results of
operations for the three and six months ended June 30, 2004 include the results of operations of Webridge, Inc. (see note 4) from April 21, 2004 through the end of the
period. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire fiscal year ending
December 31, 2004. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United
States of America have been condensed or omitted in accordance with the Securities and Exchange Commission's rules and regulations. The unaudited condensed consolidated financial statements and notes
included herein should be read in conjunction with the Company's audited consolidated financial statements and notes included in the Company's Annual Report on Form 10-K and other
documents that have been filed with the Securities and Exchange Commission.

Certain
prior year amounts have been reclassified to conform to the 2004 presentation.

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue and Cost Recognition

The Company recognizes product license revenue from licensing the rights to use its software on a perpetual basis. Software licenses that are limited in duration
are recognized as subscriptions. The Company generates consulting and implementation service revenues from integrating its software, performing needs analyses for customers and providing training
services. Maintenance and hosting revenues are generated under contracts that provide customers with maintenance, product support and hosting services.

The
Company's software is generally licensed on either a perpetual basis or through a subscription. Revenues related to arrangements with multiple elements are allocated to the
individual elements in accordance with EITF Issue No. 00-21, "Revenue Arrangements with Multiple Elements," ("EITF 00-21") based upon verifiable, objective evidence of
the fair values of each accounting unit. The Company recognizes software license and other related revenue in accordance with Statement of Position ("SOP") No. 97-2
"Software Revenue Recognition" as amended by SOP 98-9, "Modification of SOP 97-2, Software Revenue
Recognition, with Respect to Certain Transactions." For those contracts that either do not contain a services component or that have services which are not essential to the
functionality of any other element of the contract, software license revenue is recognized upon delivery of the Company's software provided that the fee is fixed and determinable, persuasive evidence
of an arrangement exists and collection of the resulting receivable is considered probable. Revenue from service contracts is typically recognized as the services are performed. The revenue to be
recognized from multiple-element software contracts is based on the fair value of each element. The Company records deferred revenue on software contracts for which it has billed or collected amounts,
but for which the requirements for revenue recognition have not been met.

Revenue
from contracts in which the Company's services are essential to the functionality of the other elements of the contract is recognized using the
percentage-of-completion method under contract accounting as services are performed or output milestones are reached, as the Company delivers,

6

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configures
and installs the software. The percentage completed is measured either by the percentage of labor hours incurred to date in relation to estimated total labor hours or in consideration of
achievement of certain output milestones, depending on the specific nature of each contract. For arrangements in which percentage-of-completion accounting is used, the Company
records cash receipts from customers and billed amounts due from customers in excess of recognized revenue as billings in excess of revenues earned on contracts in progress. The timing and amount of
cash receipts from customers can vary significantly depending on specific contract terms and can, therefore, have a significant impact on the amount of billings in excess of revenues, a component of
accounts receivable, earned on contracts in progress at the end of any given period.

Revenue
from contracts recognized under the percentage-of-completion method is presented as product revenue to the extent that the underlying milestones are
related to software deliveries. To the extent that contract milestones relate to professional services, revenues are presented as service revenues.

When
hours of input are used as the basis for percentage completed, revenues of the arrangement are presented as product revenue based on the percentage of product list price divided by
total estimated project list price multiplied by the contract value and are presented as services revenue based on the percentage of estimated services base line hours at list prices divided by total
estimated project list price multiplied by the contract value.

For
software subscriptions, the Company applies revenue recognition principles in accordance with the guidance provided by Staff Accounting Bulletin ("SAB") No. 104,
"Revenue Recognition." The fee related to multi-element arrangements is allocated to the individual elements in accordance with EITF 00-21
based upon verifiable, objective evidence of the fair values of each accounting unit. The Company's arrangements with customers generally include several elements, including (1) strategic
consulting services, (2) set-up and software subscription services, and (3) hosting services. Set-up and subscription services are presented as subscription
revenues. If the arrangement includes consulting or hosting services, those elements are presented as service and hosting revenue, respectively, based on the individual contracts. Total arrangement
revenues and direct costs are deferred until customer acceptance has occurred and the software subscription service begins. Revenues and direct costs are then amortized ratably to revenue and expense
over the noncancelable contractual term, which typically is 18 to 24 months.

Maintenance
service is sold separately under contracts that are renewable annually and is provided only to customers who purchase maintenance. The Company recognizes maintenance service
revenue ratably over the contract period, which is generally one year in length. Maintenance fees are generally billed annually in advance and are recorded as deferred revenue upon billing. The
Company also provides hosting services to its customers under separate contracts with terms that are typically 18 months. The Company recognizes hosting services revenues ratably over the
contract period, comprising a monthly hosting fee and amortization of a one-time initial hosting services set-up fee that is required at the beginning of a new hosting
contract. For software license sales with bundled maintenance and hosting services, the Company applies revenue recognition principles using the residual method. Under the residual method, revenue is
recognized for delivered elements when a contractually stipulated annual renewal rate for maintenance is provided in the contract with the customer; provided, however, that collection is deemed
probable and the fee is fixed and determinable.

As
part of the sales process, the Company may perform a needs analysis for the potential customer on a fixed fee basis. Revenue from needs analyses is recognized as the work is
performed. Training revenue is recognized as the services are provided.

In
accordance with EITF No. 01-14 "Income Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred," the
Company characterizes the reimbursement of

7

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out-of-pocket
expenses from its customers as revenue, rather than as a reduction of the related expense in the statement of operations.

Cost
of product license revenue includes production and shipping expenses, which are expensed as incurred, as well as costs of licensing third party software incorporated into the
Company's products. These third party license costs are expensed as the products are delivered.

Cost
of service revenue includes salaries and related expenses for professional services and technical support personnel who provide development, implementation and installation services
to customers, as well as an allocation of data processing and overhead costs. Service costs under contracts for which the related services are accounted for as separate accounting units under the
accounting rules are expensed as incurred. In situations where the services and software licenses cannot be accounted for as separate accounting units, services are recognized on the
percentage-of-completion basis along with the underlying software license. When services are provided for subscription arrangements, the cost of such services are deferred and
recognized ratably over the same period as the subscription revenues.

Cash, Cash Equivalents and Short-Term Investments

The Company considers all highly liquid investments with original maturity dates of three months or less to be cash equivalents. Cash equivalents are carried at
cost, which approximates fair market value. Short-term investments are classified as available-for-sale securities and are adjusted to market value.

