**UNITED STATESSECURITIES 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

**Forthe Quarterly Period Ended March 31, 2006**

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

**Forthe transition periodfrom                        to                        **

**Commission FileNumber 0-30881**

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**CLICK COMMERCE, INC.**

(Exact name of registrant as specified in its charter)

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

 

**233 North Michigan Avenue,22nd FloorChicago, Illinois 60601**

(Address of principalexecutive offices)

**(312) 482-9006**

(Registrant’s telephonenumber, including area code)

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Indicateby check mark whether the registrant: (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes o  No x

Indicateby check mark whether the registrant is a large accelerated filer, an acceleratedfiler, or a non-accelerated filer. See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer o |   | Accelerated filer x |   | Non-accelerated filer o |
|--------------------------------|--------|--------------------------|--------|------------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes oNo x

As of May 8, 2006, there were 12,618,659 sharesof the registrant’s common shares outstanding.

 

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**CLICKCOMMERCE, INC.**

**INDEX**
|               | ** ** | ** **                                                                                                                                 | ** ** | **Page No.** |
|---------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|
| PART I.  |       | FINANCIAL  INFORMATION                                                                                                                     |       |              |   |   |
| Item 1.       |       | Financial  Statements                                                                                                                      |       |              |   |   |
|          |       | Condensed  Consolidated Balance Sheets as of March 31, 2006 (unaudited) and  December 31, 2005                                   |       |              | 3 |   |
|          |       | Condensed  Consolidated Statements of Income and Comprehensive Income for the three  months ended March 31, 2006 and 2005 (unaudited) |       |              | 4 |   |
|          |       | Condensed  Consolidated Statements of Cash Flows for the three months ended  March 31, 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             |       |              | 17 |   |
| Item  3.      |       | Quantitative  and Qualitative Disclosures About Market Risk                                                                                |       |              | 23 |   |
| Item  4.      |       | Controls  and Procedures                                                                                                                   |       |              | 24 |   |
| PART II. |       | OTHER  INFORMATION                                                                                                                         |       |              |   |   |
| Item  6.      |       | Exhibits                                                                                                                                   |       |              | 25 |   |
| SIGNATURES    |       |                                                                                                                                       | 26         |              |

 

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**Part 1.   FINANCIALINFORMATION**

**Item 1.   Financial Statements**

**CLICKCOMMERCE, INC.CONDENSED CONSOLIDATED BALANCE SHEETS(Dollars in thousands, except share data)(Unaudited)**

| ** **                                                                                                                                                                                                                                                                                                    | ** ** | **March 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| **ASSETS**                                                                                                                                                                                                                                                                                                    | ** ** |                         | ** ** | ** **                      |       |   | ** ** | ** ** |   |
| Current assets:                                                                                                                                                                                                                                                                                               |       |                         |       |                            |       |   |   |   |   |
| Cash and cash  equivalents                                                                                                                                                                                                                                                                                    |       |                         | $          | 22,327                          |       |   |   | $ | 17,498 |   |   |
| Trade accounts  receivable, less allowance for doubtful accounts of $1,014 and $935  respectively                                                                                                                                                                                                             |       |                         | 22,043     |                            |       |   | 25,336 |   |   |
| Revenue earned on  contracts in progress in excess of billings                                                                                                                                                                                                                                                |       |                         | 746        |                            |       |   | 481 |   |   |
| Prepaids and other  current assets                                                                                                                                                                                                                                                                            |       |                         | 3,222      |                            |       |   | 1,879 |   |   |
| Total current assets                                                                                                                                                                                                                                                                                          |       |                         | 48,338     |                            |       |   | 45,194 |   |   |
| Property and equipment,  net                                                                                                                                                                                                                                                                                  |       |                         | 2,922      |                            |       |   | 2,765 |   |   |
| Intangible assets, net                                                                                                                                                                                                                                                                                        |       |                         | 24,574     |                            |       |   | 22,129 |   |   |
| Goodwill                                                                                                                                                                                                                                                                                                      |       |                         | 60,565     |                            |       |   | 48,782 |   |   |
| Deferred tax assets                                                                                                                                                                                                                                                                                           |       |                         | 4,194      |                            |       |   | 7,116 |   |   |
| Other assets                                                                                                                                                                                                                                                                                                  |       |                         | 1,653      |                            |       |   | 1,673 |   |   |
| Total assets                                                                                                                                                                                                                                                                                                  |       |                         | $          | 142,246                         |       |   |   | $ | 127,659 |   |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                                                                                                                | ** ** |                         | ** ** | ** **                      |       |   | ** ** | ** ** |   |
| Current liabilities:                                                                                                                                                                                                                                                                                          |       |                         |       |                            |       |   |   |   |   |
| Accounts payable                                                                                                                                                                                                                                                                                              |       |                         | $          | 1,443                           |       |   |   | $ | 1,454 |   |   |
| Billings in excess of  revenues earned on contracts in progress                                                                                                                                                                                                                                               |       |                         | 15         |                            |       |   | 177 |   |   |
| Deferred revenue                                                                                                                                                                                                                                                                                              |       |                         | 15,623     |                            |       |   | 16,421 |   |   |
| Accrued compensation                                                                                                                                                                                                                                                                                          |       |                         | 3,087      |                            |       |   | 3,190 |   |   |
| Accrued rent                                                                                                                                                                                                                                                                                                  |       |                         | 1,986      |                            |       |   | 2,610 |   |   |
| Accrued expenses and  other current liabilities                                                                                                                                                                                                                                                               |       |                         | 4,991      |                            |       |   | 4,552 |   |   |
| Short-term notes payable                                                                                                                                                                                                                                                                                      |       |                         | 307        |                            |       |   | 829 |   |   |
| Total current  liabilities                                                                                                                                                                                                                                                                                    |       |                         | 27,452     |                            |       |   | 29,233 |   |   |
| Long-term debt                                                                                                                                                                                                                                                                                                |       |                         | 6,456      |                            |       |   | 6,464 |   |   |
| Other liabilities                                                                                                                                                                                                                                                                                             |       |                         | 1,185      |                            |       |   | 846 |   |   |
| Total liabilities                                                                                                                                                                                                                                                                                             |       |                         | 35,093     |                            |       |   | 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 March 31, 2006 and December 31, 2005, respectively;  12,618,659 and 12,007,769 shares outstanding as of March 31, 2006  and December 31, 2005, respectively  |       |                         | 13         |                            |       |   | 12 |   |   |
| Additional paid-in  capital                                                                                                                                                                                                                                                                                   |       |                         | 133,769    |                            |       |   | 120,589 |   |   |
| Accumulated other  comprehensive income                                                                                                                                                                                                                                                                       |       |                         | 133        |                            |       |   | 194 |   |   |
| Treasury stock, at  cost—210,088 shares                                                                                                                                                                                                                                                                  |       |                         | (2,923     | )                               |       |   | (2,923 | ) |   |
| Accumulated deficit                                                                                                                                                                                                                                                                                           |       |                         | (23,839    | )                               |       |   | (26,756 | ) |   |
| Total shareholders’  equity                                                                                                                                                                                                                                                                              |       |                         | 107,153    |                            |       |   | 91,116 |   |   |
| Total liabilities and shareholders’ equity                                                                                                                                                                                                                                                               |       |                         | $          | 142,246                         |       |   |   | $ | 127,659 |   |   |

