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

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FORM 10-Q

|(Mark One)                                                    |                                                                                         
|------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                                             | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|For the Quarterly Period Ended June 30, 2003                 
|or                                                           
|o                                                             | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
from                             to

Commission File Number 0-30881

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

|Delaware(State or other jurisdiction
of incorporation or organization)                              |  | 36-4088644(I.R.S. Employer Identification Number)
|--------------------------------------------------------------------------------------------------- |  | -------------------------------------------------
|200 East Randolph Drive, 52nd Floor
Chicago, Illinois 60601(Address of principal executive offices)
|(312) 482-9006(Registrant's telephone number, including area code)                                 

Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share

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

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

As
of August 13, 2003, there were 8,136,643 shares of the registrant's common shares outstanding.

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CLICK COMMERCE, INC.  INDEX

|           |  |                                                                                                                                                       |  | Page No.
|---------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------
|PART I.    |  | FINANCIAL INFORMATION                                                                                                                                 |  | 3       
|Item 1.    |  | Financial Statements                                                                                                                                  |  | 3       
|           |  | Condensed Consolidated Balance Sheets at June 30, 2003 (unaudited) and December 31, 2002                                                              |  | 3       
|           |  | Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2003 and June 30, 2002 (unaudited) |  | 4       
|           |  | Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002 (unaudited)                                           |  | 5       
|           |  | Notes to Condensed Consolidated Financial Statements (unaudited)                                                                                      |  | 6       
|Item 2.    |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                                                                 |  | 12      
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                                                                            |  | 20      
|Item 4.    |  | Controls and Procedures                                                                                                                               |  | 21      
|PART II.   |  | OTHER INFORMATION                                                                                                                                     |  | 22      
|Item 1.    |  | Legal Proceedings                                                                                                                                     |  | 22      
|Item 2.    |  | Changes in Securities and Use of Proceeds                                                                                                             |  | 22      
|Item 3.    |  | Defaults Upon Senior Securities                                                                                                                       |  | 22      
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                                                                   |  | 22      
|Item 5.    |  | Other Information                                                                                                                                     |  | 22      
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                                                                                      |  | 22      
|SIGNATURES |  | 24                                                                                                                                                   

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PART I.    FINANCIAL INFORMATION

Item 1.    Financial Statements

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

|                                                                                                                                                |                                                                | June 30,
2003 |         | December 31,
2002 | 
|----------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------- | ------------- | ------- | ----------------- | 
|
|ASSETS                                                                                                                                          |                                                                |               |         |                   | 
|Current assets:                                                                                                                                 |                                                                |               |         |                   | 
|                                                                                                                                                | Cash and cash equivalents                                      |               | $       | 12,225            | 
|                                                                                                                                                | Short-term investments                                         |               |         |                  | 
|                                                                                                                                                | Trade accounts receivable, net                                 |               |         | 4,656             | 
|                                                                                                                                                | Prepaids and other current assets                              |               |         | 1,043             | 
|                                                                                                                                                |                                                                |               |         |                   | 
|                                                                                                                                                | Total current assets                                           |               |         | 17,924            | 
|Property and equipment, net                                                                                                                     |                                                                |               | 1,112   |                   | 
|Restricted cash                                                                                                                                 |                                                                |               | 170     |                   | 
|Goodwill and intangible assets                                                                                                                  |                                                                |               | 466     |                   | 
|Other assets                                                                                                                                    |                                                                |               | 300     |                   | 
|                                                                                                                                                |                                                                |               |         |                   | 
|                                                                                                                                                | Total assets                                                   |               | $       | 19,972            | 
|                                                                                                                                                |                                                                |               |         |                   | 
|LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                                            |                                                                |               |         |                   | 
|Current liabilities:                                                                                                                            |                                                                |               |         |                   | 
|                                                                                                                                                | Accounts payable                                               |               | $       | 737               | 
|                                                                                                                                                | Billings in excess of revenues earned on contracts in progress |               |         | 351               | 
|                                                                                                                                                | Deferred revenue, short term                                   |               |         | 4,958             | 
|                                                                                                                                                | Accrued compensation                                           |               |         | 1,033             | 
|                                                                                                                                                | Accrued expenses and other current liabilities                 |               |         | 2,189             | 
|                                                                                                                                                | Restructuring accrual                                          |               |         | 1,122             | 
|                                                                                                                                                | Current portion of capital lease obligations                   |               |         | 327               | 
|                                                                                                                                                |                                                                |               |         |                   | 
|                                                                                                                                                | Total current liabilities                                      |               |         | 10,717            | 
|Capital lease obligations, less current portion                                                                                                 |                                                                |               |        |                   | 
|Accrued restructuring, long term                                                                                                                |                                                                |               | 1,042   |                   | 
|                                                                                                                                                |                                                                |               |         |                   | 
|                                                                                                                                                | Total liabilities                                              |               |         | 11,759            | 
|                                                                                                                                                |                                                                |               |         |                   | 
|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; 8,165,707 and 8,121,850 shares issued; 8,136,643 and 8,092,786 shares outstanding |                                                                |               | 8       |                   | 
|Additional paid-in capital                                                                                                                      |                                                                |               | 62,252  |                   | 
|Accumulated other comprehensive income                                                                                                          |                                                                |               | 144     |                   | 
|Deferred compensation                                                                                                                           |                                                                |               | (202    | )                 | 
|Treasury stock, at cost29,064 and 29,064 shares                                                                                                |                                                                |               | (117    | )                 | 
|Accumulated deficit                                                                                                                             |                                                                |               | (53,872 | )                 | 
|                                                                                                                                                |                                                                |               |         |                   | 
|                                                                                                                                                | Total shareholders' equity                                     |               |         | 8,213             | 
|                                                                                                                                                |                                                                |               |         |                   | 
|                                                                                                                                                | Total liabilities and shareholders' equity                     |               | $       | 19,972            | 
|                                                                                                                                                |                                                                |               |         |                   | 

