**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**Form 10-Q**

**(Mark One)**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**For the Quarterly Period Ended June 30, 2006**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**For the transition period from                           to                           **

**Commission File Number 0-30881**

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**CLICK COMMERCE, INC.**

(Exact name of registrantas specified in its charter)

| **Delaware**                     |   | **36-4088644**          |
|----------------------------------|--------|-------------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer        |
| incorporation or  organization)  |   | Identification  Number) |

 

**233 N Michigan Ave, 22**nd FloorChicago, Illinois 60601

(Address of principalexecutive offices)

**(312) 482-9006**

(Registrant’s telephonenumber, including area code)

**Securitiesregistered pursuant to Section 12(b) of the Act: None**

**Securitiesregistered 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) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes o  No x

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act. (Check one)

| Large accelerated filer: o |   | Accelerated  filer: x |   | Non-accelerated  filer: o |
|----------------------------|--------|-----------------------|--------|---------------------------|

 

Indicate by check mark whether the registrant is a shellcompany (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Asof August 9, 2006, there were 12,198,536 shares of the registrant’s commonshares outstanding.

 

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**CLICK COMMERCE,INC.**

**INDEX**
|               | ** ** | ** **                                                                                                                                                      | ** ** | **Page No.** |
|---------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|
| PART I.  |       | FINANCIAL INFORMATION                                                                                                                                           |       |              |   |   |
| Item 1.       |       | Financial Statements                                                                                                                                            |       |              |   |   |
|          |       | Condensed  Consolidated Balance Sheets as of June 30, 2006 (unaudited) and  December 31, 2005                                                         |       |              | 3 |   |
|          |       | Condensed Consolidated  Statements of Income and Comprehensive Income for the three and six months  ended June 30, 2006 and June 30, 2005 (unaudited) |       |              | 4 |   |
|          |       | Condensed Consolidated Statements of Cash  Flows for the six months ended June 30, 2006 and 2005 (unaudited)                                               |       |              | 5 |   |
|          |       | Notes to Condensed  Consolidated Financial Statements (unaudited)                                                                                               |       |              | 7 |   |
| Item 2.       |       | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                                                                     |       |              | 18 |   |
| Item 3.       |       | Quantitative and Qualitative  Disclosures About Market Risk                                                                                                     |       |              | 26 |   |
| Item 4.       |       | Controls and Procedures                                                                                                                                         |       |              | 27 |   |
| PART II. |       | OTHER INFORMATION                                                                                                                                               |       |              |   |   |
| Item 2.       |       | Unregistered Sales of Equity Securities and Use of  Proceeds                                                                                                    |       |              | 28 |   |
| Item 4.       |       | Submission of Matters to a Vote of Security Holders                                                                                                             |       |              | 28 |   |
| Item 6.       |       | Exhibits                                                                                                                                                        |       |              | 28 |   |
| SIGNATURES    |       |                                                                                                                                                            | 29         |              |

 

2

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**PART I.**   FINANCIALINFORMATION

**Item 1.**   FinancialStatements

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

| ** **                                                                                                                                                                                                                                                                                  | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                  | ** ** | **(unaudited)**             | ** ** | ** **                      | ** ** |
| **ASSETS**                                                                                                                                                                                                                                                                                  |       |                        |       |                            |       |   |   |   |   |
| Current assets:                                                                                                                                                                                                                                                                             |       |                        |       |                            |       |   |   |   |   |
| Cash and cash  equivalents                                                                                                                                                                                                                                                                  |       |                        | $          | 12,696                          |       |   |   | $ | 17,498 |   |   |
| Trade accounts  receivable, less allowance for doubtful accounts of $936 and $935,  respectively                                                                                                                                                                                            |       |                        | 22,514     |                            |       |   | 25,336 |   |   |
| Revenues received on  contracts in progress in excess of billings                                                                                                                                                                                                                           |       |                        | 1,054      |                            |       |   | 481 |   |   |
| Prepaids and other  current assets                                                                                                                                                                                                                                                          |       |                        | 4,311      |                            |       |   | 1,879 |   |   |
| Total current assets                                                                                                                                                                                                                                                                        |       |                        | 40,575     |                            |       |   | 45,194 |   |   |
| Property and equipment,  net                                                                                                                                                                                                                                                                |       |                        | 3,411      |                            |       |   | 2,765 |   |   |
| Intangible assets, net                                                                                                                                                                                                                                                                      |       |                        | 23,880     |                            |       |   | 22,129 |   |   |
| Goodwill                                                                                                                                                                                                                                                                                    |       |                        | 60,303     |                            |       |   | 48,782 |   |   |
| Deferred tax asset                                                                                                                                                                                                                                                                          |       |                        | 3,239      |                            |       |   | 7,116 |   |   |
| Other assets                                                                                                                                                                                                                                                                                |       |                        | 1,719      |                            |       |   | 1,673 |   |   |
| Total assets                                                                                                                                                                                                                                                                                |       |                        | $          | 133,127                         |       |   |   | $ | 127,659 |   |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                                                                                              |       |                        |       |                            |       |   |   |   |   |
| Current liabilities:                                                                                                                                                                                                                                                                        |       |                        |       |                            |       |   |   |   |   |
| Accounts payable                                                                                                                                                                                                                                                                            |       |                        | $          | 1,010                           |       |   |   | $ | 1,454 |   |   |
| Billings in excess of  revenues earned on contracts in progress                                                                                                                                                                                                                             |       |                        | 15         |                            |       |   | 177 |   |   |
| Deferred revenue                                                                                                                                                                                                                                                                            |       |                        | 14,331     |                            |       |   | 16,421 |   |   |
| Accrued compensation                                                                                                                                                                                                                                                                        |       |                        | 1,351      |                            |       |   | 3,190 |   |   |
| Accrued rent                                                                                                                                                                                                                                                                                |       |                        | 1,834      |                            |       |   | 2,610 |   |   |
| Accrued expenses and  other current liabilities                                                                                                                                                                                                                                             |       |                        | 4,416      |                            |       |   | 4,552 |   |   |
| Short-term notes payable                                                                                                                                                                                                                                                                    |       |                        | —     |                            |       |   | 829 |   |   |
| Total current  liabilities                                                                                                                                                                                                                                                                  |       |                        | 22,957     |                            |       |   | 29,233 |   |   |
| Long-term debt                                                                                                                                                                                                                                                                              |       |                        | 6,417      |                            |       |   | 6,464 |   |   |
| Other liabilities                                                                                                                                                                                                                                                                           |       |                        | 1,177      |                            |       |   | 846 |   |   |
| Total liabilities                                                                                                                                                                                                                                                                           |       |                        | 30,551     |                            |       |   | 36,543 |   |   |
| 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; 12,828,747 and 12,217,857 shares issued  as of June 30, 2006 and December 31, 2005, respectively; 12,198,536  and 12,007,769 shares outstanding as of June 30, 2006 and  December 31, 2005, respectively |       |                        | 13         |                            |       |   | 12 |   |   |
| Additional paid-in  capital                                                                                                                                                                                                                                                                 |       |                        | 133,898    |                            |       |   | 120,589 |   |   |
| Accumulated other  comprehensive income                                                                                                                                                                                                                                                     |       |                        | 249        |                            |       |   | 194 |   |   |
| Treasury stock, at cost—630,211  and 210,088 shares as of June 30, 2006 and December 31, 2005                                                                                                                                                                                          |       |                        | (10,905    | )                               |       |   | (2,923 | ) |   |
| Accumulated deficit                                                                                                                                                                                                                                                                         |       |                        | (20,679    | )                               |       |   | (26,756 | ) |   |
| Total shareholders’  equity                                                                                                                                                                                                                                                            |       |                        | 102,576    |                            |       |   | 91,116 |   |   |
| Total liabilities and shareholders’ equity                                                                                                                                                                                                                                             |       |                        | $          | 133,127                         |       |   |   | $ | 127,659 |   |   |

 

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

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**CLICKCOMMERCE, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF INCOME ANDCOMPREHENSIVE INCOME**

**(Dollars in thousands, except per share data)(Unaudited)**

| ** **                                               | ** ** | **Three months ended June 30,**                                      | ** ** | **Six months ended June 30,**                        | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                                               | ** ** | **2006**                                                                                 | ** ** | **2005**                                                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues                                                 |       |                                                                                     |       |                                                                     |       |   |   |   |   |
| Product license and  hardware                            |       |                                                                                     |       |                                                                     |       |   |   |   |   |
| Product license                                          |       | $                                                                                        | 2,288      |                                                                     | $          | 1,841 |   | $ | 4,964 |   | $ | 3,804 |   |
| Hardware                                                 |       |                350 |       | —                                                                   |       |                726 |   | — |   |
| Total product license and hardware                       |       |             2,638                 |       |             1,841 |       |             5,690 |   |             3,804 |   |
| Service                                                  |       |                                                                                     |       |                                                                     |       |   |   |   |   |
| Maintenance and hosting                                  |       | 9,098                                                                                    |       | 5,729                                                                    |       | 18,105 |   | 9,543 |   |
| Consulting and implementation services                   |       | 6,017                                                                                    |       | 3,849                                                                    |       | 11,660 |   | 7,346 |   |
| Subscription                                             |       | 1,989                                                                                    |       | 1,930                                                                    |       | 3,975 |   | 3,581 |   |
| Total service                                            |       | 17,104                                                                                   |       | 11,508                                                                   |       | 33,740 |   | 20,470 |   |
| Total revenues                                           |       | 19,742                                                                                   |       | 13,349                                                                   |       | 39,430 |   | 24,274 |   |
| Cost of revenues:                                        |       |                                                                                     |       |                                                                     |       |   |   |   |   |
| Product license and hardware                             |       | 818                                                                                      |       | 344                                                                      |       | 1,636 |   | 542 |   |
| Service                                                  |       | 6,102                                                                                    |       | 4,827                                                                    |       | 12,185 |   | 8,816 |   |
| Total cost of revenues                                   |       | 6,920                                                                                    |       | 5,171                                                                    |       | 13,821 |   | 9,358 |   |
| Gross profit                                             |       | 12,822                                                                                   |       | 8,178                                                                    |       | 25,609 |   | 14,916 |   |
| Operating expenses:                                      |       |                                                                                     |       |                                                                     |       |   |   |   |   |
| Sales and marketing                                      |       | 2,179                                                                                    |       | 1,602                                                                    |       | 4,270 |   | 2,748 |   |
| Research and development                                 |       | 2,309                                                                                    |       | 1,666                                                                    |       | 4,748 |   | 2,875 |   |
| General and administrative                               |       | 2,629                                                                                    |       | 1,282                                                                    |       | 4,993 |   | 2,288 |   |
| Amortization of intangible assets                        |       | 961                                                                                      |       | 505                                                                      |       | 1,947 |   | 1,225 |   |
| Amortization of stock-based compensation                 |       | 129                                                                                      |       | —                                                                   |       | 210 |   | — |   |
| Total operating expenses                                 |       | 8,207                                                                                    |       | 5,055                                                                    |       | 16,168 |   | 9,136 |   |
| Operating income                                         |       | 4,615                                                                                    |       | 3,123                                                                    |       | 9,441 |   | 5,780 |   |
| Other income, net                                        |       | 109                                                                                      |       | 89                                                                       |       | 240 |   | 62 |   |
| Income before  income taxes                              |       | 4,724                                                                                    |       | 3,212                                                                    |       | 9,681 |   | 5,842 |   |
| Income tax  expense                                      |       | 1,564                                                                                    |       | —                                                                   |       | 3,604 |   | — |   |
| Net income                                               |       | $                                                                                        | 3,160      |                                                                     | $          | 3,212 |   | $ | 6,077 |   | $ | 5,842 |   |
| Basic net income  per common share                       |       | $                                                                                        | 0.26       |                                                                     | $          | 0.29 |   | $ | 0.51 |   | $ | 0.54 |   |
| Diluted net  income per common share                     |       | $                                                                                        | 0.24       |                                                                     | $          | 0.27 |   | $ | 0.47 |   | $ | 0.50 |   |
| Weighted average common shares outstanding—basic    |       | 12,041,614                                                                               |       | 11,008,162                                                               |       | 11,969,504 |   | 10,720,961 |   |
| Weighted average  common shares outstanding—diluted |       | 12,912,929                                                                               |       | 12,116,806                                                               |       | 12,927,854 |   | 11,766,721 |   |
| Comprehensive income:                                    |       |                                                                                     |       |                                                                     |       |   |   |   |   |
| Net income                                               |       | $                                                                                        | 3,160      |                                                                     | $          | 3,212 |   | $ | 6,077 |   | $ | 5,842 |   |
| Foreign currency translation adjustment                  |       | 116                                                                                      |       | 8                                                                        |       | 55 |   | 8 |   |
| Comprehensive  income                                    |       | $                                                                                        | 3,276      |                                                                     | $          | 3,220 |   | $ | 6,132 |   | $ | 5,850 |   |

