**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-K**

| **(Mark  One)** |                                                                                                     |
|-----------------|----------------------------------------------------------------------------------------------------------|
| x               | **ANNUAL REPORT PURSUANT  TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**      |
|            | **For the Fiscal Year Ended  December 31, 2005**                                                    |
| o               | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**For the transition period fromto                        to                        **

**Commission File Number 0-30881**

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**CLICKCOMMERCE, INC.**

(Exactname of registrant as specified in its charter)

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

 

**233 North Michigan Avenue,22**nd Floor

**Chicago,Illinois 60601**

(Addressof principal executive offices)

**(312)482-9006**

(Registrant’stelephone number, including area code)

**Securities registered pursuant to Section 12(b) ofthe Act: None**

**Securitiesregistered pursuant to Section 12(g) of the Act:**

**Common Stock, par value $0.001 per share**

Indicateby check mark if the Company is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.   Yes o   No x

Indicateby check mark if the Company is not required to file reports pursuant to Section 13or Section 15(d) of the Exchange Act.   Yes o   No x

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

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to thebest of the registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.  x

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the ExchangeAct.

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

 

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

Asof June 30, 2005 the last business day of the registrant’s most recentlycompleted second fiscal quarter, the aggregate market value of the registrant’scommon stock held by non-affiliates was approximately $182 million. Theaggregate market value was calculated by using the closing price of the commonstock as of that date on the NASDAQ National Market. Shares of common stockheld by officers, directors, and 5% or more stockholders have been excluded inmaking the calculation because such persons may be deemed affiliates. Thisdetermination of affiliate status is not necessarily a conclusive determinationfor other purposes.

Asof March 29, 2006, there were 12,618,659 shares of the registrant’scommon shares issued and outstanding.

**DOCUMENTS INCORPORATED HEREIN BY REFERENCE**

Portions of the registrant’s Definitive ProxyStatement for its 2005 Annual Meeting of Shareholders to be held on May 18,2006 are incorporated by reference in Part III of this report.

 

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**CLICKCOMMERCE, INC.**

**INDEX**

|            | **Item No.** | ** **                                                                                                         | ** ** | ** ** | ** ** | **Page  Number** |
|------------|-------------------|--------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------------|
| ** ** | ** **        | **PART I**                                                                                                    | ** ** | ** ** |
| 1.         |              | Business                                                                                                           |       | 3          |
| 1A.        |              | Risk Factors                                                                                                       |       | 12         |
| 1B.        |              | Unresolved Staff  Comments                                                                                         |       | 16         |
| 2.         |              | Properties                                                                                                         |       | 17         |
| 3.         |              | Legal Proceedings                                                                                                  |       | 17         |
| 4.         |              | Submission of  Matters to a Vote of Security Holders                                                               |       | 17         |
| ** ** | ** **        | **PART II**                                                                                                   | ** ** | ** ** |
| 5.         |              | Market for  Registrant’s Common Stock, Related Shareholder Matters and Issuer Purchases  of Equity Securities |       | 18         |
| 6.         |              | Selected Financial  Data                                                                                           |       | 18         |
| 7.         |              | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                        |       | 20         |
| 7A.        |              | Quantitative  and Qualitative Disclosures About Market Risk                                                        |       | 33         |
| 8.         |              | Consolidated  Financial Statements and Supplementary Data                                                          |       | 34         |
| 9.         |              | Changes in and  Disagreements With Accountants on Accounting and Financial Disclosure                              |       | 34         |
| 9A.        |              | Controls and  Procedures                                                                                           |       | 35         |
| 9B.        |              | Other  Information                                                                                                 |       | 37         |
| ** ** | ** **        | **PART III**                                                                                                  | ** ** | ** ** |
| 10.        |              | Directors and  Executive Officers of the Registrant                                                                |       | 38         |
| 11.        |              | Executive  Compensation                                                                                            |       | 38         |
| 12.        |              | Security  Ownership of Certain Beneficial Owners and Management and Related Shareholder  Matters                   |       | 38         |
| 13.        |              | Certain  Relationships and Related Transactions                                                                    |       | 38         |
| 14.        |              | Principal  Accountant Fees and Services                                                                            |       | 38         |
| ** ** | ** **        | **PART IV**                                                                                                   | ** ** | ** ** |
| 15.        |              | Exhibits,  Financial Statement Schedules and Reports on Form 8-K                                              |       | 39         |

 

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**PARTI**

*Thisreport and the documents incorporated herein by reference containforward-looking statements that involve risks and uncertainties. Actual resultsmay differ significantly from those indicated in such forward-lookingstatements. Some of the factors that may cause actual results to differinclude, but are not limited to, those discussed in “Risk Factors” contained inItem 1A of this report, “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” contained in Item 7 of this report and“Quantitative and Qualitative Disclosures About Market Risk” contained in Item7A of this report.*

**Item 1.**   Business

**Overview**

Click Commerce, Inc (the “Company”) provides on-demandsupply and demand chain management software and consulting, hosting and relatedservices that enable users throughout the world to collaborate, in real time,with business partners across an extended enterprise. Our solutions support theunique business processes of a wide variety of industries, includingmanufacturing, aerospace, defense, and high-tech. The Company believes itsproducts and services help its customers coordinate and optimize their businessprocesses, lower their costs and improve their customer service. 

The Company’s product offerings include its historicdemand chain management solutions, supply chain management solutions, serviceparts planning and optimization solutions, master data management solutions,contract and service management solutions and eResearch and healthcaresolutions. While each of these solutions has a unique focus and its ownhistoric customer base, the Company’s target market, large multinationalbusinesses, often require solutions from several of these categories.

Each of oursolutions is designed to assist our customers with their key businessprocesses. Our solutions are designed to help our customers:

·  coordinate and optimize business processes byproviding visibility into partner activities and the tools for improvedmanagement of tasks and processes

·  shorten revenue cycles by standardizing salesand order management processes and facilitating collaborative commerce amongtrading partners

·  lower costs by reducing manual touchpoints andprocessing times

·  increase brand loyalty by assisting partnersto provide better service

·  comply with regulatory requirements by speedingapplication preparation, eliminating routine errors and notifying researchteams of approaching deadlines

·  enhance collaboration with customers andprospective customers

The Company believes that the quality, depth and scopeof its various product offerings create opportunities for integrating andcross-selling its solutions from one product offering to its existing andfuture customers of other product offerings. For example, through severalrecent acquisitions, the Company has assembled a suite of products and servicesthat enterprises can use to implement radio frequency identification(RFID)-enabled supply chain solutions. The Company views the RFID market asimportant because major, industry-leading retail chains, including The HomeDepot and Wal-Mart, have announced initiatives that will require theirsuppliers to become RFID-enabled. While the Company does not supply RFID transmittingor receiving devices, its RFID-enabling software that can process data fromsuch devices and integrate and communicate that data to and among tradingpartners. The key enablement software, the Company’s data synchronization andsecure communications product, is part of its master data management solutionsproduct offering.

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Historically, the Company realized most of itsrevenues from licensing of our software and related implementation andmaintenance services. The Company’s software was usually installed oncustomer-owned hardware at a customer’s facility and was operated andmaintained by the customer’s personnel. This software license model generallyresulted in lengthy sales cycles, significant integration and implementationchallenges and expenses and relatively large, but one-time, revenue recognitionevents for the Company.

Today, while still selling some product under thelicense model, the Company offers all of its products on a “Software as aService” (“SaaS”) or a hosted, application service provider (“ASP”) basis.Under this SaaS model, the Company’s software is installed, operates and ismaintained on Company-owned servers, which are monitored and maintained byCompany personnel. While our software is still configured and integrated to ourcustomers’ needs, implementation and integration challenges are substantiallyreduced. Under this approach, a customer’s monthly subscription and hosting feeis substantially less than the typical one-time license fee, but, over the lifeof the subscription generally produces equivalent or greater revenue to theCompany. The lower up-front costs and integration hurdles tend to reducecustomer approval requirements and shorten sales cycles.

More than 1,500 customers in manufacturing, aerospaceand defense, high technology, retail, financial services, healthcare and highereducation fields utilize the Company’s solutions. For example, the MobileDevices unit of Motorola uses the Company’s Demand Chain solution to manage itsglobal partner network. Lockheed Martin utilizes the Company’s Service PartsPlanning and Optimization Solution to support its Performance Based Logisticscontracts with the U.S. Department of Defense. In addition, many top medicalresearch institutions in North America use the Company’s compliance automationsoftware including Johns Hopkins University, Washington University and theUniversity of Michigan.

The Company wasincorporated in Delaware in August of 1996. Our executive offices are locatedin Chicago, Illinois. Our common stock is listed on the NASDAQ National Marketunder the symbol “CKCM.” As used herein, Click Commerce (the “Company”)includes Click Commerce, Inc. and its wholly-owned subsidiaries.

The Company’s internetaddress is: www.clickcommerce.com. Information on our website is notincorporated by reference into this report. The Company makes available free ofcharge through its website its annual report on Form 10-K, quarterlyreports on Form 10-Q, current reports on Form 8-K andamendments to those reports filed or furnished pursuant to Section 13(a)or 15(d) of the Exchange Act and Section 16 reports as soon as reasonablypracticable after such documents are electronically filed with the Securitiesand Exchange Commission. The internet website and the information containedtherein or incorporated therein are not intended to be incorporated into this annualreport on Form 10-K.

**Demand Chain Management Solutions**

The historic ClickCommerce Demand Chain Management solution offers an integrated demand chainmanagement and e-commerce solution. It includes over 35 software componentsthat automate communication and business processes across distributionchannels. The Company’s software is customized for each of its customers, andeach of its customers can allow each of its users to further customize it—establishing,for example, the individual user’s language, time zone and currencypreferences. Supported demand chain business processes include:

·  Partner recruitment and profiling

·  Lead management and distribution

·  Price and quotation management

·  Integrated quote-to-order and lead-to-order

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·  Monitoring and tracking of warranty claims andreturns

·  Training and certification

·  Channel forecasting

·  Point-of-sale analysis

·  Marketing funds management

With the Click CommerceDemand Chain Management solution, we believe that our customers can gain abetter understanding of who their partners are, what they sell, where they selland to whom they sell. Using this information, we believe that our customerscan more easily identify gaps in their partner coverage and then target,qualify and recruit the new partners they need to fill these gaps and buildtheir businesses.

**Supply Chain Management Solutions**

Click Commerce’s Supply Chain Management solutions,which were acquired in February 2005, provide supply chain execution andwarehouse management solutions for multi-tiered supply chains and include anRFID-ready demand fulfillment solution. These solutions enable supply networkcommunications, coordinate business processes and services, and optimize supplychain functions. With this technology, Click Commerce’s clients can receiveorders and other information from their customers who have implemented RFIDinitiatives and can run their warehouse and fulfillment operations using thesame RFID information that their customers use in their retail operations. TheCompany’s solutions are designed to function independently of one another, orin tandem for tailored enterprise network environments. Supported supply chainbusiness processes include:

·  Supplier Enablement

·  Fulfillment Coordination

·  Service Logistics

·  Shipment Execution

·  Warehouse Management

Each solution includesClick Commerce’s rapid integration platform, best business practice methods,and a supply chain intelligence dashboard.

**ServiceParts Planning and Optimization Solutions**

The Click CommerceService Parts Planning and Optimization solutions, which were acquired in May 2005,are designed to improve the performance of our customers’ service and repairactivities and their investments in spare parts inventories. Thesesolutions are particularly important for companies in the aerospace, defense,automotive and high technology industries, where maintaining and repairingcomplex equipment is critical. These products are designed to help optimize theprocurement and distribution of spare parts inventories, the deployment ofparts to optimal stocking locations, and the flow and disposition of inventorythrough the repair loop and back into usable stock. The Company’s Service PartsPlanning and Optimization solution applications have a broad view of theservice network and provide world-class planning capabilities coupled with anintegrated tool for bridging the information gaps between partners. Embeddedalgorithms identify and address issues related to a company’s service partssupply chain and help companies determine disposition and routing at each step:return, receipt, repair, and restock. Supported service supply chain businessprocesses include:

·  Parts Planning Optimization

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·  Product Acquisition

·  Reverse Logistics

·  Inspection and Testing

·  Reconditioning and Repair

·  Distributionand Sales

**MasterData Management Solutions**

The Click Commerce MasterData Management (MDM) solutions, acquired in November 2005, consolidate andmanage widely distributed master product data within an enterprise. Thesesolutions provide a single, consolidated version of this information thatimproves the accuracy of dependent systems and reduces errors that arise fromdata duplication and inaccuracy. This product is intended to address problemscaused by a company maintaining its master data in raw or “native” form inmultiple, disconnected Enterprise Resource Planning applications (ERP) andother systems and lacking detailed descriptions, product attributes andclassification structures that permit corporate-wide analysis and visibilityinto cost and performance. The Company’s customers’ use its MDM solutions todeliver core services and infrastructure to turn raw master data into morereadily available product information that can be acted upon to cut costs,deliver products faster and boost competitiveness. Supported MDM businessprocesses include:

·  Cleansing and Normalizing Existing Data

·  Organizing and Mapping Data to InternalStructures

·  Integration to MDM/ERP Legacy Systems

·  Master Data Maintenance

The MDM solution does notreplace enterprise applications or the data contained therein. Rather, thesolution enhances the existing ERP system, helping reduce customer costs byintegrating its solution with tools and processes already deployed throughoutan organization. The Company’s data synchronization and secure communicationssolutions, acquired in 2004, complement the Company’s MDM capabilities byallowing companies to communicate their normalized master data with theirtrading partner community via the Internet. Data synchronization is anindustry-wide retail initiative that requires manufacturers and suppliers to“sync” product information with their retailer customers.

**Contractand Service Management Solutions**

TheClick Commerce Contract and Service Management products, acquired, in February2006, are on-demand e-commerce solutions for service businesses. They enable theCompany’s customers to manage their complete services and contractor managementlife cycle. Customers use these solutions to find, evaluate, purchase, manageand pay for a wide variety of outsourcing, professional and other services. Thesolutions handle multiple types of services contracts and payment structuressuch as time and materials, retained relationships, milestones, blanket orders,service level based payments and volume based contracts. Using these solutions,our customers realize the following benefits:

·  Compliance with key policies, laws andcontrols for corporate reporting, including Sarbanes-Oxley, and labor andstaffing

·  Visibilityinto spend volumes, supplier performance, and efficiency

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**eResearchand Healthcare Solutions**

TheClick Commerce eResearch and Healthcare solutions help healthcare and highereducation institutions improve response time and accuracy of approval processesby connecting research departments through administrative Extranets. TheCompany’s software automates labor-intensive review and approval processes intomore easily navigated, flexible sequences of workflows. Supported eResearch andHealthcare business processes include:

·  Grant and Contract Management

·  Institutional Review Board Review

·  Institutional Animal Care and Use CommitteeReview

·  Clinical Trials Discovery

·  Incident Reporting

·  Conflict of Interest Reporting

**Industry Background**

Traditional phone, fax andpaper-based communications systems are labor intensive, inefficient and proneto error. Companies historically dedicated significant resources and time tothe manual entry of information from faxed or phoned-in purchase orders and themanual processing of paper checks, invoices and shipping notices. Whilespreadsheets and e-mail are also used to manage their partner relationships,even these electronic systems can be difficult to integrate and inefficient.The large volume of paper generated by these systems and the mass ofinformation to be sorted and processed frequently produce hidden costs such aserrors and delays in information delivery. Timely changes can be difficult toimplement in manually intensive processes and the cost related to such changescan be significant. For example, a paper-based catalog cannot be quickly orinexpensively updated to inform customers of changes in product offerings,availability or pricing. In addition, a manufacturer and the members of itsdistribution network often have limited capability to track orders, inventory,warranties and other information or to compile useful databases usingpaper-based or semi-automated processes. These forms of communicationdo notpermit , manufacturers and their business partners to exchange information on areal-time basis, preventing easy access to key information needed to transactbusiness with the manufacturer or its channel partners. Manufacturers may alsosuffer from differences in language and time zone, which are barriers thattraditional methods cannot easily overcome.

Increasing market andsupply chain complexity motivates companies to improve operations andcommunications with their supplier community. The continued growth ofoutsourced manufacturing, increased focus on low-cost international materialsprocurement, and heavy market reliance on vendor or supplier managed inventoryprograms to control costs require a solid infrastructure for coordinating theextended supply network. Traditional enterprise systems tend not to provide thevisibility and control required to efficiently manage and synchronize extendedbusiness processes, resulting in excess operating costs and poor customerservice. The ability to view complete and accurate orders, integrate data, andmanage inventory and activities for effective fulfillment execution isnecessary to effectively respond to challenging customer requirements andachieve competitive advantage.

**Growth Strategy**

Our objective is to offercomprehensive business-to-business automation solutions that optimize theinternal and external business processes of large, global companies, includingtheir channel partners and their supplier community. Key elements of ourstrategy to achieve this objective include:

*DeliveringIndustry-Specific Solutions*.   We believe that, based onthe breadth of the applications that we offer, we have a comprehensivebusiness-to-business software, integration and hosting 

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solutionscurrently available for large, global companies. By packaging and marketing thesesolutions along with maintaining a highly referenceable client base, we believethat we address the existing market needs of high technology, industrial andconsumer product manufacturing, retail, higher education and health care, financialservices.

*Targeting Large, GlobalEnterprises*.   By focusing on the complex requirements ofthese companies, we believe our solutions give our customers certaincompetitive advantages, such as improved efficiency, financial performance,customer service and brand loyalty, by effectively managing their complexexternal distribution and procurement networks and internal resource allocationfunctions. We specifically target divisions of these large companies. There areoften opportunities to sell to other products to the same division or similarproducts to other divisions within the organization, providing leverage in oursales model. We intend to continue to primarily target large, multi-nationalcorporations.

*Providing Value-Added Services toOur Customers*.   We plan to grow our complementaryservice offerings to deliver additional value to our customers. Through our clientimplementations, we have developed expertise and best practices in managingpartner relationships and in launching solutions, driving adoption, hosting,administering and optimizing our software and the network environment. Thesenew service initiatives are expected to attract both new and existingcustomers, strengthening our business case for sales to new customers and additionalsales to current customers.

*AcquiringComplementary Businesses*.   The Company continues toevaluate strategic opportunities to acquire completmentary businesses that willincrease the breadth and depth of our compliance automation and RFID-enablingproduct offerings. We look for combinations that can enlarge our customer base,provide additional revenue streams and leverage our existing corporate andtechnical infrastructure.

**Technology**

Wedeliver our applications through integrated, high-performance technologiesdesigned for maximum compatibility with our customers’ existing systems andcomputing environments. Our underlying platform is based on the latest openstandards platform, and provides the tools necessary to derive maximum returnon investment for our customers:

·  Click Commerce packaged applications helpmanage critical trading partner interactions

·  Our platform supports real-time configurationand distributed administration for greater business flexibility

·  Through easy-to-use web interfaces, businessusers can modify workflows and detailed feature configuration to align thesystem to business needs

·  Our platform takes advantage of the latestopen standards to facilitate integration with customer relationship managementtools, enterprise resource planning systems, portals and custom enterprisesystems

·  Implementation tools cover customization,deployment, management, and upgrades. These tools are part of an integratedenvironment providing access across the system

·  Our software has configurable security, whichoperates throughout the levels of a system, from encryption of network trafficto business-oriented authorization policies

·  Ourplatform is multi-lingual for international deployments, and its open standardsplatform provides high-performance, cost-effective, reliable and scalable operations

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**Customers**

We have established a strong, referenceable portfolioof Global 2000 clients. Our clients typically have complex products andmulti-level, hierarchical relationships with a broad range of channel partners.

Thefollowing is a partial list of the companies that have licensed our softwareand that we believe are representative of our overall customer base. Byidentifying these customers we are not implying that these customers areactively endorsing or promoting our solutions.

| **High-Tech   and Electronics** | ** ** | ** **            | ** ** | **Manufacturing  and Distribution** | ** ** | **Financial Services**      | ** ** | **Commercial Aviation,  Aerospace & Defense** |
|---------------------------------|------------|-----------------------|------------|-------------------------------------|------------|-----------------------------|------------|---------------------------------------------------|
| Motorola                        |       | Delphi                |       | Bank of America                     |       | American Airlines           |
| Microsoft                       |       | Hyundai               |       | JP Morgan Chase                     |       | Delta Airlines              |
| Dell                            |       | Jabil Global Services |       | ABN Amro                            |       | Lockheed Martin             |
| SAP                             |       | Abbott Labs           |       | Capital One                         |       | Alaska Airlines             |
| Oracle                          |       | Kawasaki              |       | American Express                    |       | GE Aircraft Engines         |
| Intel                           |       | Lincoln Electric      |       | Citibank                            |       | Aviall                      |
| Nortel                          |       | Goodrich              |       | Union Bank of California            |       | Air France Industries       |
| Lucent                          |       | Honeywell             |       | Charles Schwab                      |       | National Defense of  Canada |
| Hitachi                         |       | BP                    |       | Countrywide Financial               |       |                        |
|                            |       | Solectron             |       |                                |       |                        |
|                            |       | Subaru                |       |                                |       |                        |
|                            |       | Tyco                  |       |                                |       |                        |

 

During the year ended December 31,2005, Lucent Technologies Inc. accounted for 13% of the Company’s total revenue.During the years ended December 31, 2004 and 2003, Microsoft Corporationaccounted for approximately 11% and 19%, respectively, of the Company’s totalrevenue.

**Research and Development**

We have made and willcontinue to make investments in research and development through internaldevelopment, licensed technology and acquisitions. In fiscal 2005, 2004 and2003, we spent approximately $7.0 million, $2.9 million, and $2.4 million,respectively, on research and development. Our research and development staffis responsible for enhancing our existing products and services and expandingour product line and services offerings. Our current product developmentactivities focus on product enhancements to increase the robustness,functionality and ease of integration of our configurable applications and theintegration of external services and partner technology.

**Sales and Marketing**

The Company markets applications and services throughits direct sales force. The Company’s sales force is assisted throughout thesales process by a team of Click Commerce business consultants and projectmanagers. This team oversees the project from start to finish and isresponsible for installing the collaborative commerce or compliance solutions.To complement our direct sales efforts, we also use methods such astelemarketing, direct mail campaigns, website marketing and speakingengagements to build market awareness. Substantially all of our clients havehistorically provided strong references to our sales prospects.

We focus our marketingefforts on educating our target market, generating new sales opportunities andcreating awareness of our solutions and integration services through Internetand telemarketing efforts. We have engaged in marketing activities such asindustry conferences and trade shows, industry analyst programs and advisorycouncils. Our marketing professionals also produce marketing materials thatinclude data sheets, brochures and white papers, to support sales toprospective customers.