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

3

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

|                                                             |                                                                                                                                                                                                                                                            | Three months ended June 30, |           | Six months ended June 30, |  
|------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------- | --------- | ------------------------- | -
|
|Revenues                                                     |                                                                                                                                                                                                                                                            |                             |           |                           |  
|                                                             | Product license                                                                                                                                                                                                                                            |                             | $         | 689                       |  
|                                                             | Subscription                                                                                                                                                                                                                                               |                             |           | 944                       |  
|                                                             | Maintenance and hosting                                                                                                                                                                                                                                    |                             |           | 1,705                     |  
|                                                             | Service                                                                                                                                                                                                                                                    |                             |           | 1,741                     |  
|                                                             |                                                                                                                                                                                                                                                            |                             |           |                           |  
|                                                             | Total revenues                                                                                                                                                                                                                                             |                             |           | 5,079                     |  
|                                                             |                                                                                                                                                                                                                                                            |                             |           |                           |  
|Cost of revenues                                             |                                                                                                                                                                                                                                                            |                             |           |                           |  
|                                                             | Product                                                                                                                                                                                                                                                    |                             |           | 148                       |  
|                                                             | Service (exclusive of $2 and $17 for the three months ended June 30, 2003 and 2002, respectively, and $4 and $29 for the six months ended June 30, 2003 and 2002 respectively, reported below as amortization of
stock-based compensation)                 |                             |           | 2,524                     |  
|                                                             |                                                                                                                                                                                                                                                            |                             |           |                           |  
|                                                             | Total cost of revenues                                                                                                                                                                                                                                     |                             |           | 2,672                     |  
|                                                             |                                                                                                                                                                                                                                                            |                             |           |                           |  
|Gross profit                                                 |                                                                                                                                                                                                                                                            |                             | 2,407     |                           |  
|                                                             |                                                                                                                                                                                                                                                            |                             |           |                           |  
|Operating expenses:                                          |                                                                                                                                                                                                                                                            |                             |           |                           |  
|                                                             | Sales and marketing (exclusive of $6 and $360 for the three months ended June 30, 2003 and 2002, respectively, and $37 and $732 for the six months ended June 30, 2003 and 2002, respectively, reported below as
amortization of stock-based compensation) |                             |           | 1,225                     |  
|                                                             | Research and development (exclusive of $2 for the three months ended June 30, 2002, and $2 and $5 for the six months ended June 30, 2003 and 2002, respectively, reported below as amortization of stock-based
compensation)                               |                             |           | 887                       |  
|                                                             | General and administrative (exclusive of $21 for the three months ended June 30, 2002, and $45 for the six months ended June 30, 2002, reported below as amortization of stock-based compensation)                                                         |                             |           | 1,714                     |  
|                                                             | Amortization of stock-based compensation                                                                                                                                                                                                                   |                             |           | 8                         |  
|                                                             | Amortization of intangible assets                                                                                                                                                                                                                          |                             |           | 28                        |  
|                                                             | Restructuring and other charges                                                                                                                                                                                                                            |                             |           | 3,942                     |  
|                                                             |                                                                                                                                                                                                                                                            |                             |           |                           |  
|                                                             | Total operating expenses                                                                                                                                                                                                                                   |                             |           | 7,804                     |  
|                                                             |                                                                                                                                                                                                                                                            |                             |           |                           |  
|Operating loss                                               |                                                                                                                                                                                                                                                            |                             | (5,397    | )                         |  
|                                                             |                                                                                                                                                                                                                                                            |                             |           |                           |  
|Interest income                                              |                                                                                                                                                                                                                                                            |                             | 116       |                           |  
|Interest expense                                             |                                                                                                                                                                                                                                                            |                             | (5        | )                         |  
|Other income                                                 |                                                                                                                                                                                                                                                            |                             | 54        |                           |  
|Loss before income taxes                                     |                                                                                                                                                                                                                                                            |                             | (5,232    | )                         |  
|Income tax expense (benefit)                                 |                                                                                                                                                                                                                                                            |                             |          |                           |  
|                                                             |                                                                                                                                                                                                                                                            |                             |           |                           |  
|Net loss                                                     |                                                                                                                                                                                                                                                            | $                           | (5,232    | )                         | $
|                                                             |                                                                                                                                                                                                                                                            |                             |           |                           |  
|Basic and diluted net loss per common share                  |                                                                                                                                                                                                                                                            | $                           | (0.64     | )                         | $
|                                                             |                                                                                                                                                                                                                                                            |                             |           |                           |  
|Weighted average common shares outstandingbasic and diluted |                                                                                                                                                                                                                                                            |                             | 8,120,292 |                           |  
|Comprehensive loss:                                          |                                                                                                                                                                                                                                                            |                             |           |                           |  
|                                                             | Net loss                                                                                                                                                                                                                                                   |                             | $         | (5,232                    | )
|                                                             | Foreign currency translation adjustment                                                                                                                                                                                                                    |                             |           | 5                         |  
|                                                             |                                                                                                                                                                                                                                                            |                             |           |                           |  
|                                                             | Comprehensive loss                                                                                                                                                                                                                                         |                             | $         | (5,227                    | )
|                                                             |                                                                                                                                                                                                                                                            |                             |           |                           |  

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

4

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

|                                                                            |                                                                | Six months ended June 30, |        
|--------------------------------------------------------------------------- | -------------------------------------------------------------- | ------------------------- | -------
|
|Cash flows from operating activities:                                       |                                                                |                           |        
|Net loss                                                                    |                                                                | $                         | (6,068 
|Adjustments to reconcile net loss to net cash used in operating activities: |                                                                |                           |        
|                                                                            | Amortization of stock-based compensation                       |                           |        
|                                                                            | Depreciation and amortization                                  |                           |        
|                                                                            | Provision for doubtful accounts                                |                           |        
|                                                                            | Amortization of deferred compensation                          |                           |        
|                                                                            | Restructuring and other charges, net of payments               |                           |        
|Changes in operating assets and liabilities, net of effect of acquisitions: |                                                                |                           |        
|                                                                            | Trade accounts receivable                                      |                           |        
|                                                                            | Other current assets                                           |                           |        
|                                                                            | Accounts payable                                               |                           |        
|                                                                            | Billings in excess of revenues earned on contracts in progress |                           |        
|                                                                            | Deferred revenue                                               |                           |        
|                                                                            | Accrued compensation                                           |                           |        
|                                                                            | Accrued expenses and other current liabilities                 |                           |        
|                                                                            | Income taxes payable                                           |                           |        
|                                                                            | Other assets                                                   |                           |        
|                                                                            |                                                                |                           |        
|Net cash used in operating activities                                       |                                                                |                           | (1,107 
|Cash flows from investing activities:                                       |                                                                |                           |        
|Purchases of property and equipment                                         |                                                                |                           | (7     
|Acquisition of Allegis, net of deal costs                                   |                                                                |                           | 176    
|Redemptions (purchases) of short-term investments, net                      |                                                                |                           | 10,367 
|Purchase of long-term investments                                           |                                                                |                           | (200   
|                                                                            |                                                                |                           |        
|Net cash provided by (used in) investing activities                         |                                                                |                           | 10,336 
|Cash flows from financing activities:                                       |                                                                |                           |        
|Proceeds from exercise of stock options                                     |                                                                |                           | 62     
|Purchase of treasury stock                                                  |                                                                |                           |       
|Payment of special dividend                                                 |                                                                |                           | (20,342
|Principal payments under capital lease obligations                          |                                                                |                           | (366   
|                                                                            |                                                                |                           |        
|Net cash used in financing activities                                       |                                                                |                           | (20,646
|Effect of foreign exchange rates on cash and cash equivalents               |                                                                |                           | (4     
|                                                                            |                                                                |                           |        
|Net decrease in cash and cash equivalents                                   |                                                                |                           | (11,421
|Cash and cash equivalents at beginning of period                            |                                                                |                           | 23,646 
|                                                                            |                                                                |                           |        
|Cash and cash equivalents at end of period                                  |                                                                | $                         | 12,225 
|                                                                            |                                                                |                           |        
|Supplemental disclosures:                                                   |                                                                |                           |        
|Interest paid                                                               |                                                                | $                         | 12     
|Income taxes paid                                                           |                                                                |                           | 0      

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 condensed consolidated financial statements include the accounts of Click Commerce, Inc. and its wholly owned subsidiaries (the "Company")
and reflect all adjustments (which are normal and recurring in nature) that, in the opinion of management, are necessary for a fair presentation of the interim periods presented. The results of
operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire fiscal year ending December 31, 2003.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been
condensed or omitted in accordance with the Securities and Exchange Commission's rules and regulations. The unaudited condensed consolidated financial statements and notes included herein should be
read in conjunction with the Company's audited consolidated financial statements and notes included in the Company's Annual Report on Form 10-K and other documents that have been
filed with the Securities and Exchange Commission.