Long-term Investments

The Company has invested in a long-term investment fund. Under terms of the investment, the Company has a total commitment of $2.0 million of
which $460,000 has been contributed to date for a pro rata ownership interest of less than 2%. During the second quarter of 2004, the Company learned that part of the amount of cash invested in the
fund since the second quarter of 2003 related to management fees. As a result, the Company recorded an expense to reduce
the value of the investment by $101,000. The majority of the reduction of the investment during the quarter ended June 30, 2004 related to periods prior to the quarter ended June 30,
2004.

Stock-Based Compensation

The Company accounts for its stock options in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation,"which permits entities to recognize as expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees"("APB 25") and related interpretations. The Company continues to apply the provisions of APB 25 and provides
the pro forma disclosures required by SFAS No. 123, as amended by SFAS No. 148,"Accounting for Stock-Based CompensationTransition and Disclosure, an
amendment of FASB Statement No. 123."Accordingly, the Company measures compensation expense for its employee stock-based compensation using the intrinsic value method
and discloses the pro forma effects on earnings had the fair value of the options been expensed. As such, compensation expense would be recorded only if the fair value of the underlying stock exceeded
the exercise price on the grant date. Accordingly, no compensation cost has been recognized on stock options for which the exercise price equaled the fair value at the date of grant. With respect to
stock options granted at exercise prices less than their deemed fair value prior to the Company's initial public offering ("IPO"), the Company recorded deferred stock-based compensation. Such deferred
stock-based compensation is amortized on a straight-line basis over the vesting period of each individual award. The fair value of equity instruments

8

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issued
to non-employees is amortized and charged to expense over the vesting period of the respective instruments.

The
Company has applied APB No. 25 and related interpretations in accounting for the Employee Plan and the Directors' Plan. Accordingly, no compensation cost has been recognized
on stock options for which the exercise price equaled the fair value at the date of grant. Had the Company determined compensation cost based on the method required by SFAS No. 123, the
Company's net income (loss) and net income (loss) per common share for the three and six months ended June 30, 2004 and 2003 would approximate the pro forma amounts below:

The
fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option-pricing model, with the following weighted average assumptions for the three
and six months ended June 30, 2004 and the three and six months ended June 30, 2003, respectively: expected life of 4.25 years for each period; expected volatility of 147% and
99%; risk-free interest rate of 2.7% for each period; and 0% dividend yield for each period.

|                                 |                                                                                                                             | Three months ended
June 30, |       | Six months ended
June 30, |  
|-------------------------------- | --------------------------------------------------------------------------------------------------------------------------- | --------------------------- | ----- | ------------------------- | -
|
|
|Net income (loss), as reported   |                                                                                                                             | $                           | 1,178 |                           | $
|                                 | Stock-based employee compensation expense included in the determination of net loss as reported, net of related tax effects |                             |       | 13                        |  
|                                 | Total fair value method employee stock-based compensation expense, net of related tax effects                               |                             |       | (305                      | )
|                                 |                                                                                                                             |                             |       |                           |  
|                                 | Pro forma net income (loss)                                                                                                 |                             | $     | 886                       |  
|                                 |                                                                                                                             |                             |       |                           |  
|Basic income (loss) per share:   |                                                                                                                             |                             |       |                           |  
|                                 | As reported                                                                                                                 |                             | $     | 0.13                      |  
|                                 | Pro forma                                                                                                                   |                             | $     | 0.10                      |  
|Diluted income (loss) per share: |                                                                                                                             |                             |       |                           |  
|                                 | As reported                                                                                                                 |                             | $     | 0.13                      |  
|                                 | Pro forma                                                                                                                   |                             | $     | 0.10                      |  

Prior
to its IPO, the Company granted certain stock options at exercise prices less than their deemed fair value; accordingly, the Company recorded deferred compensation of $4,636,000.
Such deferred compensation is amortized on a straight-line basis over the vesting period of each individual award, resulting in $13,000 and $8,000 of stock-based compensation expense for
the three months ended June 30, 2004 and 2003, and $21,000 and $43,000 for the six months ended June 30, 2004 and 2003 respectively. The following table contains the amortization expense
attributable to each noted expense caption, as applicable on the Condensed Consolidated Statements of Operations.

|                                                           |                          | Three months ended
June 30, |    | Six months ended
June 30,
|---------------------------------------------------------- | ------------------------ | --------------------------- | -- | -------------------------
|
|
|Stock based employee compensation expense attributable to: |                          |                             |    |                          
|                                                           | Cost of revenues         |                             |    | 11                       
|                                                           | Sales and marketing      |                             |    | 2                        
|                                                           | Research and development |                             |    |                         
|                                                           |                          |                             |    |                          
|Total                                                      |                          | $                           | 13 |                          
|                                                           |                          |                             |    |                          

9

---



3.     NET INCOME (LOSS) PER SHARE

Net income (loss) per share was computed as follows:

|                                 |                                                  | Three months ended
June 30, |   | Six months ended
June 30, |     
|-------------------------------- | ------------------------------------------------ | --------------------------- | - | ------------------------- | ----
|
|
|Basic income (loss) per share:   |                                                  |                             |   |                           |     
|                                 | Net income (loss)                                |                             | $ | 1,178                     |     
|                                 | Weighted average common shares outstanding       |                             |   | 8,866                     |     
|                                 |                                                  | Per share amount            |   | $                         | 0.13
|Diluted income (loss) per share: |                                                  |                             |   |                           |     
|                                 | Net income (loss)                                |                             | $ | 1,178                     |     
|                                 | Weighted average common shares outstanding       |                             |   | 8,866                     |     
|                                 | Add: Effect of dilutive securitiesstock options |                             |   | 413                       |     
|                                 |                                                  |                             |   |                           |     
|                                 | Diluted weighted average shares outstanding      |                             |   | 9,276                     |     
|                                 |                                                  | Per share amount            |   | $                         | 0.13

For
the three months ended June 30, 2004 and 2003, 366,177 and 172,811 shares attributable to outstanding stock options were excluded from the calculation of diluted earnings per
share because their effect was antidilutive. For the six months ended June 30, 2004 and 2003, 283,183 and 206,864 shares attributable to outstanding stock options were excluded from the
calculation of diluted earnings per share because their effect was antidilutive.