 

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

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**CLICKCOMMERCE, INC.**

**CONDENSED CONSOLIDATEDSTATEMENTS OF INCOME ANDCOMPREHENSIVE INCOME**

**(Dollars inthousands, except share and per share data)(Unaudited)**

| ** **                                               | ** ** | **Three months ended March 31,** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                               | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| Revenues:                                                |       |                                                 |       |   |   |
| Product license  and hardware                            |       |                                                 |       |   |   |
| Product license                                          |       | $                                                    | 2,676      |   | $ | 1,963 |   |
| Hardware                                                 |       | 376                                                  |       | — |   |
| Total product license and hardware                       |       | 3,052                                                |       | 1,963 |   |
| Service                                                  |       |                                                 |       |   |   |
| Maintenance and hosting                                  |       | 9,007                                                |       | 3,814 |   |
| Consulting and implementation service                    |       | 5,643                                                |       | 3,497 |   |
| Subscription                                             |       | 1,986                                                |       | 1,651 |   |
| Total service                                            |       | 16,636                                               |       | 8,962 |   |
| Total revenues                                           |       | 19,688                                               |       | 10,925 |   |
| Cost of revenues:                                        |       |                                                 |       |   |   |
| Product license and hardware                             |       | 818                                                  |       | 198 |   |
| Service                                                  |       | 6,083                                                |       | 3,989 |   |
| Total cost of revenues                                   |       | 6,901                                                |       | 4,187 |   |
| Gross profit                                             |       | 12,787                                               |       | 6,738 |   |
| Operating expenses:                                      |       |                                                 |       |   |   |
| Sales and marketing                                      |       | 2,091                                                |       | 1,146 |   |
| Research and development                                 |       | 2,439                                                |       | 1,209 |   |
| General and administrative                               |       | 2,364                                                |       | 1,006 |   |
| Amortization of intangibles                              |       | 986                                                  |       | 720 |   |
| Stock-based compensation                                 |       | 81                                                   |       | — |   |
| Total operating expenses                                 |       | 7,961                                                |       | 4,081 |   |
| Operating income                                         |       | 4,826                                                |       | 2,657 |   |
| Other income  (expense), net                             |       | 131                                                  |       | (27 | ) |
| Income before  income taxes                              |       | 4,957                                                |       | 2,630 |   |
| Income tax  expense                                      |       | 2,040                                                |       | — |   |
| Net Income                                               |       | $                                                    | 2,917      |   | $ | 2,630 |   |
| Basic income per  common share                           |       | $                                                    | 0.25       |   | $ | 0.25 |   |
| Diluted income  per common share                         |       | $                                                    | 0.22       |   | $ | 0.23 |   |
| Weighted average common shares outstanding—basic    |       | 11,896,592                                           |       | 10,423,675 |   |
| Weighted average  common shares outstanding—diluted |       | 13,082,101                                           |       | 11,412,852 |   |
| Comprehensive income:                                    |       |                                                 |       |   |   |
| Net income                                               |       | $                                                    | 2,917      |   | $ | 2,630 |   |
| Foreign currency translation adjustment                  |       | (61                                                  | )          | — |   |
| Comprehensive income                                     |       | $                                                    | 2,856      |   | $ | 2,630 |   |

 

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)**

| ** **                                                                                                                | ** ** | **Three months ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                                                | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| **Cash flows from operating activities:**                                                                                 | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Net income                                                                                                                |       | $                                                | 2,917      |   | $ | 2,630 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities:                                        |       |                                             |       |   |   |
| Income tax expense                                                                                                        |       | 2,040                                            |       | — |   |
| Depreciation                                                                                                              |       | 353                                              |       | 204 |   |
| Amortization of  intangibles                                                                                              |       | 1,417                                            |       | 917 |   |
| Provision for doubtful  accounts                                                                                          |       | 79                                               |       | — |   |
| Gain on disposal of  assets                                                                                               |       | (13                                              | )          | — |   |
| Stock-based compensation                                                                                                  |       | 81                                               |       | — |   |
| Changes in operating  assets and liabilities, net of effect of acquisitions:                                              |       |                                             |       |   |   |
| Trade accounts  receivable                                                                                                |       | 4,001                                            |       | 603 |   |
| Prepaids and other  current assets                                                                                        |       | (1,381                                           | )          | 130 |   |
| Accounts payable                                                                                                          |       | (18                                              | )          | (1,303 | ) |
| Billings in excess of  revenues earned on contracts in progress                                                           |       | (162                                             | )          | 2 |   |
| Deferred revenue                                                                                                          |       | (2,076                                           | )          | (880 | ) |
| Accrued compensation                                                                                                      |       | (145                                             | )          | (2,668 | ) |
| Accrued rent, accrued  expenses and other current liabilities                                                             |       | 1,090                                            |       | 415 |   |
| Other, net                                                                                                                |       | —                                           |       | 243 |   |
| Net cash provided by operating  activities                                                                                |       | 8,183                                            |       | 293 |   |
| **Cash  flows from investing activities:**                                                                                |       |                                             |       |   |   |
| Purchases of property  and equipment                                                                                      |       | (301                                             | )          | (156 | ) |
| Payments for  acquisitions, net of transaction costs and cash required (see supplemental  schedule on the following page) |       | (3,894                                           | )          | (1,986 | ) |
| Other investing  activities                                                                                               |       | 22                                               |       | — |   |
| Net cash used in  investing activities                                                                                    |       | (4,173                                           | )          | (2,142 | ) |
| **Cash  flows from financing activities:**                                                                                |       |                                             |       |   |   |
| Proceeds from exercise  of stock options                                                                                  |       | 1,349                                            |       | 114 |   |
| Proceeds from long-term  debt                                                                                             |       | —                                           |       | 4,500 |   |
| Payments on capital  lease obligations                                                                                    |       | —                                           |       | (3 | ) |
| Payments of short-term  debt obligations                                                                                  |       | (522                                             | )          | (1,761 | ) |
| Payments of long-term  debt obligations                                                                                   |       | (8                                               | )          | (2,524 | ) |
| Net cash provided by financing  activities                                                                                |       | 819                                              |       | 326 |   |
| Net increase (decrease)  in cash and cash equivalents                                                                     |       | 4,829                                            |       | (1,523 | ) |
| Cash and cash  equivalents at beginning of period                                                                         |       | 17,498                                           |       | 13,382 |   |
| Cash and cash  equivalents at end of period                                                                               |       | $                                                | 22,327     |   | $ | 11,859 |   |
| **Supplemental  disclosures:**                                                                                            | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Cash paid in the period  for:                                                                                             |       |                                             |       |   |   |
| Interest                                                                                                                  |       | $                                                | 114        |   | $ | 35 |   |
| Income taxes                                                                                                              |       | $                                                | 891        |   | $ | — |   |
| Noncash investing  activities:                                                                                            |       |                                             |       |   |   |
| 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)Supplemental Information(Dollars in thousands)(Unaudited)**