 

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

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

| ** **                                                                                                              | ** ** | **Six months ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                              | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| **Cash flows from operating  activities:**                                                                              |       |                                          |       |   |   |
| Net income                                                                                                              |       | $                                             | 6,077      |   | $ | 5,842 |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities:                            |       |                                          |       |   |   |
| Income tax expense                                                                                                      |       | 3,604                                         |       | — |   |
| Amortization of stock-based compensation                                                                                |       | 210                                           |       | — |   |
| Depreciation                                                                                                            |       | 704                                           |       | 470 |   |
| Amortization of Intangibles                                                                                             |       | 2,866                                         |       | 1,706 |   |
| Provision for doubtful accounts                                                                                         |       | (1                                            | )          | 60 |   |
| Gain on disposal of assets                                                                                              |       | (6                                            | )          | — |   |
| Changes in  operating assets and liabilities, net of effect of acquisitions:                                            |       |                                          |       |   |   |
| Trade accounts receivable                                                                                               |       | 3,065                                         |       | (1,033 | ) |
| Prepaids and other current assets                                                                                       |       | (2,440                                        | )          | 673 |   |
| Accounts payable                                                                                                        |       | (451                                          | )          | (1,726 | ) |
| Billings in excess of revenues earned on contracts  in progress                                                         |       | (162                                          | )          | 276 |   |
| Deferred revenue                                                                                                        |       | (3,432                                        | )          | (3,374 | ) |
| Accrued compensation                                                                                                    |       | (1,881                                        | )          | (3,922 | ) |
| Accrued expenses and other current liabilities                                                                          |       | (382                                          | )          | (284 | ) |
| Other, net                                                                                                              |       | —                                        |       | 465 |   |
| Net cash provided by (used in) operating activities                                                                     |       | 7,771                                         |       | (847 | ) |
| **Cash  flows from investing activities:**                                                                              |       |                                          |       |   |   |
| Purchase of property and equipment                                                                                      |       | (1,148                                        | )          | (247 | ) |
| Payments for acquistions, net of transaction costs  and cash required (see supplemental schedule on the following page) |       | (3,935                                        | )          | (1,774 | ) |
| Other investing activities                                                                                              |       | 22                                            |       | — |   |
| Net cash used in investing activities                                                                                   |       | (5,061                                        | )          | (2,021 | ) |
| **Cash  flows from financing activities:**                                                                              |       |                                          |       |   |   |
| Proceeds from exercise of stock options                                                                                 |       | 1,349                                         |       | 219 |   |
| Payments on stock repurchase                                                                                            |       | (7,982                                        | )          | — |   |
| Proceeds from long-term debt                                                                                            |       | —                                        |       | 6,368 |   |
| Payments on long-term and short-term debt                                                                               |       | (879                                          | )          | (5,270 | ) |
| Payments under capital lease obligations                                                                                |       | —                                        |       | (3 | ) |
| Net cash (used in) provided by financing activities                                                                     |       | (7,512                                        | )          | 1,314 |   |
| Net decrease in cash and cash equivalents                                                                               |       | (4,802                                        | )          | (1,554 | ) |
| Cash and cash  equivalents at beginning of period                                                                       |       | 17,498                                        |       | 13,382 |   |
| Cash and cash  equivalents at end of period                                                                             |       | $                                             | 12,696     |   | $ | 11,828 |   |
| **Supplemental  disclosures:**                                                                                          |       |                                          |       |   |   |
| Interest paid                                                                                                           |       | $                                             | 222        |   | $ | 59 |   |
| Income taxes paid                                                                                                       |       | $                                             | 1,249      |   | $ | — |   |
| Common stock  issued for acquisition activities                                                                         |       | $                                             | 11,751     |   | $ | 30,404 |   |

 

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

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**CLICKCOMMERCE, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)(Dollars in thousands)(Unaudited)**

| ** **                                   | ** ** | **Six months ended June 30, 2005** | ** ** |
|----------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                   | ** ** | **Channel Wave  Inc**              | ** ** | **Optum,  Inc** | ** ** | **Xelus,  Inc.** | ** ** | **Total** | ** ** |
| Intangible assets  acquired                  |       |                                    | $          | 3,272 |   |   | $ | 13,726 |   | $ | 3,036 |   | $ | 20,034 |   |
| Goodwill                                     |       |                                    | 2,896      |   |   | 24,151 |   | 4,013 |   | 31,060 |   |
| Other assets acquired,  not including cash   |       |                                    | 471        |   |   | 6,815 |   | 2,578 |   | 9,864 |   |
| Total assets  acquired                       |       |                                    | 6,639      |   |   | 44,692 |   | 9,627 |   | 60,958 |   |
| Less: Liabilities acquired                   |       |                                    | 1,381      |   |   | 19,042 |   | 9,944 |   | 30,367 |   |
| Net assets acquired, not including cash      |       |                                    | 5,258      |   |   | 25,650 |   | (317 | ) | 30,591 |   |
| Less:Value of  shares issued for acquisition |       |                                    | 4,280      |   |   | 26,124 |   | — |   | 30,404 |   |
| Plus: Acquisition  costs paid                |       |                                    | 75         |   |   | 50 |   | 110 |   | 235 |   |
| Plus: Cash paid  for escrow settlement       |       |                                    | —     |   |   | 745 |   | — |   | 745 |   |
| Total cash paid  (acquired)                  |       |                                    | $          | 1,053 |   |   | $ | 321 |   | $ | (207 | ) | $ | 1,167 |   |

 

| ** **                                   | ** ** | **Six months ended June 30, 2006** | ** ** |
|----------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                   | ** ** | **Elance, Inc.**                   | ** ** | **Requisite,  Inc.** | ** ** | **Total** | ** ** |
| Intangible assets  acquired                  |       |                                    | $          | 4,255 |   |   |   | — |   |   | $ | 4,255 |   |
| Goodwill                                     |       |                                    | 11,022     |   |   |   | — |   |   | 11,022 |   |
| Other assets  aquired, not including cash    |       |                                    | 1,575      |   |   |   | — |   |   | 1,575 |   |
| Total assets  acquired                       |       |                                    | 16,852     |   |   |   | — |   |   | 16,852 |   |
| Less: Liabilities acquired                   |       |                                    | 1,632      |   |   |   | — |   |   | 1,632 |   |
| Net assets acquired, not including cash      |       |                                    | 15,220     |   |   |   | — |   |   | 15,220 |   |
| Less:Value of  shares issued for acquisition |       |                                    | 11,751     |   |   |   | — |   |   | 11,751 |   |
| Plus: Acquisition  costs paid                |       |                                    | 141        |   |   |   | — |   |   | 141 |   |
| Plus: Cash paid  for escrow settlement       |       |                                    | —     |   |   |   | 325 |   |   | 325 |   |
| Total cash paid                              |       |                                    | $          | 3,610 |   |   |   | $ | 325 |   |   | $ | 3,935 |   |
|                                              |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |

 

The difference between the June 30, 2005Supplemental Information and the Condensed Consolidated Statements of CashFlows is due to a valuation change in the Channelwave, Inc., Optum, Inc.and Xelus, Inc. opening balance sheets subsequent to June 30, 2005.

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**CLICKCOMMERCE, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)**

**1. BASIS OFPRESENTATION**

The unaudited condensedconsolidated 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. Theresults of operations for the three and six months ended June 30, 2006include the results of operations of Elance, Inc (see note 4) from February 8,2006 through the end of the periods. The results of operations for the periodspresented are not necessarily indicative of the results to be expected for anysubsequent quarter or for the entire fiscal year ending December 31, 2006.Certain information and footnote disclosures normally included in financialstatements prepared in accordance with accounting principles generally acceptedin the United States of America have been condensed or omitted in accordancewith the Securities and Exchange Commission’s rules and regulations. Theunaudited condensed consolidated financial statements and notes included hereinshould be read in conjunction with the Company’s audited consolidated financialstatements and notes included in the Company’s Annual Report on Form 10-Kand other documents that have been filed with the Securities and ExchangeCommission.

**2. SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

**Revenue Recognition**

Substantially all of the Company’s revenues arederived from four primary sources: (i) licensing software, (ii) providingtechnical support and product updates, otherwise known as maintenance, (iii) applicationhosting, and (iv) providing professional services, includingimplementation and training services. The Company’s software is generally soldthrough a perpetual license or a limited term license (a subscription). TheCompany licenses its software in multiple-element arrangements in which thecustomer typically purchases a combination of: (i) software products, (ii) amaintenance arrangement, which is generally priced as a percentage of thesoftware license fees and provides for technical support and updates over aperiod of generally one year, (iii) hosting services, and/or (iv) aprofessional services arrangement.

The Company recognizes revenue using the residualmethod pursuant to the requirements of Statement of Position No. 97-2“Software Revenue Recognition” (“SOP 97-2”), as amended by Statementof Position No. 98-9, “Software Revenue Recognition with Respect toCertain Arrangements.” Under the residual method, revenue is recognized in amultiple-element arrangement when company-specific objective evidence of fairvalue exists for all of the undelivered elements in the arrangement, but doesnot exist for one or more of the delivered elements in the arrangement. TheCompany allocates revenue to each element in a multiple-element arrangementbased on its fair value, with the fair value determined by the price chargedwhen that element is sold separately. The Company defers revenue for the fairvalue of its undelivered elements (e.g. professional services and maintenance)and recognizes revenue attributable to the delivered elements (i.e. softwareproduct) when the criteria in SOP 97-2 have been met. If evidence offair value of the undelivered elements of the arrangement does not exist, allrevenue from the arrangement is deferred until such time evidence of fair valuedoes exist, or until all elements of the arrangement are delivered.

License revenue from contracts in which the Company’sservices are not considered essential to the functionality of the software arerecognized upon delivery, assuming the above criteria for revenue recognitionare met under SOP 97-2. Services are not considered essential if thesoftware is ready for use 

7

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by the customer uponreceipt and, therefore, implementation services do not involve significantcustomization to, or modification or development of, the underlying softwarecode.

Revenue from contracts in which the Company’s servicesare essential to the functionality of the other elements of the contract isrecognized using the percentage-of-completion method under contract accountingas services are performed as the Company delivers, customizes and installs thesoftware. The percentage completed is measured by the percentage of labor hoursincurred to date in relation to estimated total labor hours required to fulfillthe contract. In contracts with revenue recognized under the percentage-of-completionmethod based on labor hour inputs, revenues are presented as product licenserevenue to the extent that the underlying contracts are for software licensesbased on equal application of discounts across all elements of the larger arrangement.For arrangements in which percentage-of-completion accounting is used, theCompany records cash receipts from customers and billed amounts due fromcustomers in excess of recognized revenue as billings in excess of revenuesearned on contracts in progress. The timing and amount of cash receipts fromcustomers can vary significantly depending on specific contract terms and can,therefore, have a significant impact on the amount of billings in excess ofrevenues earned on contracts in progress at the end of any given period.