Certain
prior year amounts have been reclassified to conform to the 2003 presentation.

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue and Cost Recognition

The Company recognizes product license revenue from licensing the rights to use its software on a perpetual basis. Software licenses that are limited in duration
are recognized as subscriptions. The Company generates service revenues from integrating its software, performing needs analyses for customers and providing training services. Maintenance and hosting
revenues are generated under contracts that provide customers with maintenance, product support and hosting services. The Company recognizes revenue in accordance with Statement of Position ("SOP")
No. 97-2"Software Revenue Recognition"as amended by SOP 98-9,"Modification of SOP
97-2, Software Revenue Recognition, with Respect to Certain Transactions."For those contracts that either do not contain a services component or that have services
which are not essential to the functionality of any other element of the contract, software license revenue is recognized upon delivery of the Company's software provided that the fee is fixed and
determinable, persuasive evidence of an arrangement exists and collection of the resulting receivable is considered probable. Revenue from service contracts is typically recognized as the services are
performed. The revenue to be recognized from multiple-element software contracts is based on the fair value of each element. The Company records deferred revenue on software contracts for which it has
billed or collected amounts, but for which the requirements for revenue recognition have not been met.

In
accordance with EITF No. 01-14, the Company characterizes the reimbursement of out-of-pocket expenses from their customers as revenue,
rather than as a reduction of the related expense in the income statement.

Revenue
from contracts in which the Company's services are essential to the functionality of the other elements of the contract is recognized using the
percentage-of-completion method under contract accounting as services are performed or output milestones are reached, as the Company delivers, customizes and installs the
software. The percentage completed is measured either by the percentage of labor hours incurred to date in relation to estimated total labor hours or in consideration of achievement of certain output
milestones, depending on the specific nature of each contract. For arrangements in which percentage-of-completion accounting is used, the Company records cash receipts from
customers and billed amounts due from customers in excess of recognized revenue as billings in

6

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excess
of revenues earned on contracts in progress. The timing and amount of cash receipts from customers can vary significantly depending on specific contract terms and can therefore have a
significant impact on the amount of billings in excess of revenues earned on contracts in progress at the end of any given period.

Revenue
from contracts recognized under the percentage-of-completion method is presented as product revenue to the extent that the underlying milestones are
related to software deliveries. To the extent that contract milestones relate to software customization or other professional services, revenues are presented as service revenues. When hours of input
are used as the
basis for percentage complete, revenues of the arrangement are presented as product revenue based on the percentage of product list price divided by total estimated project list price multiplied by
the contract value and are presented as services revenue based on the percentage of estimated services base line hours at list prices divided by total estimated project list price multiplied by the
contract value.

For
software subscriptions, the Company applies revenue recognition principles in accordance with the guidance provided by Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements."The arrangement fee related to multi-element arrangements should be allocated to the individual elements
based upon verifiable, objective evidence of the fair values of each separate element. To be considered a separate element, the product or service in question must represent a separate earnings
process. The Company's arrangements with customers generally include several elements, including (1) strategic consulting services, (2) set-up and software subscription
services, and (3) hosting services.All the elements of a software subscription are presented as subscription revenues. Total arrangement
revenues and direct costs are deferred until customer acceptance has occurred and the software subscription service begins. Revenues and direct costs are then amortized ratably to income over the
noncancelable contractual term, which is normally 18 months.

Maintenance
service is sold separately under contracts that are renewable annually and is provided only to customers who purchase maintenance. The Company recognizes maintenance service
revenue ratably over the contract period, which is generally one year in length. Maintenance fees are generally billed annually in advance and are recorded as deferred revenue. The Company also
provides hosting services to its customers under separate contracts with terms that are typically 18 months. The Company recognizes hosting services revenues ratably over the contract period,
comprising a monthly hosting fee and an amortization of a one-time initial hosting services set-up fee that is required at the beginning of a new hosting contract. For software
license sales with bundled maintenance and hosting services, the Company applies revenue recognition principles using the residual method pursuant to the requirements of Statement of Position (SOP)
97-2, "Software Revenue Recognition,"as amended by SOP 98-9,"Software Revenue Recognition with Respect
to Certain Transactions."Under the residual method, revenue is recognized for delivered elements when a contractually stipulated annual renewal rate for maintenance is
provided in the contract with the customer; provided, however, that collection is deemed probable and the fee is fixed and determinable. As part of the sales process, the Company may perform a needs
analysis for the potential customer on a fixed fee basis. Revenue from needs analyses is recognized as the work is performed. Training revenue is recognized as the services are provided.

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

Cost
of service revenue includes salaries and related expenses for professional services and technical support personnel who provide development, customization and installation services
to customers, as well as an allocation of data processing and overhead costs. Service costs under contracts for which the related services are accounted for as a separate element under the accounting
rules are expensed as incurred. In situations where the services and software licenses cannot be accounted for as separate elements, services are recognized on the percentage complete basis along with
the underlying

7

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software
license. When services are provided for subscription arrangements, the cost of such services are deferred and recognized ratably over the same period as the subscription revenues.

Cash, Cash Equivalents and Short-Term Investments

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

Reverse Stock Split

On September 4, 2002, the Company effectuated a 1-for-5 reverse stock split of its common stock. On that day, each five shares of
outstanding common stock of the Company automatically converted to one share of common stock. All share and per share amounts in the accompanying condensed consolidated financial statements have been
retroactively restated to give effect to the September 4, 2002 reverse stock split. The authorized shares of 75,000,000 and par value of $0.001 per share for the Company's common stock were not
affected by the reverse stock split.

Stock-Based Compensation

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

The
fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option-pricing model, with the following weighted average assumptions for both the
three and six month periods ended June 30, 2003: expected life of 4.25 years, expected volatility of 147%, risk-free interest rate of 2.7% and 0% dividend yield. The weighted
average assumptions for both the three and six month periods ended June 30, 2002: expected life of 4.25 years, expected volatility of 99%; risk-free interest rate of 2.7% and
0% dividend yield.