4.     BUSINESS COMBINATIONS

Effective March 24, 2003, the Company completed its acquisition of all of the capital stock of Allegis Corporation ("Allegis"), a
privately-held California corporation engaged in licensing partner relationship management software and providing professional implementation services, hosting, and maintenance services
related to its software. Results of Allegis' operations have been included in the Company's consolidated financial statements since March 24, 2003. Under the terms and conditions
of the Agreement and Plan of Merger, Allegis became a wholly-owned subsidiary of the Company, and the holders of Allegis' preferred stock received cash consideration in an aggregate amount of
approximately $10,200. The Company funded the acquisition using available cash on hand. The acquisition of Allegis has broadened the Company's installed base and product offerings and expanded its
market share within the partner relationship management area, as well as achieving cost savings through elimination of redundant development efforts and administrative functions.

Effective
April 21, 2004, the Company completed its acquisition of substantially all the operating assets of Webridge, Inc. ("Webridge"), a privately-held
Delaware corporation based in Beaverton, Oregon. Pursuant to the Asset Purchase Agreement, dated as of March 17, 2004 and amended March 30, 2004, Click Webridge, Inc., a wholly
owned subsidiary of the Company, purchased substantially all of the operating assets of Webridge. The Company acquired the operating assets of Webridge, Inc., based on a valuation of Webridge
as a going-concern, for consideration consisting of 615,303 shares of Click Commerce, Inc. common stock, valued at $5.766 per share, including shares issued for working capital adjustments. The
acquisition of Webridge is expected to broaden the Company's position in the areas of compliance automation and grant management within the higher education and healthcare markets as well as expand
its market share within partner collaborative commerce.

The
following table summarizes the estimated fair values of the assets acquired and the liabilities assumed on the effective date of the Webridge acquisition. The Company incurred
approximately

10

---



$186,000
of direct expenses related to the closing of the Webridge acquisition. Due to the timing of the acquisition, the final allocation of the purchase price is subject to change as the Company
completes the valuation of the acquired assets and assumed liabilities.

|                       |                       | At April 21, 2004
|---------------------- | --------------------- | -----------------
|
|Current assets         |                       | $                
|Property and equipment |                       |                  
|Intangible assets      |                       |                  
|Goodwill               |                       |                  
|                       |                       |                  
|                       | Total assets acquired |                  
|Current liabilities    |                       |                  
|                       |                       |                  
|Net assets acquired    |                       | $                
|                       |                       |                  

The
following table details the intangible assets recorded to date related to developed technology, trade names and customer relationships acquired in the Company's acquisitions. These
intangible assets will be evaluated annually to determine that the fair value of such assets do not exceed their recorded values. If such an impairment occurs, the carrying value of such assets will
be reduced to their fair value.

|                                                        |                                | Developed
Technology |       | Trade Names |   | Customer Relationships |     |  
|------------------------------------------------------- | ------------------------------ | -------------------- | ----- | ----------- | - | ---------------------- | --- | -
|
|
|
|Webridge acquisition (4/21/04)                          |                                | $                    | 1,000 |             | $ | 150                    |     | $
|Allegis acquisition (3/27/03)                           |                                |                      |      |             |   |                       |     |  
|                                                        |                                |                      |       |             |   |                        |     |  
|                                                        | Total intangibles acquired     |                      |       | 1,000       |   |                        | 150 |  
|                                                        |                                |                      |       |             |   |                        |     |  
|Accumulated amortization, from date of acquisition      |                                |                      | 48    |             |   | 10                     |     |  
|Intangible, net, as of June 30, 2004                    |                                | $                    | 952   |             | $ | 140                    |     | $
|                                                        |                                |                      |       |             |   |                        |     |  
|Amortization expense:                                   |                                |                      |       |             |   |                        |     |  
|                                                        | Six months ended June 30, 2004 |                      |       | 48          |   |                        | 10  |  
|                                                        | Six months ended June 30, 2003 |                      |       |            |   |                        |    |  
|Estimated amortization expense for the 12 months ended: |                                |                      |       |             |   |                        |     |  
|                                                        | December 31, 2004              |                      | $     | 173         |   | $                      | 34  |  
|                                                        | December 31, 2005              |                      | $     | 250         |   | $                      | 50  |  
|                                                        | December 31, 2006              |                      | $     | 250         |   | $                      | 50  |  
|                                                        | December 31, 2007              |                      | $     | 250         |   | $                      | 15  |  
|                                                        | December 31, 2008              |                      | $     | 76          |   | $                      |    |  
|                                                        | December 31, 2009              |                      | $     |            |   | $                      |    |  

---

The
following unaudited pro forma financial information for the three and six months ended June 30, 2004 and 2003 presents the consolidated operations of the Company as if both of
the acquisitions had been made on January 1, 2003, after giving effect to certain adjustments for the pro forma acquisition as of the acquisition date. Under the provisions of SFAS
No. 142, goodwill acquired in transactions completed after June 30, 2001 is not amortized. As the acquisition of Allegis and

11

---



Webridge
occurred subsequent to that date, these pro forma results do not reflect any goodwill amortization expense. The unaudited pro forma financial information is provided for informational
purposes only, should not be construed to be indicative of the Company's consolidated results of operations had the acquisition of Allegis and Webridge been consummated on these earlier dates, and do
not project the Company's results of operations for any future period:

|                                    |  | Three months ended
June 30, |       | Six months ended
June 30, |  
|----------------------------------- |  | --------------------------- | ----- | ------------------------- | -
|
|
|Revenues                            |  | $                           | 6,698 |                           | $
|Net income (loss)                   |  |                             | 1,407 |                           |  
|Basic net income (loss) per share   |  | $                           | 0.16  |                           | $
|Diluted net income (loss) per share |  | $                           | 0.15  |                           | $

5.     RESTRUCTURING

During the second quarter of 2003, the Company continued to execute its restructuring plan following the Allegis acquisition. As part of this plan, certain
redundant costs were eliminated. These actions resulted in the termination of approximately 15 employees primarily across the professional services, support and research and development departments.
All of these employees were terminated in the second quarter of 2003. The employee severance and related costs totaled $182,000 with legal and other costs incurred of $30,000. The Company also
consolidated office space and included an additional restructuring charge for the remaining lease payments on the Company's excess office space located in Chicago and Boston totaling $2,144,000. In
the third quarter of 2003, the Company reached a settlement with the landlord for its vacant office space in Chicago that resulted from its consolidation efforts in the second quarter. This agreement
resulted in the cancellation of the Company's original lease obligation in exchange for a $900,000 cash payment. As of June 30, 2003, the total cost of this lease was estimated at $1,865,000
and was included in the restructuring charge and accrual recorded during the second quarter. Accordingly, the Company reversed $965,000 of the restructuring accrual in the quarter ended
September 30, 2003 as a result of the lease settlement as well as $18,000 related to recoveries of restructured assets.