The Company provides hosting services to customersthat have licensed the Company’s software under a limited-term software license(a subscription). Software subscriptions are accounted for under revenuerecognition principles in accordance with the guidance provided by StaffAccounting Bulletin (“SAB”) No. 104, “*RevenueRecognition.”* The fees related to multiple-element arrangements areallocated to the individual elements in accordance with Emerging Issues TaskForce (“EITF”) 00-21 “*RevenueArrangements with Multiple Deliverables,”* based upon verifiable,objective evidence of the fair values of each element. The Company’ssubscription arrangements with customers generally include several elements,including (1) a limited-term software license (a subscription), (2) strategicconsulting services, (3) set-up and software subscription services, and (4) hostingservices. The Company requires customers in these limited term arrangements touse its hosting services, which in accordance with EITF 00-3, “*Application of AICPA Statement of Position 97-2to Arrangements That Include the Right to Use Software Stored on Another Entity’sHardware,”* results in all such revenue being deferred and recognizedratably over the term of the agreement analogous to a service arrangement. Ifthe arrangement includes consulting services, these services are presented asconsulting and implementation service revenues and are deferred and recognizedratably over the term of the arrangement, which is normally 12-36 months.Under SAB No. 104 “Revenue Recognition,” costs associated with set-up andimplementation of the subscriptions may be expensed as incurred or deferred andrecognized over the term of the related arrangement. The Company has elected todefer such costs. The software subscription service typically begins uponcustomer acceptance.

The Company also provides hosting services tocustomers that have licensed the Company’s software on a perpetual basis. Insuch cases and in accordance with EITF 00-3, the hosting revenue isconsidered a separate contractual element of the arrangement and is recognizedaccording to SOP 97-2. Fair value of the hosting services istypically based on the stated renewal rate of the hosting services, which isdeemed substantive by management.

The Company determines the fair value of themaintenance portion of an arrangement based on the stated renewal rate foradditional maintenance terms based on renewal rates charged separately to othercompanies. The Company’s customers typically prepay maintenance for the firstyear in connection with new software licenses and the related revenue isdeferred and recognized ratably over the term of the initial maintenancecontract. Maintenance is renewable by the customer on an annual basis thereafter.Rates for maintenance, including subsequent renewal rates, are typicallyestablished based upon a specified percentage of net license fees as set forthin the arrangement and is deemed to be substantive by management.

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Professional service revenue primarily consists ofimplementation services related to the installation of the Company’s softwareproducts and training revenues. The fair value of the professional servicesportion of the arrangement is based on the daily rates the Company charges forthese services when sold independently from a software license.

In accordance with EITF No. 01-14,the Company classifies the reimbursement of out-of-pocket expenses from itscustomers as consulting and implementation revenue in the statement of income.

**Cash, CashEquivalents and Short-Term Investments**

The Company considers allhighly liquid investments with original maturity dates of three months or lessto be cash equivalents. Cash equivalents are carried at cost, whichapproximates fair market value.

**Long-termInvestments**

The Company has investedin a long-term investment fund. Under the terms of the fund operating Agreement,the Company has a total commitment of $2.0 million of which $1.4 millionhas been contributed to date for an ownership interest of less than 2%. Thisinvestment is accounted for under the equity method and is recorded in otherassets in the Condensed Consolidated Balance Sheet.

**Income Taxes**

SFAS No. 109, *Accounting for Income Taxes*, establishesfinancial accounting and reporting standards for the effect of income taxes.The objectives of accounting for income taxes are to recognize the amount oftaxes payable or refundable for the current year and deferred tax liabilitiesand assets for the future tax consequences of events that have been recognizedin an entity’s financial statements or tax returns. Judgment is required inassessing the future tax consequences of events that have been recognized in thefinancial statements or tax returns. Variations in the actual outcome of thesefuture tax consequences could materially impact the Company’s financialposition, its results of operations or its cash flows.

**Stock-BasedCompensation**

In December 2004, the Financial AccountingStandards Board (FASB) issued SFAS No. 123 (revised 2004), *Share—Based Payments* (“SFAS No. 123(R)”).SFAS No. 123(R) requires companies to measure all employeestock-based compensation awards using a fair value method and record suchexpense in their consolidated financial statements. The standard is effectivefor fiscal years beginning after December 15, 2005.

Effective January 1, 2006, the Company hasadopted SFAS No. 123(R) using the modified prospective method. Underthe modified prospective method, the Company is required to recognizecompensation expense for all share-based payments granted after the effectivedate, and also for all awards granted prior to the effective date of SFAS No. 123(R) thatremain unvested. For the three and six months ended June 30, 2006, theCompany incurred approximately $0.1 million and $0.2 million,respectively, in non-cash stock-based compensation charges in connection withits adoption of SFAS No. 123(R). The Company determined the fair value ofthis charge using the Black-Scholes option-pricing model applying the followingweighted average assumptions for the three and six months ended June 30,2006; an expected life of 4 years, an expected volatility of 100%, a risk freeinterest rate of 4.5% and a 0% dividend yield.

The Company previously accounted for its stock optionsin accordance with the provisions of Statement of Financial AccountingStandards (“SFAS”) No. 123, “*Accountingfor Stock-Based Compensation*,” which allowed entities to continue toapply the provisions of Accounting Principles Board Opinion No. 25, “*Accounting for Stock Issued to Employees*”(“APB 25”) and related interpretations. The Company applied the provisionsof APB 25 and provided the pro forma disclosures required by SFAS 

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No. 123, as amendedby SFAS No. 148, “*Accounting forStock-Based Compensation—Transition and Disclosure, an amendment of FASB StatementNo. 123*.”

TheCompany has applied APB 25 and related interpretations in accounting forits stock options issued under the Amended and Restated Click Commerce StockOption and Stock Award Plan and the Amended and Restated Directors’ StockOption and Stock Award Plan. Accordingly, no compensation expense wasrecognized in the quarter ended June 30, 2005 for stock options becausethe exercise price equaled the fair value at the date of grant. Had the Companydetermined compensation expense based on the method required by SFAS No. 123,the Company’s net income and net income per common share for the three and sixmonths ended June 30, 2005 would approximate the pro forma amounts below:

| ** **                                                                                          | ** ** | **Three months  ended  June 30, 2005**            | ** ** | **Six months  ended  June 30, 2005** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                          | ** ** | **(in thousands,   except  per share data)** | ** ** |
| Net income, as reported                                                                             |       |                                                             | $          | 3,212                                               |       |   |   | $ | 5,842 |   |   |
| Total fair value method  employee stock-based compensation expense, net of related tax effects |       |                                                             | $          | (1,598                                              | )          |   |   | (1,797 | ) |   |
| Pro forma net income                                                                                |       |                                                             | $          | 1,614                                               |       |   |   | $ | 4,045 |   |   |
| Basic income per share:                                                                             |       |                                                             |       |                                                |       |   |   |   |   |
| As restated                                                                                         |       |                                                             | $          | 0.29                                                |       |   |   | $ | 0.54 |   |   |
| Pro forma                                                                                           |       |                                                             | $          | 0.15                                                |       |   |   | $ | 0.38 |   |   |
| Diluted income per  share:                                                                          |       |                                                             |       |                                                |       |   |   |   |   |
| As reported                                                                                         |       |                                                             | $          | 0.27                                                |       |   |   | $ | 0.50 |   |   |
| Pro forma                                                                                           |       |                                                             | $          | 0.13                                                |       |   |   | $ | 0.34 |   |   |

 

The fair value of eachstock option granted is estimated on the date of grant using the Black-Scholesoption-pricing model, with the following weighted average assumptions for thethree and six months ended June 30, 2005; an expected life of4 years, an expected volatility between 79% and 91%, a risk-free interestrate of 4% and a 0% dividend yield.

**New Accounting Pronouncements**

In June 2006, the FASB issued FASB Interpretation No. 48,“Accounting for Uncertainty in Income Taxes-an interpretation of FASB StatementNo. 109.” This Interpretation prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return. ThisInterpretation also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure, and transition.The Interpretation is effective for fiscal years beginning after December 15,2006. The Company does not expect that the adoption will have a material effecton its financial statements or tax returns.

In February 2006, the FASBissued SFAS No. 155 “Accounting for Certain Hybrid FinancialInstruments—an amendment of FASB Statements No. 133 and 140”(“FAS 155”). FAS 155 addresses the following: a) permits fairvalue remeasurement for any hybrid financial instrument that contains anembedded derivative that otherwise would require bifurcation; b) clarifieswhich interest-only strips and principal-only strips are not subject to therequirements of Statement 133; c) establishes a requirement toevaluate interests in securitized financial assets to identify interests thatare freestanding derivatives or that are hybrid financial instruments thatcontain an embedded derivative requiring bifurcation; d) clarifies thatconcentrations of credit risk in the form of subordination are not embeddedderivatives; and e) amends Statement 140 to eliminate the prohibitionon a qualifying special-purpose entity from holding a derivative financialinstrument that pertains to a beneficial interest other than another derivativefinancial 

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instrument.FAS 155 is effective for all financial instruments acquired or issuedafter the beginning of an entity’s first fiscal year that begins afterSeptember 15, 2006. The Company does not expect that the adoption willhave a material effect on its financial statements.

**3. NET INCOME PERSHARE**

Netincome per share was computed as follows:

| ** **                                             | ** ** | **Three months ended  June 30,**                       | ** ** | **Six months ended  June 30,** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                             | ** ** | **2006**                                                              | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                             | ** ** | **(in thouasnds, except per share amounts)** | ** ** |
| **Basic income per share:**                            | ** ** | ** **                                                            | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                             |       | $                                                                     | 3,160      |                                          | $          | 3,212 |   | $ | 6,077 |   | $ | 5,842 |   |
| Weighted average common  shares outstanding            |       | 12,042                                                                |       | 11,008                                        |       | 11,970 |   | 10,721 |   |
| Per share amount                                       |       | $                                                                     | 0.26       |                                          | $          | 0.29 |   | $ | 0.51 |   | $ | 0.54 |   |
| **Diluted income (loss) per  share:**                  | ** ** | ** **                                                            | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                             |       | $                                                                     | 3,160      |                                          | $          | 3,217 |   | $ | 6,077 |   | $ | 5,839 |   |
| Weighted average common  shares outstanding            |       | 12,042                                                                |       | 11,008                                        |       | 11,970 |   | 10,721 |   |
| Add: Effect of dilutive  securities—stock options |       | 457                                                                   |       | 733                                           |       | 543 |   | 724 |   |
| Common stock held in  escrow                           |       | 414                                                                   |       | 376                                           |       | 415 |   | 322 |   |
| Diluted weighted average  shares outstanding           |       | 12,913                                                                |       | 12,117                                        |       | 12,928 |   | 11,767 |   |
| Per share amount                                       |       | $                                                                     | 0.24       |                                          | $          | 0.27 |   | $ | 0.47 |   | $ | 0.50 |   |

 

Common stock held in escrow is not included in thebasic weighted average common shares outstanding calculation until the sharesare released from escrow. The Company previously reported basic weightedaverage common shares outstanding of 11,383,737 and 11,043,155 for the threeand six months ended June 30, 2005. These amounts included common stockheld in escrow. The Company has adjusted the basic weighted average common sharesoutstanding to not include the common stock held in escrow and thus hasreported adjusted basic weighted average common shares outstanding of11,008,162 and 10,720,961 for the three and six months ended June 30,2005. Based upon this change, the basic income per share for the three and sixmonths ended June 30, 2005 has increased by $0.01 to $0.29 and $0.54, respectively.

For the three months endedJune 30, 2006 and 2005, 85,126 and 60,935 shares, respectively,attributable to outstanding stock options were excluded from the calculation ofdiluted earnings per share because their effect was antidilutive. For the sixmonths ended June 30, 2006 and 2005, 54,274 and 125,767 shares,respectively, attributable to outstanding stock options were excluded from thecalculation of diluted earnings per share because their effect wasantidilutive.

**4. BUSINESSCOMBINATIONS**

Effective February 2, 2005, the Company enteredinto an Asset Purchase Agreement (the “Purchase Agreement”) with ChannelWave, Inc.(“ChannelWave”). Pursuant to the Purchase Agreement, the Company acquiredcertain assets from ChannelWave, including substantially all assets relating toChannelWave’s Partner Relationship Management System and Service InformationSystem businesses, for consideration comprised of $1.0 million of cash and225,807 shares valued at $18.954 per share of the Company’s common stock(of which 29,033 shares were initially held by the Company in escrow butwere released on the anniversary date of the acquisition pursuant to thePurchase Agreement). The Company incurred $0.1 million of transactioncosts. ChannelWave offers demand chain solutions. On October 19, 2005, theCompany completed a repurchase of 181,024 shares pursuant to ShareRepurchase Agreements (the “Share Repurchase Agreements”) with Commerce 5, Inc.(formerly known as ChannelWave, Inc.) 