The
Company has applied APB No. 25 and related interpretations in accounting for the Click Commerce, Inc. Stock Option and Stock Award Plan and the Directors' Stock Option
and Stock Award Plan. Accordingly, no compensation cost has been recognized on stock options for which the exercise price equaled the fair value at the date of grant. Had the Company determined
compensation cost based on the method required by SFAS No. 123, the Company's net loss available to common

8

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shareholders
and net loss per common share for the three and six months ended June 30, 2003 and 2002 would approximate the pro forma amounts below:

|                                  |                                                                                                                             | Three months ended June 30, |        | Six months ended June 30, |  
|--------------------------------- | --------------------------------------------------------------------------------------------------------------------------- | --------------------------- | ------ | ------------------------- | -
|
|
|Net loss, as reported             |                                                                                                                             | $                           | (5,232 | )                         | $
|                                  | Stock-based employee compensation expense included in the determination of net loss as reported, net of related tax effects |                             |        | 8                         |  
|                                  | Total fair value method employee stock-based compensation expense, net of related tax effects                               |                             |        | (39                       | )
|                                  | Pro forma net loss                                                                                                          |                             | $      | (5,263                    | )
|Basic and diluted loss per share: |                                                                                                                             |                             |        |                           |  
|                                  | As reported                                                                                                                 |                             | $      | (0.64                     | )
|                                  | Pro forma                                                                                                                   |                             | $      | (0.65                     | )

3.     BUSINESS COMBINATION

On March 27, 2003, the Company completed its acquisition of all of the capital stock of Allegis Corporation ("Allegis"), a privately-held
California corporation engaged in licensing partner relationship management software and providing professional implementation services, hosting, and maintenance services related to its software,
effective as of March 24, 2003. Results of Allegis' operations have been included in the Company's consolidated financial statements since March 24, 2003. Under the terms and conditions
of the Agreement and Plan of Merger, Allegis became a wholly-owned subsidiary of the Company, and the holders of Allegis' preferred stock received cash consideration in an aggregate amount of
approximately $10,200. The Company funded the acquisition using available cash on hand. The acquisition of Allegis was expected to broaden the Company's installed base and product offerings and expand
its market share within the partner relationship management area, as well as achieve cost savings through elimination of redundant development efforts and administrative functions.

The
following unaudited pro forma financial information for the three and six months ended June 30, 2003 and 2002 presents the consolidated operations of the Company as if the
Allegis acquisition had been made on January 1, 2002, after giving effect to certain adjustments for the pro forma acquisition as of the acquisition date. Under the provisions of SFAS
No. 142, goodwill acquired in transactions
completed after June 30, 2001 is not amortized. As the acquisition of Allegis occurred subsequent to that date, these pro forma results do not reflect any goodwill amortization expense. The
unaudited pro forma financial information is provided for informational purposes only, should not be construed to be indicative of the Company's consolidated results of operations had the acquisition
of Allegis been consummated on this earlier date, and do not project the Company's results of operations for any future period:

|                                     |  | Three months ended June 30, |        | Six months ended June 30, |  
|------------------------------------ |  | --------------------------- | ------ | ------------------------- | -
|
|
|Revenues                             |  | $                           | 5,079  |                           | $
|Net loss                             |  |                             | (5,232 | )                         |  
|Basic and diluted net loss per share |  |                             | (0.64  | )                         |  

9

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4.     STOCK-BASED COMPENSATION

Prior to its initial public offering, the Company granted certain stock options at exercise prices less than their deemed fair value; accordingly, the Company
recorded deferred compensation of $4,636,000. Such deferred compensation is amortized on a straight-line basis over the vesting period of each individual award, resulting in $8,000 and
$91,000 of stock-based compensation expense for the
three months ended June 30, 2003 and 2002, respectively. For the six months ended June 30, 2003 and 2002, respectively, deferred compensation on a straight-line basis over
the vesting period of each individual award was $43,000 and $193,000.

In
April 2000, the Company issued a warrant to Accenture Ltd. ("Accenture") to purchase up to 163,645 shares of common stock at $61.11 per share. The warrant vested
contingently upon the achievement of certain milestones, primarily the generation of license revenue for the Company, and was set to expire on April 20, 2004. The warrant contained a
significant cash penalty for Accenture's failure to meet the agreed revenue target by the expiration date, and, accordingly, the fair value of the warrant was measured at the date of grant in
accordance with EITF Issue No. 96-18 and Statement of Financial Accounting Standards No. 123, resulting in a fair value of approximately $5,000,000, which was determined
using the Black-Scholes option-pricing model. In the fourth quarter of 2002, the Company reached an agreement with Accenture to cancel the warrant. For the three and six months ended June 30,
2002, the Company recognized $309,000 and $618,000 respectively, in amortization expense related to the warrant.

5.     RESTRUCTURING

During the second quarter of 2003, the Company continued to execute its restructuring plan following the Allegis acquisition. As part of this plan, certain
redundant costs were eliminated. These actions resulted in the termination of approximately 15 employees primarily across the professional services, support and research and development departments.
All of these employees were terminated within the second quarter. The Company also consolidated office space and included an additional restructuring charge for the remaining lease payments on the
Company's excess office space located in Chicago and Boston. The restructuring costs of $2,356,000 are detailed below.

In
conjunction with its review of redundant costs structures, the Company also recorded a $1,586,000 asset impairment charge. The write-down of assets related to leasehold
improvements and excess furniture and equipment resulting from the reduction in the office space utilized and a redundant computer system. The restructuring plan also included a review of the future
prospects for several of the Company's product offerings. This review resulted in the assessment that two of its prepaid third party software licenses had no future value as there were no projected
sales of the product and no plans to further develop software on technology related to those licenses.

During
the fourth quarter of 2002, the Company performed an asset impairment analysis on its third party prepaid licenses and other intangible assets. The Company evaluated the
undiscounted future operating cash flows to determine whether these cash flows will be sufficient to recover the carrying value of the related assets. The Company assessed that two of its third party
prepaid license agreements had impaired values resulting from diminished maintenance contracts and slow software sales on related products. The Company also determined that an acquired product line,
purchased in the third quarter of 2001, had no future value based on its assessment of no expected future sales and no further plans to develop this product line. Accordingly, the Company recorded an
impairment charge of $1,043,000 during the fourth quarter of 2002.

In
the quarter ended June 30, 2002, the Company determined that its cost structure exceeded the level suggested by its assessment of the Company's then-current
near-term revenue opportunities. The Company experienced longer sales cycles and higher executive level review and approval processes on capital projects, particularly for technology and
e-commerce projects. As a result, the Company

10

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developed
a plan to reduce its cost structure to a level in line with current revenue opportunities, resulting in an $821,000 restructuring charge. Included in this restructuring plan was the
termination of 51 employees across all areas of the Company. All of these employees were notified of their termination by June 30, 2002, and were severed by August 2, 2002. The resulting
employee severance and related costs are presented below. The facilities related costs represented the remaining lease payments for closing four regional offices.