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**IntellectualProperty and Other Proprietary Rights**

Our success and ability to compete is affected by ourability to develop and maintain the proprietary aspects of our technology andoperate without infringing on the proprietary rights of others. We relyprimarily on a combination of copyright, patent, trade secret and trademarklaws, confidentiality and nondisclosure procedures, contractual provisions andother similar measures to protect our proprietary information. Any patentsissued to us may be invalidated, circumvented or challenged. Any of our pendingor future patent applications, whether or not being currently challenged, maynot be issued within the scope of the claims we seek, if at all. Furthermore,others may develop technologies that are similar or superior to our technologyor design around our patents. As part of our confidentiality procedures, weenter into nondisclosure agreements with virtually all of our employees,directors, contractors, consultants, corporate partners, customers and prospectivecustomers. These legal protections, however, afford only limited protection forour technology. Due to rapid technological change, we believe that factors suchas the technological and creative skills of our personnel, new productdevelopments and enhancements to existing solutions are more important than thevarious legal protections in establishing and maintaining a technologyleadership position. Click Commerce does hold several patents in configurationtechnology and has one patent pending for security management in amulti-channel environment.

Despite our best efforts to protect our proprietaryrights, unauthorized parties may attempt to copy or otherwise obtain and useour solutions or technology that we consider proprietary and third parties mayattempt to develop similar technology independently. Policing unauthorized useof our solutions is difficult. While we are unable to determine the extent towhich piracy of our software exists, we expect software piracy to be apersistent problem. In addition, effective protection of proprietary rights maybe unavailable or limited in certain countries. The laws of some foreigncountries do not protect our proprietary rights to the same extent as do thelaws of the United States. Overall, the protection of our proprietary rightsmay not be adequate, and our competitors may independently develop similartechnology.

We are not aware that oursolutions, trademarks, copyrights or other proprietary rights infringe theproprietary rights of third parties. However, we have not reviewed all existingpatents and patent applications in order to determine whether grounds exist foran infringement claim against us. Third parties may assert infringement claimsagainst us in the future with respect to current or future products. Further,we expect that software product developers will increasingly be subject toinfringement claims as the number of potential products and competitors in ourindustry segment grows and the functionality of solutions in different industrysegments overlaps. From time to time, we hire or retain employees orconsultants who have worked for independent software vendors or other companiesdeveloping solutions similar to those offered by us. Those prior employers mayclaim that our solutions are based on their products and that we havemisappropriated their intellectual property. Any claims of that variety, withor without merit, could cause a significant diversion of management attention,result in costly and protracted litigation, cause product shipment delays orrequire us to enter into royalty or licensing agreements. Those royalty orlicensing agreements, if required, may not be available on terms acceptable tous or at all, which would have a material adverse effect on our business.

**Competition**

Themarket for our products is intensely competitive, subject to rapidtechnological change and is significantly affected by new product introductionsand other market activities of industry participants. There are relatively fewbarriers to entry in the Internet-based software market, and we expectcompetition to persist and intensify in the future. We currently have fourprimary sources of competition: in-house development teams of our potentialclients; large software and enterprise resource planning vendors;infrastructure and platform providers; and independent software vendors. In thepast, when competing for 

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customers, we have directly competed with providers ofalternative products and services, including those identified in the tablebelow.

| **Solution Focus**                                                                 | ** ** | ** **                                                                         | ** ** | **Competitors** |
|------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|-----------------|
| Demand Chain Management                                                            |       | Comergent, IBM, SAP, Oracle                                                        |
| Supply Chain Management                                                            |       | Manhattan Associates,  Red Prairie, High Jump, OneNetwork, I2, Manugistics         |
| Service Supply Chain  Management                                                   |       | Servigistics, MCA  Solutions, Baxter Planning                                      |
| Master Data Management  (including Data Synchronization and Secure Communications) |       | GXS, Sterling Commerce,  Lansa, ISS, Cyclone Commerce, Inovis, Seeburger, IBM, SAP |
| eResearch and Healthcare                                                           |       | InfoEd, iMedRIS, API  Software                                                     |
| Contract and Service Management                                                    |       | IQ Navigator, Fieldglass, ICG Commerce                                             |

 

The number and nature of competitors and thecompetition that we will experience are likely to change substantially in thefuture.

We believe that the principal competitive factorsaffecting our market include speed of implementation, price, knowledge of theindustry and its related distribution channels, core technology, an ability tointegrate and interoperate with existing technology and the financial capacityof the respective vendors. Although we believe that our products andintegration services currently compete favorably with respect to most of thesefactors, our market is evolving rapidly. We may not be able to maintain ourcompetitive position against current and potential competitors, especiallythose with significantly broader product lines and/or greater financial,marketing, service, support, technical and other resources.

Some of our competitors have longer operatinghistories in related markets, greater financial, technical, marketing and otherresources, greater name recognition and a larger installed base of customers inrelated markets. Moreover, a number of our competitors, particularly majorbusiness software companies (including those known for their enterpriseresource management, database, customer relationship or other software) havewell-established relationships with our current and potential customers, aswell as with independent systems consultants and other vendors and serviceproviders that may influence certain customer’s product selection processes. Inaddition, these competitors may be able to respond more quickly to new oremerging technologies and changes in customer requirements, or devote greaterresources to the development, promotion and sale of their products, than wecan.

In addition, some of our customers are softwarecompanies that use certain of our software products, particularly our masterdata management solutions, as components or modules of their larger and morecomprehensive enterprise resource management software systems or bundle oursoftware products with their products to complete the range of functionalityrequired by their customers. These software companies may design and developtheir own software solutions to replace our software products or could acquirealternative solutions from third parties. If our customers develop or acquirealternative software solutions, we could lose sales or be forced to lower ourprices to maintain these customer relationships.

Such competition couldmaterially and adversely affect our ability to obtain revenues from eitherlicense, maintenance and/or service contracts with new or existing customers onterms favorable to us. Further, competitive pressures may require us to reducethe price of our products and services. In either case, our business, operatingresults and financial condition would be materially and adversely affected.There can be no assurance that we will be able to compete successfully withexisting or new competitors or that competition will not have a material adverseeffect on our business, financial condition and operating results.

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**Employees**

As of December 31,2005, our full-time headcount was 262. Our employees are not represented by alabor union, and we consider our relations with our employees to be good. Inorder to provide benefits to our employees in a cost-effective manner, we havea client services agreement with Administaff Companies, Inc. (“Administaff”)under which Administaff provides us with certain personnel management services,such as payroll, medical and dental insurance and the administration of our401(k) plan. Under the agreement, Administaff and the Company are intended tobe co-employers of all of our employees. Co-employment is necessary forAdministaff to administer payroll and sponsor and maintain benefit plans.

**Item 1A.**   RiskFactors

*Risks Related toOur Business*

***Acquisitions or investments in other technologycompanies or related businesses may disrupt or otherwise have a negative impacton our business and dilute shareholder value.***

We have and may continueto acquire or make investments in complementary businesses, technologies,services or products, or enter into relationships with parties who can provideaccess to those assets, if appropriate opportunities arise. From time to timewe have had discussions and negotiations with companies regarding ouracquiring, investing in or partnering with their businesses, products, servicesor technologies, and we regularly engage in these discussions and negotiationsin the ordinary course of our business. We may not identify suitableacquisition, investment or relationship candidates, or if we do identifysuitable candidates, we may not complete those transactions on commerciallyacceptable terms or at all. If we acquire another company, we could have difficultyin assimilating that company’s personnel, operations, technology and software.In addition, the personnel of the acquired company may decide not to work forus. If we make other types of acquisitions, we could have difficulty inintegrating the acquired products, services or technologies into ouroperations. These difficulties could disrupt our ongoing business, distract ourmanagement and employees and increase our expenses. Furthermore, we may incurindebtedness or issue equity securities to pay for any future acquisitions. Theissuance of equity securities would dilute the ownership interests of theholders of our common stock.

***Integration of recent acquisitions may result in asignificant use of capital.***

Our recent acquisitionshave required various expenditures and the assumption of indebtedness.Integration of these acquisitions may result in further cash outlays.

***We are dependent on the success of our suite ofapplications and related services for our success.***

To date, substantially allof our revenues have been attributable to sales of licenses and relatedservices, consisting of hosting, site administration, implementation,integration with a customer’s existing back-office computer systems andmaintenance and support of our software products. We currently expect our suiteof applications and related services to account for a substantial portion ofour future revenues. Accordingly, factors adversely affecting the pricing of ordemand for our suite of applications, such as competition or technologicalchange, could have a material adverse effect on our business, financialcondition, and operating results. Our future financial performance will depend,in significant part, on the successful development, introduction and customeracceptance of new and enhanced versions of our suite of applications and of newproducts and services that we develop or acquire. We can provide no assurancethat we will be successful in upgrading and continuing to market our suite ofapplications or that we will successfully develop or acquire new products andservices or that any new products and services will achieve market acceptance.

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***Our business is subject to quarterly fluctuations inoperating results, which may negatively impact the price of our common stock.***

While our growing base of recurring maintenance,hosting and subscription revenues provides revenues which are more predictablethan sales of software licenses and related implementation services, we stillhave significant revenues that are not recurring or accurately predictable insucceeding quarters. Our quarterly operating results have varied significantlyin the past, and we expect that they will continue to vary significantly fromquarter to quarter in the future due to variations in sales of softwarelicenses and related implementation services and the additional results ofoperations from acquired businesses. We have difficulty predicting the volumeand timing of contracts, and short delays in closing contracts or inimplementation of products can cause our operating results to fallsubstantially short of anticipated levels for any particular quarter. This is,in part, due to the fact that our products tend to have long sales cycles,which makes it difficult to predict the periods in which we will recognizerevenue and may cause operating results to vary significantly. As a result ofthese and other factors, we believe that period-to-period comparisons of ourhistorical results of operations are not necessarily meaningful and are not areliable predictor of our future performance. We may not be successful ingenerating and sustaining recurring revenue streams to offset the aboveeffects.

In addition, we regularly incur expenses to developproducts and service offerings ancillary to our existing line of products andservices. These expenses are variable and may affect our earnings and mayresult in losses in particular quarterly or annual periods.

Finally, the Company may incur costs related to theinvestigation of acquisitions

If we are unable to complete a substantial number ofsales contracts when anticipated or experience delays in the process orproblems with satisfying contract terms, we may have to defer or withholdrecognition of revenue, causing our quarterly results to fluctuate and fallbelow anticipated levels. For contracts in which revenue is recognized usingthe percentage-of-completion method, we may not be able to recognize all or aportion of the revenue because milestones were not achieved or the level ofhours incurred fell short of expectations. If we are unable to complete one ormore substantial anticipated license sales or experience problems with satisfyingcontract terms required for revenue recognition in a particular quarter, we maynot be able to recognize revenue when anticipated. We may, nonetheless,recognize marketing and other expenses, causing our quarterly results tofluctuate and fall below anticipated levels.

For all of these reasons,in some future quarters or years our operating results may be below theexpectations of investors, which could cause volatility or a decline in theprice of our common stock.

***An economic slowdown, particularly in informationtechnology, may adversely impact our business.***

Our business has beenadversely impacted by past economic slowdowns that resulted in a decline ininformation technology spending by our customers and potential customers. Theadverse impacts from an economic slowdown include longer sales cycles, loweraverage selling prices and reduced bookings and revenue. Any future economicslowdowns could adversely impact our business.

***We license certain software from third parties.***

We license a small amountof software from third parties. These third party software licenses may notcontinue to be available to us on acceptable terms. The loss of, or inabilityto maintain, any of these software licenses could result in shipment delays orreductions in revenue. This could adversely affect our business, operatingresults and financial condition.

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***We will not be ableto achieve desired growth in our business if we cannot increase our direct andindirect sales channels.***

Our products and servicesrequire a sophisticated sales effort targeted at several people within ourprospective clients’ organizations. We believe that our success is dependentupon developing more economical sales efforts which may include establishingstrategic relationships with third parties. We cannot be sure that we will besuccessful in achieving these economies in our direct or indirect sales or inestablishing these desired relationships or that these third parties willdevote adequate resources or have the technical and other sales capabilities tosell our products. The failure to achieve expected sales could adversely affectthe market price of our common stock.

***We face competitionand may face future competition.***

The market for softwareproducts and services that enable business-to-business e-commerce is intenselycompetitive, rapidly changing. There are relatively few barriers to entry inmany of the markets in which we operate. We expect competition to persist andintensify, which could result in our losing market share or lowering ourprices.

In addition, some of ourcustomers are software companies that use certain of our software products,particularly our master data management solutions, as components or modules oftheir larger and more comprehensive enterprise resource management softwaresystems or bundle our software products with their products to complete therange of functionality required by their customers. These software companiesmay design and develop their own software solutions to replace our softwareproducts or could acquire alternative solutions from third parties. If ourcustomers develop or acquire alternative software solutions, we could losesales or be forced to lower our prices to maintain these customerrelationships.

**Someof our competitors have advantages over us.**

Some of our existingcompetitors, as well as potential future competitors, are multi-billion dollar,international, software providers with longer operating histories in marketsrelated to ours, greater name recognition, larger customer bases and significantlygreater financial, technical and marketing resources than our Company. Theseadvantages may allow them to respond more quickly and effectively to new oremerging technologies and changes in customer requirements. It may also allowthem to engage in more extensive research and development, undertakefarther-reaching marketing campaigns, adopt more aggressive pricing policies,implement their products and services more rapidly, and make more attractiveoffers to potential employees and other business associates. One or more ofthese companies could adopt a different business strategy for achievingprofitability, which could allow them to charge fees that are lower than ours,in order to attract clients. In addition, current and potential competitorshave established or may establish cooperative relationships among themselves orwith third parties to increase the ability of their products or services toaddress the needs of our current and prospective clients.

**Ourchief executive officer is critical to our business.**

Our future success dependsto some extent upon the continued service of our chief executive officer. Theservices of Michael W. Ferro, Jr., our founder, chairman of the board ofdirectors and chief executive officer would be difficult to replace.

***If we fail toprotect our intellectual property rights or face a claim of intellectualproperty infringement by a third party, we could lose our intellectual propertyrights or be liable for significant damages.***

Our success dependssignificantly upon our proprietary technology. We have a small number ofpatents, and limited plans to initiate applications for any new patents.Unauthorized parties could copy aspects of our products or services or obtainand use information that we regard as proprietary. Our means of protecting ourproprietary rights may not be adequate, and our competitors may independentlydevelop 

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similartechnology or duplicate our products or our other intellectual property rights.Our failure to protect our proprietary rights adequately, or our competitors’successful duplication of our technology, could negatively affect our operatingresults and cause the price of our common stock to decline.

In addition, we haveagreed, and may agree in the future, to indemnify certain of our customersagainst claims that our software infringes upon the intellectual propertyrights of others. We could incur substantial costs in defending ourselves andour customers against infringement claims. In the event of a claim ofinfringement, we and our customers could be required to obtain one or morelicenses from third parties. We or our customers may be unable to obtainnecessary licenses from third parties at a reasonable cost, or at all. Defenseof any lawsuit or failure to obtain any such required licenses could harm ourbusiness, operating results and financial condition.

***Litigation overintellectual property rights could disrupt or otherwise have a negative impacton our business.***

There has been frequentlitigation in the computer industry regarding intellectual property rights.Third parties may make claims of infringement by us with respect to current orfuture products, trademarks or other proprietary rights. These claims could betime-consuming, result in costly litigation, divert management’s attention,cause product release or service delays, require us to redesign our products orservices or require us to enter into costly royalty or licensing agreements.Any of these events could have a material and adverse effect on our financialcondition and results of operations.

***If we becomesubject to product liability litigation, it could be costly and time consumingto defend.***

Since our products areused for company-wide, integral computer applications with significantpotential impact on our customers’ sales of their products, any errors, defectsor other performance problems with our products could result in financial orother loss for our customers. Although we have contractual limits to ourliability, product liability litigation would be time consuming and costly todefend, even if we are successful.

***We have disclosedpro forma financial information.***

We prepare and releasequarterly unaudited financial statements prepared in accordance with generallyaccepted accounting principles (“GAAP”). We also have disclosed and discussedcertain pro forma financial information in certain previous earnings releasesand related investor conference calls. This pro forma financial informationexcluded certain non-cash charges, consisting primarily of amortization of stock-basedcompensation, restructuring charges, accretion related to preferred stock,amortization of intangible assets and certain income tax expense or benefit.Disclosure of pro forma results of operations was also required in relation toour acquisitions to present certain results as if these acquisitions hadoccurred at the beginning of the related reporting periods presented. Althoughwe believe the disclosure of pro forma information may have helped investorsmore meaningfully evaluate the results of our ongoing operations and althoughwe provided a reconciliation of the pro forma information to our GAAP financialstatements, we urge investors to carefully review the GAAP financialinformation included as part of our quarterly reports on Form 10-Q, annualreports on Form 10-K and our quarterly earnings releases and comparethat GAAP financial information with the pro forma financial results previouslydisclosed in the related earnings releases and investor calls.

*Risks Related to Our Industry*

***We are highly dependenton the acceptance and effectiveness of the Internet as a medium forbusiness-to-business commerce.***

Our future revenues andthe success of a number of our products and services are dependent in largepart on an increase in the use of the Internet for business-to-businesscommerce. The failure of the Internet to continue to develop as a commercial orbusiness medium could harm our business, operating 

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resultsand financial condition. The acceptance and use of the Internet forbusiness-to-business e-commerce could be limited by a number of factors,such as the growth and the use of the Internet in general, the threat ofillegal activity that causes performance degradations at unprotected sitesacross the Internet, the relative ease of conducting business on the Internet,the efficiencies and improvements that conducting commerce on the Internetprovides, concerns about transaction security and taxation of transactions onthe Internet.

***We depend on thespeed and reliability of the Internet.***

The growth in Internettraffic has occasionally caused periods of decreased performance. If Internetusage continues to grow rapidly, its infrastructure may not be able to supportthese demands and its performance and reliability may decline. Decreasedperformance at some unprotected Internet sites has also been attributed toillegal attacks by third parties. If outages or delays on the Internet occurmore frequently or businesses are not able to protect themselves adequatelyfrom such illegal attacks, business-to-business e-commerce could grow moreslowly or decline, which might reduce demand for our software products andservices. The ability of our products to satisfy our customers’ needs isultimately limited by, and depends upon, the speed and reliability of the Internet.Consequently, the emergence and growth of the market for our software productsand services depends upon improvements being made to the entire Internet toimprove security and alleviate overloading and congestion. If theseimprovements are not made, the ability of our customers to benefit from ourproducts and services will be hindered, and our business, operating results andfinancial condition could suffer.

***Increased securityrisks of the Internet may deter future use of our software products and services.***

A fundamental requirementof Internet-based, business-to-business software is the secure transmission ofconfidential information over public networks. Advances in computercapabilities, new discoveries in the field of cryptography, or other developmentsmight result in a compromise or a breach of the security features contained inour software or the algorithms used by our customers and their businesspartners to protect content and transactions on Internet e-commercemarketplaces or proprietary information in our customers’ and their businesspartners’ databases. Anyone who is able to circumvent security measures couldmisappropriate proprietary, confidential customer information or causeinterruptions in our customers’ and their business partners’ operations. Ourcustomers and their business partners may be required to incur significantcosts to protect against security breaches or to alleviate problems caused bybreaches, reducing the demand for our software products and services. Further,a well-publicized compromise of security could deter businesses from using theInternet to conduct transactions that involve transmitting confidentialinformation. The failure of the security features of our software to preventsecurity breaches, or well-publicized security breaches affecting the Internetin general, could significantly harm our business, operating results andfinancial condition.

***Internet-relatedlaws could adversely affect our business.***

Regulation of the Internetis largely unsettled. The adoption of laws, regulations or taxes that increasethe costs or administrative burdens of doing business using the Internet couldcause companies to seek an alternative means of transacting business. If theadoption of new Internet laws, regulations or taxes causes companies to seekalternative methods for conducting business, the demand for our softwareproducts and services could decrease and our business could be adverselyaffected.

**Item 1B.     Unresolved Staff Comments**

None

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**Item 2.        Properties**

Our corporate headquartersis located in leased office space in Chicago, Illinois. This lease expires in2010. We also have leased offices in San Francisco, California, Portland,Oregon, Denver, Colorado, Costa Mesa, California, White Plains, New York,Fremont, California, Fairport, New York, Houston, Texas, Toronto, Canada, Munich,Germany and London, England.

**Item 3.        LegalProceedings**

The Company is not partyto any pending legal proceedings that we believe would, if adverselydetermined, individually or in the aggregate, have a material adverse effect onthe Company’s financial condition or results of operations.

**Item 4.        Submissionof Matters to a Vote of the Securities Holders**

There were no matters submitted to a vote of ourshareholders during the fourth quarter of the year ended December 31, 2005.

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**PART II**

**Item 5.**                        Marketfor Registrant’s Common Stock, Related Shareholder Matters and Issuer Purchaseof Equity Securities

*Market Information*

Our common stock trades on the NASDAQ National Marketunder the symbol “CKCM.” On March 29, 2006, the last reported closingprice per common share was $24.05.

The following table sets forth the high and low bidprices per share of the common stock for the years ended December 31, 2005and 2004, as reported on the NASDAQ National Market:

| ** **     | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| **2005**       |       |     |       |    |       |
| First Quarter  |       | $        | 21.86      |    | $          | 10.70 |   |
| Second Quarter |       | $        | 25.46      |    | $          | 8.51 |   |
| Third Quarter  |       | $        | 29.20      |    | $          | 17.01 |   |
| Fourth Quarter |       | $        | 28.00      |    | $          | 13.52 |   |
| **2004**       |       |     |       |    |       |
| First Quarter  |       | $        | 8.89       |    | $          | 4.63 |   |
| Second Quarter |       | $        | 8.30       |    | $          | 4.57 |   |
| Third Quarter  |       | $        | 6.20       |    | $          | 4.27 |   |
| Fourth Quarter |       | $        | 18.00      |    | $          | 4.65 |   |

 

*Holders of Record*

As of March 24, 2006,there were 248 holders of record of our common stock. The number ofholders of record is not representative of the number of beneficial holdersbecause many shares are held by depositories, brokers or other nominees.

*Dividends*

On May 1, 2003, weannounced that our Board of Directors had declared a special cash dividend inthe amount of $2.50 per share of our common stock (“Special Dividend”). TheSpecial Dividend was paid on June 4, 2003 to stockholders of record on May 20,2003. On May 20, 2003, we had 8,136,643 shares of common stockoutstanding, which resulted in a total Special Dividend payment ofapproximately $20,342,000. Prior to the declaration and payment of the SpecialDividend, we had never declared or paid any cash dividends on our common stock.We currently intend to retain earnings, if any, to support our growth strategyand do not anticipate paying further cash dividends in the foreseeable future.

*Purchase of EquitySecurities by the Issuer*

On October 18, 2005, the Company repurchased181,024 shares of its common stock for a purchase price of $15.50 per share, or$2,805,872 in the aggregate, from Commerce 5, Inc. (formerly known asChannelWave, Inc.) and a former executive officer of Commerce 5.

**Item 6.**                        SelectedFinancial Data

The following selected financial data should be readin conjunction with our consolidated financial statements and related notes tothe consolidated financial statements and “Management’s Discussion and Analysisof Financial Condition and Results of Operations” included elsewhere in thisreport. The consolidated statement of operations data for the years ended December 31,2005, 2004 and 2003, and the consolidated balance sheet data as of December 31,2005 and 2004, are derived from our consolidated financial statements, includedin Item 8 of this report.