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and a former executiveofficer of Commerce 5, Inc., respectively. Pursuant to the terms of theShare Repurchase Agreements, the Company repurchased shares of its common stockfor a purchase price of $15.50 per share, or $2,805,872 in the aggregate.

Effective February 7, 2005, the Company enteredinto an Agreement and Plan of Merger (the “Merger Agreement”) with Optum, Inc.(“Optum”), and its stockholders, pursuant to which the Company acquired Optum.In consideration for the merger, the Company paid $325,467 in cash, issued1,405,780 shares valued at $18.583 per share of the Company’s commonstock to the stockholders of Optum (of which $65,093 in cash and281,156 shares of the Company’s common stock are being held by an escrowagent for certain potential additional liabilities of Optum pursuant to theMerger Agreement until such time as outstanding claims have been resolved), andassumed approximately $4.3 million of Optum indebtedness. The Companyincurred $0.1 million of transaction costs.

Effective May 27, 2005, the Company entered intoan Agreement and Plan of Merger (the “Merger Agreement”) with Xelus, Inc.(“Xelus”), and its stockholders, pursuant to which the Company acquired Xelus.In consideration for the merger, the Company paid $1 in cash, assumedapproximately $2.2 million of Xelus indebtedness, settled a long-termlease liability for $543,000 and incurred transaction-related expenses in theamount of $0.1 million. No shares of Company stock were issued inconnection with the Xelus acquisition.

Effective November 22, 2005, the Company acquiredall of the assets and liabilities of Requisite Technology, Inc. (“Requisite”),pursuant to an Agreement and Plan of Merger (the “Agreement”). In considerationfor the merger, the Company paid $1,526,416 in cash and issued 777,903 sharesof the Company’s common stock valued at $26.42 per share to stockholders ofRequisite (of which $93,800 in cash and 80,337 shares of the Company’scommon stock are being held by an escrow agent to satisfy certain potentialobligations of Requisite and its former stockholders for a period of twelvemonths from the date of acquisition). The shares of the Company’s common stockare expected to be registered for resale on a Registration Statement on Form S-1.The Company incurred $0.2 million of transaction costs.

On February 8, 2006, the Company and itswholly-owned subsidiary, Click Procure, Inc. (the “Subsidiary”) enteredinto an Asset Purchase Agreement (the “Purchase Agreement”), withElance, Inc., (“Elance”) pursuant to which the Subsidiary purchased theassets of the Seller’s on-demand e-commerce solutions for services business(the “enterprise software business”). The assets acquired by the Subsidiary inthe transaction include software, trademarks, customer contracts and lists,product processes, other intangible assets, cash, receivables and otheroperating assets, as well as its obligations under certain contracts related tothe enterprise software business. The Subsidiary also acquired all of the stockof Elance’s subsidiaries in the United Kingdom and India engaged in suchbusiness. The total consideration paid for the acquisition was approximately$15,250,000, comprised of $3,500,000 in cash and 420,123 shares of theCompany’s common stock valued at $27.97 per share to Elance (of which75,622 shares of the Company’s common stock were being held by an escrowagent to satisfy the indemnification obligations of Elance under the agreementfor a period of twelve months from the date of acquisition). The Companyincurred $0.1 million of transaction costs. On June 13, 2006, theCompany completed a repurchase of 420,123 shares (including the sharesheld in escrow) pursuant to a Share Repurchase Agreement with Elance, Inc.Pursuant to the terms of the Elance Share Repurchase Agreement, the Companyrepurchased shares of its common stock for a purchase price of $19 per share or$7,982,337, in the aggregate.

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Thefollowing table summarizes the estimated fair values of the assets acquired andthe liabilities assumed on the effective dates of the Xelus and Requisiteacquisitions. The Company incurred approximately $0.1 million and$0.2 million of direct expenses related to the closing of the Xelus andRequisite acquisitions, respectively. The final allocations of the purchaseprice for Requisite are subject to change as the Company completes thevaluation of the acquired assets and assumed liabilities.

| ** **                      | ** ** | **Xelus**                  | ** ** | **Requisite**                   | ** ** |
|---------------------------------|------------|----------------------------|------------|---------------------------------|------------|
| ** **                      | ** ** | **May 27, 2005** | ** ** | **November 22, 2005** | ** ** |
| ** **                      | ** ** | **(in thousands)**    | ** ** |
| Assets:                         |       |                       |       |                            |       |   |   |   |   |
| Cash and cash  equivalents      |       |                       | $          | 844                             |       |   |   | $ | 9,473 |   |   |
| Trade accounts  receivable, net |       |                       | 1,393      |                            |       |   | 1,366 |   |   |
| Other current  assets           |       |                       | 378        |                            |       |   | 608 |   |   |
| Total current assets            |       |                       | 2,615      |                            |       |   | 11,447 |   |   |
| Property and  equipment         |       |                       | 807        |                            |       |   | 39 |   |   |
| Intangible assets               |       |                       | 3,036      |                            |       |   | 3,372 |   |   |
| Goodwill                        |       |                       | 4,013      |                            |       |   | 11,598 |   |   |
| Other assets                    |       |                       | —     |                            |       |   | 299 |   |   |
| Total assets                    |       |                       | $          | 10,471                          |       |   |   | $ | 26,755 |   |   |
| Liabilities:                    |       |                       |       |                            |       |   |   |   |   |
| Accounts payable                |       |                       | $          | 1,141                           |       |   |   | $ | 26 |   |   |
| Accrued liabilities             |       |                       | 701        |                            |       |   | 2,709 |   |   |
| Accrued compensation            |       |                       | 1,023      |                            |       |   | 500 |   |   |
| Deferred revenue                |       |                       | 4,803      |                            |       |   | 1,391 |   |   |
| Short-term lease obligation     |       |                       | —     |                            |       |   | — |   |   |
| Short-term debt obligation      |       |                       | 2,207      |                            |       |   | — |   |   |
| Long-term debt obligation       |       |                       | 69         |                            |       |   | — |   |   |
| Total liabilities               |       |                       | 9,944      |                            |       |   | 4,626 |   |   |
| Net assets  acquired            |       |                       | $          | 527                             |       |   |   | $ | 22,129 |   |   |

 

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The following tablesummarizes the estimated fair values of the assets acquired and the liabilitiesassumed on the effective date of the Elance acquisition. The Company incurredapproximately $0.1 million of direct expenses related to the closing ofthe transaction. The final allocations of the purchase price are subject tochange as the Company completes the valuation of the acquired assets andassumed liabilities.

| ** **                     | ** ** | **Elance  February 8, 2006** | ** ** |
|--------------------------------|------------|----------------------------------------|------------|
| Assets:                        |       |                                   |       |   |   |
| Cash and cash equivalents      |       |                                   | $          | 31 |   |   |
| Trade accounts receivable, net |       |                                   | 1,324      |   |   |
| Other current assets           |       |                                   | 33         |   |   |
| Total current assets           |       |                                   | 1,388      |   |   |
| Property and equipment         |       |                                   | 218        |   |   |
| Intangible assets              |       |                                   | 4,255      |   |   |
| Goodwill                       |       |                                   | 11,022     |   |   |
| Total assets                   |       |                                   | 16,883     |   |   |
| Liabilities:                   |       |                                   |       |   |   |
| Accounts payable               |       |                                   | 7          |   |   |
| Accrued liabilities            |       |                                   | 241        |   |   |
| Accrued compensation           |       |                                   | 42         |   |   |
| Deferred revenue               |       |                                   | 1,342      |   |   |
| Total liabilities              |       |                                   | 1,632      |   |   |
| Net assets  acquired           |       |                                   | $          | 15,251 |   |   |

 

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The following table setsforth the allocation, to date, of intangible assets to customer relationships,developed technology, trade names and order backlog, as well as the in-processR&D charge recorded from the acquisition of bTrade. These intangibleassets, as well as the goodwill recorded by the Company, will be evaluated, asrequired, to compare the fair values of such assets to their recorded values.If impairment exists, the carrying values of such assets will be reduced totheir fair value.

| ** **                                                         | ** ** | **Customer  Relationships(1)** | ** ** | **Developed  Technology(2)** | ** ** | **Trade  Names(3)** | ** ** | **Order  Backlog(4)** | ** ** | **In process  R&D(5)** | ** ** | **Total** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|---------------------|------------|-----------------------|------------|---------------------------------|------------|-----------|------------|
| Elance                                                             |       |                           | $          | 1,512                        |       |                |       | $                     | 1,187      |                            |       |      | $          | — |   |   |   | $ | 1,556 |   |   |   | $ | — |   |   | $ | 4,255 |   |
| Requisite                                                          |       |                           | 748        |                         |       |                | 2,288      |                  |       |                            | —     |      |       |   | 336 |   |   |   | — |   |   | 3,372 |   |
| Xelus                                                              |       |                           | 2,684      |                         |       |                | 283        |                  |       |                            | —     |      |       |   | 69 |   |   |   | — |   |   | 3,036 |   |
| Optum                                                              |       |                           | 9,850      |                         |       |                | 3,573      |                  |       |                            | —     |      |       |   | 303 |   |   |   | — |   |   | 13,726 |   |
| ChannelWave                                                        |       |                           | 2,758      |                         |       |                | 514        |                  |       |                            | —     |      |       |   | — |   |   |   | — |   |   | 3,272 |   |
| bTrade                                                             |       |                           | 1,195      |                         |       |                | 274        |                  |       |                            | —     |      |       |   | 143 |   |   |   | 6 |   |   | 1,618 |   |
| Webridge                                                           |       |                           | 560        |                         |       |                | 910        |                  |       |                            | 150        |      |       |   | — |   |   |   | — |   |   | 1,620 |   |
| Allegis                                                            |       |                           | 466        |                         |       |                | —     |                  |       |                            | —     |      |       |   | — |   |   |   | — |   |   | 466 |   |
| Gross intangible  assets and in-process R&D                    |       |                           | 19,773     |                         |       |                | 9,029      |                  |       |                            | 150        |      |       |   | 2,407 |   |   |   | 6 |   |   | 31,365 |   |
| Accumulated  amortization to date                                  |       |                           | (4,267     | )                            |       |                | (2,181     | )                     |       |                            | (110       | )         |       |   | (921 | ) |   |   | (6 | ) |   | (7,485 | ) |
| Balance at  June 30, 2006                                     |       |                           | $          | 15,506                       |       |                |       | $                     | 6,848      |                            |       |      | $          | 40 |   |   |   | $ | 1,486 |   |   |   | $ | — |   |   | $ | 23,880 |   |
| Amortization expense                                               |       |                           |       |                         |       |                |       |                  |       |                            |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Six months ended  June 30, 2006                          |       |                           | 1,456      |                         |       |                | 921        |                  |       |                            | 25         |      |       |   | 464 |   |   |   | — |   |   | 2,866 |   |
| Six months ended  June 30, 2005                          |       |                           | 1,001      |                         |       |                | 481        |                  |       |                            | 25         |      |       |   | 199 |   |   |   | — |   |   | 1,706 |   |
| Estimated amortization  expense for the 12 months ended: |       |                           |       |                         |       |                |       |                  |       |                            |       |      |       |   |   |   |   |   |   |   |   |   |   |
| December 31,  2006                                            |       |                           | 2,852      |                         |       |                | 1,827      |                  |       |                            | 50         |      |       |   | 859 |   |   |   | — |   |   | 5,589 |   |
| December 31,  2007                                            |       |                           | 2,794      |                         |       |                | 1,813      |                  |       |                            | 15         |      |       |   | 519 |   |   |   | — |   |   | 5,140 |   |
| December 31,  2008                                            |       |                           | 2,794      |                         |       |                | 1,599      |                  |       |                            | —     |      |       |   | — |   |   |   | — |   |   | 4,393 |   |
| December 31,  2009                                            |       |                           | 2,597      |                         |       |                | 1,464      |                  |       |                            | —     |      |       |   | — |   |   |   | — |   |   | 4,060 |   |
| December 31,  2010                                            |       |                           | 2,443      |                         |       |                | 700        |                  |       |                            | —     |      |       |   | — |   |   |   | — |   |   | 3,143 |   |
| Thereafter                                                         |       |                           | 3,483      |                         |       |                | 367        |                  |       |                            | —     |      |       |   | — |   |   |   | — |   |   | 3,850 |   |

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(1)          Customer relationshipsare amortized over ten years for Elance, seven years for Requisite, Xelus,Optum and ChannelWave, five years for bTrade and Webridge, and three years forAllegis.