 

| ** **                                                                                  | ** ** | **Quarter Ended March 31, 2005** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                  | ** ** | **ChannelWave,  Inc.**                               | ** ** | **Optum,  Inc.** | ** ** | **Total** | ** ** |
| Intangible assets  acquired                                                                 |       |                                                 | $          | 3,272 |   |   | $ | 13,726 |   | $ | 16,998 |   |
| Goodwill                                                                                    |       |                                                 | 2,896      |   |   | 24,151 |   | 26,922 |   |
| Other assets  acquired, not including cash                                                  |       |                                                 | 471        |   |   | 6,815 |   | 7,286 |   |
| Total assets  acquired                                                                      |       |                                                 | 6,639      |   |   | 44,692 |   | 51,206 |   |
| Less: Liabilities  acquired                                                                 |       |                                                 | 1,381      |   |   | 19,042 |   | 20,298 |   |
| Net assets acquired, not including cash                                                     |       |                                                 | 5,258      |   |   | 25,650 |   | 30,908 |   |
| Less: Value of  shares issued for acquisition                                               |       |                                                 | 4,280      |   |   | 26,124 |   | 30,404 |   |
| Plus: Acquisition  costs paid                                                               |       |                                                 | 75         |   |   | 50 |   | 125 |   |
| Plus: Cash paid  for escrow settlements — year ended December 31, 2005  |       |                                                 | —     |   |   | 745 |   | 745 |   |
| Payments for  acquisitions, net of transaction costs and cash acquired                      |       |                                                 | $          | 1,053 |   |   | $ | 321 |   | $ | 1,374 |   |

 

| ** **                                                             | ** ** | **Quarter Ended March 31, 2006** | ** ** |
|------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                             | ** ** | **Elance**                                           | ** ** | **Requisite,  Inc.** | ** ** | **Total** | ** ** |
| Intangible assets  acquired                                            |       | $                                                    | 3,500      |   |   | $ | — |   |   | $ | 3,500 |   |
| Goodwill                                                               |       | 11,614                                               |       |   | — |   |   | 11,614 |   |
| Other assets  acquired, not including cash                             |       | 1,575                                                |       |   | — |   |   | 1,575 |   |
| Total assets  acquired                                                 |       | 16,689                                               |       |   | — |   |   | 16,689 |   |
| Less: Liabilities  acquired                                            |       | 1,469                                                |       |   | — |   |   | 1,469 |   |
| 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                                          |       | 100                                                  |       |   | — |   |   | 100 |   |
| Plus: Cash paid  for escrow settlements                                |       | —                                               |       |   | 325 |   |   | 325 |   |
| Payments for  acquisitions, net of transaction costs and cash acquired |       | $                                                    | 3,569      |   |   | $ | 325 |   |   | $ | 3,894 |   |

 

The difference between the March 31, 2005 SupplementalInformation and the Condensed Consolidated Statements of Cash Flows is due to avaluation change in both the ChannelWave, Inc. and Optum Inc. opening balancesheet subsequent to March 31, 2005.

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

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

**1. BASIS OF PRESENTATION**

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 months ended March 31, 2006, includethe results of operations of Elance, Inc. (see note 4) from February 8,2006 through the end of the period. The results of operations for the interimperiods presented are not necessarily indicative of the results to be expectedfor any subsequent quarter or for the entire fiscal year ending December 31,2006. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America have been condensed oromitted in accordance with the Securities and Exchange Commission’s rules andregulations. The unaudited condensed consolidated financial statements andnotes included herein should be read in conjunction with the Company’s auditedconsolidated financial statements and notes included in the Company’s AnnualReport on Form 10-K and other documents that have been filed withthe Securities and Exchange Commission.

**2. SUMMARY OF SIGNIFICANTACCOUNTING 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 to the delivered elements (i.e. software product) whenthe criteria in SOP 97-2 have been met. If evidence of fair value ofthe undelivered elements of the arrangement does not exist, all revenue fromthe arrangement is deferred until such time evidence of fair value does exist,or until all elements of the arrangement are delivered.

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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 by the customer upon receipt and, therefore,implementation services do not involve significant customization to, ormodification or development of, the underlying software code.

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 accounting asservices 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 thepercentage-of-completion method based on labor hour inputs, revenues arepresented as product license revenue to the extent that the underlyingcontracts are for software licenses based on equal application of discountsacross all elements of the larger arrangement. For arrangements in whichpercentage-of-completion accounting is used, the Company records cash receiptsfrom customers and billed amounts due from customers in excess of recognizedrevenue as billings in excess of revenues earned on contracts in progress. Thetiming and amount of cash receipts from customers can vary significantlydepending on specific contract terms and can, therefore, have a significantimpact on the amount of billings in excess of revenues earned on contracts inprogress 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 12-24 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 basisthereafter. Rates for maintenance, including subsequent renewal rates, aretypically established based upon a 

8

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specified percentage ofnet license fees as set forth in the arrangement and is deemed to besubstantive by management. 

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 terms of the investment, the Company hasa total commitment of $2.0 million of which $1.4 million has been contributedto date for an ownership interest of less than 2%. This investment is stated atbook value and is recorded in other assets in the 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 inour financial statements or tax returns. Variations in the actual outcome ofthese future tax consequences could materially impact our financial position,our results of operations, or our 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) will require companies to measure all employee stock-basedcompensation awards using a fair value method and record such expense in theirconsolidated financial statements. The standard is effective for fiscal yearsbeginning after December 15, 2005.

Effective January 1, 2006, the Company hasadopted SFAS No. 123(R) using the modified prospective method. Under themodified prospective method, the Company is required to recognize compensationexpense for all share-based payments granted after the effective date, and alsofor all awards granted prior to the effective date of SFAS NO. 123(R) thatremain unvested. For the quarter ended March 31, 2006, the Companyincurred approximately $0.1 million in non-cash stock-based compensationcharges in connection with its adoption of SFAS No. 123(R). The Companydetermined the fair value for this charge using the Black-Scholes option-pricingmodel.

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 permits entities to recognizeas expense over the vesting period the fair value of all stock-based awards onthe date of grant. Alternatively, SFAS No. 123 also allowed entities tocontinue to apply the provisions of Accounting Principles Board Opinion No. 25,“*Accounting for Stock Issued to*

9

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*Employees*”(“APB 25”) and related interpretations. The Company applied the provisionsof APB 25 and provided the pro forma disclosures required by SFAS No. 123,as amended by SFAS No. 148, “*Accountingfor Stock-Based Compensation—Transition and Disclosure, an amendment of FASBStatement No. 123*.” As such, compensation expense would berecorded only if the fair value of the underlying stock exceeded the exerciseprice of the option on the grant date.