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The consolidated statement of operations data for theyear ended December 31, 2005 and the consolidated balance sheet data as of December 31,2005 are derived from our consolidated financial statements that have beenaudited by BDO Seidman, LLP, an independent registered public accounting firm.The consolidated statements of operations data for the years ended December 31,2004, 2003, 2002 and 2001 and the consolidated balance sheet data as of December 31,2004, 2003, 2002 and 2001 are derived from our consolidated financial statementsthat have been audited by KPMG LLP, an independent registered public accountingfirm. The historical results presented below are not necessarily indicative ofthe results to be expected for any future fiscal year. All shares and per shareamounts in the selected financial data below have been retroactively restatedto give effect to the 1-for-5 reverse stock split of the Company’scommon stock, effectuated on September 4, 2002.

| ** **                                               | ** ** | **Year ended December 31**                                       | ** ** |
|----------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                                               | ** ** | **2005**                                                                        | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                               | ** ** | **(dollars in thousands, except per share data)** | ** ** |
| **Consolidated  Statement of Operations Data:**          |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Revenues                                                 |       | $                                                                               | 58,710     |   | $ | 25,729 |   | $ | 18,189 |   | $ | 18,276 |   | $ | 43,855 |   |
| Cost of revenue(a)                                       |       | 21,594                                                                          |       | 9,538 |   | 9,298 |   | 10,107 |   | 13,383 |   |
| Gross profit                                             |       | 37,116                                                                          |       | 16,191 |   | 8,891 |   | 8,169 |   | 30,472 |   |
| Operating  expenses:                                     |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Sales and marketing(a)                                   |       | 7,288                                                                           |       | 3,464 |   | 3,409 |   | 9,237 |   | 23,286 |   |
| Research and development(a)                              |       | 7,026                                                                           |       | 2,913 |   | 2,411 |   | 4,230 |   | 9,656 |   |
| General and administrative(a)                            |       | 5,807                                                                           |       | 4,524 |   | 4,520 |   | 4,613 |   | 8,528 |   |
| Amortization of intangible   assets                      |       | 2,783                                                                           |       | 477 |   | 107 |   | — |   | — |   |
| Amortization of stock-based compensation                 |       | —                                                                          |       | 21 |   | 58 |   | 236 |   | 2,124 |   |
| Restructuring and other charges (recoveries)             |       | —                                                                          |       | (121 | ) | 2,378 |   | 1,214 |   | 1,827 |   |
| Total operating expenses                                 |       | 22,904                                                                          |       | 11,278 |   | 12,883 |   | 19,530 |   | 45,421 |   |
| Operating income (loss)                                  |       | 14,212                                                                          |       | 4,913 |   | (3,992 | ) | (11,361 | ) | (14,949 | ) |
| Other income(expense), net                               |       | (89                                                                             | )          | 264 |   | 341 |   | 1,031 |   | 1,641 |   |
| Income tax expense (benefit)                             |       | (5,399                                                                          | )          | — |   | — |   | — |   | 3,492 |   |
| Net income (loss)                                        |       | 19,522                                                                          |       | 5,177 |   | (3,651 | ) | (10,330 | ) | $ | (16,800 | ) |
| Basic net income (loss) per common share                 |       | $                                                                               | 1.73       |   | $ | 0.56 |   | $ | (0.45 | ) | $ | (1.28 | ) | $ | (2.15 | ) |
| Diluted net income (loss) per common share               |       | $                                                                               | 1.63       |   | $ | 0.54 |   | $ | (0.45 | ) | $ | (1.28 | ) | $ | (2.15 | ) |
| Weighted average common shares outstanding—basic    |       | 11,274,545                                                                      |       | 9,163,702 |   | 8,163,223 |   | 8,064,044 |   | 7,811,945 |   |
| Weighted average  common shares outstanding—diluted |       | 12,006,978                                                                      |       | 9,621,123 |   | 8,163,223 |   | 8,064,044 |   | 7,811,945 |   |

 

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| ** **                                           | ** ** | **As of December 31,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                           | ** ** | **2005**                              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                           | ** ** | **(in thousands)**               | ** ** |
| **Consolidated  Balance Sheet Data:**                |       |                                  |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents and short-term investments |       | $                                     | 17,498     |   | $ | 13,382 |   | $ | 11,863 |   | $ | 34,013 |   | $ | 40,677 |   |
| Working capital                                      |       | 15,961                                |       | 11,734 |   | 9,245 |   | 32,131 |   | 40,510 |   |
| Total assets                                         |       | 127,659                               |       | 32,737 |   | 19,194 |   | 42,282 |   | 54,694 |   |
| Long-term debt                                       |       | 6,464                                 |       | — |   | — |   | — |   | — |   |
| Capital lease obligations, less current portion      |       | —                                |       | — |   | — |   | 47 |   | 727 |   |
| Total  shareholders’ equity                     |       | 91,116                                |       | 23,154 |   | 11,049 |   | 34,521 |   | 44,438 |   |
|                                                      |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(a)*          *Excludes amortization of stock-basedcompensation presented in a separate caption, as described in the Company’sconsolidated financial statements.

**Item7.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operations

*The following discussion and analysis of financialcondition and results of operations should be read in conjunction with “SelectedFinancial Data” and the consolidated financial statements and related notesappearing elsewhere in this report. This discussion and analysis containsforward-looking statements within the meaning of Section 27A of theSecurities Act and Section 21E of the Exchange Act that involve risks,uncertainties and assumptions. These forward-looking statements are generallyidentified by words such as “expect,” “anticipate,” “intend,” “believe,” “hope,”“assume,” “estimate” and other similar words and expressions. The statementsare subject to risks and uncertainties and actual results may differ materiallyfrom those indicated by these forward-looking statements as a result of variousfactors, including but not limited to the ability of the Company to integrateacquisitions or investments in other companies, the extent of customeracceptance and utilization of channel management products and services, theimpact of competitive products and services, the volume and timing of customercontracts, changes in technology, deployment delays or errors associated withClick Commerce’s products and the ability to protect Click Commerce’sintellectual property rights. For a discussion of these and other risk factorsthat could affect Click Commerce’s business, see “Risk Factors” and “Quantitativeand Quantitative Disclosures About Market Risk” set forth elsewhere in thisreport.*

**Overview**

Click Commerce providessoftware designed to help companies streamline their trading partnerinteractions and automate compliance-related activities. Using our software,companies can optimize business processes, improve financial performance, lowercosts for partners and customers, increase brand loyalty, improve customerservice, and reduce risk. The Click Commerce collaborative commerce and supplychain solutions enable companies to streamline their trading partnerinteractions to drive business value and competitive advantage. The Company’scompliance automation solutions enable institutions to automate theirregulatory compliance processes and manage research project approvals. TheCompany incorporated on August 20, 1996.

Effective March 24,2003, the Company completed its acquisition of all of the capital stock ofAllegis Corporation (“Allegis”), a privately-held California corporationengaged in licensing partner relationship management software and providingprofessional implementation services, hosting, and maintenance services relatedto its software. Results of Allegis’ operations have been included in theCompany’s consolidated financial statements since March 24, 2003. Underthe terms and conditions of the Agreement and Plan of Merger, Allegis became awholly-owned subsidiary of the Company, and the holders of Allegis’ preferredstock received cash consideration in an aggregate amount of approximately$10,200. The Company funded the acquisition using available cash on hand. Theproduct line acquired in this 

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transactionis considered to be the Company’s partner relationship manager product line andis considered to be a part of the Company’s legacy product lines for 2005reporting purposes.

Effective April 21,2004, the Company completed its acquisition of substantially all the operatingassets of Webridge, Inc. (“Webridge”), a privately-held Delawarecorporation based in Beaverton, Oregon. Pursuant to the Asset PurchaseAgreement, dated as of March 17, 2004 and amended March 30, 2004, theCompany acquired the operating assets of Webridge, Inc., based on avaluation of Webridge as a going-concern, for consideration consisting of615,303 shares of the Company’s common stock, valued at $5.766 per share,including shares issued for working capital adjustments. The Company incurred$0.2 million of transaction costs. The product line acquired in thistransaction is considered to be the Company’s research and health care productline which is one of the Company’s legacy product lines for 2005 reportingpurposes.

Effective July 1,2004, the Company acquired all of the capital stock of bTrade, Inc. (“bTrade”),a privately-held Texas corporation based in Irving, Texas. Pursuant to anAgreement and Plan of Merger, dated as of June 17, 2004, bTrade became awholly-owned subsidiary of the Company. The Company acquired bTrade, based on avaluation of bTrade as a going-concern, for consideration consisting of 666,425shares (net of a 2,942 share adjustment in 2005 for working capitalsettlements) of the Company’s common stock, valued at $4.795 per share,$0.2 million of cash, and the assumption of and repayment of approximately$1.3 million of existing bTrade indebtedness. The Company incurred$0.2 million of transaction costs. The product line acquired in thistransaction is considered to be the Company’s date synchronization and securecommunications product line, which is one of the Company’s legacy product linesfor 2005 reporting purposes.

Effective February 2,2005, the Company entered into an Asset Purchase Agreement (the “PurchaseAgreement”) with ChannelWave, Inc. (“ChannelWave”). Pursuant to thePurchase Agreement, the Company acquired certain assets from ChannelWave,including substantially all assets relating to ChannelWave’s PartnerRelationship Management System and Service Information System businesses, forconsideration comprised of $1.0 million in cash and 225,807 shares of theCompany’s common stock valued at $18.954 per share of the (of which 29,033shares are being held by the Company in escrow for certain potential additionalliabilities of ChannelWave pursuant to the Purchase Agreement). The Companyincurred $0.1 million of transaction costs. ChannelWave offers demandchain solutions which are considered part of the Company’s legacy demand chainmanagement solution product line. On October 19, 2005, the Companycompleted a repurchase of 181,024 shares pursuant to Share RepurchaseAgreements (the “Share Repurchase Agreements”) with Commerce 5, Inc.(formerly known as ChannelWave, Inc.) and a former executive officer of Commerce 5, Inc.,respectively, dated October 18, 2005. The Company repurchased these sharesfor a purchase price of $15.50 per share, or $2,805,872 in the aggregate.

Effective February 7,2005, the Company entered into an Agreement and Plan of Merger (the “MergerAgreement”) with Optum, Inc. (“Optum”), and its stockholders, pursuant towhich the Company acquired Optum. In consideration for the merger, the Companypaid $325,467 in cash, issued 1,405,780 shares of the Company’s common stock valuedat $18.583 per share to the stockholders of Optum (of which $65,093 incash and 281,156 shares are being held by an escrow agent for certainpotential additional liabilities of Optum pursuant to the Merger Agreement),and assumed approximately $4.3 million of Optum indebtedness. The Companyincurred $0.1 million of transaction costs. The product line acquired inthis transaction is the Company’s supply chain management product line which ispart of the Company’s acquired product lines for 2005 reporting purposes.

Effective May 27,2005, the Company entered into an Agreement and Plan of Merger (the “MergerAgreement”) with Xelus, Inc. (“Xelus”), and its stockholders, pursuant towhich the Company acquired Xelus. In consideration for the merger, the Companypaid $1 in cash, assumed approximately $2.2 million of Xelus indebtedness,settled a long-term lease liability for $543,000 and incurredtransaction-related expenses in the amount of $0.1 million. No shares ofCompany stock were issued in connection with the 

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Xelusacquisition. The product line acquired in this transaction is the Company’sservice parts planning and optimization product line and is  part of the Company’s acquired product linesfor 2005 reporting purposes.

Effective November 22,2005, the Company acquired all of the assets and liabilities of RequisiteTechnology, Inc. (“Requisite”), pursuant to an Agreement and Plan of Merger(the “Agreement”). In consideration for the merger, the Company paid $1,526,416in cash and issued 777,903 shares of the Company’s common stock valued at $26.42per share to stockholders of Requisite (of which $93,800 in cash and 80,337shares of the Company’s common stock are being held by an escrow agent forpotential obligations of Requisite and its former shareholders).  The shares of the Company’s common stock areexpected to be registered for resale on a Registration Statement on Form S-1.The Company incurred $0.2 million of transaction costs. The product lineacquired in this transaction is considered to be the Company’s master datamanagement product line and is considered to be a part of the Company’sacquired product lines for 2005 reporting purposes.

Effective February 8,2006, the Company entered into an Asset Purchase Agreement (the “PurchaseAgreement”), with Elance, Inc., (“Elance”), pursuant to which the Companypurchased the assets of the Seller’s on-demand e-commerce solutions forservices business (the “enterprise software business”). The assets acquired inthe transaction include software, trademarks, customer contracts and lists,product processes, other intangible assets, cash, receivables and otheroperating assets, as well as its obligations under certain contracts related tothe enterprise software business. The Company also acquired all of the stock ofElance’s subsidiaries in the United Kingdom and India engaged in such business.The total consideration paid for the acquisition was approximately $15,250,000,comprised of $3,500,000 in cash and 420,123 shares of the Company’s commonstock valued at $27.97 per share (of which 75,980 shares of the Company’scommon stock are being held by an escrow agent to satisfy the indemnificationobligations of Elance under the agreement). The shares of the Company’s commonstock are expected to be registered for resale on a Registration Statement on Form S-1.The Company incurred approximately $0.2 million of transaction costs.

The Company focused itsefforts in 2004 and 2005 on maintaining and improving profitability as well asbroadening its product offerings through acquisitions. In 2004 and 2005, theCompany reported increasing profits in each quarter. Management plans tocontinue investing in developing new and improved product offerings and inincreasing the exposure of the Company’s products and services through itstargeted marketing programs. Management further believes that each investmentmust be prudently made and justified by the expected return on such investment.

The Company offers severallicensing and service options for its software products. Customers can eitherpurchase a perpetual software license or enter into a subscription licensecontract. Customers may also choose to use our hosting services for theirperpetual software license or install the software on servers within their owninternal environment. Subscription licenses are typically only available tocustomers who also use our hosting services.

Perpetual license revenuesand professional services are usually recognized as the software or service isdelivered, assuming all other revenue recognition criteria are met and do notprovide a contractual, predictable future revenue stream. The recurring revenueopportunities come from subscriptions or maintenance and hosting services.While the Company may have better visibility of future revenue fromsubscription licenses, our customers make the final decision on the form oftheir software license. The Company encourages all of its customers to use itshosting services.

The Company depends onseveral factors to increase revenue and maintain profitability: adding newcustomers, maintaining its current base of subscription, hosting andmaintenance revenues, and improving the gross margins of our professionalservices. Adding new customers is the primary responsibility of the salesdepartment. Maintaining the other revenue streams is the responsibility of ourprofessional services 

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department.The Company has developed compensation structures for these departments that itbelieves provide appropriate incentives for achievement of their respectivegoals.

The Company’s revenue is principallydriven from sales of perpetual licenses or subscriptions to its software. TheCompany also recognizes revenue from services, including hosting siteadministration, implementation services, training, maintenance and customersupport.

Cost of product licenserevenues includes production and shipping expenses, which are expensed asincurred, amortization of developed technology, and the costs of licensingthird party software incorporated into or required by the Company’s products.These third party license costs are expensed as the products are deliveredunder perpetual licenses or subscriptions or over the maintenance period to theextent that the third party license costs related to those product offerings.Cost of service revenues include salaries and related expenses for professionalservices and technical support personnel who provide hosting, siteadministration, implementation services, training, maintenance and customersupport, as well as an allocation of data processing and direct overhead costswhich are expensed as incurred.

Operating expenses areclassified into five general categories: sales and marketing, research anddevelopment, general and administrative, amortization of intangible assets and amortizationof stock-based compensation. Sales and marketing expenses consist primarily ofsalaries and other related costs for sales and marketing personnel, salescommissions, travel, public relations and marketing materials. Research anddevelopment expenses consist primarily of personnel costs to support productdevelopment. 

General and administrativeexpenses consist primarily of salaries and other related costs for executivemanagement, finance and administrative employees, legal and accountingservices, and corporate liability insurance. Amortization of intangible assetsrepresents amortization expense for certain intangible assets with finiteuseful lives, which were recorded in connection with the acquisition of AllegisCorporation March 24, 2003, Webridge on April 21, 2004, bTrade on July 1,2004, ChannelWave on February 2, 2005, Optum on February 7, 2005,Xelus on May 27, 2005 and Requisite on November 22, 2005. Theintangible assets are identified, valued and classified into separatecategories. The categories are customer relationships, order backlog, tradenames and in-process research and development. The amortization of developedtechnologies is recorded in the cost of product license line item on theconsolidated statement of operations and comprehensive income (loss). Amortizationof stock based compensation represents the amortization over the relatedservice period of the difference between the exercise price of options grantedand the deemed fair market value of the underlying common stock on the date ofgrant.

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

**CriticalAccounting Policies and Estimates**

Our consolidated financialstatements are prepared in accordance with U.S. generally accepted accountingprinciples (GAAP). These accounting principles require us to make certainestimates, judgments and assumptions. These judgments and assumptions areaffected by management’s application of accounting policies. Criticalaccounting policies for us include revenue recognition, impairment of goodwill,business acquisitions, accounting for income taxes, and allowances for doubtfulaccounts and returns.

*Revenue Recognition*

The Company’s revenue isderived from (i) licensing software, (ii) providing technical supportand product updates, otherwise known as maintenance (iii) applicationhosting, and (iv) providing professional services, including siteadministration, implementation and training services.

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Revenue recognition rules forsoftware companies are very complex. The Company recognizes software fees inaccordance with Statement of Position No. 97-2, “Software RevenueRecognition” (“SOP 97-2”), as amended by Statement of Position No. 98-9,“Software Revenue Recognition, With Respect to Certain Transactions” (“SOP 98-9”).Although the Company follows very specific and detailed guidelines in measuringrevenue, the application of those guidelines requires judgment including: (i) whethera software arrangement includes multiple elements, and if so, whethervendor-specific objective evidence of fair value exists for those elements; (ii) whethercustomizations or modifications of the software are significant; and (iii) whethercollection of the software fee is probable. Additionally, the Companyspecifically evaluates any other elements in our license transactions,including but not limited to options to purchase additional software at afuture date, extended payment terms, functionality commitments not deliveredwith the software, if any, and existing outstanding receivable balances inmaking the determination of the amount and timing of revenue recognition.

Most of the Company’ssoftware arrangements include professional services. Professional servicesrevenues are generally accounted for separately from the software licenserevenues because the arrangements qualify as separate elements in accordancewith SOP 97-2. The most significant factors considered in determiningwhether the revenue should be accounted for as separate elements include thenature of the services (*i.e.*,consideration of whether the services are essential to the functionality of thelicensed product), degree of risk and timing of payments. Professional servicesare provided under services agreements on a time and material basis or based ona fixed-price arrangement. The revenues from time and material basedprofessional consulting and implementation services are recognized as the workis performed, provided that the customer has a contractual obligation to pay,the fee is non-refundable and collection is probable. Delays in projectimplementation will result in delays in revenue recognition. For professionalconsulting services under fixed-price arrangements, the related revenues arerecognized using the percentage-of-completion method, withprogress-to-completion measured by using actual to-date labor inputs comparedto estimated total labor inputs to complete the associated project. Revisionsto the estimates are reflected in the period in which changes become known.Project losses are provided for in their entirety in the period they become known,without regard to the percentage-of-completion. If the Company does notaccurately estimate the resources required or the scope of work to beperformed, or if the projects are not managed properly within the plannedperiods of time, then future consulting margins on such projects may benegatively affected or losses on existing contracts may need to be recognized.

The Company also provideshosting services to customers that have licensed the Company’s software on aperpetual basis. In such cases and in accordance with EITF 00-3, thehosting revenue is considered a separate contractual element of the arrangementand is recognized according to SOP 97-2. The Company typicallydetermines the fair value of the hosting services based on the stated renewal rateof the hosting services, which is deemed substantive by management.

The Company also provides maintenance services whichare typically paid up-front and recognized over a stated future service period.The Company determines the fair value of maintenance services based on thestated renewal rate for additional maintenance terms based on renewal ratescharged separately to other companies. Rates for maintenance, includingsubsequent renewal rates, are typically established based upon a specifiedpercentage of net license fees as set forth in the arrangement and are deemedto be substantive by management.

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*Business Acquisitions*

In accordance withbusiness combination accounting, the Company allocates the purchase price ofacquired companies or lines of businesses acquired to the tangible andintangible assets acquired, liabilities assumed, and any in-process research anddevelopment based on their estimated fair values. Third party appraisal firmshave been used by the Company to assist management in determining the fairvalues of certain assets acquired. Such a valuation requires management to makesignificant estimates and assumptions, especially with respect to intangibleassets.

Management makes estimatesof fair value based upon assumptions believed to be reasonable. These estimatesare based on historical experience and information obtained from the managementof the acquired companies and are inherently uncertain. Critical estimates invaluing certain of the intangible assets include but are not limited to: futureexpected cash flows from license sales, maintenance agreements, consultingcontracts, customer contracts and acquired developed technologies and patents;the acquired company’s brand awareness and market position, and value ofassembled workforces in the acquired company’s product portfolio; and discountrates. Unanticipated events and circumstances may occur which may affect theaccuracy or validity of such assumptions, estimates or actual results.

**Inconnection with purchase price allocations, management estimates the fair valueof the support obligations assumed in connection with acquisitions. The estimatedfair value of the support obligations is determined utilizing a cost build-upapproach. The cost build-up approach determines fair value by estimating thecosts related to fulfilling the obligations plus a normal profit margin. Theestimated costs to fulfill the support obligations are based on historicaldirect costs related to providing the support services and to correct anyerrors in the software products acquired. The Company does not include anycosts associated with selling efforts or research and development or therelated fulfillment margins on these costs. Profit associated with sellingeffort is excluded because the acquired entities would have concluded theselling effort on the support contracts prior to the acquisition date. Theestimated research and development costs are not included in the fair valuedetermination, as these costs are not deemed to represent a legal obligation atthe time of acquisition. The sum of the costs and operating profitapproximates, in theory, the amount that would be required to pay a third partyto assume the support obligation.**

Other significant estimates associated with theaccounting for acquisitions include restructuring costs. Restructuring costsare primarily comprised of severance costs, costs of consolidating duplicatefacilities and contract termination costs. Restructuring expenses are basedupon plans that have been committed to by management but which are subject torefinement. To estimate restructuring expenses, management utilizes assumptionsof the number of employees that would be involuntarily terminated and of futurecosts to operate and eventually vacate duplicate facilities. Estimatedrestructuring expenses may change as management executes the approved plan.Decreases to the estimates of executing the currently approved plans associatedwith pre-merger activities of the companies acquired are recorded as anadjustment to goodwill indefinitely, whereas increases to the estimates arerecorded as an adjustment to goodwill during the purchase price allocationperiod (generally within one year of the acquisition date) and as operatingexpenses thereafter.