(2)          Developed technology isamortized over six years for Requisite, five years for Optum, ChannelWave,Elance, and bTrade, four years for Webridge and three years for Xelus and isreflected in the cost of product license revenue on the consolidated statementof income and comprehensive income.

(3)          Trade names areamortized over three years.

(4)          Order backlogs areamortized over three years for Elance and one year for Requisite, Optum, Xelus,and bTrade.

(5)          In-process R&D wascharged immediately to amortization of intangible assets on the statement ofincome and comprehensive income.

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The following unauditedpro forma financial information for the three months ended June 30, 2005and the six months ended June 30, 2006 and 2005 presents the consolidatedoperations of the Company as if all of the acquisitions had been made on January 1,2005, after giving effect to certain adjustments for the pro forma acquisitionas of the assumed January 1, 2005 acquisition date. The pro formafinancial information for the three months ended June 30, 2006 has notbeen provided as Elance was acquired on February 7, 2006. The unauditedpro forma financial information is provided for informational purposes only. Itshould not be construed to be indicative of the Company’s consolidated resultsof operations had the acquisitions been consummated on the earlier date and donot project the Company’s results of operations for any future period:

| ** **                           | ** ** | **Three months ended  June 30,**                    | ** ** | **Six months ended  June 30,** | ** ** |
|--------------------------------------|------------|--------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                           | ** ** | **2005**                                                           | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| ** **                           | ** ** | **(in thousands, except per share data)** | ** ** |
| Revenues                             |       |                                                               | $          | 20,954                                        |       |   | $ | 40,170 |   | $ | 42,563 |   |
| Net income (loss)                    |       |                                                               | 2,079      |                                          |       | 6,099 |   | 4,853 |   |
| Basic net income  (loss) per share   |       |                                                               | $          | 0.17                                          |       |   | $ | 0.50 |   | $ | 0.42 |   |
| Diluted net income  (loss) per share |       |                                                               | $          | 0.16                                          |       |   | $ | 0.47 |   | $ | 0.38 |   |

 

**5. RESTRUCTURING**

As of June 30, 2005,the Company had a restructuring accrual in the amount of $37,000 covering theremaining lease commitments on excess office space. The final payment againstthe restructuring accrual was made in the quarter ending December 31,2005. The cash paid for the the three and six months ended June 30, 2005was $24,000 and $42,000, respectively.

**6. CREDIT FACILITY**

On March 31, 2005,the Company entered into a $10.0 million revolving line of credit maturingon April 1, 2008. The borrowing under the line of credit carries aninterest rate based on the LIBOR average rate with a weighted average interestrate of 6.42% in the quarter ended June 30, 2006. There is a fee of 0.3%on the unused portion of this line of credit. On June 30, 2006, Companyborrowings under this revolving line of credit were $6.4 million. Theproceeds were used to pay off debt and certain liabilities assumed in the Optumand Xelus acquisitions. Of the remaining $3.6 million, up to$2.0 million may be used for the Company’s letters of credit. As of June 30,2006, the Company had $0.6 outstanding under various letters of credit. Theline of credit contains terms that, among other provisions, require the Companyto maintain a minimum net worth, meet other financial ratio tests, and imposes specificlimits or restrictions on additional indebtedness and or liens. Provisionsunder this line of credit are not considered restrictive to normal operations.The Company is not obligated to make any principal payments on the loan until April 1,2008 unless it violates loan covenants. The Company was not in violation of anyloan covenants at June 30, 2006.

**7. COMMITMENTS ANDCONTINGENCIES**

In November 2002, the FASB issued FIN 45, “*Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others*.”Under the Company’s standard software license agreements, the Company agrees toindemnify, defend and hold harmless its licensees’ use of Company software fromand against certain losses, damages and costs arising from claims alleging thelicensees’ use of Company software infringes on the intellectual propertyrights of a third party. The indemnification is contingent upon (a) thecustomer providing the Company with prompt written notice of such claims; (b) thecustomer providing reasonable cooperation to the Company in the defense andsettlement of such claim, at the Company’s expense; and (c) the Companyhaving sole authority to defend or settle such claims. Historically, theCompany has not been required to pay material amounts in 

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connection with claimsasserted under these provisions, and accordingly, the Company has not recordeda liability relating to such provisions.

In 2004, the Company was notified by the taxauthorities in the Netherlands that the Company had a potential tax liability.In the fourth quarter of 2005, the Company received a determination letter fromthe Netherlands tax authorities that asserted tax deficiencies, penalties andinterest in the amount of EURO 2.3 million, or approximately$2.8 million. The asserted tax deficiencies relate to certain wage taxamounts, including amounts related to vested employee stock options that thetax inspector believes should have been withheld by the Company on behalf ofseveral employees. The Company believes that it has meritorious legal defensesto a significant portion of these alleged deficiencies. The Company recorded anaccrual of $650,000 in the year ended December 31, 2004 for its assessmentof the most probable outcome of this matter. This reserve is recorded inaccrued expenses and other current liabilities on the June 30, 2006 and December 31,2005 consolidated balance sheets.

Inaddition to its revolving credit facility, the Company also assumed threeshort-term notes in connection with its acquisition of Xelus. The notes wererepaid as of June 30, 2006. In addition, the Company has entered into certainSublease Agreements to sublease office space from its existing leasedfacilities. The table below outlines the payment time frames for these notes, theamounts to be collected under subleases and the Company’s lease commitmentsover the next five years. The Company is obligated as lessee under certainnoncancelable operating leases for equipment, cars and office space, and isalso obligated to pay insurance, maintenance and other executory costsassociated with the leases.

| ** ** | ** ** | **Operating  Leases** | ** ** | **Subleases** | ** ** | **Short-term  Notes payable** | ** ** | **Long-term  Debt** | ** ** |
|------------|------------|-----------------------|------------|---------------|------------|------------------------------------|------------|---------------------|------------|
| 2006       |       |                  | $          | 3,326         |       |                               |       | $                   | 889        |   |   |   | $ | 307 |   |   |   | $ | — |   |   |
| 2007       |       |                  | 1,418      |          |       |                               | 260        |                |       |   | — |   |   |   | — |   |   |
| 2008       |       |                  | 1,206      |          |       |                               | 126        |                |       |   | — |   |   |   | 6,416 |   |   |
| 2009       |       |                  | 844        |          |       |                               | 42         |                |       |   | — |   |   |   | — |   |   |
| 2010       |       |                  | 486        |          |       |                               | —     |                |       |   | — |   |   |   | — |   |   |

 

**8. Income Taxes**

The Company’s effective tax rates for the three monthsended June 30, 2006 and June 30, 2005 were 33% and 0%, respectively. Forthe six months ended June 30, 2006 and June 30, 2005, the effectivetax rates were 37% and 0%, respectively. The reduction in the effective taxrate to 37% for the six months, from 41% in the prior quarter is due to the Companybeing able to identify and estimate in the second quarter tax benefits it willrecognize in 2006 from research and development credits and other taxincentives. The increase in the tax rate from 2005 resulted primarily from thereversal of a valuation allowance on the Company’s net deferred tax assets (notrelated to acquisitions) in the fourth quarter of 2005.

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**Item 2.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operations

The following discussionshould be read in conjunction with the Company’s consolidated condensedfinancial statements and notes elsewhere in this quarterly report.

**Overview**

Click Commerce, Inc. (the “Company”) providessoftware designed to help companies streamline their trading partnerinteractions and automate compliance-related activities. We believe thatcompanies using our software can optimize business processes, improve financialperformance, lower costs for partners and customers, increase brand loyalty,improve customer service and reduce risk. The Company’s collaborative commerceand supply chain solutions are designed to enable companies to streamline theirtrading partner interactions to drive business value and competitive advantage.The Company’s compliance automation solutions are designed to enableinstitutions to automate their regulatory compliance processes and manageresearch project approvals. Each of the Company’s product lines applies similarunderlying technology to effect secure Internet communications as a replacementfor handwritten forms, telephone and fax communications and other electronicdata systems. The Company commenced operations on August 20, 1996.

Effective February 2, 2005, the Company enteredinto an Asset Purchase Agreement (the “Purchase Agreement”) with ChannelWave, Inc.(“ChannelWave”). Pursuant to the Purchase Agreement, the Company acquiredcertain assets from ChannelWave, including substantially all assets relating toChannelWave’s Partner Relationship Management System and Service InformationSystem businesses, for consideration comprised of $1.0 million of cash and225,807 shares valued at $18.954 per share of the Company’s common stock (ofwhich 29,033 shares were initially held by the Company in escrow but werereleased on the anniversary date of the acquisition pursuant to the PurchaseAgreement). The Company incurred $0.1 million of transaction costs.ChannelWave offers demand chain solutions. On October 19, 2005, theCompany completed a repurchase of 181,024 shares pursuant to Share RepurchaseAgreements (the “Share Repurchase Agreements”) with Commerce 5, Inc.(formerly known as ChannelWave, Inc.) and a former executive officer ofCommerce 5, Inc., respectively. Pursuant to the terms of the ShareRepurchase Agreements, the Company repurchased shares of its common stock for apurchase price of $15.50 per share, or $2,805,872 in the aggregate.

Effective February 7, 2005, the Company enteredinto an Agreement and Plan of Merger (the “Merger Agreement”) with Optum, Inc.(“Optum”), and its stockholders, pursuant to which the Company acquired Optum.In consideration for the merger, the Company paid $325,467 in cash, issued1,405,780 shares valued at $18.583 per share of the Company’s common stockto the stockholders of Optum (of which $65,093 in cash and 281,156 sharesof the Company’s common stock are being held by an escrow agent for certainpotential additional liabilities of Optum pursuant to the Merger Agreement untilsuch time as outstanding claims have been resolved), and assumed approximately$4.3 million of Optum indebtedness. The Company incurred $0.1 millionof transaction costs.

Effective May 27, 2005, the Company entered intoan Agreement and Plan of Merger (the “Merger Agreement”) with Xelus, Inc.(“Xelus”), and its stockholders, pursuant to which the Company acquired Xelus.In consideration for the merger, the Company paid $1 in cash, assumedapproximately $2.2 million of Xelus indebtedness, settled a long-termlease liability for $543,000 and incurred transaction-related expenses in theamount of $0.1 million. No shares of Company stock were issued in connectionwith the Xelus acquisition.

Effective November 22, 2005, the Company acquiredall of the assets and liabilities of Requisite Technology, Inc. (“Requisite”),pursuant to an Agreement and Plan of Merger (the “Agreement”). In considerationfor the merger, the Company paid $1,526,416 in cash and issued 777,903 sharesof the Company’s common stock valued at $26.42 per share to stockholders ofRequisite (of which $93,800 in 

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cash and 80,337 shares ofthe Company’s common stock are being held by an escrow agent to satisfy certainpotential obligations of Requisite and its former stockholders for a period oftwelve months from the date of acquisition). The shares of the Company’s commonstock are expected to be registered for resale on a Registration Statement on Form S-1.The Company incurred $0.2 million of transaction costs.