In
conjunction with a review of its cost structures, the Company also recorded a $1,586,000 asset impairment charge during the quarter ended June 30, 2003. This charge related to
leasehold improvements associated with the excess office space, a redundant computer system and excess equipment totaling $1,004,000 and the write-off of certain third party software
licenses
related to products that had no projected sales and no plans for further development in the amount of $582,000.

As
of June 30, 2004, the Company's restructuring accrual covered accruals for final wage tax settlements and related professional fees in Europe and remaining lease commitments on
excess office space resulting from the restructuring that occurred in the second quarter of 2003. Due to extended payment terms under these lease agreements, payments against the restructuring accrual
will be made through the quarter ending December 31, 2005. The following table contains the significant components of the restructuring charge and current year-to-date
activity relating to those components.

|                                               |       | Accrual at
December 31,
2003 |     | 2004 YTD cash payments |   | Balance at June 30,
2004
|---------------------------------------------- | ----- | ---------------------------- | --- | ---------------------- | - | ------------------------
|Employee severance, benefits and related costs |       | $                            | 121 |                        | $ | (74                     
|Facilities related costs                       |       |                              | 152 |                        |   | (36                     
|Legal costs and other                          |       |                              | 30  |                        |   |                        
|                                               |       |                              |     |                        |   |                         
|                                               | Total |                              | $   | 303                    |   | $                       
|                                               |       |                              |     |                        |   |                         

12

---



6.     SPECIAL DIVIDEND

On May 1, 2003, the Company announced that its Board of Directors had declared a special cash dividend in the amount of $2.50 per share of the Company's
common stock ("Special Dividend"). The Special Dividend was paid on June 4, 2003 to stockholders of record as of May 20, 2003. For Federal income tax purposes, the Company expects the
Special Dividend to be treated as a "return of capital." As a return of capital, the Special Dividend would be either wholly tax-free or taxable in part as capital gain, depending on each
stockholder's tax basis in the Company's common stock. The outstanding shares as of May 20, 2003 were 8,136,643 shares resulting in a total special dividend payment of $20,342,000.

7.     COMMITMENTS AND CONTINGENCIES

In November 2002, the FASB issued FIN 45,Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of others. Under the Company's standard software license agreements, the Company agrees to indemnify, defend and hold harmless its licensees' use of
Company software from and against certain losses, damages and costs arising from claims alleging the licensees' use of Company software infringes on the intellectual property rights of a third party.
The indemnification is contingent upon (a) the customer providing the Company with prompt written notice of such claims; (b) the customer providing reasonable cooperation to the Company
in the defense and settlement of such claim, at the Company's expense, and the Company having sole authority to defend or settle the claim. Historically, the Company has not been required to pay
material amounts in connection with claims asserted under these provisions, and accordingly, the Company has not recorded a liability relating to such provisions.

8.     SUBSEQUENT EVENT

On July 1, 2004, Click Commerce, Inc. acquired bTrade, Inc. ("bTrade"), a privately-held Texas corporation based in Irving,
Texas. Pursuant to an Agreement and Plan of Merger, dated as of June 17, 2004, bTrade became a wholly-owned indirect subsidiary of the Company. The Company acquired bTrade, based on a valuation
of bTrade as a going-concern, for consideration consisting of approximately 700,000 shares, valued at $4.795 per share, of Company common stock and the repayment of approximately $1.25 million
of existing bTrade indebtedness.

13

---





Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Company's consolidated condensed financial statements and notes elsewhere in this quarterly
report.

Overview

Click Commerce, Inc. ("Click Commerce" or the "Company") provides collaborative extranet solutions that optimize business relationships for companies in
the manufacturing, high-technology, financial services, health care, and higher education markets. The Company's secure, Internet-based software products, along with supplemental
integration, hosting, and business consulting services assist our customers in managing their collaborative commerce, channel management, and compliance automation business initiatives.

The
Company commenced operations on August 20, 1996. During the period from inception until early 1998, the Company was primarily engaged in developing software for the Partner
Portal (formerly referred to as the Relationship Manager or Extranet Manager). In 1996 and 1997, the Company was also engaged in developing Internet websites and providing related consulting services.
The Company implemented the first Click Commerce Relationship Manager in the second quarter of 1997.

Effective
as of March 24, 2003, the Company acquired Allegis Corporation ("Allegis"), a privately-held California corporation engaged in licensing partner relationship
management software and providing professional implementation services, hosting, and maintenance services related to its software. Results of Allegis' operations have been included in the Company's
consolidated financial statements since March 24, 2003. Allegis, a wholly-owned subsidiary of the Company, broadened the Company's installed base and product offerings and expanded its market
share within the partner relationship management area especially in the high technology and financial services verticals. Allegis contributed revenues related to hosting and license subscriptions as
well as adding additional software license, maintenance and professional services revenues to the consolidated results. Prior to the Allegis acquisition, the Company did not sell hosting and license
subscriptions. However, as a result of the integration of Allegis personnel and products, the common business problems the Company solves and the common management team, the Company has presented the
business overview and results of Click Commerce and Allegis on a consolidated basis.

Effective
April 21, 2004, the Company completed its acquisition of substantially all the operating assets of Webridge, Inc. ("Webridge"), a privately-held
Delaware corporation based in Beaverton, Oregon. Pursuant to the Asset Purchase Agreement, dated as of March 17, 2004 and amended March 30, 2004, Click Webridge, Inc. purchased
substantially all of the operating assets of Webridge. The Company acquired the operating assets of Webridge, Inc., based on a valuation of Webridge as a going-concern, for consideration
consisting of 615,303 shares of Click Commerce, Inc. common stock, valued at $5.766 per share, including certain shares used for working capital adjustments. The acquisition of Webridge is
expected to broaden the Company's position in the areas of compliance automation and grant management within the higher education and healthcare markets as well as expand its market share within
partner collaborative commerce.

The
Company has focused its efforts in 2003 and first half of 2004 on maintaining its profitability. In the second half of 2003 and the first half of 2004, the Company reported profits
of approximately $2.4 million and $2.0 million, respectively. The Company's goal of continuing to achieve profitable operations is a primary focus of management. The Company plans to
continue investing in new and improved product offerings and in increasing the exposure of the Company's products and services through its targeted marketing programs. The Company believes that each
investment must be prudently made and justified by the expected return on such investment.