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 cost was recognizedin the quarter ended March 31, 2005 for stock options for which theexercise 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 months endedMarch 31, 2005 would approximate the pro forma amounts below:

| ** **                                                                                     | ** ** | **Three months  ended  March 31, 2005**           | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                                                                     | ** ** | **(in thousands,   except  per share data)** | ** ** |
| Net income, as reported                                                                        |       |                                                             | $          | 2,630 |   |   |
| Total fair value method  employee stock-based compensation expense, net of related tax effects |       |                                                             | (199       | ) |   |
| Pro forma net income                                                                           |       |                                                             | $          | 2,431 |   |   |
| Basic income per share:                                                                        |       |                                                             |       |   |   |
| As reported                                                                                    |       |                                                             | $          | 0.25 |   |   |
| Pro forma                                                                                      |       |                                                             | $          | 0.23 |   |   |
| Diluted income per  share:                                                                     |       |                                                             |       |   |   |
| As reported                                                                                    |       |                                                             | $          | 0.23 |   |   |
| Pro forma                                                                                      |       |                                                             | $          | 0.21 |   |   |

 

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 months ended March 31, 2005; an expected life of 4.25 years, anexpected volatility of 147%, a risk-free interest rate of 2.7% and a 0%dividend yield. There were no stock options granted in 2006.

**3. NET INCOME PER SHARE**

Netincome per share was computed as follows:

| ** **                                                                               | ** ** | **Three months ended  March 31,**               | ** ** |
|------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                                               | ** ** | **2006**                                                       | ** ** | **2005** | ** ** |
| ** **                                                                               | ** ** | **(in thousands, except  per share data)** | ** ** |
| **Basic  income per share:**                                                             | ** ** | ** **                                                     | ** ** | ** ** | ** ** |
| Net income                                                                               |       | $                                                              | 2,917      |   | $ | 2,630 |   |
| Weighted average common shares outstanding                                               |       | 11,897                                                         |       | 10,424 |   |
| Per share amount                                                                         |       | $                                                              | 0.25       |   | $ | 0.25 |   |
| **Diluted income per share:**                                                            | ** ** | ** **                                                     | ** ** | ** ** | ** ** |
| Net income                                                                               |       | $                                                              | 2,917      |   | $ | 2,630 |   |
| Weighted average common shares outstanding                                               |       | 11,897                                                         |       | 10,424 |   |
| Add: Effect of dilutive securities—stock options                                    |       | 774                                                            |       | 714 |   |
|           Common  stock held in escrow |       | 411                                                            |       | 275 |   |
| Diluted weighted average and equivalent shares  outstanding                              |       | 13,082                                                         |       | 11,413 |   |
| Per share amount                                                                         |       | $                                                              | 0.22       |   | $ | 0.23 |   |

 

10

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Common stock held inescrow is not included in the basic weighted average common shares outstandingcalculation until the shares are released from escrow.

For the three months endedMarch 31, 2006 and 2005, 58,810 and 67,210 shares, respectively,attributable to outstanding stock options were excluded from the calculation ofdiluted earnings per share because their effect was antidilutive.

**4. BUSINESS COMBINATIONS**

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 being held by the Company in escrow but were releasedon the anniversary date of the acquisition pursuant to the Purchase Agreement).The Company incurred $0.1 million of transaction costs. ChannelWave offersdemand chain solutions. On October 19, 2005, the Company completed arepurchase of 181,024 shares pursuant to Share Repurchase Agreements (the “ShareRepurchase Agreements”) with Commerce 5, Inc. (formerly known asChannelWave, Inc.) and a former executive officer of Commerce 5, Inc.,respectively. Pursuant to the terms of the Share Repurchase Agreements, theCompany repurchased shares of its common stock for a purchase price of $15.50per 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 fora period of fifteen months from the date of acquisition), and assumedapproximately $4.3 million of Optum indebtedness. The Company incurred$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 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 cash and 80,337 shares of the Company’s commonstock 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.

11

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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 which 75,622 sharesof the Company’s common stock are 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 shares of the Company’s commonstock are expected to be registered for resale on a Registration Statement onForm S-1. The Company incurred $0.1 million of transactioncosts

Thefollowing table summarizes the estimated fair values of the assets acquired andthe liabilities assumed on the effective dates of the ChannelWave, Optum, Xelusand Requisite acquisitions. The Company incurred approximately $0.1 million,$0.1 million, $0.1 million and $0.2 million of direct expensesrelated to the closing of the ChannelWave, Optum, Xelus and Requisiteacquisitions, respectively. The final allocations of the purchase price forRequisite are subject to change as the Company completes the valuation of theacquired assets and assumed liabilities.

| ** **                     | ** ** | **ChannelWave**                | ** ** | **Optum**                      | ** ** | **Xelus**                  | ** ** | **Requisite**                   | ** ** |
|--------------------------------|------------|--------------------------------|------------|--------------------------------|------------|----------------------------|------------|---------------------------------|------------|
| ** **                     | ** ** | **February 2, 2005** | ** ** | **February 7, 2005** | ** ** | **May 27, 2005** | ** ** | **November 22, 2005** | ** ** |
| ** **                     | ** ** | **(in thousands)**        | ** ** |
| Assets:                        |       |                           |       |                           |       |                       |       |                            |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents      |       |                           | $          | —                         |       |                       |       | $                               | 817        |   |   |   | $ | 844 |   |   |   | $ | 9,473 |   |   |
| Trade accounts receivable, net |       |                           | 421        |                           |       |                       | 4,235      |                            |       |   | 1,742 |   |   |   | 1,370 |   |   |
| Other current assets           |       |                           | —     |                           |       |                       | 516        |                            |       |   | 378 |   |   |   | 416 |   |   |
| Total current assets           |       |                           | 421        |                           |       |                       | 5,568      |                            |       |   | 2,964 |   |   |   | $ | 11,259 |   |   |
| Property and equipment         |       |                           | 50         |                           |       |                       | 1,644      |                            |       |   | 807 |   |   |   | 39 |   |   |
| Intangible assets              |       |                           | 3,272      |                           |       |                       | 13,726     |                            |       |   | 3,036 |   |   |   | 3,372 |   |   |
| Goodwill                       |       |                           | 2,896      |                           |       |                       | 24,151     |                            |       |   | 3,608 |   |   |   | 11,672 |   |   |
| Other assets                   |       |                           | —     |                           |       |                       | 420        |                            |       |   | — |   |   |   | 299 |   |   |
| Total assets                   |       |                           | $          | 6,639                          |       |                       |       | $                               | 45,509     |   |   |   | $ | 10,415 |   |   |   | $ | 26,641 |   |   |
| Liabilities:                   |       |                           |       |                           |       |                       |       |                            |       |   |   |   |   |   |   |   |   |
| Accounts payable               |       |                           | $          | —                         |       |                       |       | $                               | 1,703      |   |   |   | $ | 1,141 |   |   |   | 26 |   |   |
| Accrued liabilities            |       |                           | 52         |                           |       |                       | 6,215      |                            |       |   | 648 |   |   |   | 2,595 |   |   |
| Accrued compensation           |       |                           | —     |                           |       |                       | 3,073      |                            |       |   | 1,023 |   |   |   | 500 |   |   |
| Deferred revenue               |       |                           | 1,329      |                           |       |                       | 3,587      |                            |       |   | 4,803 |   |   |   | 1,391 |   |   |
| Short-term lease obligation    |       |                           | —     |                           |       |                       | 165        |                            |       |   | — |   |   |   | — |   |   |
| Short-term debt obligation     |       |                           | —     |                           |       |                       | 1,762      |                            |       |   | 2,204 |   |   |   | — |   |   |
| Long-term debt obligation      |       |                           | —     |                           |       |                       | 2,537      |                            |       |   | 69 |   |   |   | — |   |   |
| Total liabilities              |       |                           | 1,381      |                           |       |                       | 19,042     |                            |       |   | 9,888 |   |   |   | 4,512 |   |   |
| Net assets  acquired           |       |                           | $          | 5,258                          |       |                       |       | $                               | 26,467     |   |   |   | $ | 527 |   |   |   | $ | 22,129 |   |   |