On February 8, 2006, the Company and itswholly-owned subsidiary, Click Procure, Inc. (the “Subsidiary”) enteredinto an Asset Purchase Agreement (the “Purchase Agreement”), with Elance, Inc.,(“Elance”) pursuant to which the Subsidiary purchased the assets of the Seller’son-demand e-commerce solutions for services business (the “enterprise softwarebusiness”). The assets acquired by the Subsidiary in the transaction includesoftware, trademarks, customer contracts and lists, product processes, otherintangible assets, cash, receivables and other operating assets, as well as itsobligations under certain contracts related to the enterprise softwarebusiness. The Subsidiary also acquired all of the stock of Elance’ssubsidiaries in the United Kingdom and India engaged in such business. Thetotal consideration paid for the acquisition was approximately $15,250,000,comprised of $3,500,000 in cash and 420,123 shares of the Company’s commonstock valued at $27.97 per share to Elance (of which 75,622 shares of theCompany’s common stock were being held by an escrow agent to satisfy theindemnification obligations of Elance under the agreement for a period oftwelve months from the date of acquisition). The Company incurred$0.1 million of transaction costs. On June 13, 2006, the Companycompleted a repurchase of 420,123 shares (including the shares held in escrow)pursuant to a Share Repurchase Agreement with Elance, Inc. Pursuant to theterms of the Elance Share Repurchase Agreement, the Company repurchased sharesof its common stock for a purchase price of $19 per share or $7,982,337, in theaggregate.

The Company focused its efforts in 2005 and the first halfof 2006 on maintaining and improving profitability as well as broadening itsproduct offerings through acquisitions. In 2005 and through the first half of2006, the Company reported increasing operating profits as compared to theprior year’s corresponding quarter. Management plans to continue investing innew and improved product offerings and in increasing the exposure of theCompany’s products and services through its targeted marketing programs.Management further believes that each investment must be prudently made andjustified by the expected return on such investment.

The Company offers several licensing and serviceoptions for its software products. Customers can either purchase a perpetualsoftware license or enter into a limited-term software license, also called asubscription contract. Customers may also choose to use the Company’s hostingservices for their perpetual software license or install the software onservers within their own internal environment. Subscription licenses are onlyavailable to customers who also use our hosting services.

Perpetual license revenues and professional servicesare typically recognized as the software or service is delivered, assuming allother revenue recognition criteria are met and do not provide a contractual,predictable future revenue stream. Recurring revenue opportunities come fromsubscriptions or maintenance and hosting services. While the Company may havebetter visibility of future revenue from subscription licenses, customers makethe final decision on the form of their software license. The Companyencourages all of its customers to use its hosting services.

The Company depends on several factors to increaserevenue and maintain profitability: adding new customers, maintaining itscurrent base of subscriptions, increasing hosting and maintenance revenues, andimproving the gross margin on professional services. Adding new customers isthe primary responsibility of the sales department. Maintaining the otherrevenue streams is the responsibility of the Company’s professional servicesdepartment. The Company has developed compensation structures for thesedepartments that it believes provide appropriate incentives for achievement oftheir respective goals.

The Company’s revenue is principally derived fromsales of perpetual licenses or subscriptions to its software, and the relatedservices surrounding those products. The Click Commerce software suite consistsof the Partner Portal platform; various applications that provide the basis forcontrolling workflow, 

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reporting, opportunitymanagement, product information management, sales order management, after salesservice management, supply chain management and warehouse management andnetwork logistics management, parts optimization and master data management.The Company also recognizes revenue from services, including businessconsulting, implementation, maintenance, training and managed hosting services.

Cost of product license revenues includes productionand shipping expenses, which are expensed as incurred, amortization ofdeveloped technology (acquired in the Company’s acquisitions), the costs oflicensing third party software incorporated into or required by the Company’sproducts and the costs of hardware purchased for resale to customers. The thirdparty license costs are expensed as the products are delivered under perpetuallicenses and subscriptions or over the maintenance period to the extent thatthe third party license costs relate to those product offerings.

Cost of service revenues include salaries and relatedexpenses for professional services and technical support personnel who provideconsulting and implementation services, maintenance and hosting services, aswell as an allocation of data processing and direct overhead costs which areexpensed as incurred.

Operating expenses are classified into five generalcategories: sales and marketing, research and development, general andadministrative, amortization of intangible assets and stock-based compensation.Sales and marketing expenses consist primarily of salaries and other relatedcosts for sales and marketing personnel, sales commissions, travel, publicrelations and marketing materials. Research and development expenses consistprimarily of personnel costs to support product development. General andadministrative expenses consist primarily of salaries and other related costsfor executive management, finance and administrative employees, legal andaccounting services, and corporate liability insurance. Amortization ofintangible assets represents amortization expense for certain intangible assetswith finite useful lives, which were recorded in connection with the Company’sacquisitions. The intangible assets are identified, valued, and classified intoseparate categories. The categories are customer relationships, developedtechnologies, order backlog, trade names, and in-process research anddevelopment. The amortization of developed technologies is recorded in the costof product license line item on the consolidated statement of income andcomprehensive income. Stock-based compensation represents the charge inconnection with the adoption, as of January 1, 2006, of the provisions ofSFAS 123(R) for the fair value of share-based payments granted toemployees after the adoption of SFAS 123(R) and the fair value for allawards granted to employees prior to the effective date that are unvested.

The Company believes thatperiod-to-period comparisons of operating results should not be relied upon aspredictive of future performance. The Company’s prospects must be considered inlight of the risks, expenses and difficulties encountered by similarly sizedsoftware and technology companies, particularly companies in new, rapidlyevolving markets. The Company may not be successful in addressing such risksand difficulties.

**Critical AccountingPolicies**

The Company’s consolidatedfinancial statements are prepared in accordance with accounting principlesgenerally accepted in the United States of America. As such, the Company makescertain estimates, judgments and assumptions that it believes are reasonablebased upon the information available. These estimates and assumptions affectthe reported amounts of assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during the periodspresented. The Company’s critical accounting policies include revenuerecognition and any resulting deferral of revenues and related costs, theestimation of credit losses on accounts receivable, the application of purchaseaccounting and the valuation of deferred tax assets. There has been no changeto these policies. For a discussion of these critical accounting policies, see “CriticalAccounting Policies and Estimates” in 

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theCompany’s Annual Report on Form 10-K for the year ended December 31,2005, filed with the Securities and Exchange Commission.

**Results ofOperations**

Thefollowing table sets forth selected unaudited financial data for the periodsindicated in dollars and as a percentage of total revenue.

| ** **                            | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                            | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                            | ** ** | **(in 000’s)**                            | ** ** | **% of  Revenue**                            | ** ** | **(in 000’s)** | ** ** | **% of  Revenue** | ** ** | **(in 000’s)** | ** ** | **% of  Revenue** | ** ** | **(in 000’s)** | ** ** | **% of  Revenue** | ** ** |
| Revenues                              |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Product license                       |       |                                                | $          | 2,288                                             |       |   |   | 11.6 | % |   |   | $ | 1,841 |   |   |   | 13.8 | % |   |   | $ | 4,964 |   |   |   | 12.6 | % |   |   | $ | 3,804 |   |   |   | 15.7 | % |   |
| Hardware                              |       |                                                | $          | 350                                               |       |   |   | 1.8 | % |   |   | — |   |   |   | 0.0 | % |   |   | 726 |   |   |   | 1.8 | % |   |   | — |   |   |   | 0.0 | % |   |
| Total product license and hardware    |       |                                                | 2,638      |                                              |       |   | 13.4 | % |   |   | 1,841 |   |   |   | 13.8 | % |   |   | 5,690 |   |   |   | 14.4 | % |   |   | 3,804 |   |   |   | 15.7 | % |   |
| Service                               |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Maintenance and hosting               |       |                                                | 9,098      |                                              |       |   | 46.1 | % |   |   | 5,729 |   |   |   | 42.9 | % |   |   | 18,105 |   |   |   | 45.9 | % |   |   | 9,543 |   |   |   | 39.3 | % |   |
| Consulting and implementation service |       |                                                | 6,017      |                                              |       |   | 30.5 | % |   |   | 3,849 |   |   |   | 28.8 | % |   |   | 11,660 |   |   |   | 29.6 | % |   |   | 7,346 |   |   |   | 30.3 | % |   |
| Subscription                          |       |                                                | 1,989      |                                              |       |   | 10.1 | % |   |   | 1,930 |   |   |   | 14.5 | % |   |   | 3,975 |   |   |   | 10.1 | % |   |   | 3,581 |   |   |   | 14.8 | % |   |
| Total Service                         |       |                                                | 17,104     |                                              |       |   | 86.6 | % |   |   | 11,508 |   |   |   | 86.2 | % |   |   | 33,740 |   |   |   | 85.6 | % |   |   | 20,470 |   |   |   | 84.3 | % |   |
| Total Revenues                        |       |                                                | 19,742     |                                              |       |   | 100.0 | % |   |   | 13,349 |   |   |   | 100.0 | % |   |   | 39,430 |   |   |   | 100.0 | % |   |   | 24,274 |   |   |   | 100.0 | % |   |
| Cost of Revenues                      |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Product license and hardware          |       |                                                | 818        |                                              |       |   | 4.1 | % |   |   | 344 |   |   |   | 2.6 | % |   |   | 1,636 |   |   |   | 4.1 | % |   |   | 542 |   |   |   | 2.2 | % |   |
| Service                               |       |                                                | 6,102      |                                              |       |   | 30.9 | % |   |   | 4,827 |   |   |   | 36.2 | % |   |   | 12,185 |   |   |   | 30.9 | % |   |   | 8,816 |   |   |   | 36.3 | % |   |
| Total cost of revenues                |       |                                                | 6,920      |                                              |       |   | 35.1 | % |   |   | 5,171 |   |   |   | 38.7 | % |   |   | 13,821 |   |   |   | 35.1 | % |   |   | 9,358 |   |   |   | 38.6 | % |   |
| Gross profit                          |       |                                                | 12,822     |                                              |       |   | 64.9 | % |   |   | 8,178 |   |   |   | 61.3 | % |   |   | 25,609 |   |   |   | 64.9 | % |   |   | 14,916 |   |   |   | 61.4 | % |   |
| Operating Expenses:                   |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sales and marketing                   |       |                                                | 2,179      |                                              |       |   | 11.0 | % |   |   | 1,602 |   |   |   | 12.0 | % |   |   | 4,270 |   |   |   | 10.8 | % |   |   | 2,748 |   |   |   | 11.3 | % |   |
| Research and development              |       |                                                | 2,309      |                                              |       |   | 11.7 | % |   |   | 1,666 |   |   |   | 12.5 | % |   |   | 4,748 |   |   |   | 12.0 | % |   |   | 2,875 |   |   |   | 11.8 | % |   |
| General and administrative            |       |                                                | 2,629      |                                              |       |   | 13.3 | % |   |   | 1,282 |   |   |   | 9.6 | % |   |   | 4,993 |   |   |   | 12.7 | % |   |   | 2,288 |   |   |   | 9.4 | % |   |
| Amortization of intangibles assets    |       |                                                | 961        |                                              |       |   | 4.9 | % |   |   | 505 |   |   |   | 3.8 | % |   |   | 1,947 |   |   |   | 4.9 | % |   |   | 1,225 |   |   |   | 5.0 | % |   |
| Stock-based compensation              |       |                                                | 129        |                                              |       |   | 0.7 | % |   |   | — |   |   |   | 0.0 | % |   |   | 210 |   |   |   | 0.5 | % |   |   | — |   |   |   | 0.0 | % |   |
| Total operating expenses              |       |                                                | 8,207      |                                              |       |   | 41.6 | % |   |   | 5,055 |   |   |   | 37.9 | % |   |   | 16,168 |   |   |   | 41.0 | % |   |   | 9,136 |   |   |   | 37.6 | % |   |
| Operating income                      |       |                                                | $          | 4,615                                             |       |   |   | 23.4 | % |   |   | $ | 3,123 |   |   |   | 23.4 | % |   |   | $ | 9,441 |   |   |   | 23.9 | % |   |   | $ | 5,780 |   |   |   | 23.8 | % |   |

 

**Comparison of the three months ended June 30, 2006to the three months ended June 30, 2005**

*Revenue*

Total revenue increased $6.4 million, or 47.9%, to$19.7 million for the three months ended June 30, 2006 from $13.3 millionfor the three months ended June 30, 2005.

Product license revenue consists of revenue fromseparate product-only agreements and from multiple element agreements accountedfor under the percentage-of-completion method using hours of input in relationto the estimate of total hours to complete the engagements. Product license andhardware revenue increased by $0.8 million, or 43.3%, to $2.6 million including$0.4 million from the sale of hardware. The remaining increase of $0.4 millionwas attributable to $0.7 million in license sales by Elance, Requisite andXelus, partially offset by a $0.3 million decrease in the Company’s legacylicense sales.