In
conjunction with the June 30, 2002 restructuring, the Company recorded a $451,000 asset impairment charge. The write-down of assets, primarily computer equipment
under capital leases, was a direct result of the staffing reductions. The fair value of the equipment included in the write-down was deemed to be $0. The Company has no foreseeable use for
the assets, and the assets are under leases, which at the end of the lease term, the Company is required to either return the equipment or purchase the equipment at the then fair market value. The
Company intends to return this equipment upon expiration of the current lease terms.

As
of June 30, 2003, the majority of the Company's restructuring accrual related to remaining lease commitments on excess office space. Due to extended payment terms under these
lease agreements, payments against the restructuring charge will be made through the quarter ending December 31, 2005.

|                                               |       | Accrual at
December 31,
2002 |     | Additional
restructuring
charges |   | 2003
YTD cash
payments |       | Balance at
June 30,
2003
|---------------------------------------------- | ----- | ---------------------------- | --- | -------------------------------- | - | ---------------------- | ----- | ------------------------
|
|Employee severance, benefits and related costs |       | $                            | 252 |                                  | $ | 182                    |       | $                       
|Facilities related costs                       |       |                              |    |                                  |   | 2,144                  |       |                         
|Legal costs and other                          |       |                              | 30  |                                  |   | 30                     |       |                         
|                                               |       |                              |     |                                  |   |                        |       |                         
|                                               | Total |                              | $   | 282                              |   | $                      | 2,356 |                         
|                                               |       |                              |     |                                  |   |                        |       |                         

6.     SPECIAL DIVIDEND

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

11

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

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

Overview

Click Commerce, Inc. (the "Company") is a provider of business-to-business partner relationship management software products and
integration services that connect large, global manufacturing companies with their distribution channel partners. The Company's software products and integration services enable large companies to
effectively manage and engage in collaborative business-to-business interactions throughout their sell-side channels and processes. The Company's software uses the
Internet to enable communication between a company and all participants in its network or chain of distribution who have a password and an Internet browser.

The
Company commenced operations on August 20, 1996. During the period from inception until early 1998, the Company was primarily engaged in developing software for the
Relationship Manager (formerly referred to as the Extranet Manager). In 1996 and 1997, the Company was also engaged in developing Internet Web sites and providing related consulting services. The
Company implemented the first Click Commerce Relationship Manager in the second quarter of 1997. On June 30, 2000, the Company completed an initial public offering ("IPO") of common stock that
resulted in the issuance of 5,000,000 shares of common stock with an IPO price of $10.00 per share (adjusted to 1,000,000 shares of common stock with a price of $50.00 per share following the
1-for-5 reverse stock split that occurred on September 4, 2002). The Company completed its acquisition of Allegis Corporation on March 24, 2003, which expanded
the product offerings available to customers to include subscription licenses and hosting capabilities.

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

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

Operating
expenses are classified into four general categories: sales and marketing, research and development, general and administrative and amortization of stock-based compensation.
Sales and marketing expenses consist primarily of salaries and other related costs for sales and marketing personnel, sales commissions, travel, public relations and marketing materials. Research and
development expenses consist primarily of personnel costs to support product development. General and administrative expenses consist primarily of salaries and other related costs for executive
management, finance and administrative employees, legal and accounting services, and corporate liability insurance. Amortization of stock-based compensation represents the amortization over the
related service period of the difference between the exercise price of options granted and the deemed fair market value of the underlying common stock on the date of grant, as well as amortization of
the warrant issued in connection with a joint marketing agreement with Accenture. Since the Company reached an agreement with Accenture to cancel the warrant in the fourth quarter of 2002, no
amortization expense of the warrant is reflected in the accompanying statements of operations for 2003.

12

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

Critical Accounting Policies

The Company's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. As such,
the Company makes certain estimates, judgments and assumptions that it believes are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The Company's critical accounting policies include
revenue recognition and any resulting deferral of revenues and related costs, the estimation of credit losses on accounts receivable and the valuation of deferred tax assets. For a discussion of these
critical accounting policies, see "Critical Accounting Policies and Estimates" in the Company's Annual Report on Form 10-K for the year ended December 31, 2002, filed with
the Securities and Exchange Commission.

13

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Results of Operations

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

|                                  |                                          | Three Months Ended June 30, |        | Six Months Ended June 30, |       
|--------------------------------- | ---------------------------------------- | --------------------------- | ------ | ------------------------- | ------
|
|
|Revenues                          |                                          |                             |        |                           |       
|                                  | Product license                          |                             | 689    |                           | 13.6  
|                                  | Subscription                             |                             | 944    |                           | 18.6  
|                                  | Maintenance and hosting                  |                             | 1,705  |                           | 33.6  
|                                  | Service                                  |                             | 1,741  |                           | 34.3  
|                                  |                                          |                             |        |                           |       
|                                  | Total                                    |                             | 5,079  |                           | 100.0 
|                                  |                                          |                             |        |                           |       
|Cost of revenues                  |                                          |                             |        |                           |       
|                                  | Product                                  |                             | 148    |                           | 2.9   
|                                  | Service (a)                              |                             | 2,524  |                           | 49.7  
|                                  |                                          |                             |        |                           |       
|                                  | Total cost of revenues                   |                             | 2,672  |                           | 52.6  
|                                  |                                          |                             |        |                           |       
|Gross profit                      |                                          | 2,407                       |        | 47.4                      | %     
|Gross margin %                    |                                          | 47                          | %      |                           |       
|Operating expenses:               |                                          |                             |        |                           |       
|                                  | Sales and marketing (a)                  |                             | 1,225  |                           | 24.1  
|                                  | Research and development (a)             |                             | 887    |                           | 17.5  
|                                  | General and administrative (a)           |                             | 1,714  |                           | 33.8  
|                                  | Amortization of stock-based compensation |                             | 8      |                           | 0.2   
|                                  | Amortization of intangible assets        |                             | 28     |                           | 0.5   
|                                  | Restructuring and other charges          |                             | 3,942  |                           | 77.6  
|                                  |                                          |                             |        |                           |       
|Total cost and operating expenses |                                          | 7,804                       |        | 153.7                     | %     
|                                  |                                          |                             |        |                           |       
|Operating loss                    |                                          | (5,397                      | )      | (106.3                    | %)    
|Other income                      |                                          |                             |        |                           |       
|                                  | Interest income                          |                             | 116    |                           | 2.3   
|                                  | Interest expense                         |                             | (5     | )                         | (0.1  
|                                  | Other income                             |                             | 54     |                           | 1.1   
|Total other income                |                                          | 165                         |        | 3.2                       | %     
|Pretax loss                       |                                          | (5,232                      | )      | (103.0                    | )%    
|Tax provision                     |                                          |                            |        |                           |       
|                                  | Net loss                                 |                             | (5,232 | )                         | (103.0

---

14

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Comparison of the three months ended June 30, 2003 to the three months ended June 30, 2002



Total revenue decreased approximately $0.3 million, or 6.3%, to $5.1 million for the three months ended June 30, 2003 from
$5.4 million for the three months ended June 30, 2002. Product license revenue consists of revenue from separate product-only agreements and from multi-element agreements
accounted for under a percentage-of-completion basis using product-related milestones. Product license revenue decreased by $64,000, or 8.5%, as a result of a decrease in the
number of new contracts and the average selling price of the current quarter's contracts. Service revenue, comprising fees related to time and materials service contracts, maintenance, hosting,
training and needs analyses, as well as multi-element agreements accounted for under a percentage completed basis using hours of input or milestones that specifically relate to integration and
customization services, decreased by $1.2 million, or 26.2%, over the prior year quarter. The decrease in service revenue was largely offset by the addition of $0.9 million in
subscription revenues. In any period, service revenue from time and materials contracts is dependent, among other things, on license transactions closed during the current and preceding quarters and
customer decisions regarding implementations of licensed software. The revenues and expenses of Allegis Corporation are included in the second quarter of 2003 results.