*Income Taxes*

The Company recognizes deferred tax assets andliabilities for the future tax consequences attributable to differences betweenthe financial statement carrying amounts of existing assets and liabilities andtheir respective tax bases and operating loss and tax credit carryforwards.Deferred tax assets and liabilities are measured using enacted tax ratesexpected to apply to taxable income in the years in which those temporarydifferences are expected to be recovered or settled. The effect on deferred taxassets and liabilities of a change in tax rates is recognized in income in theperiod that includes the enactment date. Valuation allowances are establishedwhen necessary to reduce deferred tax assets to the 

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amount expected to berealized. In assessing the realizablility of deferred tax assets, managementconsiders whether it is more likely than not that some portion or all of thedeferred tax assets will not be realized. The ultimate realization of deferredtax assets is dependent upon the generation of future taxable income duringperiods in which those temporary differences become deductible. Managementconsiders the scheduled reversal of deferred tax liabilities, projected futuretaxable income, and tax planning strategies in making this assessment.

*Allowances fordoubtful accounts and returns*

Management makes judgments as to the ability tocollect outstanding receivables and provide allowances for the portion ofreceivables when collection becomes doubtful. Provisions are made based upon aspecific review of all significant outstanding invoices. For those invoices notspecifically reviewed, provisions are recorded at differing rates, based uponthe age of the receivable. In determining these percentages, managementanalyzes the historical collection experience and current economic trends. Ifthe historical data used to calculate the allowance for doubtful accounts doesnot reflect the future ability to collect outstanding receivables, additionalprovisions for doubtful accounts may be needed and the future results ofoperations could be materially affected.

**Comparisonof the year ended December 31, 2005 to the year ended December 31,2004**

*Revenue*

In the year ended December 31, 2005, totalrevenues increased $33.0 million or 128.2% to $58.7 million from$25.7 million in the year ended December 31, 2004. Product licenserevenue consists of revenue from the sales of perpetual software licenses andfrom product elements of agreements accounted for under thepercentage-of-completion basis. Product license revenue increased $5.6 millionor 133.0% from $4.2 million in 2004 to $9.8 million in 2005. $0.7 millionof this increase relates to internal growth from the Company’s legacy productlines, while the remaining $4.9 million increase relates to agreementsentered into by companies acquired in 2005. Of the increase related toacquisitions, 57.1% related to the Optum (“supply chain management product line”)acquisition and the remaining 42.9% of the increase related to the Xelus (“serviceparts planning and optimization product line”) acquisition. The $0.7 internalgrowth related to licenses sold to the Company’s health care and retailindustry verticals.

Maintenance and hosting revenues increased by $15.5 millionor 168.8% to $24.6 million in the year ended December 31, 2005 from$9.1 million in the year ended December 31, 2004. Internal growthfrom legacy product lines accounted for 28.8% of this increase while theremaining 140.0%, or $12.8 million, increase in revenue resulted from theCompany’s 2005 acquisitions. Of the $12.8 million increase related toacquisitions, $6.5 million or 50.8% related to the supply chain productline, $5.8 million or 45.3%, related to the service parts planning andoptimization product line and $0.5 million or 3.9% related to Requisite (“masterdata management product line”) acquisition. The data synchronization and securecommunications, research and health care product lines accounted for 78.0% ofthe Company’s internal growth.

Consulting and implementation service revenueincreased $6.7 million or 66.6% to $16.9 million in the year ended December 31,2005 from $10.2 million in the year ended December 31, 2004. TheCompany’s 2005 acquisitions accounted for $8.6 million of this increase. Thisincrease was partially offset by a decrease in the Company’s legacy productline revenues of $1.7 million. The $8.6 million of consulting andimplementation service revenue relating to the Company’s acquisitions wascomprised of $5.2 million from the supply chain product line, $3.2 millionfrom service parts planning and optimization product line and $0.2 millionfrom the master data management product line.

Subscription revenueincreased by $5.2 million or 233.7% to $7.4 million in the year endedDecember 31, 2005 from $2.2 million in the year ended December 31,2004. Internal growth accounted for $1.3 million, or 25.2%, of thisincrease. The Company’s data synchronization and secure communications 

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productline accounted for $0.6 million of the internal growth while the Company’sdemand chain management product line made up the remaining portion of thisinternal growth. The supply chain product line made up over 98.9% of thesubscription revenue generated through 2005 acquisitions.

*Cost of Revenue*

Total cost of revenue increased by approximately $12.1 million,or 126.4%, to $21.6 million in the year ended December 31, 2005 from$9.5 million in the year ended December 31, 2004. Cost of productlicense revenue increased by $1.3 million, or 437.1%, to $1.6 million.$0.7 million of this increase related to the amortization of acquireddeveloped technology, and another $0.3 million related to software royaltyexpenses for the Company’s service parts planning and optimization product line.The remaining $0.3 million increase in cost of product in 2005 was due toa full years amortization of developed technology of the Company’s datasynchronization and secure communications and research and health care productlines. In total, cost of product was comprised of $1.1 million ofamortization of developed technology, and $0.5 million of royalty relatedexpenses.

The cost of service revenues was $19.9 million inthe year ended December 31, 2005, a $10.7 million or 116.1% increase.The 2005 acquisitions accounted for an increase in cost of sales of $11.1 million.The Company’s supply chain management product line made up $7.3 million,or 65.8%, of this $11.1 million increase, and service parts planning andoptimization product line made up the remaining $3.2 million, or 28.8% ofthe $11.1 million increase. These acquisitions increased head count byapproximately 61 full time equivalents to the services and support departments.The legacy product lines had a reduction in cost of service of $0.4 millionin the year ended 2005. This decrease was a result of a decreased head count ofapproximately 10 full time equivalents. This reduced headcount resulted in areduction in expenses of approximately $1.0 million. The decrease insalary and wages was offset by an increase in third party contractor costs of$0.6 million.

Gross margin was $37.1 million in the year endedDecember 31, 2005, an increase of $20.9 million, or 129.2% from theyear ended December 31, 2004. The gross margin percentage was 63.2% in theyear ended December 31, 2005. The gross margin percentage in the yearended December 31, 2004 was 62.9%. The increase in gross margin percentageof 0.29% reflects consistent utilization percentages throughout the Company’sservice organization.

*Operating Expenses*

*Salesand Marketing.**  *Salesand marketing expenses increased by approximately $3.8 million, or 110.4%,to $7.3 million in the year ended December 31, 2005 from $3.5 millionin the year ended December 31, 2004. The legacy product lines accountedfor $1.1 million of this increase. There was an increase in headcount ofthe legacy product lines of seven. Of the seven, the Company added four newsales and three new marketing employees. The addition to head count contributedapproximately $0.5 million while another $0.2 million increaserelated to increased commissions. The remaining $0.4 increase related tocorporate wide marketing programs and events. There was an increase in salesand marketing expenses of $2.7 million attributable to 2005 acquisitions. Costsrelated to the acquisitions of the supply chain management and service partsplanning and optimization product lines made up 95.9%, or $2.6 million, ofthe increase related to 2005 acquisitions. $2.0 million of the costsrelated to 2005 acquisitions related to salaries, benefits and commissions,while the remaining $0.6 related to customer programs and events. The Companyadded nine sales and marketing employees through its 2005 acquisitions.

*Researchand Development.**  *Researchand development expenses increased by approximately $4.1 million, or141.2%, to $7.0 million in the year ended December 31, 2005, comparedto $2.9 million in the prior year. The 2005 acquisitions increasedresearch and development costs by $3.6 million. The increase due toacquisitions was primarily made up of the supply chain management product line,which 

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added costs of $1.9 million,and the service parts planning and optimization product line which added $1.6 millionto the increased costs due to acquisitions. Acquisitions added 40 people to theCompany’s research and development headcount. Acquired research and developmentcosts are roughly 85.0% compensation costs and 15.0% third party contractorcosts. The Company’s legacy headcount grew by two employees and total costincreased by $0.5 million. Third party contractors made up 80.0% or $0.4 millionof the Company’s increase in legacy product line research and developmentcosts.

*Generaland Administrative.**  *Generaland administrative expenses increased by 28.4% or $1.3 million to $5.8 millionin the year ended December 31, 2005. The increase in the Company’s generaland administrative costs attributable to 2005 acquisitions was $0.5 million,or 37.8%. The costs attributable to 2005 acquisitions are primarily transitioncosts as most general and administrative activities are transferred to theCompany corporate headquarters as soon as possible following an acquisition. Theincrease in general and administrative costs related to the legacy Company’soperations was $0.8 million and represented 62.2% of the total increase. Costsinvolving compliance with the Sarbanes-Oxley Act accounted for $0.6 millionof the $0.8 million increase. The remaining $0.2 million increase wasdue to increased executive compensation.

*Amortizationof intangible assets.**  *Inthe year ended December 31, 2005, the Company recorded $2.8 millionof amortization expense, an increase of 483.4% or $2.3 million. $2.2 millionof the increase related to 2005 acquisitions, while the remaining $0.1 millionincrease related to a full years amortization of the Company’s 2004acquisitions (see details at Footnote 3 to the consolidated financialstatements contained in this report).

*Amortizationof stock-based compensation.**  *Prior to its initial public offering, the Companygranted certain stock options at exercise prices less than their deemed fairvalue; accordingly, the Company recorded deferred compensation of $4.6 million.Such deferred compensation was amortized over the vesting periods of theapplicable options, resulting in gross expense of $21,000, during the yearended December 31, 2004. There was no amortization of stock-basedcompensation in 2005 as all such options were fully amortized in 2004.

*Restructuringand other charges.**  *Inthe year ended December 31, 2004, the Company determined that $121,000 ofrestructuring accruals were no longer needed as all employee severance had beenpaid out and no further obligations existed. Accordingly, the Company reversedthis accrual. There were no similar charges in 2005.

**Comparisonof the year ended December 31, 2004 to the year ended December 31,2003**

*Revenue*

Total revenue increased $7.5 million, or 41.5%,to $25.7 million for the year ended December 31, 2004 from $18.2 millionfor the year ended December 31, 2003. Product license revenue consists ofrevenue from the sale of perpetual software licenses and from software elementsof agreements accounted for under the percentage-of-completion basis. Productlicense revenue increased $2.1 million or 101.5%. The acquisitions ofWebridge, Inc. (“Webridge”) and bTrade, Inc. (“bTrade”) accounted forapproximately $1.7 million of the increase in product license revenue.Webridge was acquired by the Company on April 21, 2004 and bTrade wasacquired by the Company on July 1, 2004. The results of operations fromWebridge and bTrade are included in the results of operations for the Companyfrom their respective dates of acquisition. On March 24, 2003, the Companyacquired Allegis, Inc. (“Allegis”). Allegis’s results are included in theCompany’s results of operations beginning from the date of its acquisition. Maintenanceand hosting revenue increased $2.4 million, or 35.9%, to $9.1 millionfor 2004, from $6.7 million for 2003. Webridge and bTrade contributedequally to $1.9 million of the increase and the remaining $0.5 millionincrease resulting from Allegis’s operations being included for a full year in2004. Consulting and implementation service revenue increased by $2.9 millionto $10.2 million in 2004, or 

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39.3%, from $7.3 millionfor the prior year. Revenues generated from the Webridge acquisition accountedfor 72.3% of this increase. The remaining increase primarily resulted fromconsulting and implementation services generated by bTrade. The Companyrecorded $2.2 million of subscription revenue during the year ended December 31,2004, an increase of $0.1 million or 7.0%, from $2.1 million in theprevious year.

*Cost of Revenue*

Total cost of revenueincreased by approximately $0.2 million or 2.6%, to $9.5 million forthe year ended December 31, 2004 from $9.3 million for the year endedDecember 31, 2003. Cost of product license revenue decreased by $34,000,or 10.0%, to $307,000 due to lower royalty fees for licensed third partysoftware that is embedded in the Company’s products or incorporated in theCompany’s product offerings. This decrease was offset by an increase in theamortization of intangibles related to developed technologies. The developedtechnologies arose from the acquisitions of Webridge and bTrade. The associatedamortization of these intangible assets was $0.2 million in 2004. The costof service revenues increased by $0.9 million, or 10.2%, to $9.2 millionfor the year ended December 31, 2004. The increase in cost of service isdirectly related to a 12.2% increase in headcount. For the year ended December 31,2003, a $0.6 million charge for the impairment of third party softwarelicenses was recorded in cost of revenues. There was no impairment of thirdparty licenses in 2004. Gross profit margins increased to 62.9% for the yearended December 31, 2004, compared to 48.9% for the year ended December 31,2003. The gross margin increase is due to the increase of product licenserevenue as a percentage of total revenue. For the year ended December 31,2004, product license revenue increased to 16.3% of total revenue, as comparedto 11.5% of total revenue for the year ended December 31, 2003. Inaddition, services margins improved to 57% in 2004 from 48% in 2003, due toimproved utilization of service personnel.

*Operating Expenses*

*Sales and Marketing.**  *Sales and marketing expensesincreased by approximately $0.1 million, or 1.6%, to $3.5 million forthe year ended December 31, 2004 from $3.4 million for the year endedDecember 31, 2003. The increase in sales and marketing was primarilyattributable to an increase in employee compensation expense partially offsetby lower discretionary marketing spending.

*Research and Development.**  *Research and development expensesincreased by approximately $0.5 million, or 20.8%, to $2.9 millionfor the year ended December 31, 2004 compared to $2.4 million for theprior year. The acquisitions of Webridge Inc. and bTrade, Inc. added $0.8 millionand $0.5 million, respectively, to the overall increase. Combined, Webridge,Inc. and bTrade, Inc. added 18 employees to the research and developmentdepartment. This increase was partially offset by a decrease of $0.8 millionin the Company’s legacy research and development costs. All softwaredevelopment costs have been expensed as incurred.

*General and Administrative.**  *General and administrative expensesremained constant at $4.5 million for the years ended December 31,2004 and 2003.The consistency can be attributable to lower lease relatedexpenses in 2004 of approximately $0.4 million, and a reversal of anaccrual for a liability that the Company was no longer responsible for of $0.5 million.These decreases were offset by an accrual established to estimate a potentialforeign tax liability of $0.7 million and an increase in audit and auditrelated expenses of approximately $0.1 million. In 2003, the Company’slegal expenses related to its consideration of and response to an unsolicitedacquisition proposal. These expenses were offset in 2004 by non-recurring legalexpense related to acquisitions that the Company investigated but did notcomplete made by the Company.

*Amortization of intangibleassets.**  *TheCompany recorded in year ended December 31, 2004, $477,000 in amortizationexpense related to customer relationships, trade names and order backlogintangible assets resulting from the acquisitions of Allegis, Webridge andbTrade. In the year ended, December 31, 2003, the Company recorded$107,000 in amortization of customer relationship intangible assets that wererecorded as part of the Allegis acquisition.

*Amortization ofstock-based compensation.**  *Prior to its initial public offering, the Companygranted certain stock options at exercise prices less than their deemed fairvalue; accordingly, the Company 

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recorded deferredcompensation of $4.6 million. Such deferred compensation was amortizedover the vesting periods of the applicable options, resulting in gross expenseof $21,000, and $58,000 during the years ended December 31, 2004, and2003, respectively.

*Restructuring and othercharges.**  *Inthe fourth quarter of 2004, the Company determined that $121,000 ofrestructuring accruals were no longer needed as all employee severance had beenpaid out and no further obligations existed. Accordingly, the Company hasreversed this accrual.

In the quarter ended June 30,2003, the Company continued to execute its restructuring plan following theAllegis acquisition. As part of this plan, certain redundant costs wereeliminated and a restructuring charge of $2.3 million was recorded. Therestructuring charge primarily related to $2.1 million of excess leasecosts in two locations and severance and other benefit costs of $0.2 millionfor the termination of 15 employees as part of the restructuring plan. In thethird quarter of 2003, the Company reached a settlement with the landlord forits vacant office space in Chicago that resulted from its consolidation effortsin the second quarter. This agreement resulted in the cancellation of theCompany’s original lease obligation in exchange for a $900,000 cash payment. Asof June 30, 2003, the total cost of this lease was estimated at $1,865,000and was included in the restructuring accrual recorded during the secondquarter. Accordingly, the Company reversed $965,000 of the restructuringaccrual in the quarter ended September 30, 2003 as a result of the leasesettlement.

The Company also recorded a $1.0 million assetimpairment charge during the second quarter of 2003. This charge related toleasehold improvements associated with the excess office leases and a redundantcomputer system and excess equipment totaling $1.0 million. The Companyalso recorded a recovery of $18,000 during the third quarter of 2003 related tothe sale of impaired assets that had been previously written off the Company’sbooks.

**Liquidityand Capital Resources**

At December 31, 2005,the Company had $17.5 million of cash and equivalents, consistingprimarily of cash provided by operations and cash acquired in its 2005acquisitions. The cash provided by operating activities for the years endedDecember 31, 2005 and 2004 was $0.6 million and $3.6 million,respectively, and cash used in operating activities was $1.6 million forthe year ended December 31, 2003. The $0.6 million of cash providedby operating activities during 2005 consists primarily of cash generated fromnet income of $19.5 million and non-cash expenses related to depreciation,amortization, provision for doubtful accounts and loss on disposal of assetstotaling $5.7. This amount was partially offset by the non-cash provision forincome tax benefit in the amount of $5.4 million. This net source of cashof $19.8 million was partially offset by a net use of cash of $19.2 millionresulting from changes in operating assets and liabilities, net of the effectof acquisitions.

The cash use of $19.2 millionresulted from increases in receivables $10.0 million (net of receivablesacquired of $8.0 million), an decrease in accrued compensation of $2.8 million(net of accrued compensation acquired of $4.6 million), a decrease ofaccrued expenses, and other current liabilities of $3.9 million (net ofaccrued expenses and other current liabilities of $9.0 million), adecrease in accounts payable of $2.2 million (net of accounts payableacquired of $2.9 million) and an increase in other current assets of $0.4 million(net other current assets acquired of $1.4 million).

The use of cash resultingfrom the increase of accounts receivable of $10.0 million was a result ofbillings in December 2005, which were not collected in 2005. Thesebillings related to license and service agreements for which revenue wasrecognized but cash was not collected. The use of cash of $2.8 million foraccrued compensation was a result of payments on severance agreement relatingto the Company’s 2005 acquisitions. These payments total approximately $3.2 million.The use of cash related to accrued compensation was partially offset by anincrease in the Company’s 2005 accrued bonus of $0.4 million. The use ofcash of $2.2 million, relating to the decrease in accounts payable,resulted from the pay-down of the payables acquired in the Company’s 2005acquisitions. The Company paid approximately $2.7 million of 

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the $2.9 millionacquired through its 2005 acquisitions. The use of cash of $3.9 million,resulting from the net decrease in accrued liabilities resulted predominatelyfrom payments made on rent accruals. The Company made approximately $2.9 millionin payments related to accrued rents in 2005. The use of cash of $0.4 millionrelated to the increase in other current assets predominately related topayments for prepaid royalties. The Company paid approximately $0.7 millionfor prepaid royalty licenses; these prepaid royalties will be amortized in2006.

Net cash provided byinvesting activities was $5.3 million for the year ended December 31,2005, consisting primarily of $6.5 million of cash obtained in theCompany’s 2005 acquisition, net of cash used in the acquisitions in the amountof $0.5 million. Cash used was for purchases of equipment, purchases ofinvestments and other items was $1.2 million. For the year ended December 31,2004, net cash used investing activities was $2.1 million, which consistsprimarily of cash used in acquisitions, net of cash acquired of $1.8 million,and purchases of equipment of $0.3 million. For the year ended December 31,2003, net cash provided by investing activities was $10.4 million, whichconsisted primarily of the redemption of $10.4 million of short-terminvestments to fund the Special Dividend.

Net cash used by financingactivities for the year ended December 31, 2005 was $1.8 millionreflecting the payment of long-term and short-term debt of $5.7 millionand the repurchase of 181,024 shares of common stock from Commerce 5,Inc for $2.8 million, offset by proceeds from long-term debt of $6.4 millionand exercise of stock option of $0.3 million. Net cash provided byfinancing activities for the year ended, December 31, 2004 was $64,000,reflecting proceeds from the exercise of stock options, offset partially bypayments under capital lease obligations. Net cash used in financing activitiesfor the year ended December 31, 2003 was $20.4 million, reflectingthe payment of the $20.3 million Special Dividend on June 4, 2003.

As ofDecember 31, 2005, the Company had the following contractual obligationsoutstanding:

| **Contractual**                 | ** ** | **Payments due by period** | ** ** |
|---------------------------------|------------|-------------------------------------------|------------|
| **obligations**                 | ** ** | **Total**                                 | ** ** | **Less than 1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than 5 years** | ** ** |
| Operating lease  obligations(1) |       | $                                         | 7,236      |   |   | $ | 3,267 |   |   | $ | 2,639 |   |   | $ | 1,330 |   |   |   | — |   |   |
| Short-term notes payable        |       | 829                                       |       |   | 829 |   |   | — |   |   | — |   |   |   | — |   |   |
| Long-term debt                  |       | 6,464                                     |       |   | — |   |   | 6,464 |   |   | — |   |   |   | — |   |   |
| Investment obligations          |       | 600                                       |       |   | 300 |   |   | 300 |   |   | — |   |   |   | — |   |   |
| Other long-term  liabilities    |       | 846                                       |       |   | — |   |   | 846 |   |   | — |   |   |   | — |   |   |
| Total                           |       | $                                         | 15,975     |   |   | $ | 4,396 |   |   | $ | 10,249 |   |   | $ | 1,330 |   |   |   | $ | — |   |   |
|                                 |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)   The Companyhas sub-lease commitments of $610 pertaining to these lease obligations.

Subsequent toDecember 31, 2005, the Company completed the acquisition of certain assetsof Elance, Inc., in exchange for $3.5 million in cash and 420,123 sharesof its common stock. See “Recent Developments”

As a result of larger than anticipated restructuringand asset impairment charges in the second quarter of 2003 and the payment ofthe June 4, 2003 Special Dividend, the Company fell below the $10 millionminimum shareholders’ equity requirement to maintain listing on the NasdaqNational Market (“NNM”). As a result, Nasdaq formally notified the Company inthe third quarter of 2003 that unless the Company could demonstrate compliancewith the minimum shareholders’ equity requirement, the Company’s shares wouldeither be delisted, or, upon request of the Company, transferred to the NasdaqSmall Cap Market. In October of 2003, the Company presented a plan toachieve compliance with NNM requirements through the achievement ofprofitability in the second half of 2003 and the exercise of stock options bythe Company’s CEO. Based upon the successful implementation of this complianceplan, the Company was released from all delisting actions and allowed to remainin good standing with the NNM. The Company is currently in compliance with alllisting requirements for the NNM.

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In May 2002,the Company announced that its Board of Directors had authorized the repurchaseof up to $5.0 million of its common stock in the open market. These sharescould be purchased pursuant to Rule 10b-18 under the Exchange Actfrom time to time in the public market or through privately negotiatedtransactions. The timing and amount of any repurchase was at the discretion ofthe Company’s management. Through December 31, 2002, the Company hadrepurchased 29,064 shares of its common stock at an average purchase priceof $4.03 per share and at an aggregate cost of $117,239. No shares wererepurchased during 2003 and 2004. 