14

---



On
July 1, 2004 the Company acquired bTrade Inc. (bTrade), a privately held Texas Corporation based in Irving, Texas. The acquisition of bTrade is expected to enhance the
Company's presence in the item synchronization market. The Company plans to use its synchronization products, which are an important reference technology for radio frequency identification (RFID), to
increase its product offerings in the RFID market to serve multi-tier and retail channels.

The
Company offers several licensing and service options for its software products. Customers can either purchase a perpetual software license or enter into a subscription license
contract. Customers may also choose to use the Company's hosting services for their software license or install the software on servers within their own internal environment. Subscription licenses are
only available to customers who also use the Company's hosting services.

Perpetual
license revenues and professional services are typically recognized as the software or service is delivered and do not provide a contractual, predictable future revenue stream.
The recurring revenue opportunities come from subscriptions or maintenance and hosting services. While the Company may have better visibility of future revenue from subscription licenses, its
customers make the final decision on the form of their software license. The Company encourages all of its customers to use its hosting services.

The
Company depends on several factors to increase revenue and maintain profitability: adding new customers, maintaining its current base of subscription, hosting and maintenance
revenues, and improving the gross margins of its professional services. Adding new customers is the primary responsibility of the sales department. Maintaining the other revenue streams is the
responsibility of the professional services department. The Company has developed compensation structures for these departments that it believes provides appropriate incentives for achievement of
their respective goals.

The
Company's revenue is principally derived from sales of perpetual licenses for, or subscriptions to, its software. The Click Commerce software suite consists of the Partner Portal
platform and eighteen business applications. The Company also recognizes revenue from services, including business consulting, implementation, maintenance, training and managed hosting services.

Cost
of product license revenues includes production and shipping expenses, which are expensed as incurred, as well as costs of licensing third party software incorporated into or
required by the Company's products. These third party license costs are expensed as the products are delivered on perpetual licenses or subscriptions or as maintenance to the extent that the third
party license costs related to those product offerings. Cost of service revenues include salaries and related expenses for professional services and technical support personnel who provide
implementation services, maintenance and hosting services, as well as an allocation of data processing and overhead costs which are expensed as incurred.

Operating
expenses are classified into five general categories: sales and marketing, research and development, general and administrative, amortization of stock-based compensation and
amortization of intangible assets. Sales and marketing expenses consist primarily of salaries and other related costs for sales and marketing personnel, sales commissions, travel, public relations and
marketing materials. Research and development expenses consist primarily of personnel costs to support product development. General and administrative expenses consist primarily of salaries and other
related costs for executive management, finance and administrative employees, legal and accounting services, and corporate liability insurance. Amortization of stock-based compensation represents the
amortization over the related service period of the difference between the exercise price of options granted and the deemed fair market value of the underlying common stock on the date of grant.
Amortization of intangible assets represents amortization expense for certain customer relationships, acquired technologies and assembled workforces with finite useful lives. These intangible assets
were recorded in

15

---



connection
with the acquisitions of Allegis Corporation during the first quarter of 2003 and Webridge Inc. during the second quarter of 2004 and are amortized over their useful lives, which
range from three to five years.

The
Company believes that period-to-period comparisons of operating results should not be relied upon as predictive of future performance. The Company's prospects
must
be considered in light of the risks, expenses and difficulties encountered by companies at an early stage of development, particularly companies in new, rapidly evolving markets. The Company may not
be successful in addressing such risks and difficulties.

Critical Accounting Policies

The Company's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. As such,
the Company makes certain estimates, judgments and assumptions that it believes are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The Company's critical accounting policies include
revenue recognition and any resulting deferral of revenues and related costs, the estimation of credit losses on accounts receivable, the application of purchase accounting and the valuation of
deferred tax assets. For a discussion of these critical accounting policies, see "Critical Accounting Policies and Estimates" in the Company's Annual Report on Form 10-K for the
year ended December 31, 2003, filed with the Securities and Exchange Commission.

In
November 2002, the FASB issued FIN 45,Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of others. Under the Company's standard software license agreements, the Company agrees to indemnify, defend and hold harmless its licensees' use of Company software from and
against certain losses, damages and costs arising from claims alleging the licensees' use of Company software infringes on the intellectual property rights of a third party.    The
indemnification is contingent upon (a) the customer providing the Company with prompt written notice of such claims; (b) the customer providing reasonable cooperation to the Company in
the defense and settlement of such claim, at the Company's expense, and the Company having sole authority to defend or settle the claim. Historically, the Company has not been required to pay material
amounts in connection with claims asserted under these provisions, and accordingly, the Company has not recorded a liability relating to such provisions.

16

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Results of Operations

The following table sets forth selected unaudited financial data for the periods indicated in dollars and as a percentage of total revenue.

|                                  |                                          | Three Months Ended June 30, |       | Six Months Ended June 30, |      
|--------------------------------- | ---------------------------------------- | --------------------------- | ----- | ------------------------- | -----
|
|
|Revenues                          |                                          |                             |       |                           |      
|                                  | Product license                          |                             | $     | 1,215                     |      
|                                  | Subscription                             |                             |       | 220                       |      
|                                  |                                          |                             |       |                           |      
|                                  | Total product                            |                             |       | 1,435                     |      
|                                  | Maintenance and hosting                  |                             |       | 1,987                     |      
|                                  | Consulting and implementation service    |                             |       | 2,786                     |      
|                                  |                                          |                             |       |                           |      
|                                  | Total service                            |                             |       | 4,733                     |      
|                                  |                                          |                             |       |                           |      
|Total                             |                                          |                             | 6,208 |                           | 100.0
|                                  |                                          |                             |       |                           |      
|Cost of revenues                  |                                          |                             |       |                           |      
|                                  | Product                                  |                             |       | 42                        |      
|                                  | Service                                  |                             |       | 2,258                     |      
|                                  |                                          |                             |       |                           |      
|                                  | Total cost of revenues                   |                             |       | 2,300                     |      
|                                  |                                          |                             |       |                           |      
|Gross profit                      |                                          |                             | 3,908 |                           | 63.0 
|                                  |                                          |                             |       |                           |      
|Operating Expenses:               |                                          |                             |       |                           |      
|                                  | Sales and marketing                      |                             |       | 680                       |      
|                                  | Research and development                 |                             |       | 654                       |      
|                                  | General and administrative               |                             |       | 1,200                     |      
|                                  | Amortization of stock-based compensation |                             |       | 13                        |      
|                                  | Amortization of intangibles assets       |                             |       | 129                       |      
|                                  | Restructuring Charge                     |                             |       |                          |      
|                                  |                                          |                             |       |                           |      
|Total cost and operating expenses |                                          |                             | 2,676 |                           | 43.1 
|                                  |                                          |                             |       |                           |      
|Operating income (loss)           |                                          | $                           | 1,232 |                           | 19.8 
|                                  |                                          |                             |       |                           |      