Total cost of revenue decreased by $18,000 to remain relatively flat at $2.7 million for the three months ended June 30, 2003 and June 30,
2002. This cost of revenue decrease is primarily a result of lower third party contractor costs and employee compensation related costs due to a reduction in project management personnel. Cost of
product revenue decreased by $9,000 or 5.7% due to lower royalty fees for licensed third party software that is embedded in the Company's products or incorporated in the Company's product offerings
arising from lower product sales, as well as lower amortization of product packaging and other product costs. Gross profit margins decreased to 47.4% for the three months ended June 30, 2003,
compared to 50.4% for the three months ended June 30, 2002. The gross margin decrease is due to a decrease in product revenue as a percentage of total revenue as well as lower margins on both
product and services revenue. The decrease in service margins is due to lower average hourly rates and lower utilization rates for the professional services staff in the current quarter. Product
margins are lower due to lower product revenues against which comparable product-related costs are amortized.



Sales and Marketing.Sales and marketing expenses decreased by approximately $1.4 million, or 53.0%, to
$1.2 million for the three months ended June 30, 2003 from $2.6 million for the three months ended June 30, 2002. The decrease in sales and marketing expense was primarily
attributable to lower employee compensation and related costs due to a reduction in personnel and from lower discretionary marketing spending.

Research and Development.Research and development expenses decreased by approximately $0.4 million, or 32.8%, to
$0.9 million for the three months ended June 30, 2003, compared to $1.3 million for the comparable prior year three-month period. This decrease was primarily attributable to lower
third party contractor costs and reduction in salaries due to lower headcount. To date, all software development costs have been expensed as incurred.

General and Administrative.General and administrative expenses increased by approximately $0.7 million, or 74.1%, to
$1.7 million for the three months ended June 30, 2003 from $1.0 million for the three months ended June 30, 2002. The increase is attributable to $0.1 million in
additional administrative overhead acquired with the Allegis acquisition, and $0.7 million of non-recurring legal and consulting expenses related to the Company's consideration of
an unsolicited acquisition proposal

15

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by
one of its investors and the payment of the June 4, 2003 $2.50 Special Dividend. That increase was offset by a $0.1 million reduction in administrative personnel and other overhead
costs.

Amortization of stock-based compensation.Prior to its initial public offering, the Company granted certain stock options at
exercise prices less than their deemed fair value; accordingly, the Company recorded deferred compensation of $4.6 million. Such deferred compensation is being amortized over the vesting
periods of the applicable options, resulting in expense of $8,000 and $91,000 for the three months ended June 30, 2003 and 2002, respectively. Additionally, the $5.0 million fair value
of the warrant issued to Accenture in April 2000 was being amortized over the vesting period of the warrant. As discussed above in "Overview", the Company reached an Agreement with Accenture in
the fourth quarter of 2002 to cancel the warrant. The Company recognized no related amortization expense in the three months ended June 30, 2003 and $0.3 million in amortization expense
in the three months ended June 30, 2002.

Restructuring and other charges.In the quarter ended June 30, 2003, the Company continued to execute its
restructuring plan following the Allegis acquisition. As part of this plan, certain redundant costs were eliminated and a restructuring charge of $2.3 million was recorded. The restructuring
charge primarily related to $2.1 million of excess lease costs in two locations and severance and other benefit costs of $0.2 million for the termination of 15 employees as part of the
restructuring plan. The Company also recorded a $1.6 million asset impairment charge. This charge related to leasehold improvements associated with the excess office leases, a redundant
computer system and excess equipment totaling $1.0 million and the write-off of certain third party software licenses related to products that had no projected sales and no plans
for further development in the amount of $0.6 million. The restructuring and other charges in the second quarter of 2002 included $0.7 million of employee severance costs for 51
employees, other restructuring costs of $0.1 million and a $0.5 million asset impairment charge primarily related to excess computer equipment.

Income tax expense.The Company recorded no income tax expense or benefit for the three months ended June 30, 2003 and
2002.

Comparison of the six months ended June 30, 2003 to the six months ended June 30, 2002



Total revenue decreased approximately $2.8 million, or 25.6%, to $8.0 million for the six months ended June 30, 2003 from
$10.8 million for the six months ended June 30, 2002. Product license revenue consists of revenue from separate product-only agreements and from multi-element agreements
accounted for under a percentage-of-completion basis using product-related milestones. Product license revenue decreased by $0.4 million, or 34.0%, as a
result of a decrease in the number of new contracts and the average selling price of the current quarter's contracts. Service revenue, comprised of fees related to time and materials service
contracts, maintenance, training and needs analyses, as well as multi-element agreements accounted for under a percentage completed basis using hours of input or milestones that specifically relate to
integration and customization services, decreased by $3.3 million, or 34.4%, over the prior year quarter. The decrease in service revenue was offset by the addition of $0.9 million in
subscription revenues. The results for the first six months of 2003 include the revenues and expenses for Allegis Corporation beginning on the March 24, 2003 acquisition date through the period
ended June 30, 2003.



Total cost of revenue decreased approximately $0.6 million, or 11.7%, to $4.3 million for the six months ended June 30, 2003 compared to
$4.9 million for the six months ended June 30, 2002. This cost of revenue decrease is primarily a result of lower third party contractor costs and employee

16

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compensation
and related costs due to a reduction in project management personnel. Cost of product revenue decreased by $0.1 million or 31.9% due to lower royalty fees for licensed third party
software that is embedded in the Company's products or incorporated in the Company's product offerings arising from lower product sales, as well as lower amortization of product packaging and other
costs. Gross profit margins decreased to 45.8% for the six months ended June 30, 2003, compared to 54.3% for the six months ended June 30, 2002. The gross margin decrease is due to a
decrease in product revenue as a percentage of total revenue as well as lower margins on both product and services revenue. The decrease in service margins is due to the following reasons: the
classification of project management overhead in cost of services after the first quarter of 2002 rather than general and administrative expenses as their allocation related to internal projects that
were completed or discontinued in that quarter, lower average hourly rates, and a lower utilization rate for the professional services staff. Product margins are lower due to lower product revenues
against which comparable product-related costs are amortized.