Maintenance and hostingrevenues increased by $3.4 million or 58.8% to $9.1 million for the threemonths ended June 30, 2006. The acquisitions of Elance, Inc. andRequisite Inc. accounted for $2.0 million 

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of thisincrease. Of the remaining $1.4 increase, $1.9 million resulted from afull quarter of maintenance and hosting by Xelus, offset by a decrease of $0.5million from Optum. 

Consulting and implementationservice revenues are largely comprised of fees related to time and materialsprojects, other service agreements, maintenance, hosting, training and needsanalyses, as well as multiple element agreements accounted for under thepercentage-of-completion method using hours of input in relation to theestimate of total hours to complete the engagements. Consulting andimplementation service revenues increased by $2.2 million, or 56.3%, to $6.0million, over the prior year quarter. Acquisitions increased consulting andimplementation services by $2.5 million. Elance and Requisite accounted for67.6% of this $2.5 million increase. The remaining increase of $1.0 millionresulted from having a full quarter of revenue from Xelus. The increase inconsulting and implementation service of $2.5 million emanated fromacquisitions and was partially offset by a decrease of $0.4 million inconsulting and implementation service from the Company’s legacy operations.This decrease was due to a reduction in revenues in the Company’s retailproduct line. 

Subscription revenueincreased by $0.1 million, to $2.0 million for the quarter ended June 30,2006. The increase is a direct result of the acquisitions of Elance andRequisite.

*Cost of Revenue*

Total cost of revenueincreased by $1.7 million, or 33.8% to $6.9 million for the three months ended June 30,2006. The increase relates to the increased volume of business generated by theCompany, largely through the acquisitions made in 2005 and 2006. The costs consistof compensation expenses, amortization of developed technology, cost ofhardware purchased for resale, third party software royalties and third partycontracted labor. The increase in employee compensation results from theacquisitions of Requisite and Elance and a full quarter of Xelus. Theseacquisitions added approximately 54 full time equivalents to the service andsupport departments. The additional head count resulted in an increase incompensation expense of $0.8 million. Contracted labor increased by $0.4million. Third party software royalties increased by $0.1million due to theincreased sale of third party software. Amortization of developed technologyhas increased by $0.2 million. The amortization of developed technologyresulted from the allocation of purchase price to developed technologies arisingfrom the Company’s acquisitions. Outside of the increases related toacquisitions, the Company also incurred an increase in cost of revenue of$0.2 million pertaining to the sale of hardware. Gross profit marginsincreased to 64.9% for the three months ended June 30, 2006, compared to61.3% for the three months ended June 30, 2005. The gross marginpercentage increase is due to an improvement in the utilization rate ofprofessional service staff and the increase in higher margin subscription andlicense revenue.

*Operating Expenses*

*Sales and Marketing*   Sales and marketing expenses increased byapproximately $0.6 million, or 36.0%, to $2.2 million for the three monthsended June 30, 2006 from $1.6 million for the three months ended June 30,2005. The increase in sales and marketing expense related to an increase inhead count due to the Requisite and Elance acquisitions and a full quarter ofsales and marketing expenses of Xelus. These acquisitions added 10 full timeequivalents and an additional $0.6 million in compensation expense.

*Research and Development**  *Research and development expensesincreased by approximately $0.6 million, or 38.6%, to $2.3 million for thethree months ended June 30, 2006, from $1.7 million for thecomparable prior year three-month period. This increase was attributable to anincrease in employee compensation and related costs of $0.4 million and anincrease in contracted labor costs of $0.2 million. The Requisite and Elanceacquisitions resulted in an increase in the Company’s employee compensationexpense by $0.4 million. The Company added 16 full time equivalents with theseacquisitions. To date, all software development costs have been expensed asincurred.

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*Generaland Administrative**  *Generaland administrative expenses increased by approximately $1.3 million, or105.1%, to $2.6 million for the three months ended June 30, 2006 from$1.3 million for the three months ended June 30, 2005. The increaserelated to an increase in compensation expense in the finance and informationtechnology department of $0.3 million (resulting from the addition of sixfull time equivalents), an increase in contracted labor of $0.3 million, (largelyrelated to Sarbanes-Oxley Act compliance work), an increase in legal feesrelating to general matters an increase in executive compensation of $0.2million relating to adding two full time equivalents in the third quarter of2005, and an increase in outside accounting fees related to Sarbanes-Oxley Act of$0.2 million.

*Amortizationof Intangible Assets**  *Theincrease in amortization of intangibles relates to the intangible assetsacquired in the Company’s acquisitions. These intangible assets have usefullives that range from one to ten years and accounted for the $0.5 millionincrease in amortization expense for the quarter ended June 30, 2006.

*Stock-based Compensation**  *The charge of $0.1 millionarose in connection with the adoption, as of January 1, 2006, of theprovisions of SFAS 123(R) for the fair value of share-based compensationgranted to employees after the adoption of SFAS 123(R) and the fair valueof all awards granted to employees prior to the effective date that areunvested.

**Comparison of thesix months ended June 30, 2006 to the six months ended June 30, 2005**

*Revenue*

Total revenue increased $15.1 million, or 62.4%, to$39.4 million for the six months ended June 30, 2006 from $24.3 millionfor the six months ended June 30, 2005. 

Product license revenue consists of revenue fromseparate product-only agreements and from multiple element agreements accountedfor under the percentage-of-completion method using hours of input in relationto the estimate of total hours to complete the engagements. Product license andhardware revenue increased by $1.9 million, or 49.6%, to $5.7 million including$0.7 million from the sale of hardware. The remaining increase of $1.2 millionwas attributable to $1.5 million in license sales by Elance, Requisite, a fullsix months of revenue from Xelus, and an increase of $0.2 million in legacysales. This increase was partially offset by a $0.5 million decrease in licensesales from Optum. 

Maintenance and hostingrevenues increased by $8.5 million, or 89.7%, to $18.1 million for the sixmonths ended June 30, 2006 from the prior period. The acquisitions ofElance, Requisite and a full six months of revenue from Xelus accounted for $8.1million of this increase. The remaining $0.4 million increase resulted fromlegacy maintenance and hosting sales. 

Consulting andimplementation service revenues are largely comprised of fees related to timeand materials projects, other service agreements, maintenance, hosting,training and needs analyses, as well as multiple element agreements accountedfor under the percentage-of-completion method using hours of input in relationto the estimate of total hours to complete the engagements. Consulting andimplementation service revenues increased by $4.4 million, or 58.7%, to $11.7million, over the comparable prior year six month period. Acquisitions ofElance and Requisite and a full six months of revenue from Xelus and Optumincreased consulting and implementation services revenue by $5.3 million. Elance, Inc.and Requisite, Inc, accounted for 43.5% of this $5.3 million increase. Theremaining increase of $3.0 million resulted from having a full six months ofrevenue from Xelus, and Optum. The increase was partially offset by a decreaseof $0.9 million in consulting and implementation services from the Company’slegacy operations. This decrease was due to a reduction in revenues in theCompany’s retail product line. 

Subscription revenueincreased by $0.4 million, to $4.0 million for the six months ended June 30,2006. The increase is a direct result of the acquisitions of Elance andRequisite.

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*Cost of Revenue*

Total cost of revenueincreased by $4.4 million, or 47.7% to $13.8 million for the six months ended June 30,2006. The increase relates to the increased volume of business generated by theCompany, largely through the acquisitions made in 2005 and 2006. The costsconsist of compensation expenses, amortization of developed technology, cost ofhardware purchased for resale, third party software royalties and third partycontracted labor. The increase in employee compensation results from theacquisitions of Requisite and Elance and a full six month of Xelus and Optum.These acquisitions added approximately 54 full time equivalents to the serviceand support departments. The additional head count resulted in an increase incompensation expense of $2.2 million. Contracted labor increased by $1.1million. Amortization of developed technology increased by $0.5 million. Thirdparty software royalties increased by $0.2 million. The amortization ofdeveloped technology resulted from the allocation of purchase price todeveloped technologies in the Company’s acquisitions. Outside of the increasesrelated to acquisitions, the Company also incurred an increase in cost ofrevenue of $0.4 million pertaining to the sale of hardware. Gross profitmargins increased to 64.9% for the six months ended June 30, 2006,compared to 61.4% for the six months ended June 30, 2005. The gross marginpercentage increase is due to an improvement in the utilization rate ofprofessional service staff and the increase in higher margin subscription andlicense revenue.

*Operating Expenses*

*Salesand Marketing**  *Salesand marketing expenses increased by approximately $1.6 million, or 55.4%, to$4.3 million for the six months ended June 30, 2006 from $2.7 million forthe six months ended June 30, 2005. The increase in sales and marketingexpense was related to an increase in head count due to the Requisite andElance acquisitions and a full six months of sales and marketing expenses ofXelus and Optum. The acquisitions of Elance and Requisite added 10 full timeequivalents and an additional $1.0 million in compensation expense. A full sixmonths of sales and marketing expenses of Optum and Xelus increased sales andmarketing expense by approximately $0.4 million. The remaining increase of $0.2million for the six months ended June 30, 2006 pertains to corporate marketingexpenditures.

*Researchand Development**  *Researchand development expenses increased by approximately $1.8 million, or65.1%, to $4.7 million for the six months ended June 30, 2006, from $2.9million for the comparable prior year six-month period. This increase wasalmost entirely attributable to an increase in employee compensation andrelated costs and contracted labor. The Requisite and Elance acquisitionsresulted in an increase in the Company’s research and development expenses by$0.9 million. The Company added 16 full time equivalents with theseacquisitions. A full six months of research and development expenses of Xelusresulted in an increase of $0.9 million. To date, all software developmentcosts have been expensed as incurred.

*Generaland Administrative**  *Generaland administrative expenses increased by approximately $2.7 million, or118.2%, to $5.0 million for the six months ended June 30, 2006 from $2.3million for the six months ended June 30, 2005. The increase related to anincrease in compensation expense in the finance and information technologydepartment of $0.6 million (resulting from the addition of six full timeequivalents), an increase in contracted labor (information technology andSarbanes-Oxley Act compliance work) of $0.5 million, an increase in legal feesrelating to general matters of $0.4 million, an increase in executivecompensation of $0.4 million relating to adding two full time equivalents inthe third quarter of 2005, an increase in outside accounting fees related to theannual audit and Sarbanes-Oxley Act compliance work of $0.4 million and anincrease in general insurance and taxes (not including income taxes) of $0.4million.

*Amortizationof Intangible Assets**  *Theincrease in amortization of intangibles relates to the intangible assetsacquired in the Company’s acquisitions. These intangible assets have usefullives that range from 

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one to ten years andaccounted for the $0.7 million increase in amortization expense for the sixmonths ended June 30, 2006.

*Stock-based Compensation**  *Stock-based compensation representsthe charge of $0.2 million in connection with the adoption, as of January 1,2006, of the provisions of SFAS 123(R) for the fair value of share-basedpayments granted to employees after the adoption of SFAS 123(R) and thefair value of all awards granted to employees prior to the effective date thatare unvested.

**Liquidity andCapital Resources**

At June 30, 2006, the Company had $12.7 millionof cash and cash equivalents.

Net cash provided by operating activities was $7.8 millionfor the six months ended June 30, 2006. The cash provided by operatingactivities was the result of net income plus non-cash charges for depreciation,amortization, stock-based compensation and a noncash charge for income taxes.Sources of cash from operations include $6.1 million in net income,$7.4 million in depreciation, amortization, income tax expense,stock-based compensation, and a source of cash from the decrease in receivables(net of $1.1 million of receivables acquired) of $3.1 million. Thereduction of receivables resulted from the receipt of payments from customersinvoiced in the fourth quarter of 2005. Cash sources were partially offset byuses of cash of $7.8 million involving decreases in deferred revenue,accrued compensation, and increases in prepaids and other expenses and a use ofcash from the other working capital accounts in the amount of $1.0 million. Thedecrease in deferred revenue resulted from the recognition of revenue frompreviously billed transactions and amounted to $3.4 million (net of$1.3 million of deferred revenue acquired) and the $1.9 million decreasein accrued compensation resulting from the payment of commissions and annualbonuses accrued for as of December 31, 2005. The $2.4 millionincrease in prepaids and other current assets resulted from tax payments and anincrease in other receivables from Elance relating to amounts owedpost-acquisition.