 

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Thefollowing table summarizes the estimated fair values of the assets acquired andthe liabilities assumed on the effective date of the Elance acquisition. TheCompany incurred approximately $0.1 million of direct expenses related tothe closing of the transaction. The final allocations of the purchase price aresubject to change as the Company completes the valuation of the acquired assetsand assumed 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              |       |                                 | 3,500      |   |   |
| Goodwill                       |       |                                 | 11,614     |   |   |
| Other assets                   |       |                                 |       |   |   |
| Total assets                   |       |                                 | 16,720     |   |   |
| Liabilities:                   |       |                                 |       |   |   |
| Accounts payable               |       |                                 | 7          |   |   |
| Accrued liabilities            |       |                                 | 142        |   |   |
| Accrued compensation           |       |                                 | 42         |   |   |
| Deferred revenue               |       |                                 | 1,278      |   |   |
| Total liabilities              |       |                                 | 1,469      |   |   |
| Net assets  acquired           |       |                                 | $          | 15,251 |   |   |

 

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Thefollowing table sets forth the allocation, to date, of intangible assets tocustomer relationships, developed technology, trade names and order backlog, aswell as the in-process R&D charge recorded from the acquisition of bTrade.These intangible assets, as well as the goodwill recorded by the Company, willbe evaluated, as required, to compare the fair values of such assets to theirrecorded values. If impairment exists, the carrying values of such assets willbe reduced to their fair value.

| ** **                                                         | ** ** | **Customer  Relationships(1)** | ** ** | **Developed  Technology(2)** | ** ** | **Trade  Names(3)** | ** ** | **Order  Backlog(4)** | ** ** | **In process  R&D(5)** | ** ** | **Total** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|---------------------|------------|-----------------------|------------|---------------------------------|------------|-----------|------------|
| Elance(6)                                                          |       |                           | $          | 3,500                        |       |                |       | $                     |       |                            |       |      | $          | — |   |   |   | $ | — |   |   |   | $ | — |   |   | $ | 3,500 |   |
| 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                    |       |                           | 21,761     |                         |       |                | 7,842      |                  |       |                            | 150        |      |       |   | 851 |   |   |   | 6 |   |   | 30,610 |   |
| Accumulated  amortization to date                                  |       |                           | (3,620     | )                            |       |                | (1,693     | )                     |       |                            | (98        | )         |       |   | (619 | ) |   |   | (6 | ) |   | (6,036 | ) |
| Balance at  March 31, 2006                                    |       |                           | $          | 18,141                       |       |                |       | $                     | 6,149      |                            |       |      | $          | 52 |   |   |   | $ | 232 |   |   |   | $ | — |   |   | $ | 24,574 |   |
| Amortization expense                                               |       |                           |       |                         |       |                |       |                  |       |                            |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Three months  ended March 31, 2006                       |       |                           | 808        |                         |       |                | 433        |                  |       |                            | 13         |      |       |   | 163 |   |   |   | — |   |   | 1,417 |   |
| Three months  ended March 31, 2005                       |       |                           | 401        |                         |       |                | 168        |                  |       |                            | 57         |      |       |   | 291 |   |   |   | — |   |   | 917 |   |
| Estimated amortization  expense for the 12 months ended: |       |                           |       |                         |       |                |       |                  |       |                            |       |      |       |   |   |   |   |   |   |   |   |   |   |
| December 31,  2006                                            |       |                           | 3,285      |                         |       |                | 1,615      |                  |       |                            | 50         |      |       |   | 395 |   |   |   | — |   |   | 5,345 |   |
| December 31,  2007                                            |       |                           | 3,279      |                         |       |                | 1,575      |                  |       |                            | 15         |      |       |   | — |   |   |   | — |   |   | 4,869 |   |
| December 31,  2008                                            |       |                           | 3,279      |                         |       |                | 1,362      |                  |       |                            | —     |      |       |   | — |   |   |   | — |   |   | 4,641 |   |
| December 31,  2009                                            |       |                           | 3,082      |                         |       |                | 1,226      |                  |       |                            | —     |      |       |   | — |   |   |   | — |   |   | 4,308 |   |
| December 31,  2010                                            |       |                           | 2,928      |                         |       |                | 463        |                  |       |                            | —     |      |       |   | — |   |   |   | — |   |   | 3,391 |   |
| Thereafter                                                         |       |                           | 3,096      |                         |       |                | 341        |                  |       |                            | —     |      |       |   | — |   |   |   | — |   |   | 3,437 |   |

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(1)          Customer relationshipsare amortized over seven years for Requisite, Xelus, Optum and ChannelWave,five and one-half years for Elance, five years for bTrade and Webridge, andthree years for Allegis.

(2)          Developed technology isamortized over six years for Requisite, five years for Optum, ChannelWave andbTrade, four years for Webridge and three years for Xelus and is reflected inthe cost of product license revenue on the consolidated statement of income andcomprehensive income.

(3)          Trade names areamortized over three years.

(4)          Order backlogs areamortized over one year.

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

(6)          Pending final valuationby an independent firm.