Sales and Marketing.Sales and marketing expenses decreased by approximately $4.8 million, or 72.2%, to
$1.8 million for the six months ended June 30, 2003 from $6.6 million for the six months ended June 30, 2002. The decrease in sales and marketing expense was primarily
attributable to lower employee compensation and related costs due to a reduction in personnel and discretionary marketing spending.

Research and Development.Research and development expenses decreased by approximately $1.5 million, or 53.5%, to
$1.3 million for the six months ended June 30, 2003, compared to $2.9 million for the prior year six-month period. This decrease was primarily attributable to lower
third party contractor costs, reduction in personnel, and discretionary spending. To date, all software development costs have been expensed as incurred.

General and Administrative.General and administrative expenses increased by approximately $0.1 million, or 6.3%, to
$2.8 million for the six months ended June 30, 2003 from $2.7 million for the six months ended June 30, 2002. The increase is attributable to $0.1 million in
additional administrative overhead acquired with the Allegis acquisition, and $0.7 million of non-recurring legal and consulting expenses related to the Company's consideration of
an unsolicited acquisition proposal by one of its investors and the payment of the June 4, 2003 $2.50 Special Dividend. That increase was offset by a $0.1 million reduction in
administrative personnel and lower overhead costs and a $0.6 million reduction related to services costs no longer included in general and administrative expenses.

Amortization of stock-based compensation.Prior to its initial public offering, the Company granted certain stock options at
exercise prices less than their deemed fair value; accordingly, the Company recorded deferred compensation of $4.6 million. Such deferred compensation is being amortized over the vesting
periods of the applicable options, resulting in expense of $43,000 and $193,000 for the six months ended June 30, 2003 and 2002, respectively. Additionally, the $5.0 million fair value
of the warrant issued to Accenture in April 2000 was being amortized over the vesting period of the warrant. As discussed above in "Overview," the Company reached an Agreement with Accenture in
the fourth quarter of 2002 to cancel the warrant. The Company recognized no related amortization expense in the six months ended June 30, 2003 and recognized $0.6 million in amortization
expense in the six months ended June 30, 2002.

Restructuring and other charges.In the quarter ended June 30, 2003, the Company continued to execute its
restructuring plan following the Allegis acquisition. As part of this plan, certain redundant costs were eliminated and a restructuring charge of $2.3 million was recorded. The restructuring
charge primarily related to $2.1 million of excess lease costs in two locations and severance and other benefit costs of $0.2 million for the termination of 15 employees as part of the
restructuring plan. The

17

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Company
also recorded a $1.6 million asset impairment charge. This charge related to leasehold improvements associated with the excess office leases, a redundant computer system and excess
equipment totaling $1.0 million and the write-off of certain third party software licenses related to products that had no projected sales and no plans for further development in
the amount of $0.6 million. The restructuring and other charges in the second quarter of 2002 included $0.7 million of employee severance costs for 51 employees, other restructuring
costs of $0.1 million and a $0.5 million asset impairment charge primarily related to excess computer equipment.

Income tax expense.The Company recorded no income tax expense or benefit for the six months ended June 30, 2003 and
2002.

Liquidity and Capital Resources

At June 30, 2003, the Company had $12.2 million of cash, cash equivalents and short-term investments, consisting primarily of the
remaining proceeds from its initial public offering and after the payment of the $20.3 million Special Dividend. The Special Dividend of $2.50 per share was declared on April 30, 2003
and payable on June 4, 2003 to shareholders of record as of May 20, 2003.

Net
cash used in operating activities was $1.1 million for the six months ended June 30, 2003. The $1.1 million of cash used in the current six month period
primarily consisted of net losses of $6.1 million for the period and a $1.0 million reduction in accrued compensation primarily attributable to amounts related to the Allegis
acquisition, offset by depreciation and restructuring and other charges totaling $3.2 million, collections of accounts receivable of $2.2 million, and other aggregated changes in working
capital of $0.6 million.

Net
cash provided by investing activities was $10.3 million for the six months ended June 30, 2003, consisting of the redemption of short-term investments to
fund the Special Dividend of $10.4 million, investment in a long-term equity fund of $0.2 million and the net cash acquired in the acquisition of Allegis of $176,000.

Net
cash used in financing activities was approximately $20.6 million for the six months ended June 30, 2003, reflecting the payment of the $20.3 million Special
Dividend on June 4, 2003 and $0.4 million of capital lease payments offset by proceeds from stock option exercises of $0.1 million.

The
Company had a $3.0 million revolving credit facility that expired on March 31, 2003. In January 2000, the Company obtained a letter of credit under this facility
totaling $0.5 million to secure an office lease. This letter of credit is renewable annually and declines by $0.1 million on the first, second, third and fourth anniversaries of the
lease and then declines to $38,130 on the fifth anniversary until the lease expires in August 2005. The letter of credit has a balance of $200,000 at June 30, 2003. As part of the
Allegis acquisition, the Company assumed a letter of credit securing office space in San Francisco. The letter of credit expires on September 30, 2005 and currently has a balance of $170,000.
The Company also has an outstanding letter of credit for an original amount of $820,686 in connection with an insurance premium finance agreement. The letter of credit declines on a monthly basis,
beginning in November 2002, until it expires on September 24, 2003. As of June 30, 2003, the obligations related to the letter of credit were settled. These letters of credit were
previously secured by Company's line of credit that expired on March 31, 2003. Beginning April 1, 2003, the Company secured these letters of credit with cash funds that are being pledged
in a separate account held by the respective financial institutions.

In
May 2002, the Company announced that its Board of Directors had authorized the repurchase of up to $5.0 million of its common stock in the open market. These shares may
be purchased pursuant to Rule 10b-18 under the Exchange Act from time to time in the public market or through privately negotiated transactions. The timing and amount of any
repurchase will be at the discretion of the Company's management. As of March 31, 2003, the Company had repurchased 29,064 shares of its

18

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common
stock at an average purchase price of $4.03 per share and at an aggregate cost of $117,239. No shares were repurchased during 2003.

On
August 30, 2002, at a special meeting of its shareholders, an amendment to the Company's certificate of incorporation was approved in order to effectuate a reverse stock split
of the Company's common stock at a ratio between 1-for-2 and 1-for-5, as determined by the Company's Board of Directors. At a special meeting of the
Board of Directors on August 30, 2002, the Board of Directors approved a 1-for-5 reverse stock split of the Company's common stock effective as of September 4,
2002, in order to improve the trading price for the common stock and improve the likelihood that the Company will be allowed to maintain the common stock's listing on the NASDAQ National Market by
satisfying the minimum bid requirement for continued listing on the NASDAQ National Market. As previously disclosed by the Company on a Current Report on Form 8-K dated
September 4, 2002, the Company expected to and actually did receive on September 9, 2002, a letter from NASDAQ informing the Company that the Company had not satisfied the minimum bid
price requirement for listing of its common stock and that it would be delisted on September 17, 2002. The Company appealed such notice on September 12, 2002, requesting a hearing before
a listing qualification panel to review such delisting determination. Subsequently, NASDAQ
informed the Company that it had evidenced compliance with the bid price requirement for continued listing on the NASDAQ National Market.