The Company used $5.1 million in cash forinvesting activities in the six months ended June 30, 2006. Of the $5.1 million,$3.6 million related to the acquisition of Elance and $0.3 millioninvolved a payment relating to the acquisition of Requisite. The remaining$1.2 million was used to purchase fixed assets.

Net cash used in financing activities was $7.5million. Of the $7.5 million, $8.0 million related to the repurchase of commonstock previously issued as consideration in the Elance acquisition and therepayment of short and long-term debt in the amount of $0.9 million. This waspartially offset by the generation of $1.4 million from the exercise ofstock options.

On March 31, 2005, the Company entered into a$10.0 million revolving line of credit maturing on April 1, 2008. Theborrowing under the line of credit carries an interest rate based on the LIBORaverage rate with a weighted average interest rate of 6.42% in the quarterended June 30, 2006. There is a fee of 0.3% on the unused portion of thisline of credit. On June 30, 2006, Company borrowings under this revolvingline of credit were $6.4 million. The proceeds were used to pay off debtand certain liabilities assumed in the Optum and Xelus acquisitions. Of theremaining $3.6 million, up to $2.0 million may be used for theCompany’s letters of credit. As of June 30, 2006, the Company has $0.6outstanding under various letters of credit. The line of credit contains termsthat, among other provisions, require the Company to maintain a minimum networth, meet other financial ratio tests, and imposes specific limits orrestrictions on additional indebtedness and or liens. Provisions under thisline of credit are not considered restrictive to normal operations. The Companyis not obligated to make any principal payments on the loan until April 1,2008 unless it violates any loan covenants. The Company was not in violation ofany loan covenants at June 30, 2006.

The Company continues to evaluate strategicalternatives, including opportunities to strategically grow the business, enterinto strategic relationships, make acquisitions or enter into businesscombinations. 

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The Company can provide noassurance that any such strategic alternatives will come to fruition and mayelect to terminate such evaluations at any time.

The Company believes thatits cash resources are sufficient for the long-term operation of its existingbusiness and, therefore, has no current plans to raise additional equityfinancing during the next twelve months. The Company may, however, requireadditional cash to fund investments in complementary businesses ortechnologies. The Company’s cash needs could also be affected by changes inbusiness or market conditions. If the Company finds it necessary to obtainadditional equity or debt financing, there can be no assurance that the Companywill be able to raise it on acceptable terms or at all.

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

Statements in this Form 10-Qthat are not historical facts and refer to the Company’s future prospects are “forward-lookingstatements” under the Private Securities Litigation Reform Act of 1995. Theseforward-looking statements are generally identified by words such as “expect,” “anticipate,”“intend,” “believe,” “hope,” “assume,” “estimate” and other similar words andexpressions. The statements are subject to risks and uncertainties and actualresults may differ materially from those indicated by these forward-lookingstatements as a result of various factors, including but not limited to theextent of customer acceptance and utilization of the Company’s channelmanagement solutions, the impact of competitive products and services, theCompany’s ability to develop new and enhanced versions of its products andservices, the effect of economic and business conditions, the volume and timingof customer contracts and related approval processes, capital and intellectualproperty spending of the Company’s target customers, changes in technology,deployment delays or errors associated with the Company’s products, the abilityof the Company to integrate acquired businesses or products and the Company’sability to protect its intellectual property rights. For a discussion of theseand other risk factors that could affect the Company’s business, see “RiskFactors” in the Company’s Annual Report on Form 10-K for the yearended December 31, 2005, which is on file with the Securities and ExchangeCommission.

**Item 3.**                        Qualitativeand Quantitative Disclosures About Market Risk

The following discussesthe Company’s exposure to market risk related to changes in foreign currencyexchange rates and interest rates. This discussion contains forward-lookingstatements that are subject to risks and uncertainties. Actual results couldvary materially as a result of a number of factors including those set forth inPart I of the Company’s Annual Report on Form 10-K under “RiskFactors.”

*Foreign CurrencyExchange Rate Risk*

To date, substantially allof the Company’s recognized revenues have been denominated in U.S. dollarsand primarily from customers in the United States and the exposure to foreigncurrency exchange rate changes has been immaterial. The Company expects, however,that future product license and professional service revenues may also bederived from international markets and may be denominated in the currency ofthe applicable market. As a result, operating results may become subject tosignificant fluctuations based upon changes in the exchange rates of certaincurrencies in relation to the U.S. dollar. Furthermore, to the extent theCompany engages in international sales denominated in U.S. dollars, anincrease in the value of the U.S. dollar relative to foreign currencies couldmake the Company’s products less competitive in international markets. Althoughthe Company will continue to monitor its exposure to currency fluctuations,and, when appropriate, may use financial hedging techniques in the future tominimize the effect of these fluctuations, there is no assurance that exchangerate fluctuations will not adversely affect financial results in the future.

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*Interest Rate Risk*

As of June 30, 2006,the Company had cash and cash equivalents of $12.7 million and debt of$6.4 million. Rising interest rates will increase interest income fromshort-term investments and interest expense on the Company’s debt. Based uponthe balance of cash and cash equivalents at June 30, 2006, a change ininterest rates of 0.5% would cause a corresponding change in annual interestincome of less than $0.1 million. Based on the Company’s long-term debt atJune 30, 2006, at change in interest rates of 1.0% would cause acorresponding change in interest expense of less than $0.1 million.

**Item 4.**                        Controlsand Procedures

(a) Evaluation of Disclosure Controls andProcedures

As of the end of theperiod covered by this report, under the supervision and with the participationof our management, including our Chief Executive Officer and Chief FinancialOfficer, the Company reviewed and evaluated the effectiveness of the Company’sdisclosure controls and procedures pursuant to Rule 13a-15(e) and15d-15(e) of the Securities Exchange Act of 1934, as amended (the “ExchangeAct”). Based upon their evaluation, our Chief Executive Officer and our ChiefFinancial Officer concluded that our disclosure controls and procedures wereeffective to provide reasonable assurance that information required to bedisclosed by the Company in the reports filed or submitted by it under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in the Securities and Exchange Commission’s rules andforms, and to provide reasonable assurance that information required to bedisclosed by the Company in such reports is accumulated and communicated to theCompany’s management, including its Chief Executive Officer and Chief FinancialOfficer, as appropriate to allow timely decisions regarding requireddisclosure.

(b) Change in Internal Controls

There have been no changes in the Company’s internalcontrols over financial reporting during the period covered by this report,which could materially affect, or are reasonably likely to materially affect,the Company’s internal control over financial reporting.

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**PART II.**   OTHERINFORMATION

Items 1, 1A, 3 and 5 areinapplicable and have been omitted from this report.

**Item2. Unregistered Sales of Equity Securities And Use of Proceeds**

During the second quarter of 2006, we repurchased thefollowing shares of our common stock pursuant to a Share Repurchase Agreementwith Elance, Inc. (“Elance”), dated May 25, 2006. The repurchased shares wereissued on February 8, 2006, as part of the consideration for the Company’sacquisition of certain business assets from Elance.

| ** **                    | ** ** | ** **                     | ** ** | ** **                      | ** ** | ** **                             | ** ** | **(d) Maximum**                           | ** ** |
|-------------------------------|------------|--------------------------------|------------|---------------------------------|------------|----------------------------------------|------------|------------------------------------------------|------------|
| ** **                    | ** ** | ** **                     | ** ** | ** **                      | ** ** | **(c) Total Number of** | ** ** | **Number (Approximate**                   | ** ** |
| ** **                    | ** ** | ** **                     | ** ** | ** **                      | ** ** | **Shares Purchased as**      | ** ** | **Dollar Value) of**                 | ** ** |
| ** **                    | ** ** | **(a) Total Number** | ** ** | **(b) Average Price** | ** ** | **Part of Publicly**         | ** ** | **Shares that May Yet Be** | ** ** |
| ** **                    | ** ** | **of Shares**             | ** ** | **Paid per**               | ** ** | **Announced Plans**               | ** ** | **Purchased Under**                       | ** ** |
| **Period**                    | ** ** | ** **                     | ** ** | **Purchased**                   | ** ** | **Share**                              | ** ** | **or Programs**                           | ** ** | **the Plans or Programs** | ** ** |
| Apri1 to  April 30, 2006 |       |                           | —     |                            |       |                                   | $          | —                                         |       |   |   | — |   |   |   | — |   |   |
| May 1 to  May 31, 2006   |       |                           | 420,123    |                            |       |                                   | 19.00      |                                           |       |   | — |   |   |   | — |   |   |
| June 1 to  June 30, 2006 |       |                           | —     |                            |       |                                   | —     |                                           |       |   | — |   |   |   | — |   |   |
| Total                         |       |                           | 420,123    |                            |       |                                   | $          | 19.00                                          |       |   |   | — |   |   |   | — |   |   |
|                               |            |                                |            |                                 |            |                                        |            |                                                |            |  |  |  |  |  |  |  |  |  |  |  |

 

**Item4.    Submission of Matters to a Vote of Security Holders.**

(a)    The annual meeting ofstockholders of Click Commerce Inc. was held on May 18, 2006.

(b)    Pursuant to Instruction 3 toItem 4, no response is required to this item.

(c)    Atthe Annual Meeting conducted on May 18, 2006, the shareholders voted theelections of directors and ratify the appointment of BDO Siedman LLP as theCompany’s independent registered public accounting firm. A summary of the votesis as follows:

| **Nominee**            | ** ** | ** ** | ** ** | **Votes for** | ** ** | **Votes withheld** | ** ** |
|------------------------|------------|------------|------------|--------------------|------------|-------------------------|------------|
| June E. Drewery        |       | 10,522,022 |       |               | 26,659     |                    |       |
| Michael W. Ferro,  Jr. |       | 10,515,731 |       |               | 32,950     |                    |       |
| Emmanuel A. Kampouris  |       | 10,490,787 |       |               | 57,894     |                    |       |

 

| ** **                                      | ** ** | **Votes for** | ** ** | **Votes against** | ** ** | **Votes withheld** | ** ** |
|-------------------------------------------------|------------|--------------------|------------|------------------------|------------|-------------------------|------------|
| Ratification of  appointment of BDO Siedman LLP |       | 10,526,619         |       |                   | 11,533     |                    |       |   | 10,529 |   |   |
|                                                 |            |                    |            |                        |            |                         |            |  |  |  |  |

 

**Item6.**                        Exhibits

**Exhibits:**

Thefollowing exhibits are filed as part of this Form 10-Q.
| Exhibit  Number | ** ** | **Description**                                                                                             |
|-----------------|------------|-------------------------------------------------------------------------------------------------------------|
| 10.21           |       | Offer Letter of Employment for Mr. David Arney,  dated May 8, 2006*                                         |
| 10.1            |       | Share Repurchase Agreement, dated May 25, 2006, by  and among Click Commerce, Inc. and Elance, Inc.**       |
| 31.1            |       | Certification of Michael W. Ferro, Jr. pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2            |       | Certification of David B. Arney 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 David B. Arney pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002             |

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*       Incorporated by reference to the Company’s Current Report onForm 8-K, dated May 8, 2006

**    Incorporatedby reference to the Company’s Current Report on Form 8-K, dated May 25, 2006

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**SIGNATURES**

Pursuantto the requirements of the Securities and Exchange Act of 1934, the registranthas duly caused this report to be signed on its behalf by the undersignedthereunto duly authorized.
|                            |   |   | Click Commerce, Inc. |                                                                      |
|----------------------------|--------|--------|---------------------------|---------------------------------------------------------------------------|
|                       |   |   | By:                       | /s/  DAVID B. ARNEY                                                       |
|                       |   |   |                      | David B. Arney                                                            |
|                       |   |   |                      | *Chief  Financial Officerr  (Principal Financial and Accounting Officer)* |
| Date: August 9,  2006 |   |   |                      |                                                                      |
|                            |        |        |                           |                                                                           |  |

 

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