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Thefollowing unaudited pro forma financial information for the three months ended March 31,2006 and 2005 presents the consolidated operations of the Company as if all ofthe acquisitions had been made on January 1, 2005, after giving effect tocertain adjustments for the pro forma acquisition as of the assumed January 1,2005 acquisition date. The unaudited pro forma financial information isprovided for informational purposes only. It should not be construed to beindicative of the Company’s consolidated results of operations had theacquisitions been consummated on the earlier date and do not project theCompany’s results of operations for any future period:

| ** **                    | ** ** | **Three months ended  March 31,**                                                                                 | ** ** |
|-------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                    | ** ** | **          2006          ** | ** ** | **          2005          ** | ** ** |
| ** **                    | ** ** | **(in thousands except share amount)**                                                                       | ** ** |
| Revenues                      |       |                                                                                                                             | $          | 20,428 |   |   |   | $ | 21,609 |   |   |
| Net income (loss)             |       |                                                                                                                             | 2,940      |   |   |   | 2,774 |   |   |
| Basic net income  per share   |       |                                                                                                                             | $          | 0.25 |   |   |   | $ | 0.27 |   |   |
| Diluted net income per  share |       |                                                                                                                             | $          | 0.22 |   |   |   | $ | 0.24 |   |   |

 

**5. RESTRUCTURING**

As of March 31, 2005,the Company had a restructuring accrual in the amount of $61,000 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 in the quarter ended March 31, 2005 was $18,000.

**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 6.02% in the quarter ended March 31, 2006. There is a fee of 0.3%on the unused portion of this line of credit. On March 31, 2006, Companyborrowings under this revolving line of credit were $6.5 million. Theproceeds were used to pay off debt and certain liabilities assumed in the Optumand Xelus acquisitions. Of the remaining $3.5 million, up to $2.0 millionmay be used for the Company’s letters of credit. As of March 31, 2006, theCompany has $0.6 outstanding under various letters of credit. The line ofcredit contains terms that, among other provisions, require the Company tomaintain certain minimum net worth and other financial ratios and specificlimits or restrictions on additional indebtedness, liens and continuity ofbusiness. Provisions under this line of credit are not considered restrictiveto normal operations. The Company is not obligated to make any principalpayments on the loan until April 1, 2008 unless it violates any loancovenants. The Company was not in violation of any loan covenants at March 31,2006.

**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 the claim. Historically, the Companyhas not been required to pay material amounts in connection with claimsasserted under these provisions, and accordingly, the Company has not recordeda liability relating to such provisions.

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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 tax authorities in the Netherlands that asserted tax deficiencies,penalties and interest 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 March 31, 2006 and December 31,2005 consolidated balance sheets.

Inaddition to it’s revolving credit facility, the Company also assumed threeshort-term notes in connection with its acquisition of Xelus. The table belowoutlines the payment time frames for these notes. The table also outlines theCompany’s lease commitments over the next five years. The Company is obligatedas lessee under certain noncancelable operating leases for equipment, cars andoffice space, and is also obligated to pay insurance, maintenance and otherexecutory costs associated with the leases.

| ** ** | ** ** | **Operating  Leases(1)** | ** ** | **Short-term  Notes payable** | ** ** | **Long-term  Debt** | ** ** |
|------------|------------|--------------------------|------------|------------------------------------|------------|---------------------|------------|
| 2006       |       |                     | $          | 3,172                              |       |                |       | $ | 307 |   |   |   | $ | — |   |   |
| 2007       |       |                     | 1,308      |                               |       |                | —     |   |   |   | — |   |   |
| 2008       |       |                     | 1,079      |                               |       |                | —     |   |   |   | 6,456 |   |   |
| 2009       |       |                     | 802        |                               |       |                | —     |   |   |   | — |   |   |
| 2010       |       |                     | 486        |                               |       |                | —     |   |   |   | — |   |   |

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(1)          TheCompany has sub-lease commitments of $1.0 million pertaining to leaseobligations.

**8. Income Taxes**

Our effective tax rates for the first quarter ofcalendar year 2006 and the first quarter of calendar year 2005 were 41% and 0%,respectively. The increase in the tax rate resulted primarily from the reversalof a valuation allowance on our net deferred tax assets (not related to ouracquisitions) in the fourth quarter of 2005. The effective tax rate for 2006 ismore than the statutory U.S. federal income tax rate principally due to theeffect of the amortization arising from certain acquisitions which is notdeductible for tax purposes.

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**Item2.**                        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, improvefinancial performance, lower costs for partners and customers, increase brandloyalty, improve customer service and reduce risk. The Company’s collaborativecommerce and supply chain solutions are designed to enable companies to streamlinetheir trading partner interactions to drive business value and competitiveadvantage. 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 which the Company acquired certain assets fromChannelWave, including substantially all assets relating to ChannelWave’sPartner Relationship Management System and Service Information Systembusinesses, for consideration comprising $1.0 million of cash and 225,807shares valued at $18.954 per share of the Company’s common stock (of which29,033 shares were being held by the Company in escrow but were released on theanniversary date of the acquisition pursuant to the Purchase Agreement). TheCompany incurred $0.1 million of transaction costs. On October 19,2005, the Company completed a repurchase of 181,024 shares pursuant to ShareRepurchase Agreements (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.

On February 7, 2005, the Company entered into anAgreement and Plan of Merger (the “Merger Agreement”) with Optum, Inc. (“Optum”),and its stockholders, pursuant to which the Company acquired Optum. Inconsideration 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 fora period of fifteen months from the date of acquisition), and assumedapproximately $4.3 million of Optum indebtedness. The Company incurred$0.1 million of transaction costs.

On May 27, 2005, the Company entered into anAgreement and Plan of Merger (the “Merger Agreement”) with Xelus, Inc. (“Xelus”),and its stockholders, pursuant to which the Company acquired Xelus. Inconsideration 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 costs in the amount of$0.1 million. No shares of Company stock were issued in connection with theXelus acquisition.

On November 22, 2005, the Company acquired all ofthe 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 of Requisite(of which $93,800 in cash and 80,337 shares of the Company’s common stock arebeing held by an escrow agent to satisfy certain potential obligations ofRequisite and its former stockholders for a period of twelve months from 

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the date of acquisition). Theshares of the Company’s common stock are expected to be registered for resaleon 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 75,980 shares of theCompany’s common stock are 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 shares of the Company’s commonstock are expected to be registered for resale on a Registration Statement on Form S-1.The Company incurred $0.1 million of transaction costs.

The Company focused its efforts in 2005 and the firstquarter of 2006 on maintaining and improving profitability as well asbroadening its product offerings through acquisitions. In 2005 and through thefirst quarter of 2006, the Company reported increasing operating profits.Management plans to continue investing in new and improved product offeringsand in increasing the exposure of the Company’s products and services throughits targeted marketing programs. Management further believes that eachinvestment must be prudently made and justified by the expected return on suchinvestment.

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. The recurring revenue opportunities comefrom subscriptions or maintenance and hosting services. While the Company mayhave better visibility of future revenue from subscription licenses, customersmake the 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, reporting, opportunity management, product informationmanagement, sales order management, after sales service management, supplychain management and warehouse management; network logistics management, partsoptimization and master data management. The Company also recognizes revenuefrom services, including business consulting, implementation, maintenance,training and managed hosting services.