On October 19,2005, the Company repurchased 181,024 shares of its common stock at apurchase price of $15.50 per share or $2,805,872 in the aggregate, pursuant toShare Repurchase Agreements dated October 18, 2005, with Commerce 5,Inc. (formally known as ChannelWave, Inc.) and a former executive officerof Commerce 5. 

All ofthe repurchased shares are classified as treasury stock in the consolidatedbalance sheet of the Company as of December 31, 2005.

The Company may use cash resources to fund investmentsin complementary businesses or technologies or for other purposes as determinedby the Company. The Company believes its existing cash balances and cashgenerated from future operating activities will be sufficient to fund theCompany’s operations, including cash needs of the acquired businesses, for atleast the next twelve months. Thereafter, the Company may find it necessary toobtain additional equity or debt financing. In the event additional financingis required, the Company may not be able to raise it on acceptable terms or atall. Additional equity may be issued in connection with potential acquisitionsin addition to the transaction noted in the Recent Developments section below.

**Impact of Recently Issued Accounting Standards**

In December 2004,the FASB issued SFAS No. 123(R)*, “Share-BasedPayment,”* which will be effective for public entities as of thefirst interim or annual reporting period that begins after December 31,2005. SFAS No. 123(R) replaces SFAS No. 123, *“Accounting for Stock-Based Compensation,”*and supersedes APB Opinion No. 25, *“Accountingfor Stock Issued to Employees.”* The new standard requires that thecompensation cost relating to share-based payment be recognized in financialstatements at fair value. As such, reporting employee stock options under theintrinsic value-based method prescribed by APB 25 will no longer beallowed. The Company has historically elected to use the intrinsic value methodand has not recognized expense for employee stock options granted unless theoptions were issued with intrinsic value. SFAS No. 123(R) must be adopted,and the associated expenses must be reflected in all financial statementsfilings after December 31, 2005. The Company expects it will incurapproximately $0.5 million (pre tax) in non-cash stock based compensationcharges in connection with the adoption of SFAS No. 123(R) in 2006.

In December 2004,the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets,” anamendment of APB Opinion No. 29. SFAS No. 153 addresses themeasurement of exchanges of nonmonetary assets and redefines the scope oftransactions that should be measured based on the fair value of the assetsexchanged. SFAS No. 153 is effective for nonmonetary asset exchangesbeginning in the Company’s first quarter of fiscal year 2006. The Company doesnot believe that adopting of SFAS No. 153 will have any impact on theCompany’s consolidated financial statements.

In March 2005,the FASB issued FASB Interpretation No. 47 (FIN 47), “Accounting forConditional Asset Retirement Obligations.” FIN 47 clarifies the term “conditionalasset retirement obligation” as that term is used in FASB No. 143, “Accountingfor Asset Retirement Obligations.” It also clarifies when an entity hassufficient information to reasonably estimate the fair value of an assetretirement obligation. The Company is not required to begin applying theprovisions of FIN 47 until fiscal year 2006. The Company is in the processof assessing the impact of the pronouncement’s requirements on its financialstatements.

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In May 2005, the FASB issued SFAS No. 154, “AccountingChanges and Error Corrections” (“SFAS 154”) which replaces AccountingPrinciples Board Opinions No. 20 “Accounting Changes” and SFAS No. 3,“Reporting Accounting Changes in Interim Financial Statements—An Amendment ofAPB Opinion No. 28.” SFAS 154 provides guidance on the accounting forand reporting of accounting changes and error corrections. It establishesretrospective application, or the latest practicable date, as the requiredmethod for reporting a change in accounting principle and the reporting of acorrection of an error. SFAS 154 is effective for accounting changes andcorrections of errors made in fiscal years beginning after December 15,2005 and is required to be adopted in the first quarter of fiscal 2007. TheCompany is currently evaluating the effect that the adoption of SFAS 154will have on its consolidated results of operations and financial condition butdoes not expect it to have a material impact.

**RecentDevelopments**

On February 8, 2006, the Company entered into anAsset Purchase Agreement (the “Purchase Agreement”), with Elance, Inc., (“Elance”)pursuant to which the Company purchased the assets of the Seller’s on-demande-commerce solutions for services business (the “enterprise software business”).The assets acquired by the Company in the transaction include software,trademarks, customer contracts and lists, product processes, other intangibleassets, cash, receivables and other operating assets, and the Subsidiaryassumed Elance’s obligations under certain contracts related to the enterprisesoftware business. The Company also acquired all of the stock of Elance’ssubsidiaries in the United Kingdom and India engaged in such business. Thetotal consideration paid for the acquisition was approximately $15,250,000,comprised of $3,500,000 in cash and 420,123 shares of the Company’s commonstock valued at $27.97 per share (of which 75,980 shares of the Company’scommon stock are being held by an escrow agent to satisfy the indemnificationobligations of Elance under the agreement). The shares of the Company’s commonstock are expected to be registered for resale on a Registration Statement on Form S-1.

**Item 7A.     Quantitativeand Qualitative Disclosures About Market Risk**

The following discusses the Company’s exposure tomarket risk related to changes in foreign currency exchange rates and interestrates. This discussion contains forward-looking statements that are subject torisks and uncertainties. Actual results could vary materially as a result of anumber of factors including those set forth in Part I, “Risk Factors” ofthis report.

*Foreign Currency ExchangeRate Risk*

To date, virtually all of the Company’s recognizedrevenues have been denominated in U.S. dollars and primarily from customers inthe United States. Thus, the exposure to foreign currency exchange rate changeshas been immaterial. The Company expects, however, that future product licenseand professional services revenues may also be derived from international marketsand may be denominated in the currency of the applicable market. As a result,operating results may become subject to significant fluctuations based uponchanges in the exchange rates of certain currencies in relation to the U.S.dollar. Furthermore, to the extent the Company engages in international salesdenominated in U.S. dollars, an increase in the value of the U.S. dollarrelative to foreign currencies could make the Company’s products lesscompetitive in international markets. Although the Company will continue tomonitor its exposure to currency fluctuations, and, when appropriate, may usefinancial hedging techniques in the future to minimize the effect of thesefluctuations, there is no assurance that exchange rate fluctuations will notadversely affect financial results in the future.

*Interest Rate Risk*

As of December 31, 2005, the Company had cash andcash equivalents of $17.5 million and short term and long term debt of$0.8 million and $6.5 million respectively. Based upon the balance ofcash and cash 

33

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equivalents and short-termand long-term debt at December 31, 2005, a change in interest rates of0.5% would cause a corresponding change in annual interest income ofapproximately $87,500 and in interest expense of approximately $36,500.

**Item 8.        ConsolidatedFinancial Statements and Supplementary Data**

See Index to Financial Statements on page F-1.

**Item 9.        Changesin and Disagreements with Accountants on Accounting and Financial Disclosure**

KPMG LLP(KPMG) previously served as the principal accountants for Click Commerce, Inc.(the Company). In early 2005, the Audit Committee of the Board of Directors recommended,and the Board authorized, the Company’s senior management to solicit proposalsfrom various accounting firms to provide audit and related services for the2005 fiscal year. The decision resulted from the Audit Committee’s concernsabout the increasing cost of such services. On March 31, 2005, KPMGresponded to the request for proposal by indicating that it declined to stand forreelection, and instead, resigned as the Company’s principal accountants. TheAudit Committee and the Company’s senior management interviewed suitablereplacements, and the Audit Committee selected BDO Seidam LLP as theCompany’s new auditors beginning with the review of the Company’s first quarter2005 financial results.

Inconnection with the audits of the two fiscal years ended December 31, 2004,there were no disagreements with KPMG on any matter of accounting principles orpractices, financial statement disclosure, or auditing scope or procedures,which disagreements if not resolved to their satisfaction would have causedthem to make reference in connection with their opinion to the subject matterof the disagreement, except as follows:

In the third quarter of 2004 there was a disagreementregarding the accounting for software license upgrade rights that were includedin certain of the Company’s contracts with its customers. Had the contractsthat contained these upgrade rights not been accounted for on a subscriptionbasis, KPMG’s auditors’ report on the Company’s consolidated financialstatements would have been modified. The Audit Committee of the Board ofDirectors discussed the subject matter of this disagreement with KPMG.

Asdisclosed in the Company’s quarterly report on Form 10-Q for the quarterlyperiod ended September 30, 2004, the Company, in conjunction with KPMG,determined it had a material weakness in its internal controls. In connectionwith performing a review of the Company’s interim financial information, KPMGissued a letter to the Company to communicate the control deficiencies that wereconsidered to be a material weakness. KPMG indicated, and the Company agreed,that the Company’s quarter-end reporting schedule was too compressed, allowinginsufficient time for the Company to perform adequate reviews of its accountingrecords and prepare appropriate support for the accounting positions taken bythe Company, and for its independent registered public accounting firm tocomplete its review of the Company’s financial statements, prior to theCompany’s release of its financial results. The Audit Committee of the Board ofDirectors discussed the control deficiencies that were considered to be amaterial weakness with KPMG. Consequently, the Company determined that, forfuture periods, it would release its quarterly financial results to the publicon a date closer to the due date for the filing of its Form 10-Q or Form 10-K,thereby increasing the time available for its internal review of accountingissues and for its independent public accountants’ review of the Company’sfinancial statements. The Company implemented this change in internal controlsduring the fourth quarter of 2004 and this material weakness was not repeatedin connection with the Company’s annual reporting on Form 10-K as of andfor the year ended December 31, 2004.

The audit reportsof KPMG on the consolidated financial statements of the Company as of December 31,2004 and 2003 and for each of the years in the three-year period ended December31, 2004, 

34

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did not contain anyadverse opinion or disclaimer of opinion, nor were they qualified or modifiedas to uncertainty, audit scope, or accounting principles.

**Item 9A.     Controlsand Procedures**

*Evaluation of Disclosure Controls and Procedures*.   Asrequired by Rule** **13a-15(b) under the ExchangeAct, our management, including our Chief Executive Officer and Chief FinancialOfficer, evaluated the effectiveness of the design and operation of our“disclosure controls and procedures” as of the end of the period covered bythis report. As defined in Rules** **13a-15(e)and 15d-15(e) under the Exchange Act, disclosure controls and procedures arecontrols and other procedures of our Company that are designed to ensure thatinformation required to be disclosed in the reports we file or submit under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in the SEC’s rules, forms and regulation. Disclosure controlsand procedures include, without limitation, controls and procedures designed toensure that information required to be disclosed by our Company in the reportswe file or submit under the Exchange Act is accumulated and communicated to ourCompany’s management, including our Chief Executive Officer and Chief FinancialOfficer as appropriate to allow timely decisions regarding required disclosure.

**Basedon this evaluation, our Chief Executive Officer and Chief Financial Officerconcluded that our disclosure controls and procedures were effective as of theend of the period covered by this report. It should be noted that any system ofcontrols, however well designed and operated, is based in part upon certainassumptions and can provide only reasonable, and not absolute, assurance thatthe objectives of the system are met.**

*Management’s Report onInternal Control Over Financial Reporting.  *Our management is responsible for establishing andmaintaining adequate internal control over financial reporting, as such term isdefined in Rules** **13a-15(f) and 15d-15(f) ofthe Exchange Act. Our management, including our Chief Executive Officer andChief Financial Officer, conducted an evaluation of our internal control overfinancial reporting based on the framework in Internal Control—IntegratedFramework issued by the Committee of SponsoringOrganizations of the Treadway Commission.

**Basedon its evaluation under the framework of *Internal Control—IntegratedFramework*, our management concluded that our internal control overfinancial reporting was effective at December 31, 2005. Our management’sassessment of our internal control over financial reporting as of December 31,2005 was audited by BDO Seidman, LLP, an independent registered publicaccounting firm, as stated in its report which is included herein.**

**Ourinternal control system is designed to provide reasonable assurance to ourmanagement and Board of Directors regarding the preparation and fairpresentation of published financial statements. All internal control systems,no matter how well designed, have inherent limitations. Therefore, even thosesystems determined to be effective can provide only reasonable assurance withrespect to financial statement preparation and presentation and may not preventor detect misstatements. Also, projections of any evaluation of effectivenessto future periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.**

*Changes in Internal Control over Financial Reporting.  *During our most recent fiscal quarter, there were nochanges in our internal control over financial reporting that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

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**Report of IndependentRegistered Public Accounting Firm on Internal ControlOver Financial Reporting**

**To theBoard of DirectorsClick Commerce, Inc.Chicago, Illinois**

We have audited management's assessment, included inthe accompanying “Management’s Report on Internal Control over FinancialReporting”*,*that Click Commerce,Inc. maintained effective internal control over financial reporting as ofDecember 31, 2005, based on criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO).**Click Commerce, Inc’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express an opinion on management'sassessment and an opinion on the effectiveness of the Company's internalcontrol over financial reporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement's assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. Webelieve that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. Acompany's internal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, in reasonabledetail, accurately and fairly reflect the transactions and dispositions of theassets of the company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

In our opinion, management's assessment that ClickCommerce, Inc. maintained effective internal control over financial reportingas of December 31, 2005, is fairly stated, in all material respects, based oncriteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO).**Also in our opinion, Click Commerce, Inc.maintained, in all material respects, effective internal control over financialreporting as of December 31, 2005, based on criteriaestablished in*Internal Control—Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).

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We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated balance sheet of Click Commerce, Inc. as ofDecember 31, 2005 and the related consolidated statements of operations andcomprehensive income, shareholders’ equity, and cash flows for the year thenended of Click Commerce, Inc. and our report dated March 30, 2006 expressed anunqualified opinion on those consolidated financial statements.
|                     | /s/ BDO Seidman LLP |
|---------------------|---------------------|
| Chicago, Illinois   |                |
| March 30, 2006 |                |

 

**Item 9B.     OtherInformation**

None.

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**PART III**

**Item 10.**   Directorsand Executive Officers of the Registrant

The information required by this item is incorporatedby reference to the material in the Company’s Proxy Statement for the 2005Annual Meeting of Shareholders (the “Proxy Statement”).

The Company has adopted acode of ethics that applies to all Company employees, including employees ofCompany subsidiaries, as well as each member of the Company’s Board ofDirectors. A copy of the Code of Ethics is available by writing to us at ClickCommerce, Inc., 233 North Michigan Avenue, 22nd Floor, Chicago, Illinois60601, Attention: Investor Relations. If the Company makes any amendments tothis Code other than technical, administrative, or other non-substantiveamendments, or grants any waivers, including implicit waivers, from a provisionof this Code to the Company’s chief executive officer, chief financial officeror controller, the Company will disclose the nature of the amendment or waiver,its effective date and to whom it applies on its website or in a report on Form 8-Kfiled with the Securities and Exchange Commission.

**Item11.    Executive Compensation**

The information required by this item is incorporatedby reference to the material in the Company’s Proxy Statement.

**Item12.    Security Ownership of Certain Beneficial Owners and Management andRelated Shareholder Matters**

**EquityCompensation Plan Information**

| **Plan Category**                                           | ** ** | ** ** | ** ** | **(a)  Number of  Securities to be  Issued upon Exercise  of Outstanding  Options, Warrants  and Rights** | ** ** | **(b)  Weighted Average  Exercise Price of  Outstanding  Options, Warrants  and Rights** | ** ** | **(c)  Number of Securities  Remaining Available for  Future Issuance Under Equity  Compensation Plans  (Excluding securities  Reflected in Column (a))** | ** ** |
|------------------------------------------------------------------|------------|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders (1) |       |       | 1,200,300  |                                                                                                                                              |       |                                                                                                              | 9.94       |                                                                                                                                                                                                                  |       |   | 505,890 |   |   |
| Equity  compensation plans not approved by shareholders          |       |       | —     |                                                                                                                                              |       |                                                                                                              | —     |                                                                                                                                                                                                                  |       |   | — |   |   |
| Total                                                            |       |       | 1,200,300  |                                                                                                                                              |       |                                                                                                              | 9.94       |                                                                                                                                                                                                                  |       |   | 505,890 |   |   |

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(1)   Consists of the following equity compensationplans: 

Amended and Restated ClickCommerce, Inc. Stock Option and Stock Award PlanAmended and Restated Click Commerce, Inc. Directors' Stock Option andStock Award Plan 

**Item 13.**   CertainRelationships and Related Transactions

The information requiredby this item is incorporated by reference to the material in the Company’sProxy Statement.

**Item14.    Principal Accountant Fees and Services**

The information requiredby this item is incorporated by reference to the material in the Company’sProxy Statement.

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**PART IV**

**Item 15.   Exhibitsand Financial Statement Schedules(a)**

**1.****                 FinancialStatements**

Included herein at pages F-1through F-31.

**Financial Statement Schedules**

The following auditors’ report and financial statementschedule are included herein at pages F-32 and F-33.

Report ofIndependent Registered Public Accounting Firm on the Financial StatementSchedules for the year ended and at December 31, 2005

Report ofIndependent Registered Public Accounting Firm on Financial Statement Schedule.

Schedule II—Valuationand Qualifying Account*.*

**Exhibits**

Exhibit Numbers 10.1through 10.3, 10.7 through 10.11, 10.13 and 10.14 are management contracts orcompensatory plans or arrangements.
| Exhibit Number | ** ** | ** **    | ** ** | **Description of Exhibit**                                                                                                                                                                                 | ** ** |
|---------------------|------------|---------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                | 2.1        | *             |       | Agreement and Plan of Merger, dated as of  March 21, 2003, by and among Click Commerce, Inc., Allegis  Acquisition, Inc., Allegis Acquisition of California, Inc. and  Allegis Corporation.      |       |
|                | 2.2        | *>>     |       | Asset Purchase Agreement, dated as of March 17,  2004, between Click Commerce, Inc., Click West Coast Corp.,  Click-Webridge Inc., and Webridge, Inc.                                                 |       |
|                | 2.3        | *>>     |       | Amendment No. 1 to Purchase Agreement, dated as  of March 30, 2004.                                                                                                                                        |       |
|                | 2.4        | *>>> |       | Plan of Merger Agreement, dated as of July 1,  2004, between Click Commerce Inc., Click Texas Corp., bTrade Acquisition  Corp., and bTrade, Inc.                                                           |       |
|                | 2.5        | !             |       | Asset Purchase Agreement, dated February 2, 2005,  between Click Commerce, Inc., CWV Acquisition, Inc. and  ChannelWave, Inc.                                                                    |       |
|                | 2.6        | !!            |       | Agreement and Plan of Merger, dated February 7,  2005, between Click Commerce, Inc., Opt Acquisition Inc.,  Optum, Inc. and David Simbari, as representative of the stockholders of  Optum, Inc. |       |
|                | 2.7        | !!!           |       | Agreement and Plan of Merger, dated May 27,  2005, between Click Commerce, Inc., Xelus Acquisition, Inc., Xelus  Acquisition of New York, Inc. and Xelus, Inc.                              |       |
|                | 2.8        | !!!!          |       | Agreement and Plan of Merger, dated as of November 22,  2005, by and among Click Commerce, Inc., Requisite Acquisition Inc.,  Thomas G. Washing, as representative, and Requisite Technology, Inc.    |       |
|                | 2.9        | !!!!!         |       | Asset Purchase Agreement, dated February 8,  2006, by and among Click Commerce, Inc., Click Procure, Inc. and  Elance, Inc.                                                                      |       |
|                | 3.1        | **            |       | Restated Certificate of Incorporation                                                                                                                                                                                |       |
|                | 3.2        | *^^^^^        |       | Amended and Restated Bylaws                                                                                                                                                                                          |       |
|                     |            |               |            |                                                                                                                                                                                                                      |            |  |  |

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|        | 3.3   | *^^^^  |   | Amendment to Certificate of Incorporation of Click  Commerce, Inc.                                                                                                                            |   |
|--------|-------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   | 4.1   | ***    |   | Specimen Common Stock  certificate.                                                                                                                                                                |   |
|   | 4.2   | ***    |   | Amended and Restated  Shareholders and Rights Agreement                                                                                                                                            |   |
|   | 10.1  | ***    |   | Amended and Restated  Click Commerce, Inc. Stock Option and Stock Award Plan                                                                                                                  |   |
|   | 10.2  | ***    |   | Click Commerce, Inc. Directors’ Stock Option  and Stock Award Plan                                                                                                                       |   |
|   | 10.3  | ***    |   | Form of Indemnification Agreement entered into  between Click Commerce, Inc. and its directors and executive officers                                                                    |   |
|   | 10.4  | *^     |   | Promissory Note, dated March 31, 2000, between  Click Commerce, Inc. and American National Bank and Trust Company of  Chicago.                                                           |   |
|   | 10.5  | *^     |   | Loan and Security Agreement, dated March 31,  2000, between Click Commerce, Inc. and American National Bank and Trust  Company of Chicago                                                |   |
|   | 10.6  | *^     |   | Strategic Alliance Agreement with Andersen  Consulting, LLP (now known as Accenture Ltd.).                                                                                                         |   |
|   | 10.7  | *^^    |   | Release and Severance Agreement between William  Conroy and Click Commerce, Inc. dated as of April 15, 2002                                                                              |   |
|   | 10.8  | *^^^   |   | Employment Agreement between Michael W. Nelson and  Click Commerce, Inc. dated as of August 7, 2002                                                                                      |   |
|   | 10.9  | *#     |   | Employment Agreement between Michael W. Ferro, Jr.,  and Click Commerce, Inc. dated as of January 1, 2003.                                                                          |   |
|   | 10.10 | *#     |   | Employment Agreement between Justin C. Dearborn and  Click Commerce, Inc. dated as of November 18, 2002.                                                                                 |   |
|   | 10.11 | *##    |   | Stock Option Agreement of Michael W. Ferro, Jr.                                                                                                                                               |   |
|   | 10.12 | *###   |   | Subleases Termination Agreement between Radian  Guaranty Inc., and Click Commerce, Inc., dated as of August 29,  2003.                                                                   |   |
|   | 10.13 | *>  |   | Employment Agreement between Daniel J. Taylor and  Click Commerce, Inc. dated as of July 1, 2003.                                                                                        |   |
|   | 10.14 | *%     |   | Employment Arrangement with Nancy Koenig dated May  5, 2005.                                                                                                                                       |   |
|   | 10.15 | *%     |   | Form of Stock Option Award Agreement.                                                                                                                                                              |   |
|   | 10.16 | *%     |   | 2005 Employee Stock Purchase Plan                                                                                                                                                                  |   |
|   | 10.17 | *%%    |   | Share Repurchase Agreement, dated October 18, 2005,  between Click Commerce, Inc. and Commerce 5, Inc.                                                                                             |   |
|   | 10.18 | *%%    |   | Share Repurchase Agreement, dated October 18, 2005,  between Click Commerce, Inc. and Chris Heidelberger.                                                                                          |   |
|   | 10.19 | *%%%   |   | Agreement and Plan of Merger, dated as of November  22, 2005, by and among Click Commerce, Inc., Requisite Acquisition Inc.,  Thomas G. Washing, as representative, and Requisite Technology, Inc. |   |
|   | 10.20 | *+     |   | Asset Purchase Agreement, dated February 8, 2006, by  and among Click Commerce, Inc., Click Procure, Inc. and Elance, Inc.                                                                         |   |
|   | 21.1  |   |   | Subsidiaries of the Registrant                                                                                                                                                                     |   |