The
Company may use cash resources to fund investments in complementary businesses or technologies or other purposes as determined by the Company. The Company believes that working
capital will be sufficient to meet its working capital and operating expenditure requirements for at least the next twelve months. The Company has no current plans to raise additional equity during
the next twelve months, although such plans are subject to business and market conditions. Thereafter, the Company may find it necessary to obtain additional equity or debt financing, although the
Company does not currently foresee a need for additional cash resources for long-term needs. In the event additional financing is required, the Company may not be able to raise it on
acceptable terms or at all.

Recent Accounting Pronouncements

In June 2001, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 143,"Accounting for Asset Retirement
Obligations."This statement requires that the fair value of a liability for legal obligations associated with the retirement of tangible long-lived assets be
recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. Such legal obligations include obligations a party is required to settle as a result of an existing
or enacted law, statute, or ordinance, or written or oral contract. These associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. This
statement is effective for fiscal years beginning after June 15, 2002. The adoption of this statement did not have a material impact on the Company.

In
July 2002, the FASB issued SFAS No. 146."Accounting for Costs Associated with Exit or Disposal Activities."This
statement required the recording of exit or disposal costs when they are incurred and can be measured at fair value. A liability is incurred when an event obligates a company to transfer or use assets
(i.e., when an event leaves the company little or no discretion to avoid transferring or using assets in the future). These costs will be subsequently
adjusted for changes in estimated cash flows. This statement is effective for exit or disposal activities initiated after December 31, 2002. This statement does not impact the treatment of
liabilities for exit and disposal costs previously recorded prior to adoption. The adoption of this statement did not have a material impact on the Company.

In
December 2002, the FASB issued SFAS No. 148,"Accounting for Stock-Based CompensationTransition and Disclosure, an amendment of FASB
Statement No. 123."This statement amends FASB Statement No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of Statement No. 123 to

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require
prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002 and are
included in the notes to the condensed consolidated financial statements included in this Form 10-Q.

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

Statements
in this Form 10-Q that are not historical facts and refer to the Company's future prospects are "forward-looking statements" under the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are generally identified by words such as "expect," "anticipate," "intend," "believe," "hope," "assume," "estimate" and other similar
words and expressions. The statements are subject to risks and uncertainties and actual results may differ materially from those indicated by these forward-looking statements as a result of various
factors, including but not limited to, the ability of the Company to enter into strategic alliances with system integrators and business consultants, the extent of customer acceptance and utilization
of the Company's channel management solutions, the impact of competitive products and services, the Company's ability to develop new and enhanced versions of its products and services, the effect of
economic and business conditions, the volume and timing of customer contracts, and related approval processes of capital and intellectual property spending of the Company's target customers, changes
in technology, deployment delays or errors associated with the Company's products, the ability of the Company to integrate acquired businesses or products and the Company's ability to protect its
intellectual property rights. For a discussion of these and other risk factors that could affect the Company's business, see "Risk Factors" in the Company's Annual Report on
Form 10-K for the year ended December 31, 2002, which is on file with the Securities and Exchange Commission.

Item 3.    Qualitative and Quantitative Disclosures About Market Risk

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

Foreign Currency Exchange Rate Risk

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

Interest Rate Risk

As of June 30, 2003, the Company had cash and cash equivalents of $12.2 million. Declines in interest rates will reduce interest income from
short-term investments. Based upon the balance of cash

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and
cash equivalents at June 30, 2003, a change in interest rates of 0.5% would cause a corresponding change in annual interest income of less than $0.1 million.

Item 4.    Controls and Procedures

Based on their evaluation as of a date within 90 days of the filing of this Quarterly Report on Form 10-Q, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Exchange
Act) are effective to ensure that information required to disclosed by the Company in reports that it files or submits under the Exchange Act are recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and forms.

Subsequent
to the date of their evaluation, there have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls,
including any corrective actions with regard to significant deficiencies and material weaknesses.

The
Company's management, including the Chief Executive Officer and Chief Financial Officer, does not expect that its disclosure controls and procedures or internal controls and
procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon
certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time,
control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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PART II.    OTHER INFORMATION

Item 1.    Legal Proceedings

There are no material legal proceedings to which the Company is a party or of which any of its property is subject.

Item 2.    Changes in Securities and Use of Proceeds

On June 26, 2000, the Securities and Exchange Commission declared effective the Company's Registration Statement on Form S-1, File
No. 333-30564, relating to the initial public offering of the Company's common stock, par value $.001 per share. As of June 30, 2003, the Company had spent approximately
$19.7 million of the net proceeds for working capital and general corporate purposes and returned $20.3 million to shareholders in a Special Dividend paid on June 4, 2003 to
shareholders of record as of May 20, 2003. The remaining proceeds are invested in investment grade, interest-bearing securities.

Item 3.    Defaults Upon Senior Securities

Not applicable.

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

Not applicable.

Item 5.    Other Information

Not applicable.

Item 6.    Exhibits and Reports on Form 8-K

(a)   Exhibits

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

|Exhibit
Number |  | Description                                                                                     
|-------------- |  | ------------------------------------------------------------------------------------------------
|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    
|99.1           |  | Stock Option Agreement of Michael W. Ferro, Jr.                                                 

The Company filed a Current Report on Form 8-K, dated April 14, 2003, to report that it had received an additional letter and
conditional, non-binding term sheet, dated April 9, 2003, from Insight Venture Management, LLC ("Insight") setting forth the proposed terms and conditions under which Insight was
willing to negotiate a proposed merger transaction to acquire the Company.

The
Company filed a Current Report on Form 8-K, dated May 1, 2003, to report that its Board of Directors had declared a special cash dividend in the amount of
$2.50 per share of the Company's common stock ("Special Dividend"). The Special Dividend was paid on June 4, 2003 to stockholders of

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record
as of May 20, 2003. The Company also announced the execution of employment agreements with Michael W. Ferro, Jr., Chairman and Chief Executive Officer of the Company, and Justin C.
Dearborn, Vice PresidentHuman Resources and Corporate Legal Affairs. Mr. Ferro's employment agreement replaced his prior agreement, which had reached the end of its initial three
year term on December 31, 2002.

The
Company filed on May 28, 2003, an Amendment to a Current Report of Form 8-K filed on March 28, 2003 (the "Original Filing") in connection with the
completion of the acquisition of Allegis Corporation ("Allegis"). This amendment was filed to amend Item 7 of the Original Filing to include the financial statements required by Items 7(a) and 7(b).

The
Company filed a Current Report on Form 8-K, dated July 25, 2003, to report the issuance of a press release setting forth the Company's second quarter 2003
earnings.

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SIGNATURES

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

|                      |  | CLICK COMMERCE, INC.
|--------------------- |  | --------------------
|Date: August 14, 2003 |  | By:                 

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