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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 the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2005, filed with the Securities andExchange Commission.

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**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 March 31,** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|
| ** **                             | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **                             | ** ** | ** **                                           | ** ** | **% of** | ** ** | ** ** | ** ** | **%** of | ** ** |
| ** **                             | ** ** | **(in 000’s)**                             | ** ** | **Revenue** | ** ** | **(in 000’s)** | ** ** | **Revenue** | ** ** |
| Revenues                               |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Product license                        |       | $                                                    | 2,676      |   |   | 13.6 | % |   | $ | 1,963 |   |   | 18.0 | % |   |
| Hardware                               |       | 376                                                  |       |   | 1.9 | % |   | — |   |   | 0.0 | % |   |
| Total product license and hardware     |       | 3,052                                                |       |   | 15.5 | % |   | 1,963 |   |   | 18.0 | % |   |
| Service                                |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Maintenance and  hosting               |       | 9,007                                                |       |   | 45.7 | % |   | 3,814 |   |   | 34.9 | % |   |
| Consulting and  implementation service |       | 5,643                                                |       |   | 28.7 | % |   | 3,497 |   |   | 32.0 | % |   |
| Subscription                           |       | 1,986                                                |       |   | 10.1 | % |   | 1,651 |   |   | 15.1 | % |   |
| Total Service                          |       | 16,636                                               |       |   | 84.5 | % |   | 8,962 |   |   | 82.0 | % |   |
| Total Revenues                         |       | 19,688                                               |       |   | 100.0 | % |   | 10,925 |   |   | 100.0 | % |   |
| Cost of Revenues                       |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Product license  and hardware          |       | 818                                                  |       |   | 4.2 | % |   | 198 |   |   | 1.8 | % |   |
| Service                                |       | 6,083                                                |       |   | 30.9 | % |   | 3,989 |   |   | 36.5 | % |   |
| Total cost of  revenues                |       | 6,901                                                |       |   | 35.1 | % |   | 4,187 |   |   | 38.3 | % |   |
| Gross profit                           |       | 12,787                                               |       |   | 64.9 | % |   | 6,738 |   |   | 61.7 | % |   |
| Operating  Expenses:                   |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Sales and  marketing                   |       | 2,091                                                |       |   | 10.6 | % |   | 1,146 |   |   | 10.5 | % |   |
| Research and  development              |       | 2,439                                                |       |   | 12.4 | % |   | 1,209 |   |   | 11.1 | % |   |
| General and  administrative            |       | 2,364                                                |       |   | 12.0 | % |   | 1,006 |   |   | 9.2 | % |   |
| Amortization of  intangibles assets    |       | 986                                                  |       |   | 5.0 | % |   | 720 |   |   | 6.6 | % |   |
| Stock-based  compensation              |       | 81                                                   |       |   | 0.4 | % |   | — |   |   | 0.0 | % |   |
| Total operating  expenses              |       | 7,961                                                |       |   | 40.4 | % |   | 4,081 |   |   | 37.4 | % |   |
| Operating income                       |       | 4,826                                                |       |   | 24.5 | % |   | 2,657 |   |   | 24.3 | % |   |
|                                        |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Comparison of thethree months ended March 31, 2006 to the three months ended March 31,2005**

*Revenue*

Total revenue increased$8.8 million, or 80.2%, to $19.7 million for the three months ended March 31,2006 from $10.9 million for the three months ended March 31, 2005. Productlicense revenue consists of revenue from separate product-only agreements andfrom multiple element agreements accounted for under the percentage-of-completionmethod using hours of input in relation to the estimate of total hours tocomplete the engagements. Product license and hardware revenue increased by$1.1 million, or 55.5%, to $3.1million including $0.4 million from the sale ofhardware. The remaining increase of $0.7 million was attributable to $1.0million in license sales by Xelus, Inc. (acquired on May 27, 2005). Thisincrease was partially offset by a $0.3 million decrease in the Company’slegacy license sales. Maintenance and hosting revenues increased by $5.2million or 136.2% to $9.0 million for the three months ended March 31,2006. The increase was primarily attributable to the acquisitions of Xelus, Inc.and a full quarter of maintenance and hosting by Optum, Inc., which was acquiredon February 7, 2005. These acquisitions accounted for $3.1 million of theincrease in maintenance and hosting revenue. Of the remaining $2.1 millionincrease, $1.7 million resulted from the acquisitions of Requisite Inc andElance, Inc. Internal growth accounted for $0.4 million of the 2006increase. Consulting and implementation service revenues are largely comprisedof fees 

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relatedto time and 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 $2.1 million, or 61.4%, to $5.6million, over the prior year quarter. Acquisitions increased consulting andimplementation services by $2.7 million. Xelus accounted for 60.0% of this $2.7million increase. Elance accounted for 18.8% or $0.5 million of the $2.7million increase. The remaining increase resulted from having a full quarter ofrevenue from Optum and the acquisition of Requisite. These acquisitionscontributed $0.3 million each to the increase in revenue. The increase inconsulting and implementation service of $2.7 million emanated from acquisitionsand was partially offset by a decrease of $0.6 million in consulting andimplementation service from to the Company’s legacy operations. This decreasewas due to a reduction in revenues in the Company’s retail product line. Subscriptionrevenue increased by $0.3 million, to $2.0 million for the quarter ended March 31,2006. The increase is a direct result of the acquisition of Requisite.

*Cost of Revenue*

Total cost of revenueincreased by $2.7 million, or 64.8% to $6.9 million for the three months ended March 31,2006. 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,hardware and third party contracted labor. The increase in employeecompensation results from the acquisitions of Xelus, Requisite and Elance. Theseacquisitions added approximately 69 full time equivalents to the service andsupport departments. The additional head count resulted in an increase incompensation expense of $1.5 million. Contracted labor increased by $0.7.Amortization of developed technology has increased by $0.3 million. Theamortization of developed technology resulted from the allocation of purchaseprice to developed technologies in the Company’s acquisitions. Outside of theincreases related to acquisitions, the Company also incurred an increase incost of revenue of $0.2 million pertaining to the sale of hardware. Grossprofit margins increased to 64.9% for the three months ended March 31,2006, compared to 61.7% for the three months ended March 31, 2005. Thegross margin percentage increase is due to an improvement in the utilizationrate of professional service staff and the increase in higher marginsubscription and license revenue.

*Operating Expenses*

*Salesand Marketing**  *Salesand marketing expenses increased by approximately $1.0 million, or 82.5%, to$2.1 million for the three months ended March 31, 2006 from $1.1millionfor the three months ended March 31, 2005. The increase in sales andmarketing expense was related to an increase in head count due to the Xelus,Requisite and Elance acquisitions. These acquisitions added 10 full timeequivalents and an additional $0.6 million in compensation expense. The legacycompanies added 3 full time sales people in the first quarter of 2006, adding$0.2 million in compensation and related expenses. The remaining increase of$0.2 million in the quarter ended March 31, 2006 pertains to corporatemarketing expenditures.