40

----

 
|        | 23.1 |   |   | Consent of BDO Seidman, LLP                                                                                   |   |
|--------|------|--------|--------|---------------------------------------------------------------------------------------------------------------|--------|
|   | 23.2 |   |   | Consent of KPMG LLP                                                                                           |   |
|   | 31.1 |   |   | Certification of the Chief Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |   |
|   | 31.2 |   |   | Certification of the Chief Financial Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |   |
|   | 32.1 |   |   | Certification of the Chief Executive Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |   |
|   | 32.2 |   |   | Certification of the Chief Financial Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |   |

----

| *         |   | Incorporated by reference to the Company’s  Form 8-K, filed on March 28, 2003 with the Securities and  Exchange Commission.                               |   |
|-----------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| **        |   | Incorporated by reference to the Company’s  Registration Statement on Form S-8, File No. 333-54432.                                                       |   |
| ***       |   | Incorporated by reference to the Company’s  Registration Statement on Form S-1, File No. 333-30564.                                                       |   |
| ***       |   | Incorporated by reference to Amendment No. 1 to  the Company’s Registration Statement on Form S-1, File  No. 333-30564 filed on March 28, 2004. |   |
| *^        |   | Incorporated by reference to Amendment No. 2 to  the Company’s Registration Statement on Form S-1, File  No. 333-30564, filed on May 1, 2000.   |   |
| *^^       |   | Incorporated by reference to the Company’s  Form 10-Q for the quarter ended March 31, 2002.                                                               |   |
| *^^^      |   | Incorporated by reference to the Company’s  Form 10-Q for the quarter ended June 30, 2002.                                                                |   |
| *^^^^     |   | Incorporated by reference to the Company’s  Form 10-Q for the quarter ended September 30, 2002.                                                           |   |
| *^^^^^    |   | Incorporated by reference to the Company’s annual report  on Form 10-K for the year ended December 31, 2002.                                              |   |
| *#        |   | Incorporated by reference to the Company’s  Form 10-Q for the quarter ended March 31, 2003.                                                               |   |
| *##       |   | Incorporated by reference to the Company’s  Form 10-Q for the quarter ended June 30, 2003.                                                                |   |
| *###      |   | Incorporated by reference to the Company’s  Form 10-Q for the quarter ended September 30, 2003.                                                           |   |
| *>     |   | Incorporated by reference to the Company’s  Form 10-K for the year ended December 31, 2003.                                                               |   |
| *>> |   | Incorporated by reference to the Company’s Current  Report on Form 8-K, dated April 22, 2004.                                                             |   |

41

----

 
| *>>> |   | Incorporated by  reference to the Company’s Current Report on Form 8-K, dated  July 6, 2004.      |   |
|---------------|--------|------------------------------------------------------------------------------------------------------------------|--------|
| *%            |   | Incorporated by  reference to the Company’s Current Report on Form 8-K, dated May 5, 2005              |   |
| *%%           |   | Incorporated by  reference to the Company’s Current Report on Form 8-K, dated October 19,  2005   |   |
| *%%%          |   | Incorporated by  reference to the Company’s Current Report on Form 8-K, dated November 22,  2005. |   |
| *+            |   | Incorporated by  reference to the Company’s Current Report on Form 8-K, dated February 8,  2006.  |   |
| !             |   | Incorporated by  reference to the Company’s Current Report on Form 8-K, dated  February 8, 2005.  |   |
| !!            |   | Incorporated by  reference to the Company’s Current Report on Form 8-K, dated  February 10, 2005. |   |
| !!!           |   | Incorporated by  reference to the Company’s Current Report on Form 8-K, dated  June 6, 2005.      |   |
| !!!!          |   | Incorporated by  reference to the Company’s Current Report on Form 8-K, dated  November 29, 2005. |   |
| !!!!!         |   | Incorporated by  reference to the Company’s Current Report on Form 8-K, dated  February 8, 2006.  |   |

 

 

42

----

**SIGNATURES**

**Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized, this 29th day of March, 2006.**

|        | Click Commerce, Inc. |
|--------|---------------------------|
|   | By:                  | /S/ MICHAEL  W. FERRO, JR. |
|   |                      | Michael W. Ferro, Jr. |
|   |                      | *Chairman of the Board and Chief Executive Officer* |

 

Pursuantto the requirements of the Securities Act of 1934, this report has been signedbelow by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

| Signature                             | ** ** | **Title**                                                           | ** ** | **Date**            |
|---------------------------------------|------------|---------------------------------------------------------------------|------------|---------------------|
|                                  |       |                                                                |       |                |
| /s/ MICHAEL  W. FERRO, JR.       |       | Director, Chief  Executive Officer                                  |       | March 29, 2006 |
| Michael  W. Ferro, Jr.           |       | and Chairman of the Board  of Directors                             |       |                |
| /s/ WILLIAM  J. DEVERS, JR. |       | Director                                                            |       | March 29, 2006 |
| William  J. Devers, Jr.          |       |                                                                |       |                |
| /s/ JUNE E.  DREWRY         |       | Director                                                            |       | March 29, 2006 |
| June E.  Drewry                  |       |                                                                |       |                |
| /s/ EMMANUEL  A. KAMPOURIS       |       | Director                                                            |       | March 29, 2006 |
| Emmanuel  A. Kampouris                |       |                                                                |       |                |
| /s/ ANDREW  J. MCKENNA           |       | Director                                                            |       | March 29, 2006 |
| Andrew  J. McKenna                    |       |                                                                |       |                |
| /s/ JOHN  F. SANDNER             |       | Director                                                            |       | March 29, 2006 |
| John  F. Sandner                      |       |                                                                |       |                |
| /s/ SAMUEL  K. SKINNER           |       | Director                                                            |       | March 29, 2006 |
| Samuel  K. Skinner                    |       |                                                                |       |                |
| /s/ NEELE E. STEARNS, JR.   |       | Director                                                            |       | March 29, 2006 |
| Neele  E. Stearns, Jr.           |       |                                                                |       |                |
| /s/ MICHAEL  W. NELSON           |       | Vice President,  Chief Financial                                    |       | March 29, 2006 |
| Michael W. Nelson                     |       | Officer And Treasurer (Principal Financial and  Accounting Officer) |       |                |

 

 

43

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**CLICKCOMMERCE, INC.**

**INDEXTO FINANCIAL STATEMENTS**

|                                                                        | ** ** | **Page** | ** ** |
|------------------------------------------------------------------------|------------|----------|------------|
| Report of Independent Registered Public Accounting  Firm               |       |     | F-2        |   |   |
| Report of Independent Registered Public Accounting  Firm               |       |     | F-3        |   |   |
| Consolidated Balance Sheets                                            |       |     | F-4        |   |   |
| Consolidated Statements of Operations and  Comprehensive Income (Loss) |       |     | F-5        |   |   |
| Consolidated Statements of Shareholders’ Equity                   |       |     | F-6        |   |   |
| Consolidated Statements of Cash Flows                                  |       |     | F-7        |   |   |
| Notes to Consolidated Financial Statements                             |       |     | F-9        |   |   |

 

F-1

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**Reportof the Independent Registered Public Accounting Firm**

To the Board of DirectorsClick Commerce, Inc.Chicago, Illinois

We have audited the accompanying consolidated balancesheet of Click Commerce, Inc. as of December 31, 2005 and the relatedconsolidated statements of operations and comprehensive income, shareholders’equity and cash flows for the year then ended. We have also audited the schedule listed in Item 15(a) 2. Thesefinancial statements and schedule are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialsstatements and schedule based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements and schedule are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financials statements andschedule, assessing the accounting principles used and the significantestimates made by management, as well as evaluating the overall presentation ofthe financial statements and schedule. We believe that our audits provide areasonable basis for our opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of Click Commerce, Inc. at December 31, 2005 and the results of itsoperations and its cash flows for the year then ended, in conformity withaccounting principles generally accepted in the United States of America.

Also, in our opinion, the 2005 schedule presentsfairly, in all material respects, the information set forth therein.

Wehave also audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the effectiveness of Click CommerceInc’s internal control over financial reporting as of December 31, 2005, basedon criteria established in *InternalControl-Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO) and our report dated March 30,2006 expressed an unqualified opinion on management’s assessment of, and theeffective operation of, internal control over financial reporting.

|                                   |   | /s/ BDO Seidman, LLP |
|-----------------------------------|--------|----------------------|
| Chicago, Illinois  March 30, 2006 |   |                 |

** **

F-2

----

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

The Board of Directors and ShareholdersClick Commerce, Inc.:

We have audited the accompanying consolidated balancesheet of Click Commerce, Inc. (the Company) as of December 31, 2004 andthe related consolidated statements of operations and comprehensive income(loss), shareholders’ equity, and cash flows for each of the years in the two-yearperiod ended December 31, 2004. These consolidated financial statementsare the responsibility of the Company’s management. Our responsibility is toexpress an opinion on these consolidated financial statements based on ouraudits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of the Company as of December 31,2004 and the results of its operations and its cash flows for each of the yearsin the two-year period ended December 31, 2004, in conformity with U.S.generally accepted accounting principles.
|                                        | /s/  KPMG LLP |
|----------------------------------------|-------------------------|
| Chicago, Illinois  March 21, 2005 |                    |

 

F-3

----

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

| ** **                                                                                                                                                                                                                                             | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                             | ** ** | **2005**              | ** ** | **2004** | ** ** |
| **ASSETS**                                                                                                                                                                                                                                             |       |                  |       |   |   |
| Current assets:                                                                                                                                                                                                                                        |       |                  |       |   |   |
| Cash and cash  equivalents                                                                                                                                                                                                                             |       | $                     | 17,498     |   | $ | 13,382 |   |
| Trade accounts  receivable, less allowance for doubtful accounts of $935 and $514 at  December 31, 2005 and 2004, respectively                                                                                                                    |       | 25,336                |       | 7,264 |   |
| Revenue earned on  contracts in progress in excess of billings                                                                                                                                                                                         |       | 481                   |       | 276 |   |
| Prepaids and other  current assets                                                                                                                                                                                                                     |       | 1,879                 |       | 389 |   |
| Total current assets                                                                                                                                                                                                                                   |       | 45,194                |       | 21,311 |   |
| Property and equipment,  net                                                                                                                                                                                                                           |       | 2,765                 |       | 870 |   |
| Intangible assets, net                                                                                                                                                                                                                                 |       | 22,129                |       | 2,944 |   |
| Goodwill                                                                                                                                                                                                                                               |       | 48,782                |       | 6,874 |   |
| Deferred tax assets                                                                                                                                                                                                                                    |       | 7,116                 |       | — |   |
| Other assets                                                                                                                                                                                                                                           |       | 1,673                 |       | 738 |   |
| Total assets                                                                                                                                                                                                                                           |       | $                     | 127,659    |   | $ | 32,737 |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                                                         |       |                  |       |   |   |
| Current liabilities:                                                                                                                                                                                                                                   |       |                  |       |   |   |
| Accounts payable                                                                                                                                                                                                                                       |       | $                     | 1,454      |   | $ | 573 |   |
| Billings in excess of  revenues earned on contracts in progress                                                                                                                                                                                        |       | 177                   |       | 68 |   |
| Deferred revenue                                                                                                                                                                                                                                       |       | 16,421                |       | 5,174 |   |
| Accrued compensation                                                                                                                                                                                                                                   |       | 3,190                 |       | 1,585 |   |
| Accrued rent                                                                                                                                                                                                                                           |       | 2,610                 |       | 79 |   |
| Accrued expenses and  other current liabilities                                                                                                                                                                                                        |       | 4,552                 |       | 2,098 |   |
| Short-term notes payable                                                                                                                                                                                                                               |       | 829                   |       | — |   |
| Total current  liabilities                                                                                                                                                                                                                             |       | 29,233                |       | 9,577 |   |
| Long-term debt                                                                                                                                                                                                                                         |       | 6,464                 |       | — |   |
| Other liabilities                                                                                                                                                                                                                                      |       | 846                   |       | 6 |   |
| Total liabilities                                                                                                                                                                                                                                      |       | 36,543                |       | 9,583 |   |
| Shareholders’ equity:                                                                                                                                                                                                                             |       |                  |       |   |   |
| Preferred stock, $0.001  par value, 5,000,000 shares authorized, no shares issued and outstanding                                                                                                                                                      |       | —                |       | — |   |
| Common stock, $0.001 par  value, 75,000,000 shares authorized; 12,217,857 and 9,742,401 shares issued  at December 31, 2005 and 2004, respectively; 12,007,769 and 9,713,337  shares outstanding at December 31, 2005 and 2004, respectively |       | 12                    |       | 10 |   |
| Additional paid-in  capital                                                                                                                                                                                                                            |       | 120,589               |       | 69,386 |   |
| Accumulated other  comprehensive income                                                                                                                                                                                                                |       | 194                   |       | 153 |   |
| Treasury stock, at cost  210,088 shares and 29,064 at December 31, 2005 and 2004, respectively                                                                                                                                                    |       | (2,923                | )          | (117 | ) |
| Accumulated deficit                                                                                                                                                                                                                                    |       | (26,756               | )          | (46,278 | ) |
| Total shareholders’  equity                                                                                                                                                                                                                       |       | 91,116                |       | 23,154 |   |
| Total liabilities and shareholders’ equity                                                                                                                                                                                                        |       | $                     | 127,659    |   | $ | 32,737 |   |

 

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

F-4

----

**CLICKCOMMERCE, INC.CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)(Dollars in thousands, except per share data)**

| ** **                                               | ** ** | **Year ended December 31,** | ** ** | ** ** |       |
|----------------------------------------------------------|------------|--------------------------------------------|------------|------------|------------|
| ** **                                               | ** ** | **2005**                                   | ** ** | **2004**   | ** ** | **2003** | ** ** | ** ** |
| Revenues:                                                |       |                                       |       |       |       |   |   |   |   |
| Product license                                          |       | $                                          | 9,782      |       | $          | 4,199 |   | $ | 2,084 |   |   |   |
| Service                                                  |       |                                       |       |       |       |   |   |   |   |
| Maintenance and hosting                                  |       | 24,576                                     |       | 9,143      |       | 6,728 |   |   |   |
| Consulting and implementation services                   |       | 16,927                                     |       | 10,162     |       | 7,297 |   |   |   |
| Subscription                                             |       | 7,425                                      |       | 2,225      |       | 2,080 |   |   |   |
| Total service                                            |       | 48,928                                     |       | 21,530     |       | 16,105 |   |   |   |
| Total revenues                                           |       | 58,710                                     |       | 25,729     |       | 18,189 |   |   |   |
| Cost of revenues:                                        |       |                                       |       |       |       |   |   |   |   |
| Product license                                          |       | 1,649                                      |       | 307        |       | 341 |   |   |   |
| Service                                                  |       | 19,945                                     |       | 9,231      |       | 8,375 |   |   |   |
| Impairment of third party licenses                       |       | —                                     |       | —     |       | 582 |   |   |   |
| Total cost of revenues                                   |       | 21,594                                     |       | 9,538      |       | 9,298 |   |   |   |
| Gross profit                                             |       | 37,116                                     |       | 16,191     |       | 8,891 |   |   |   |
| Operating expenses:                                      |       |                                       |       |       |       |   |   |   |   |
| Sales and marketing                                      |       | 7,288                                      |       | 3,464      |       | 3,409 |   |   |   |
| Research and development                                 |       | 7,026                                      |       | 2,913      |       | 2,411 |   |   |   |
| General and administrative                               |       | 5,807                                      |       | 4,524      |       | 4,520 |   |   |   |
| Amortization of intangible assets                        |       | 2,783                                      |       | 477        |       | 107 |   |   |   |
| Amortization of stock-based compensation                 |       | —                                     |       | 21         |       | 58 |   |   |   |
| Restructuring and other charges (recoveries)             |       | —                                     |       | (121       | )          | 2,378 |   |   |   |
| Total operating expenses                                 |       | 22,904                                     |       | 11,278     |       | 12,883 |   |   |   |
| Operating income  (loss)                                 |       | 14,212                                     |       | 4,913      |       | (3,992 | ) |   |   |
| Interest income                                          |       | 337                                        |       | 137        |       | 303 |   |   |   |
| Interest expense                                         |       | (317                                       | )          | —     |       | (15 | ) |   |   |
| Other non-operating  income(expense), net                |       | (109                                       | )          | 127        |       | 53 |   |   |   |
| Other  income(expense), net                              |       | (89                                        | )          | 264        |       | 341 |   |   |   |
| Income (loss)  before income tax benefit                 |       | 14,123                                     |       | 5,177      |       | (3,651 | ) |   |   |
| Income tax  (benefit)                                    |       | (5,399                                     | )          | —     |       | — |   |   |   |
| Net income (loss)                                        |       | 19,522                                     |       | 5,177      |       | (3,651 | ) |   |   |
| Basic income  (loss) per common share                    |       | $                                          | 1.73       |       | $          | 0.56 |   | $ | (0.45 | ) |   |   |
| Diluted income  (loss) per common share                  |       | $                                          | 1.63       |       | $          | 0.54 |   | $ | (0.45 | ) |   |   |
| Weighted average  common shares outstanding—basic   |       | 11,274,545                                 |       | 9,163,702  |       | 8,163,223 |   |   |   |
| Weighted average  common shares outstanding—diluted |       | 12,006,978                                 |       | 9,621,123  |       | 8,163,223 |   |   |   |
| Comprehensive income  (loss):                            |       |                                       |       |       |       |   |   |   |   |
| Net income (loss)                                        |       | $                                          | 19,522     |       | $          | 5,177 |   | $ | (3,651 | ) |   |   |
| Foreign currency translation adjustment                  |       | 41                                         |       | 17         |       | (12 | ) |   |   |
| Comprehensive  income (loss)                             |       | $                                          | 19,563     |       | $          | 5,194 |   | $ | (3,663 | ) |   |   |
|                                                          |            |                                            |            |            |            |  |  |  |  |  |  |  |  |  |  |  |

 

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

F-5

----

**CLICKCOMMERCE, INC.CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY(Dollars in thousands)**

| ** **                                                 | ** ** | **Common Stock** | ** ** | **Additional  paid-in** | ** ** | **Accumulated  other  comprehensive** | ** ** | **Deferred** | ** ** | **Treasury**     | ** ** | **Accumulated** | ** ** | ** **  | ** ** |
|------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|---------------------------------------|------------|--------------|------------|------------------|------------|-----------------|------------|-------------|------------|
| ** **                                                 | ** ** | **Shares**            | ** ** | **Amount**              | ** ** | **capital**                           | ** ** | **income**   | ** ** | **compensation** | ** ** | **stock**       | ** ** | **deficit** | ** ** | **Total** | ** ** |
| **Balance at December 31, 2002**                      |       | 8,092,786             |       |                    | $          | 8                                     |       |         |       | $                | 82,532     |            |       |        | $          | 148 |   |   |   | $ | (246 | ) |   |   | (117 | ) |   |   | $ | (47,804 | ) |   | $ | 34,521 |   |
| Amortization of deferred stock compensation                |       | —                |       |                    | —     |                                  |       |         | —     |             |       |            | —     |        |       |   | 58 |   |   |   | — |   |   |   | — |   |   | 58 |   |
| Deferred compensation related to cancelled options         |       | —                |       |                    | —     |                                  |       |         | (167       | )                |       |            | —     |        |       |   | 167 |   |   |   | — |   |   |   | — |   |   | — |   |
| Issuance of common stock related to board  compensation    |       | 15,951                |       |                    | —     |                                  |       |         | —     |             |       |            | —     |        |       |   | — |   |   |   | — |   |   |   | — |   |   | — |   |
| Issuance of common stock upon exercise of stock  options   |       | 252,631               |       |                    | —     |                                  |       |         | 475        |             |       |            | —     |        |       |   | — |   |   |   | — |   |   |   | — |   |   | 475 |   |
| Payment of dividends                                       |       | —                |       |                    | —     |                                  |       |         | (20,342    | )                |       |            | —     |        |       |   | — |   |   |   | — |   |   |   | — |   |   | (20,342 | ) |
| Foreign currency translation adjustment                    |       | —                |       |                    | —     |                                  |       |         | —     |             |       |            | (12        | )           |       |   | — |   |   |   | — |   |   |   | — |   |   | (12 | ) |
| Net loss                                                   |       | —                |       |                    | —     |                                  |       |         | —     |             |       |            | —     |        |       |   | — |   |   |   | — |   |   |   | (3,651 | ) |   | (3,651 | ) |
| **Balance at December 31, 2003**                      |       | 8,361,368             |       |                    | $          | 8                                     |       |         |       | $                | 62,498     |            |       |        | $          | 136 |   |   |   | $ | (21 | ) |   |   | $ | (117 | ) |   |   | $ | (51,455 | ) |   | $ | 11,049 |   |
| Amortization of deferred stock compensation                |       | —                |       |                    | —     |                                  |       |         | —     |             |       |            | —     |        |       |   | 21 |   |   |   | — |   |   |   | — |   |   | 21 |   |
| Issuance of common stock upon exercise of stock  options   |       | 67,299                |       |                    | —     |                                  |       |         | 133        |             |       |            | —     |        |       |   | — |   |   |   | — |   |   |   | — |   |   | 133 |   |
| Issuance of common stock in conjunction with  acquisitions |       | 1,284,670             |       |                    | 2          |                                  |       |         | 6,755      |             |       |            | —     |        |       |   | — |   |   |   | — |   |   |   | — |   |   | 6,757 |   |
| Foreign currency translation adjustment                    |       | —                |       |                    | —     |                                  |       |         | —     |             |       |            | 17         |        |       |   | — |   |   |   | — |   |   |   | — |   |   | 17 |   |
| Net income                                                 |       | —                |       |                    | —     |                                  |       |         | —     |             |       |            | —     |        |       |   | — |   |   |   | — |   |   |   | 5,177 |   |   | 5,177 |   |
| **Balance at December 31, 2004**                      |       | 9,713,337             |       |                    | $          | 10                                    |       |         |       | $                | 69,386     |            |       |        | $          | 153 |   |   |   | $ | — |   |   |   | $ | (117 | ) |   |   | $ | (46,278 | ) |   | $ | 23,154 |   |
| Issuance of common stock upon exercise of stock  options   |       | 68,908                |       |                    | —     |                                  |       |         | 251        |             |       |            | —     |        |       |   | — |   |   |   | — |   |   |   | — |   |   | 251 |   |
| Issuance of common stock in conjunction with  acquisitions |       | 2,406,548             |       |                    | 2          |                                  |       |         | 50,952     |             |       |            | —     |        |       |   | — |   |   |   | — |   |   |   | — |   |   | 50,954 |   |
| Treasury stock acquired                                    |       | (181,024              | )          |                    | —     |                                  |       |         | —     |             |       |            | —     |        |       |   | — |   |   |   | (2,806 | ) |   |   | — |   |   | (2,806 | ) |
| Foreign currency translation adjustment                    |       | —                |       |                    | —     |                                  |       |         | —     |             |       |            | 41         |        |       |   | — |   |   |   | — |   |   |   | — |   |   | 41 |   |
| Net Income                                                 |       |                  |       |                    |       |                                  |       |         |       |             |       |            |       |        |       |   |   |   |   |   |   |   |   |   | 19,522 |   |   | 19,522 |   |
| **Balance  at December 31, 2005**                     |       | 12,007,769            |       |                    | 12         |                                  |       |         | 120,589    |             |       |            | 194        |        |       |   | — |   |   |   | (2,923 | ) |   |   | (26,756 | ) |   | 91,116 |   |