Comparison of the three months ended June 30, 2004 to the three months ended June 30, 2003



Total revenue increased approximately $1.1 million, or 22.2%, to $6.2 million for the three months ended June 30, 2004 from
$5.1 million for the three months ended June 30, 2003. Product license revenue consists of revenue from separate product-only agreements and from multi-element agreements
accounted for under a percentage-of-completion basis using product-related milestones or hours of input in relation to the list prices of products elements to total contract
list prices. Product license revenue increased by $0.5 million, or 76.3%, as a result of an increase in the number of new contracts primarily from the acquired Webridge product. Consulting and
implementation service revenue is comprised of fees related to time and materials, maintenance and hosting, training and needs analyses, as well as multi-element agreements accounted for under a
percentage completed basis using hours of input in relation to the list prices of service elements to total contract list prices or milestones that specifically relate to integration and customization
services. Consulting and implementation services revenues increased by $1.0 million, or 60.0%, over the prior year quarter arising in part to added Webridge services in the current quarter. The
increase in consulting and implementation service revenue was offset by a decrease in subscription revenue of $0.7 million as a result of customers not renewing subscriptions or converting
existing subscriptions into perpetual licenses. Consulting and implementation service revenue increases are generally related to new license transactions or as

17

---



follow-on
service contracts. Consulting and implementation service revenues are generated in situations when a customer purchases a license from the Company and uses the Company's service
staff to install and integrate the licensed software. The operating assets of Webridge were acquired by Click on April 21, 2004. Therefore, 68 days of Webridge's operations are included
in the Company's revenues and expenses in the second quarter of 2004.



Total cost of revenue decreased by $0.4 million to $2.3 million for the three months ended June 30, 2004. This cost of revenue decrease is a
result of a reduction in employee compensation and third party contractor costs. The reduction in employee compensation is directly related to a reduction in project management personnel. Cost of
product revenue decreased by $106,000 or 71.6% due to lower royalty fees for licensed third party software that is embedded in the Company's products or incorporated in
the Company's product offerings. Gross profit margins increased to 63.0% for the three months ended June 30, 2004, compared to 47.4% for the three months ended June 30, 2003. The gross
margin increase is due to an improvement in utilization rate of professional service staff. This improvement was compounded by a reduction in third party contractors and other overhead cost
reductions.



Sales and Marketing.Sales and marketing expenses decreased by approximately $0.5 million, or 44.5%, to
$0.7 million for the three months ended June 30, 2004 from $1.2 million for the three months ended June 30, 2003. The decrease in sales and marketing expense was primarily
attributable to lower employee compensation and related costs due to a reduction in personnel and lower discretionary marketing spending.

Research and Development.Research and development expenses decreased by approximately $0.2 million, or 26.3%, to
$0.7 million for the three months ended June 30, 2004, compared to $0.9 million for the comparable prior year three-month period. This decrease was almost entirely attributable to
a reduction in employee compensation and related costs. To date, all software development costs have been expensed as incurred.

General and Administrative.General and administrative expenses decreased by approximately $0.5 million, or 30.0%, to
$1.2 million for the three months ended June 30, 2004 from $1.7 million for the three months ended June 30, 2003. The decrease is attributable to the $0.7 million of
non-recurring legal and consulting expenses (incurred in 2003) related to the Company's consideration of an unsolicited acquisition proposal by one of its investors and the payment of the
$2.50 special dividend on June 4, 2003. The decrease was partially offset by increase in employee compensation and related costs.

Amortization of Intangible Assets.The increase in amortization of intangibles relates to the intangible assets acquired with
the acquisition of the operating assets of Webridge. These intangibles have useful lives that range from three to five years and accounted for the $0.1 million increase in amortization expense
for the quarter ended June 30, 2004.

Restructuring and other charges.In the quarter ended June 30, 2003, the Company continued to execute its plan of
reorganization following the Allegis acquisition. As part of this plan, certain redundant costs were eliminated and a restructuring charge of $3.9 million was recorded. The restructuring charge
primarily related to $2.1 million of excess lease costs in two locations and severance and other benefit costs of $0.2 million for the termination of 15 employees as part of the
restructuring plan. The Company also recorded a $1.6 million asset impairment charge. This charge related to leasehold improvements associated with excess office space, a redundant computer
system and excess equipment totaling $1.0 million and the write-off of certain third party software licenses

18

---



related
to products that had no projected sales and no plans for further development in the amount of $0.6 million.

Comparison of the six months ended June 30, 2004 to the six months ended June 30, 2003



Total revenue increased by approximately $3.5 million, or 43.4%, to $11.5 million for the six months ended June 30, 2004 from
$8.0 million for the six months ended June 30, 2003. Product license revenue consists of revenue from separate product-only agreements and from multi-element agreements
accounted for under a percentage-of-completion basis using product-related milestones or hours of input in relation to the list prices of product elements to total contract
list prices. Product license revenue increased by $1.0 million, or 114.2%, as a result of an increase in the number of new contracts in the six months ended June 30, 2004. Consulting and
implementation service revenue, comprised of fees related to time and materials service contracts, maintenance and hosting, training and needs analyses, as well as multi-element agreements accounted
for under a percentage completed basis using hours of input in relation to the list prices of service elements to total contract list prices or milestones that specifically relate to integration and
customization services, increased by $2.1 million, or 70.0%, over the prior year quarter. The increase in consulting and implementation service revenue is generally related to new license
transactions or as follow on service contracts. The results for the first six months of 2004 and 2003 include the revenues and costs for Allegis Corporation beginning on the March 24, 2003
acquisition date through the period ended June 30, 2004. Webridge was acquired by the Company on April 21, 2004, therefore, 68 days of Webridge's operations are included in the
Company's revenues and expenses.