*Researchand Development**  *Researchand development expenses increased by approximately $1.2 million, or101.7%, to $2.4 million for the three months ended March 31, 2006, from$1.2 million for the comparable prior year three-month period. Thisincrease was almost entirely attributable to an increase in employeecompensation and related costs. The Xelus, Requisite and Elance acquisitionsresulted in an increase in the Company’s employee compensation expense by $1.2million. The Company added 33 full time equivalents with these acquisitions. Todate, all software development costs have been expensed as incurred.

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*Generaland Administrative**  *Generaland administrative expenses increased by approximately $1.4 million, or135.0%, to $2.4 million for the three months ended March 31, 2006from $1.0 million for the three months ended March 31, 2005. Theincrease related to an increase in compensation expense in the financedepartment of $0.2 million (resulting from the addition of four full timeequivalents), an increase in contracted labor (Sarbanes Oxley compliance work)of $0.2 million, an increase in legal fees relating to general matters of$0.3 million, an increase in executive compensation of $0.2 relating toadding two full time equivalents in the third quarter of 2005, an increase inaccounting fees related to Sarbanes Oxley of $0.2 million and an increasein use taxes 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 seven years and accounted for the $0.3 millionincrease in amortization expense for the quarter ended March 31, 2006.

*Stock-based Compensation**  *Stock-based compensation representsthe charge of $0.1 million in connection with the adoption, as ofJanuary 1, 2006, of the provisions of SFAS 123(R) for the fair valueof share-based payments granted to employees after the adoption of SFAS123(R) and the fair value of all awards granted to employees prior to theeffective date that are unvested.

**Liquidity andCapital Resources**

At March 31, 2006, the Company had $22.3 millionof cash and cash equivalents.

Net cash provided by operating activities was$8.2 million for the three months ended March 31, 2006. The cashprovided by operating activities was the product of net income plus depreciation,amortization, provision for doubtful accounts, stock-based compensation and anoncash charge for income taxes. Sources of cash from operations include $2.9 millionin net income, $4.0 million in depreciation, amortization, provisions fordoubtful accounts and income taxes, stock-based compensation, and a source ofcash from the decrease in receivables (net of $1.1 million of receivablesacquired) of $4.0 million, and an increase in accrued rent, accruedexpenses and other liabilities of $1.1 million (net of $0.2 millionof accrued expenses assumed). The reduction of receivables resulted from thereceipt of payments from existing customers invoiced in the fourth quarter of2005. Cash sources were partially offset by uses of cash of $3.8 million involvingdecreases in deferred revenue, and prepaids and other expenses and a use ofcash from the other working capital accounts in the amount of $0.3 million.The decrease in deferred revenue resulting from the recognition of revenue frompreviously billed transactions amounted to $2.1 million (net of $1.3 millionof deferred revenue acquired) and the $1.4 million increase in prepaidsand other current assets resulted from tax payments.

The Company used $4.2 million in cash forinvesting activities in the first quarter ended March 31, 2006. Of the$4.2 million, $3.6 million arose from the acquisition of Elance and$0.3 involved a payment relating to the acquisition of Requisite. The remaining$0.3 million was used to purchase fixed assets.

Net cash provided by financing activities was $0.8 million.The Company generated $1.3 million from the exercise of stock options. Thiswas partially offset by the repayment of short and long-term debt in the amountof $0.5 million.

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 6.02% in the quarterended March 31, 2006. There is a fee of 0.3% on the unused portion of thisline of credit. On March 31, 2006, the Company had $6.5 millionoutstanding under the revolving line of credit, which was classified aslong-term debt. The proceeds were used to pay off debt and certain liabilitiesassumed in the Optum and Xelus acquisitions. Of the remaining $3.5 million,up to $2.0 million may be used for the Company’s letters of credit. As of March 31,2006, the 

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Company had $0.6 millionof letters of credit outstanding. The line of credit contains terms that, amongother provisions, require the Company to maintain certain minimum net worth andother financial ratios and specific limits or restrictions on additionalindebtedness, liens and continuity of business. Provisions under this line ofcredit are not considered restrictive to normal operations. The Company has noobligation to make principal payments on this loan until April 1, 2008,unless it violates any loan covenants. As of March 31, 2006, the Companywas not in violation of any of the covenants.

The Company continues to evaluate strategicalternatives, including opportunities to strategically grow the business, enterinto strategic relationships, make acquisitions or enter into businesscombinations. The Company can provide no assurance that any such strategic alternativeswill come to fruition and may elect 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.

**Item3.**                        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 alsobe derived from international markets and may be denominated in the currency ofthe applicable market. As a result, operating results may become subject to 

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significantfluctuations based upon changes in the exchange rates of certain currencies inrelation to the U.S. dollar. Furthermore, to the extent the Company engages ininternational sales denominated in U.S. dollars, an increase in the valueof the U.S. dollar relative to foreign currencies could make the Company’sproducts less competitive in international markets. Although the Company willcontinue to monitor its exposure to currency fluctuations, and, whenappropriate, may use financial hedging techniques in the future to minimize theeffect of these fluctuations, there is no assurance that exchange ratefluctuations will not adversely affect financial results in the future.

*Interest Rate Risk*

As of March 31, 2006,the Company had cash and cash equivalents of $22.3 million and short-termand long-debt of $0.3 million and $6.4 million, respectively. Risinginterest rates will increase interest income from short-term investments andinterest expense on the Company’s debt. A change in interest rates of 0.5%would cause a corresponding change in annual interest income of approximately$0.1 million and an increase in interest expense of less than $0.1 million.

**Item4.**                        Controlsand Procedures

(a) Evaluation of Disclosure Controls and Procedures

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 being reported on, whichcould materially affect, or are reasonably likely to materially affect, theCompany’s internal control over financial reporting.

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**PART II.   OTHERINFORMATION**

Items 1, 1A, 2, 3, 4 and 5are inapplicable and have been omitted from this report.

**Item6.**                        Exhibitsand Reports on Form 8-K

**Exhibits:**

Thefollowing exhibits are filed as part of this Form 10-Q.
| Exhibit  Number | ** ** | **Description**                                                                                             |
|-----------------|------------|-------------------------------------------------------------------------------------------------------------|
| 2.3*            |       | Elance Asset Purchase Agreement                                                                             |
| 31.1            |       | Certification of Michael W. Ferro, Jr. pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2            |       | Certification of Michael W. Nelson pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002          |
| 32.1            |       | Certification of Michael W. Ferro, Jr. pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 32.2            |       | Certification of Michael W. Nelson pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002          |

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*                    Incorporated byreference to the Company’s Current Report on Form 8-K, dated February 10,2006

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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/  MICHAEL W. NELSON |
| * *          | * *             | Michael W. Nelson |
|              | * *             | *Chief  Financial Officer and Treasurer  (Principal Financial and Accounting Officer)* |
| Date: May 8, 2006 | * *             |   |

 

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