 

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

F-6

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

| ** **                                                                                                                | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                                | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Cash  flows from operating activities:**                                                                                |       |                                       |       |   |   |   |   |
| Net income (loss)                                                                                                         |       | $                                          | 19,522     |   | $ | 5,177 |   | $ | (3,651 | ) |
| Adjustments to reconcile  net income (loss) to net cash provided by (used in) operating activities:                       |       |                                       |       |   |   |   |   |
| Amortization of  stock-based compensation                                                                                 |       | —                                     |       | 21 |   | 58 |   |
| Income tax benefit                                                                                                        |       | (5,399                                     | )          | — |   | — |   |
| Depreciation                                                                                                              |       | 1,309                                      |       | 473 |   | 1,006 |   |
| Amortization of  intangibles assets                                                                                       |       | 3,858                                      |       | 654 |   | 107 |   |
| Provision for  doubtful accounts                                                                                          |       | 421                                        |       | 240 |   | 149 |   |
| Impairment of third party licenses and restructuring and other  charges, net of payments                                  |       | —                                     |       | (121 | ) | 1,173 |   |
| Loss on disposal  of assets                                                                                               |       | 108                                        |       | — |   | — |   |
| Changes in operating  assets and liabilities, net of effect of acquisitions:                                              |       |                                       |       |   |   |   |   |
| Trade accounts  receivable                                                                                                |       | (10,007                                    | )          | (2,093 | ) | 2,169 |   |
| Revenue earned on  contracts in progress in excess of billings                                                            |       | (205                                       | )          | (276 | ) | — |   |
| Other current  assets                                                                                                     |       | (391                                       | )          | 471 |   | 777 |   |
| Accounts payable                                                                                                          |       | (2,175                                     | )          | (217 | ) | (947 | ) |
| Billings in excess  of revenues earned on contracts in progress                                                           |       | 109                                        |       | 35 |   | (342 | ) |
| Deferred revenue                                                                                                          |       | 137                                        |       | (1,001 | ) | (516 | ) |
| Accrued  compensation                                                                                                     |       | (2,785                                     | )          | 62 |   | (1,028 | ) |
| Accrued expenses, and  other current liabilities                                                                          |       | (3,856                                     | )          | 135 |   | (589 | ) |
| Net cash provided  by (used in) operating activities                                                                      |       | 646                                        |       | 3,560 |   | (1,634 | ) |
| **Cash  flows from investing activities:**                                                                                |       |                                       |       |   |   |   |   |
| Purchases of  property and equipment                                                                                      |       | (777                                       | )          | (319 | ) | (187 | ) |
| Payments for  acquisitions, net of transaction costs and cash acquired (see supplemental  schedule on the following page) |       | 6,465                                      |       | (1,850 | ) | 176 |   |
| Proceeds from the  sale of assets                                                                                         |       | —                                     |       | 81 |   | — |   |
| Redemptions  (purchases) of investments, net                                                                              |       | (400                                       | )          | (17 | ) | 10,367 |   |
| Other investing  activities                                                                                               |       | 25                                         |       | — |   | — |   |
| Net cash provided  by (used in) investing activities                                                                      |       | 5,313                                      |       | (2,105 | ) | 10,356 |   |
| **Cash  flows from financing activities:**                                                                                |       |                                       |       |   |   |   |   |
| Proceeds from  exercise of stock options                                                                                  |       | 251                                        |       | 133 |   | 475 |   |
| Proceeds from the  issuance of long-term debt                                                                             |       | 6,382                                      |       | — |   | — |   |
| Payments on  long-term and short-term debt                                                                                |       | (5,660                                     | )          |   |   |   |   |
| Payment of special  dividend                                                                                              |       | —                                     |       | — |   | (20,342 | ) |
| Purchase of  treasury stock                                                                                               |       | (2,806                                     | )          | — |   | — |   |
| Principal payments  under capital lease obligations                                                                       |       | (10                                        | )          | (69 | ) | (626 | ) |
| Net cash provided  by (used in) financing activities                                                                      |       | (1,843                                     | )          | 64 |   | (20,493 | ) |
| Effect of foreign  exchange rates on cash and cash equivalents                                                            |       | —                                     |       | — |   | (12 | ) |
| Net increase  (decrease) in cash and cash equivalents                                                                     |       | 4,116                                      |       | 1,519 |   | (11,783 | ) |
| Cash and cash  equivalents at beginning of year                                                                           |       | 13,382                                     |       | 11,863 |   | 23,646 |   |
| Cash and cash  equivalents at end of year                                                                                 |       | $                                          | 17,498     |   | $ | 13,382 |   | $ | 11,863 |   |
| **Supplemental disclosures:**                                                                                             |       |                                       |       |   |   |   |   |
| Interest paid                                                                                                             |       | $                                          | 300        |   | $ | 13 |   | $ | 15 |   |
| Income taxes paid                                                                                                         |       | 225                                        |       | — |   | — |   |
| Common stock  issued for acquisitions                                                                                     |       | $                                          | 50,954     |   | $ | 6,757 |   | — |   |

 

 

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

F-7

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**CLICK COMMERCE,INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)Supplemental Information(in thousands)**

| ** **                                                               | ** ** | **Year Ended December 31, 2005** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                               | ** ** | **ChannelWave,  Inc.**                               | ** ** | **Optum,  Inc.** | ** ** | **Xelus,  Inc.** | ** ** | **Requisite,  Inc.** | ** ** | **btrade  Inc.(1)** | ** ** | **Total** | ** ** |
| Intangible assets  acquired                                              |       |                                                 | $          | 3,272 |   |   | $ | 13,726 |   | $ | 3,036 |   |   | $ | 3,010 |   |   |   | $ | — |   |   | $ | 23,044 |   |
| Goodwill                                                                 |       |                                                 | 2,919      |   |   | 23,640 |   | 3,397 |   |   | 11,952 |   |   |   |   |   |   | 41,908 |   |
| Other assets  aquired, not including cash                                |       |                                                 | 471        |   |   | 7,067 |   | 3,138 |   |   | 1,963 |   |   |   | — |   |   | 12,639 |   |
| Total assets  acquired                                                   |       |                                                 | 6,662      |   |   | 44,433 |   | 9,571 |   |   | 16,925 |   |   |   | — |   |   | 77,591 |   |
| Less: Liabilities  acquired                                              |       |                                                 | 1,404      |   |   | 18,783 |   | 9,888 |   |   | 4,269 |   |   |   | — |   |   | 34,344 |   |
| Net assets  acquired, not including cash                                 |       |                                                 | 5,258      |   |   | 25,650 |   | (317 | ) |   | 12,656 |   |   |   | — |   |   | 43,247 |   |
| Less: Value of  shares issued for acquisition                       |       |                                                 | 4,280      |   |   | 26,124 |   | — |   |   | 20,550 |   |   |   | — |   |   | 50,954 |   |
| Plus: Acquisition  costs paid                                            |       |                                                 | 75         |   |   | 50 |   | 110 |   |   | 201 |   |   |   | — |   |   | 437 |   |
| Plus: Cash paid  for escrow settlements                                  |       |                                                 | —     |   |   | 745 |   | — |   |   | — |   |   |   | 60 |   |   | 805 |   |
| Payments for  acquisitions, net of transaction costs and (cash acquired) |       |                                                 | $          | 1,053 |   |   | $ | 321 |   | $ | (206 | ) |   | $ | (7,693 | ) |   |   | $ | 60 |   |   | $ | (6,465 | ) |

 

| ** **                                                                 | ** ** | **Year Ended  December 31, 2004** | ** ** |
|----------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                 | ** ** | **bTrade Inc.**                             | ** ** | **Webridge Inc.** | ** ** | **Total** | ** ** |
| Intangible assets  acquired                                                |       |                                             | $          | 1,618 |   |   |   | $ | 1,620 |   |   | $ | 3,238 |   |
| Goodwill                                                                   |       |                                             | 5,057      |   |   |   | 1,817 |   |   | 6,874 |   |
| Other assets  aquired, not including cash                                  |       |                                             | 484        |   |   |   | 867 |   |   | 1,351 |   |
| Total assets  acquired                                                     |       |                                             | 7,159      |   |   |   | 4,304 |   |   | 11,463 |   |
| Less: Liabilities  acquired                                                |       |                                             | 3,543      |   |   |   | 568 |   |   | 4,111 |   |
| Net assets  acquired, not including cash                                   |       |                                             | 3,616      |   |   |   | 3,736 |   |   | 7,352 |   |
| Less: Proceeds  from sale of bTrade assets                                 |       |                                             | 50         |   |   |   | — |   |   | 50 |   |
| Less: Value of  shares issued for acquisition                              |       |                                             | 3,209      |   |   |   | 3,549 |   |   | 6,758 |   |
| Plus: Cash used  to pay existing indebtedness                              |       |                                             | 1,306      |   |   |   | — |   |   | 1,306 |   |
| Payments for  acquisitions, net of   transaction costs and (cash acquired) |       |                                             | $          | 1,663 |   |   |   | $ | 187 |   |   | $ | 1,850 |   |

 

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

F-8

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**CLICK COMMERCE, INC.NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

**1.   Descriptionof Business**

Click Commerce, Inc. (the “Company”)provides on-demand supply and demand chain management software and consulting,hosting and related services that enable users through out the world tocollaborate, in real time, with business partners across an extendedenterprise. Our solutions are designed to help support the unique businessprocesses of a wide variety of industries, including manufacturing, aerospacedefense, and high-tech. The Company believes its products and services help itscustomers coordinate and optimize their business processes, lower their costsand improve their customer service. The Company’s customers are primarily basedor operating in the United States.

**2.**   Summaryof Significant Accounting Policies

*Basis ofPresentation*

The consolidated financialstatements include the accounts of the Company and its wholly-ownedsubsidiaries. All significant intercompany accounts and transactions have beeneliminated in consolidation. Certain prior period amounts have beenreclassified to conform to current year presentation.

*Use of Estimates*

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates.

*Cash and CashEquivalents*

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

*Accounts Receivableand Allowance for Doubtful accounts*

The Company monitorscollections and payments from its customers and maintains an allowance forestimated credit losses based upon historical experience and any specificcustomer collection issues that are identified.

*Property andEquipment*

Propertyand equipment is stated at cost less accumulated depreciation and amortization.Fixed assets acquired through the Company’s acquisitions are valued at theirfair values at the date of the respective acquisition. Depreciation andamortization is calculated on a straight-line basis over the estimated usefullives of the assets ranging from three to seven years, or in the case ofleasehold improvements, the shorter of the assets’ useful life or the remaininglease term. Leased equipment meeting certain criteria is capitalized, and thepresent value of the related lease payments is recorded as a liability.Equipment held under capital leases is amortized on a straight-line basis.Amounts expended for repairs and maintenance are charged to expense asincurred.

F-9

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

**2.**   Summary of Significant Accounting Policies (Continued)

*Long-lived Assets*

The carrying values ofpurchased customer relationships, developed technology and other intangibleassets, and other long lived assets, are reviewed on a regular basis for theexistence of facts or circumstance, both internally and externally, that maysuggest impairment. In assessing impairment, the Company determines whether theundiscounted future operating cash flows to be derived from the related assetover the remaining life will be sufficient to recover the carrying value. Inthe event such cash flows are not expected to be sufficient to recover thecarrying value of the asset, the impairment to be recognized is measured by theamount by which the carrying value exceeds the discounted cash flows related tothe asset.

*Long-termInvestments*

The Company has investedin a long-term investment fund. Under terms of the investment, the Company hasa total commitment of $2.0 million of which $1.4 million has beencontributed to date for a pro rata ownership interest of less than 2%. Theseinvestments are stated at book value and are recorded in other assets in theConsolidated Balance Sheet.

*Goodwill*

*Goodwillrepresents the excess of the aggregate purchase price over the fair value ofthe net tangible and identifiable intangible assets and in-process research anddevelopment acquired by the Company in a purchase combination.Beginning in 2002, the Company adopted Statement of Accounting StandardsNo. 142, “Goodwill and Other Intangible Assets”, that suspendedamortization of goodwill in favor of an annual impairment evaluation bycomparing the fair value of the reporting unit to its carrying valueincluding the goodwill. If it is determined that the carrying valueexceeds the fair value, an impairment loss would be recognized. During thefourth quarter of 2005,  and 2004, theCompany performed its annual impairment review for goodwill and concludedthat there was no impairment.*

*Intangible Assets*

Intangibles assets include identifiable purchasedassets including customer relationships, developed technology, trade names,order backlogs and in-process research and development. In allocating thepurchase price to the assets acquired in a purchase business combination, theCompany allocates a portion of the purchase price equal to the fair value atthe acquisition date of each of the identifiable intangible assets. Intangibleassets are amortized, on a straight line basis, over their respective estimateduseful lives ranging from one to seven years, except for purchased in-processresearch and development which is charged immediately to amortization ofintangible assets on the statement of operations and comprehensive income (loss).Amortization of developed technology is recorded in the Cost of product line ofthe Consolidated Statements of Operations and Comprehensive Income (Loss); theamortization expense for all other intangibles is recorded in Amortization ofintangibles in the Consolidated Statements of Operations and Comprehensive Income(Loss). The Company has no intangible assets with indefinite lives.

The Company continuouslymonitors factors that could potentially trigger an impairment of its intangibleassets. At December 31, 2005, and 2004, the Company determined that therewas no evidence of any triggering factors that could potentially impair thecarrying value of its intangible assets.

F-10

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

**2.**   Summary of Significant Accounting Policies (Continued)

*Long-term Debt*

*Long-termdebt approximates fair value due to variable interest rate.*

*Revenue Recognition*

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

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

License revenue from contracts in which the Company’sservices are not considered essential to the functionality of the software arerecognized upon delivery, assuming the above criteria for revenue recognitionare met under SOP 97-2. Services are not considered essential if thesoftware is ready to use by the customer upon receipt and, therefore,implementation services do not involve significant customization, modificationor development of the underlying software code.

Revenue from contracts in which the Company’s servicesare essential to the functionality of the other elements of the contract isrecognized using the percentage-of-completion method under contract accountingas services are performed or output milestones are reached, as the Companydelivers, customizes and installs the software. The percentage completed ismeasured either by the percentage of labor hours incurred to date in relationto estimated total labor hours of the agreement or in consideration ofachievement of certain output milestones, depending on the specific nature ofeach contract. When output milestones are used, those milestones are typicallydetermined from the structure of the contract in three milestones: delivery ofthe software, completion of the initial implementation and acceptance of theproject by the customer.

F-11

----

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

**2.**   Summary of Significant Accounting Policies (Continued)

Revenue from contracts recognized under thepercentage-of-completion method based on milestones is recognized as productlicense revenue to the extent that the underlying milestones are related tosoftware deliveries. In contracts with revenue recognized under thepercentage-of-completion method based on labor hour inputs, revenues are recognizedas product license revenue to the extent that the underlying contracts are forsoftware licenses based on equal application of discounts across all elementsof the larger arrangement. For arrangements in which percentage-of-completionaccounting is used, the Company records cash receipts from customers and billedamounts due from customers in excess of recognized revenue as billings inexcess of revenues earned on contracts in progress. The timing and amount ofcash receipts from customers can vary significantly depending on specificcontract terms and can, therefore, have a significant impact on the amount ofbillings in excess of revenues earned on contracts in progress at the end ofany given period.

The Company provides hosting services to customersthat have licensed the Company’s software under a limited-term softwarelicense. Software subscriptions have been accounted for under revenuerecognition principles in accordance with the guidance provided by StaffAccounting Bulletin (“SAB”) No. 104, *“RevenueRecognition.”* The fees related to multiple-element arrangements are allocatedto the individual elements in accordance with Emerging Issues Task Force (“EITF”)00-21 *“Revenue Arrangements withMultiple Deliverables,”* based upon verifiable, objective evidence ofthe fair values of each accounting unit. The Company’s subscription arrangementswith customers generally cover several elements, including (1) alimited-term software license (a subscription), (2) strategic consultingservices, (3) set-up and software subscription services, and (4) hostingservices. The Company requires customers in these arrangements to use itshosting facilities, which in accordance with EITF 00-3, *“Application of AICPA Statement of Position 97-2to Arrangements That Include the Right to Use Software Stored on Another Entity’sHardware,”* results in all arrangement revenue being deferred andrecognized ratably over the term of the agreement. If the arrangement includesconsulting services, these services are presented as consulting andimplementation service revenue and are deferred and recognized ratably over theterm of the arrangement, which is normally 12-24 months. Under SAB No. 104“Revenue Recognition,” costs associated with set-up and implementation of thesubscriptions may be expensed as incurred or deferred and recognized over theterm of the related arrangement. The Company has elected to defer such costs.The software subscription service typically begins upon customer acceptance.Limited term licenses are required to be hosted through the Company’s hostingservices.

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

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

F-12

----

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

**2.**   Summary of Significant Accounting Policies (Continued)

Professional servicesrevenue primarily consists of implementation services related to theinstallation of the Company’s software products and training revenues. The fairvalue of the professional services portion of the arrangement is based on thedaily rates the Company charges for these services when sold independently froma software license. Substantially all of the Company’s professional servicesarrangements are on a time and materials basis and, accordingly, are recognizedas the services are performed.

Inaccordance with EITF No. 01-14, the Company classifies thereimbursement of out-of-pocket expenses from its customers as revenue, in the Statementof Operations and Comprehensive Income (Loss).

*Software Costs*

Costs associated with theplanning and designing phase of software development, including coding andtesting activities necessary to establish technological feasibility of computersoftware products to be licensed or otherwise marketed, are classified asresearch and development costs, and are expensed as incurred. Oncetechnological feasibility has been determined, costs incurred in continuing thesoftware development, including coding, testing, and product quality assurance,are capitalized. To date, the period between technological feasibility andgeneral availability has been short and costs qualifying for capitalizationhave been insignificant. Accordingly, no software development costs have beencapitalized to date.

Costs associated withsoftware developed or acquired for internal use are capitalized and amortizedover the useful life of the software.

*Income (Loss) per Share*

The Company calculatesbasic earnings per share based on the weighted average number of common sharesoutstanding during the period. Diluted earnings per share is calculated basedon the weighted average number of common shares outstanding and the dilutiveeffect of stock options and other common stock equivalents using the treasurystock method. Potentially dilutive securities are excluded from the dilutedearnings per share calculation if their effect is anti-dilutive.

Anti-dilutive stockoptions that were excluded from the net income (loss) per share calculationsfor the years ended December 31, 2005 and 2004 totaled 60,014 and 87,389respectively. All outstanding stock options were anti-dilutive for the yearended December 31, 2003, due the Company having a net loss for the period.

*Income Taxes*

Deferred tax assets andliabilities are recognized for the future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases and operating loss and tax creditcarryforwards. Deferred tax assets and liabilities are measured using enactedtax rates expected to apply to taxable income in the years in which thosetemporary differences are expected to be recovered or settled. The effect ondeferred tax assets and liabilities of a change in tax rates is recognized inincome in the period that includes the enactment date. Valuation allowances areestablished when necessary to reduce deferred tax assets to the amount thatwill more likely than not be realized.

F-13

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

**2.**   Summary of Significant Accounting Policies (Continued)

*FinancialInstruments*

The reported amounts ofthe Company’s financial instruments, which include cash equivalents, accountsreceivable, accounts payable, accrued compensation, accrued expenses, othercurrent liabilities and short-term notes payable, approximate their fair valuesdue to the short-term nature of these instruments.

*Stock-BasedCompensation*

The Company accounts for its stock options inaccordance with the provisions of Statement of Financial Accounting Standards (“SFAS”)No. 123, “*Accounting for Stock-BasedCompensation*,” which permits entities to recognize as expense overthe vesting period the fair value of all stock-based awards on the date ofgrant. Alternatively, SFAS No. 123 also allows entities to continue toapply the provisions of Accounting Principles Board Opinion No. 25, “*Accounting for Stock Issued to Employees*”(“APB 25”) and related interpretations. The Company continues to apply theprovisions of APB 25 and provides the pro forma disclosures required by SFAS No. 123,as amended by SFAS No. 148, “*Accountingfor Stock-Based Compensation—Transition and Disclosure, an amendment of FASBStatement No. 123*.” As such, compensation expense would berecorded only if the fair value of the underlying stock exceeded the exerciseprice of the option on the grant date.

The Company has appliedAPB 25 and related interpretations in accounting for its stock options issuedunder the Amended and Restated Click Commerce Stock Option and Stock Award Planand the Amended and Restated Directors’ Stock Option and Stock Award Plan.Accordingly, no compensation cost has been recognized on stock options forwhich the exercise price equaled the fair value at the date of grant. Had theCompany determined compensation cost based on the method required by SFAS No. 123,the Company’s net income (loss) and net income (loss) per common share for2005, 2004 and 2003 would approximate the pro forma amounts below:

| ** **                                                                                                                             | ** ** | **2005**                                                          | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                                                                                                             | ** ** | **(in thousands,  except per share amounts)** | ** ** |
| Net income (loss), as  reported                                                                                                        |       | $                                                                 | 19,522     |     | $          | 5,177    |       | $ | (3,651 | ) |
| Stock-based employee  compensation expense included in the determination of net income (loss) as  reported, net of related tax effects |       | —                                                            |       | 21       |       | 58       |       |
| Total fair value method  employee stock-based compensation expense, net of related tax effects                                         |       | (3,731                                                            | )          | (1,186   | )          | (1,213   | )          |
| Pro forma net income  (loss)                                                                                                           |       | $                                                                 | 15,791     |     | 4,012      |     | $          | (4,806 | ) |
| Basic income (loss) per  share:                                                                                                        |       |                                                              |       |     |       |     |       |
| As reported                                                                                                                            |       | $                                                                 | 1.73       |     | $          | 0.56     |       | $ | (0.45 | ) |
| Pro forma                                                                                                                              |       | $                                                                 | 1.40       |     | $          | 0.44     |       | $ | (0.59 | ) |
| Diluted income (loss)  per share:                                                                                                      |       |                                                              |       |     |       |     |       |
| As reported                                                                                                                            |       | $                                                                 | 1.63       |     | $          | 0.54     |       | $ | (0.45 | ) |
| Pro forma                                                                                                                              |       | $                                                                 | 1.32       |     | $          | 0.42     |       | $ | (0.59 | ) |

 

F-14

----

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

**2.**   Summary of Significant Accounting Policies (Continued)

The fair value of eachstock option granted is estimated on the date of grant using the Black-Scholesoption-pricing model, with the following weighted average assumptions:

| ** **               | ** ** | **2005**       | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------|------------|----------------|------------|----------|------------|----------|------------|
| Expected life, in  years |       | 4.0            |       |     | 4.0        |     |       |   | 4.0 |   |   |
| Expected  volatility     |       | 75 - 92   | %          |     | 78         | %        |       |   | 171 | % |   |
| Risk-free  interest rate |       | 4.0 - 4.5 | %          |     | 3.0        | %        |       |   | 3.0 | % |   |
| Dividend yield           |       | 0.0            | %          |     | 0.0        | %        |       |   | 0.0 | % |   |

 

In December 2004, the Financial AccountingStandards Board (FASB) issued SFAS No. 123 (revised 2004), “Share—BasedPayment (SFAS No. 123(R)).” SFAS No. 123(R) will require companies tomeasure all employee stock-based compensation awards using a fair value methodand record such expense in their consolidated financial statements. Beginningin January 2006, the Company expects to adopt SFAS No. 123(R) underthe modified retrospective method. Under the modified retrospective method, theCompany is required to restate prior period financial results to include theimpact of share-based compensation expense. In 2006, the Company expects itwill incur approximately $0.5 million (before the effect of income taxes)in non-cash stock-based compensation charges in connection with its adoption ofSFAS No. 123(R).