Total cost of revenue increased approximately $0.4 million, or 9.9%, to $4.8 million for the six months ended June 30, 2004 compared to
$4.3 million for the six months ended June 30, 2003. This cost of revenue increase is primarily a result of direct costs associated with increased revenues. The increase in direct cost
is predominately made up of higher employee compensation and related costs in the first quarter of 2004, primarily as a result of the Webridge asset acquisition.    Cost of product revenue
decreased by $0.1 million or 61.9% due to lower royalty fees for licensed third party software that is embedded in the Company's products or incorporated in the Company's product offerings.
Gross profit margins increased to 58.5% for the six months ended June 30, 2004, compared to 45.8% for the six months ended June 30, 2003. The gross margin increase is due to increased
product revenue of $0.8 million and the decrease in the cost of providing those services. Lower service costs as a percentage of revenue was due to higher utilization rates, lower head counts
and higher service revenues.



Sales and Marketing.Sales and marketing expenses decreased by approximately $0.6 million, or 30.2%, to
$1.3 million for the six months ended June 30, 2004 from $1.8 million for the six months ended June 30, 2003. The decrease in sales and marketing expense was primarily
attributable to lower employee compensation and related costs due to a reduction in personnel and lower discretionary marketing spending.

Research and Development.Research and development expenses decreased by approximately $0.3 million, or 20.6%, to
$1.1 million for the six months ended June 30, 2004, compared to $1.3 million for the prior year six-month period. This decrease was primarily attributable to lower
third party contractor costs, reduction in personnel, and discretionary spending. To date, all software development costs have been expensed as incurred.

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General and Administrative.General and administrative expenses decreased by approximately $0.7 million, or 25.7%, to
$2.1 million for the six months ended June 30, 2004 from $2.8 million for the six months ended June 30, 2003. The decrease is attributable to the following non recurring
costs incurred in the second quarter of 2003: $0.1 million in additional administrative overhead acquired with the Allegis acquisition, $0.7 million of non-recurring legal
and consulting expenses related to the
Company's consideration of an unsolicited acquisition proposal by one of its investors and the payment of the June 4th $2.50 special dividend.

Amortization of Intangible Assets.The increase in amortization of intangibles relates to the intangible assets acquired with
the acquisitions of Allegis and Webridge. The amortization of these assets ranges from three to five years and accounted for the $0.1 million increase in amortization expense for the six months
ended June 30, 2004.

Restructuring and other charges.In the quarter ended June 30, 2003, the Company continued to execute its plan of
reorganization following the Allegis acquisition. As part of this plan, certain redundant costs were eliminated and a restructuring charge of $3.9 million was recorded. The restructuring charge
primarily related to $2.1 million of excess lease costs in two locations and severance and other benefit costs of $0.2 million for the termination of 15 employees as part of the
restructuring plan. The Company also recorded a $1.6 million asset impairment charge. This charge related to leasehold improvements associated with excess office space, a redundant computer
system and excess equipment totaling $1.0 million and the write-off of certain third party software licenses related to products that had no projected sales and no plans for further
development in the amount of $0.6 million.

Liquidity and Capital Resources

At June 30, 2004, the Company had $12.5 million of cash, cash equivalents and short-term investments, consisting primarily of the
remaining proceeds from its initial public offering in 2000 and after the payment of the $20.3 million special dividend. The special dividend of $2.50 per share was declared on May 1,
2003 payable on June 4, 2003 to shareholders of record as of May 20, 2003.

Net
cash provided by operating activities was $1.0 million for the six months ended June 30, 2004. The $1.0 million of cash provided consisted of net income of
$2.0 million for the period, plus depreciation, amortization and an increase in the allowance for doubtful accounts totaling $0.6 million. In addition, a source of cash was generated of
a result of a decrease in other working capital of $0.9 million. These amounts were partially offset by an increase in accounts receivable of $1.6 million, and a decrease of deferred
revenue of $0.9 million.

Net
cash used in investing activities was $402,000 for the six months ended June 30, 2004, consisting of a cash contribution of $80,000 to long term investments, purchases of
fixed assets totaling $136,000 and expenses incurred in the acquisition of Webridge of $186,000.

Net
cash used by financing activities was approximately $7,000 for the six months ended June 30, 2004, reflecting payments made under capital lease obligations totaling $69,000
partially offset by $62,000 of cash proceeds received from the exercise of stock options.

As
part of the Allegis acquisition, the Company assumed a letter of credit securing an office lease in San Francisco. The letter of credit expires on September 30, 2005 and
currently has a balance of $190,000. The Company has a letter of credit in the amount of $298,000 securing an office lease in Beaverton, Oregon as a result of the Webridge asset purchase. The Company
also has an outstanding letter of credit in an original amount of approximately $821,000 in connection with an insurance premium finance agreement. The insurance premium letter of credit declines on a
monthly basis, beginning in November 2003, until it expires on September 24, 2004. As of June 30, 2004, the obligation related to the letter of credit was $329,370. This letter of
credit is secured by a line of credit that expires on June 30, 2005. The Company has also secured letters of credit, relating to the Allegis

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and
Webridge leases, with cash deposits which are classified in other current assets on the June 30, 2004 balance sheet.

As
a result of larger than anticipated restructuring and asset impairment charges in the second quarter of 2003 and the payment of the June 4, 2003 Special Dividend, the Company
fell below the $10 million minimum shareholders' equity requirement to maintain listing on the NASDAQ National Market ("NNM"). As a result, NASDAQ formally notified the Company in the third
quarter of 2003 that unless the Company could demonstrate compliance with the minimum shareholders' equity requirement, the Company's shares would either be delisted, or, upon request of the Company,
transferred to the NASDAQ Small Cap Market. In October of 2003, the Company presented a plan to achieve compliance with NNM requirements through the achievement of profitability in the second half of
2003 and the exercise of stock options by the Company's CEO. Subject to the successful implementation of this compliance plan, the Company was released from all delisting actions and allowed to remain
in good standing with the NNM. The Company is currently in compliance with all listing requirements of the NNM.

On
April 21, 2004, the Company completed its acquisition of substantially all the operating assets of Webridge. The acquisition was completed in exchange for 615,303 shares of
Company stock valued at $5.766 per share, which was the average closing price of the Company's stock two days prior to through two days after March 17, 2004. Webridge is not expected to require
significant financial support from the Company to operate on a go-forward basis.

The
Company continues to evaluate strategic alternatives, including opportunities to strategically grow the business, enter into strategic relationships, make acquisitions, or enter into
business combinations. The Company can provide no assurance of any such strategic alternatives and may elect to terminate such evaluation at any time.

The
Company may use cash resources to fund investments in complementary businesses or technologies but believes that its working capital will be sufficient for at least the next twelve
months. The Company has no current plans to raise additional equity to finance existing operations during the next twelve months, although such plans are subject to changes due to business and market
conditions. Thereafter,
the Company may find it necessary to obtain additional equity or debt financing, although the Company does not currently foresee a need for additional cash resources for long-term needs.
In the event additional financing is required, the Company may not be able to raise it on acceptable terms or at all. Additional equity may be issued in connection with potential acquisitions in
addition to the transaction noted in the Recent Developments section below.

Recent Developments

On July 1, 2004, Click Commerce, Inc. acquired bTrade, Inc. ("bTrade"), a privately-held Texas corporation based in Irving,
Texas. Pursuant to an Agreement and Plan of Merger, dated as of June 17, 2004, bTrade became a wholly-owned indirect subsidiary of the Company. The Company acquired bTrade, based on a valuation
of bTrade as a going-concern, for consideration consisting of approximately 700,000 shares, valued at $4.795 per share, of Company common stock and the repayment of approximately $1.25 million
of existing bTrade indebtedness.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended:

Statements
in this Form 10-Q that are not historical facts and refer to the Company's future prospects are "forward-looking statements" under the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are generally identified by words such as "expect," "anticipate," "intend," "believe," "hope," "assume," "estimate" and other similar
words and expressions. The statements are subject to risks and uncertainties and actual results may differ materially from those indicated by these forward-looking statements as a result of various
factors, including but not limited

21

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to,
the ability of the Company to enter into strategic alliances with system integrators and business consultants, the extent of customer acceptance and utilization of the Company's channel management
solutions, the impact of competitive products and services, the Company's ability to develop new and enhanced versions of its products and services, the effect of economic and business conditions, the
volume and timing of customer contracts, and related approval processes capital and intellectual property spending of the Company's target customers, changes in technology, deployment delays or errors
associated with the Company's products, the ability of the Company to integrate acquired businesses or products and the Company's ability to protect its intellectual property rights. For a discussion
of these and other risk factors that could affect the Company's business, see "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2003,
which is on file with the Securities and Exchange Commission.

Item 3.    Qualitative and Quantitative Disclosures About Market Risk

The following discusses the Company's exposure to market risk related to changes in foreign currency exchange rates and interest rates. This discussion contains
forward-looking statements that are subject to risks and uncertainties. Actual results could vary materially as a result of a number of factors including those set forth in Part I of the
Company's Annual Report on Form 10-K under "Risk Factors."

Foreign Currency Exchange Rate Risk

To date, predominately all of the Company's recognized revenues have been denominated in U.S. dollars and primarily from customers in the United States and the
exposure to foreign currency exchange rate changes has been immaterial. The Company expects, however, that future product license and professional services revenues may also be derived from
international markets and may be denominated in the currency of the applicable market. As a result, operating results may become subject to significant fluctuations based upon changes in the exchange
rates of certain currencies in relation to the U.S. dollar. Furthermore, to the extent the Company engages in international sales denominated in U.S. dollars, an increase in the value of the U.S.
dollar relative to foreign currencies could make the Company's products less competitive in international markets. Although the Company will continue to monitor its exposure to currency fluctuations,
and, when appropriate, may use financial hedging techniques in the future to minimize the effect of these fluctuations, there is no assurance that exchange rate fluctuations will not adversely affect
financial results in the future.

Interest Rate Risk

As of June 30, 2004, the Company had cash and cash equivalents of $12.5 million. Rising interest rates will increase interest income from
short-term investments. Based upon the balance of cash and cash equivalents at June 30, 2004, a change in interest rates of 0.5% would cause a corresponding change in annual
interest income of less than $0.1 million.

Item 4.    Controls and Procedures

The Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief
Financial Officer, of the design and
operation of the Company's disclosure controls and procedures. Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer, determined that the Company's disclosure
controls and procedures were effective as of the end of the period covered by this report. There has been no change in the Company's internal controls over financial reporting during the Company's
most recent fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting.

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PART II. OTHER INFORMATION

Item 4.    Submission of Matters to a Vote of Security Holders

Directors

For

Authority
WithheldNeele E. Stearns, Jr.

7,175,776

161,907Samuel K. Skinner

7,329,337

8,346




For

Against

Abstentions

Broker Non-Votes3,367,465

794,359

716

3,175,143




For

Against

Abstentions

Broker Non-Votes3,387,138

772,589

2,813

3,175,143




For

Against

Abstentions7,329,028

8,644

11


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Item 6.    Exhibits and Reports on Form 8-K

The
following exhibits are filed as part of this Form 10-Q.

| | Exhibit
Number |  | Description                                                                                                                           
| | -------------- |  | --------------------------------------------------------------------------------------------------------------------------------------
| | 2.1*           |  | Asset Purchase Agreement, dated as of March 17, 2004, between Click Commerce, Inc. and Webridge, Inc. ("Webridge Purchase Agreement").
| | 2.2*           |  | Amendment No. 1 to Purchase Agreement, dated as of March 30, 2004, between Click Commerce, Inc. and Webridge, Inc.                    
| | 2.3**          |  | Plan of Merger Agreement, dated as of July 1, 2004, between Click Commerce Inc. and bTrade, Inc. ("bTrade Purchase Agreement")        
| | 31.1           |  | Certification of Michael W. Ferro, Jr. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                      
| | 31.2           |  | Certification of Michael W. Nelson pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                          
| | 32.1           |  | Certification of Michael W. Ferro, Jr. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                      
| | 32.2           |  | Certification of Michael W. Nelson pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                          

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The
Company filed a Current Report on Form 8-K (Items 2, 7, and 12), dated April 23, 2004, to report the issuance of a press release setting forth the
Company's first quarter 2004 earnings and the completion of the acquisition of the operating assets of Webridge, Inc.

The
Company filed a Current Report on Form 8-K/A dated July 2, 2004 to amend Item 7 of the Original Filing dated April 21, 2004, to include the financial
statements of Webridge Inc., required by Items 7(a) and 7(b).

The
Company filed a Current Report on Form 8-K dated July 6, 2004, to report the Plan of Merger Agreement between Click Commerce Inc. and bTrade, Inc.

The
Company filed a Current Report on Form 8-K (Items 2, 7, and 12), dated August 3, 2004, to report the issuance of a press release setting forth the
Company's second quarter 2004 earnings.

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SIGNATURES

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

|                      |  | CLICK COMMERCE, INC.
|--------------------- |  | --------------------
|                      |  | By:                 
|Date: August 16, 2004 |  |                     

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