Prior to its IPO, the Company granted certain stockoptions at exercise prices less than their deemed fair value; accordingly, theCompany recorded deferred compensation of $4,636,000. Such deferredcompensation was amortized on a straight-line basis over the vesting period ofeach individual award, resulting in $21,000 and $58,000 of stock-basedcompensation expense in the years ended December 31, 2004 and 2003,respectively. The following table contains the amortization expense attributableto each noted expense caption, as applicable on the consolidated statements ofoperations and comprehensive income (loss).

| ** **                                                  | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                  | ** ** | **2005**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                  | ** ** | **(in thousands)**                     | ** ** |
| Stock-based  employee compensation expense attributable to: |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Cost of revenues                                            |       |                                        | $          | — |   |   |   | 13 |   |   |   | $ | 7 |   |   |
| Sales and  marketing                                        |       |                                        | —     |   |   |   | 8 |   |   |   | 49 |   |   |
| Research and  development                                   |       |                                        | —     |   |   |   | — |   |   |   | 2 |   |   |
| Total                                                       |       |                                        | $          | — |   |   |   | $ | 21 |   |   |   | $ | 58 |   |   |
|                                                             |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

For its fixed awards withpro-rata vesting provisions, the Company calculates any compensation expensesrecorded in the consolidated financial statements or included in the pro-formanet income (loss) required by the disclosure only provisions of SFASNo. 123 on a straight line basis.

*Segment Reporting*

The Company operates in asingle segment and makes enterprise-wide disclosures as applicable.

F-15

----

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

**2.**   Summary of Significant Accounting Policies (Continued)

*Foreign CurrencyTranslation*

The Company translatesassets and liabilities of non-U.S. functional currency subsidiaries into U.S.dollars at the rates of exchange in effect at the end of each period. Revenuesand expenses are translated using average rates in effect during the period.Gains and losses from translation adjustments are included in shareholders’equity under the caption “Accumulated other comprehensive income.” Currencytransaction gains or losses created by monetary assets and liabilities statedin currency other than the functional currencies are recognized in currentoperations and have not been significant to the Company’s operating results.

*Advertising Expense*

The Company expenses alladvertising costs as they are incurred. The Company incurred no advertisingexpense for the years ended December 31, 2005, 2004 and 2003.

**3.**   Acquisitions

Effective March 24, 2003, the Company completedits acquisition of all of the capital stock of Allegis Corporation (“Allegis”),a privately-held California corporation engaged in licensing partnerrelationship management software and providing professional implementationservices, hosting, and maintenance services related to its software. Results ofAllegis’ operations have been included in the Company’s consolidated financialstatements since March 24, 2003. Under the terms and conditions of theAgreement and Plan of Merger, Allegis became a wholly-owned subsidiary of theCompany, and the holders of Allegis’ preferred stock received cashconsideration in an aggregate amount of approximately $10,200. The Companyfunded the acquisition using available cash on hand. The product line acquiredin this transaction is considered to be the Company’s partner relationshipmanager product line and is considered to be a part of the Company’s legacyproduct lines for 2005 reporting purposes.

Thefollowing table summarizes the estimated fair values of the assets acquired andliabilities assumed on the effective date of the Allegis acquisition. Inaddition to the $10,200 purchase price, the Company incurred $135,000 of directexpenses related to closing the Allegis acquisition. The opening balancesreflecting all purchase price adjustments are presented below.

| ** **                | ** ** | **At March 24, 2003** | ** ** |
|---------------------------|------------|--------------------------------------|------------|
| ** **                | ** ** | **(in thousands)**              | ** ** |
| Current assets            |       |                                 | $          | 3,024 |   |   |
| Property and  equipment   |       |                                 | 393        |   |   |
| Intangible assets         |       |                                 | 466        |   |   |
| Other assets              |       |                                 | 274        |   |   |
| Total assets acquired     |       |                                 | 4,157      |   |   |
| Current  liabilities      |       |                                 | 3,908      |   |   |
| Long-term  liabilities    |       |                                 | 104        |   |   |
| Total liabilities assumed |       |                                 | 4,012      |   |   |
| Net assets acquired       |       |                                 | $          | 145 |   |   |

 

F-16

----

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

**3.**   Acquisitions(Continued)

Effective April 21, 2004, the Company completedits acquisition of substantially all the operating assets ofWebridge, Inc. (“Webridge”), a privately-held Delaware corporation basedin Beaverton, Oregon. Pursuant to the Asset Purchase Agreement, dated as ofMarch 17, 2004 and amended March 30, 2004, the Company acquired theoperating assets of Webridge, Inc., based on a valuation of Webridge as agoing-concern, for consideration consisting of 615,303 shares of the Company’scommon stock, valued at $5.766 per share, including shares issued for workingcapital adjustments. The Company incurred $0.2 million of transactioncosts. The product line acquired in this transaction is considered to be theCompany’s research and health care product line which is one of the Company’slegacy product lines for 2005 reporting purposes.

On July 1, 2004, the Company acquired bTrade, aprivately-held Texas corporation based in Irving, Texas. Pursuant to anAgreement and Plan of Merger, dated as of June 17, 2004, bTrade became awholly-owned subsidiary of the Company. The Company acquired bTrade, based on avaluation of bTrade as a going-concern, for consideration consisting of 666,425shares (net of a 2,942 share adjustment in 2005 for working capital settlements)valued at $4.795 per share, of Company common stock, $0.2 million in cash,and the assumption and repayment of approximately $1.3 million of existingbTrade indebtedness. The Company incurred $0.2 million of transactioncosts related to this transaction.

The following tablesummarizes the estimated fair values of the assets acquired and the liabilitiesassumed on the effective date of the Webridge and bTrade acquisitions. TheCompany incurred approximately $0.2 million and $0.2 million of direct expensesrelated to the closing of the Webridge and bTrade acquisitions, respectively.The opening balances reflecting all purchase price adjustments are presentedbelow.

| ** **                                       | ** ** | **Webridge  April 21, 2004** | ** ** | **bTrade  July 1, 2004** | ** ** |
|--------------------------------------------------|------------|----------------------------------------|------------|------------------------------------|------------|
| ** **                                       | ** ** | **(in thousands)**                | ** ** |
| Assets:                                          |       |                                   |       |                               |       |   |   |   |   |
| Cash and cash  equivalents                       |       |                                   | $          | —                             |       |   |   | $ | 9 |   |   |
| Trade accounts  receivable                       |       |                                   | 446        |                               |       |   | 322 |   |   |
| Other current assets                             |       |                                   | —     |                               |       |   | 41 |   |   |
| Total current assets                             |       |                                   | 446        |                               |       |   | 372 |   |   |
| Property and equipment                           |       |                                   | 121        |                               |       |   | 121 |   |   |
| Intangible assets,  including in-process R&D |       |                                   | 1,620      |                               |       |   | 1,618 |   |   |
| Goodwill                                         |       |                                   | 1,817      |                               |       |   | 5,057 |   |   |
| Other assets                                     |       |                                   | 300        |                               |       |   | — |   |   |
| Total assets                                     |       |                                   | 4,304      |                               |       |   | 7,168 |   |   |
| Liabilities:                                     |       |                                   |       |                               |       |   |   |   |   |
| Accounts payable                                 |       |                                   | —     |                               |       |   | 390 |   |   |
| Accrued liabilities                              |       |                                   | 422        |                               |       |   | 603 |   |   |
| Short term debt  obligations(1)                  |       |                                   | —     |                               |       |   | 1,306 |   |   |
| Deferred revenue                                 |       |                                   | 146        |                               |       |   | 1,244 |   |   |
| Total liabilities                                |       |                                   | 568        |                               |       |   | 3,543 |   |   |
| Net assets acquired                              |       |                                   | $          | 3,736                              |       |   |   | $ | 3,625 |   |   |

----

(1)          The acquired debt waspaid immediately upon the closing of the acquisition of bTrade

F-17

----

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

**3.**   Acquisitions (Continued)

Effective February 2, 2005, the Company enteredinto an Asset Purchase Agreement (the “Purchase Agreement”) with ChannelWave, Inc.(“ChannelWave”). Pursuant to the Purchase Agreement, the Company acquiredcertain assets from ChannelWave, including substantially all assets relating toChannelWave’s Partner Relationship Management System and Service InformationSystem businesses, for consideration comprised of $1.0 million of cash and225,807 shares valued at $18.954 per share of the Company’s common stock (ofwhich 29,033 shares are being held by the Company in escrow for certainpotential additional liabilities of ChannelWave pursuant to the PurchaseAgreement). The Company incurred $0.1 million of transaction costs.ChannelWave offers demand chain solutions. On October 19, 2005, theCompany completed a repurchase of 181,024 shares pursuant to Share RepurchaseAgreements (the “Share Repurchase Agreements”) with Commerce 5, Inc.(formerly known as ChannelWave, Inc.) and a former executive officer ofCommerce 5, Inc., respectively. Pursuant to the terms of the ShareRepurchase Agreements, the Company repurchased shares of its common stock for apurchase price of $15.50 per share, or $2,805,872 in the aggregate. Theremaining 44,783 shares of the Company’s common stock are expected to beregistered for resale on a Registration Statement on Form S-3. TheCompany incurred $0.1 million of transaction costs.

Effective February 7, 2005, the Company enteredinto an Agreement and Plan of Merger (the “Merger Agreement”) with Optum, Inc.(“Optum”), and its stockholders, pursuant to which the Company acquired Optum.In consideration for the merger, the Company paid $325,467 in cash, issued 1,405,780shares valued at $18.583 per share of the Company’s common stock to thestockholders of Optum (of which $65,093 in cash and 281,156 shares of theCompany’s common stock are being held by an escrow agent for certain potentialadditional liabilities of Optum pursuant to the Merger Agreement), and assumedapproximately $4.3 million of Optum indebtedness. The shares of theCompany’s common stock are expected to be registered for resale on aRegistration Statement on Form S-3. The Company incurred$0.1 million of transaction costs. The product line acquired in this transactionis considered to be the Company’s supply chain management product line and isconsidered to be a part of the Company’s acquired product lines for 2005reporting purposes.

Effective May 27, 2005, the Company entered intoan Agreement and Plan of Merger (the “Merger Agreement”) with Xelus, Inc.(“Xelus”), and its stockholders, pursuant to which the Company acquired Xelus.In consideration for the merger, the Company paid $1 in cash, assumedapproximately $2.2 million of Xelus indebtedness, settled a long-termlease liability for $543,000 and incurred transaction-related expenses in theamount of $0.1 million. No shares of Company stock were issued in connectionwith the Xelus acquisition. The product line acquired in this transaction isconsidered to be the Company’s service parts planning and optimization productline and is considered to be a part of the Company’s acquired product lines for2005 reporting purposes.

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

F-18

----

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

**3.**   Acquisitions (Continued)

considered to be theCompany’s master data management product line and is considered to be a part ofthe Company’s acquired product lines for 2005 reporting purposes.

The following tablesummarizes the estimated fair values of the assets acquired and the liabilitiesassumed on the effective date of the ChannelWave, Optum, Xelus and Requisiteacquisitions. The Company incurred approximately $100,000, $100,000, $100,000and $200,000 of direct expenses related to the closing of the ChannelWave,Optum, Xelus and Requisite acquisitions, respectively. The final allocations ofthe purchase prices are subject to change as the Company completes thevaluation of the acquired assets and assumed liabilities.

| ** **                     | ** ** | **ChannelWave**                | ** ** | **Optum**                      | ** ** | **Xelus**                  | ** ** | **Requisite**                   | ** ** |
|--------------------------------|------------|--------------------------------|------------|--------------------------------|------------|----------------------------|------------|---------------------------------|------------|
| ** **                     | ** ** | **February 2, 2005** | ** ** | **February 7, 2005** | ** ** | **May 27, 2005** | ** ** | **November 22, 2005** | ** ** |
| ** **                     | ** ** | **(in thousands)**        | ** ** |
| Assets:                        |       |                           |       |                           |       |                       |       |                            |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents      |       |                           | $          | —                         |       |                       |       | $                               | 817        |   |   |   | $ | 844 |   |   |   | $ | 9,473 |   |   |
| Trade accounts receivable, net |       |                           | 421        |                           |       |                       | 4,235      |                            |       |   | 1,953 |   |   |   | 1,370 |   |   |
| Other current assets           |       |                           | —     |                           |       |                       | 768        |                            |       |   | 378 |   |   |   | 255 |   |   |
| Total current assets           |       |                           | 421        |                           |       |                       | 5,820      |                            |       |   | 3,175 |   |   |   | $ | 11,098 |   |   |
| Property and equipment         |       |                           | 50         |                           |       |                       | 1,644      |                            |       |   | 807 |   |   |   | 39 |   |   |
| Intangible assets              |       |                           | 3,272      |                           |       |                       | 13,726     |                            |       |   | 3,036 |   |   |   | 3,010 |   |   |
| Goodwill                       |       |                           | 2,919      |                           |       |                       | 23,640     |                            |       |   | 3,397 |   |   |   | 11,952 |   |   |
| Other assets                   |       |                           | —     |                           |       |                       | 420        |                            |       |   | — |   |   |   | 299 |   |   |
| Total assets                   |       |                           | $          | 6,662                          |       |                       |       | $                               | 45,250     |   |   |   | $10,415 |   |   |   | $ | 26,398 |   |   |
| Liabilities:                   |       |                           |       |                           |       |                       |       |                            |       |   |   |   |   |   |   |   |   |
| Accounts payable               |       |                           | $          | —                         |       |                       |       | $                               | 1,703      |   |   |   | $ | 1,141 |   |   |   | 26 |   |   |
| Accrued liabilities            |       |                           | 75         |                           |       |                       | 5,956      |                            |       |   | 648 |   |   |   | 2,352 |   |   |
| Accrued compensation           |       |                           | —     |                           |       |                       | 3,073      |                            |       |   | 1,023 |   |   |   | 500 |   |   |
| Deferred revenue               |       |                           | 1,329      |                           |       |                       | 3,587      |                            |       |   | 4,803 |   |   |   | 1,391 |   |   |
| Short-term lease obligation    |       |                           | —     |                           |       |                       | 165        |                            |       |   | — |   |   |   | — |   |   |
| Short-term debt obligation     |       |                           | —     |                           |       |                       | 1,762      |                            |       |   | 2,204 |   |   |   | — |   |   |
| Long-term debt obligation      |       |                           | —     |                           |       |                       | 2,537      |                            |       |   | 69 |   |   |   | — |   |   |
| Total liabilities              |       |                           | 1,404      |                           |       |                       | 18,783     |                            |       |   | 9,888 |   |   |   | 4,269 |   |   |
| Net assets  acquired           |       |                           | $          | 5,258                          |       |                       |       | $                               | 26,467     |   |   |   | $ | 527 |   |   |   | $ | 22,129 |   |   |

 

F-19

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

**3.**   Acquisitions (Continued)

The following table setsforth the allocation of intangible assets arising from the Company’s acquisitionsto customer relationships, developed technology, trade names, order backlog aswell as the in-process R&D charge. These intangible assets, as well as thegoodwill recorded by the Company, will be evaluated, as required, to determinethat the fair value of such assets does not exceed their recorded values. Ifimpairment exists, the carrying values of such assets will be reduced to theirfair value. No goodwill or intangible asset impairments were recorded for theyear ended December 31, 2005, 2004 and 2003. 

| ** **                                               | ** ** | **Customer  Relationships(1)** | ** ** | **Developed  Technology(2)** | ** ** | **Trade  Names(3)** | ** ** | **Order  Backlog(4)** | ** ** | **In  process  R&D(5)** | ** ** | **Total** | ** ** |
|----------------------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|---------------------|------------|-----------------------|------------|-----------------------------|------------|-----------|------------|
| Requisite                                                |       |                           | $          | 1,238                        |       |                |       | $                     | 1,492      |                        |       |      | $          | — |   |   |   | $ | 280 |   |   |   | $ |   |   |   | $ | 3,010 |   |
| Xelus                                                    |       |                           | 2,684      |                         |       |                | 283        |                  |       |                        |       |      |       |   | 69 |   |   |   |   |   |   | 3,036 |   |
| Optum                                                    |       |                           | 9,850      |                         |       |                | 3,573      |                  |       |                        |       |      |       |   | 303 |   |   |   |   |   |   | 13,726 |   |
| ChannelWave                                              |       |                           | 2,758      |                         |       |                | 514        |                  |       |                        |       |      |       |   |   |   |   |   |   |   |   | 3,272 |   |
| bTrade                                                   |       |                           | 1,195      |                         |       |                | 274        |                  |       |                        | —     |      |       |   | 143 |   |   |   | 6 |   |   | 1,618 |   |
| Webridge                                                 |       |                           | 560        |                         |       |                | 910        |                  |       |                        | 150        |      |       |   | — |   |   |   | — |   |   | 1,620 |   |
| Allegis                                                  |       |                           | 466        |                         |       |                | —     |                  |       |                        | —     |      |       |   | — |   |   |   | — |   |   | 466 |   |
| Gross intangible assets  and in-process R&D          |       |                           | 18,751     |                         |       |                | 7,046      |                  |       |                        | 150        |      |       |   | 795 |   |   |   | 6 |   |   | 26,748 |   |
| Accumulated amortization  at December 31, 2005           |       |                           | (2,811     | )                            |       |                | (1,260     | )                     |       |                        | (85        | )         |       |   | (457 | ) |   |   | (6 | ) |   | (4,619 | ) |
| Balance at  December 31, 2005                       |       |                           | $          | 15,940                       |       |                |       | $                     | 5,786      |                        |       |      | $          | 65 |   |   |   | $ | 338 |   |   |   | $ | — |   |   | $ | 22,129 |   |
| Amortization expense:                                    |       |                           |       |                         |       |                |       |                  |       |                        |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Year ended  December 31, 2005                       |       |                           | $          | 2,340                        |       |                |       | $                     | 1,083      |                        |       |      | $          | 50 |   |   |   | $ | 385 |   |   |   | $ | — |   |   | $ | 3,858 |   |
| Year ended  December 31, 2004                       |       |                           | 364        |                         |       |                | 176        |                  |       |                        | 35         |      |       |   | 72 |   |   |   | 6 |   |   | 653 |   |
| Year ended  December 31, 2003                       |       |                           | 107        |                         |       |                | —     |                  |       |                        | —     |      |       |   | — |   |   |   | — |   |   | 107 |   |
| Estimated amortization  expense for the 12 months ended: |       |                           |       |                         |       |                |       |                  |       |                        |       |      |       |   |   |   |   |   |   |   |   |   |   |
| December 31, 2006                                   |       |                           | 2,788      |                         |       |                | 1,606      |                  |       |                        | 50         |      |       |   | 338 |   |   |   | — |   |   | 4,782 |   |
| December 31, 2007                                   |       |                           | 2,712      |                         |       |                | 1,567      |                  |       |                        | 15         |      |       |   | — |   |   |   | — |   |   | 4,294 |   |
| December 31, 2008                                   |       |                           | 2,712      |                         |       |                | 1,353      |                  |       |                        | —     |      |       |   | — |   |   |   | — |   |   | 4,065 |   |
| December 31, 2009                                   |       |                           | 2,515      |                         |       |                | 1,178      |                  |       |                        | —     |      |       |   | — |   |   |   | — |   |   | 3,693 |   |
| December 31, 2010                                   |       |                           | 2,361      |                         |       |                | 81         |                  |       |                        | —     |      |       |   | — |   |   |   | — |   |   | 2,442 |   |

----

(1)          Customer relationshipsare amortized over seven years for Requisite, Xelus, Optum and ChannelWave, overfive years for bTrade and Webridge, and over three years for Allegis.

(2)          Developed technology isamortized over five years for Requisite, Optum, ChannelWave and bTrade, fouryears for Webridge and three years for Xelus and is reflected in the cost ofproduct license revenue on the consolidated statement of operations andcomprehensive income (loss).

(3)          Trade names are beingamortized over three years

(4)          Order backlogs are beingamortized over one year

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

F-20

----

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

**3.**   Acquisitions (Continued)

The following unauditedpro forma financial information for the years ended December 31, 2005 and2004 presents the consolidated operations of the Company as if all of theacquisitions had been consummated on January 1, 2004, after giving effectto certain adjustments for the pro forma acquisitions as of the assumed January 1,2004 acquisition date. The unaudited pro forma financial information isprovided for informational purposes only, should not be construed to beindicative of the Company’s consolidated results of operations had theacquisition of Webridge, bTrade, ChannelWave, Optum, Xelus and Requisite beenconsummated on these earlier dates, and do not project the Company’s results ofoperations for any future period:

| ** **                           | ** ** | **Year Ended  December 31,**                         | ** ** |
|--------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                           | ** ** | **2005**                                                       | ** ** | **2004** | ** ** |
| ** **                           | ** ** | **(in thousands, except  per share data)** | ** ** |
| Revenues                             |       | $                                                              | 72,418     |   | $ | 70,202 |   |
| Net income (loss)                    |       | 18,194                                                         |       | 2,124 |   |
| Basic net income  (loss) per share   |       | $                                                              | 1.52       |   | $ | 0.18 |   |
| Diluted net income  (loss) per share |       | $                                                              | 1.42       |   | $ | 0.17 |   |

 

**4.   Net income(loss) Per Share**

| ** **                                                                             | ** ** | **Year Ended**         | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                             | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
| ** **                                                                             | ** ** | **(in thousands)**     | ** ** |
| Numerator for  basic and diluted earnings (loss) per share—net income (loss)      |       |                        | $          | 19,522 |   |   |   | $ | 5,177 |   |   |   | $ | (3,651 | ) |   |
| Denominator for  basic earnings (loss) per share—weighted average shares          |       |                        | 11,275     |   |   |   | 9,164 |   |   |   | 8,163 |   |   |
| Effect of diluted  securities:                                                         |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Stock option plans                                                                     |       |                        | 732        |   |   |   | 457 |   |   |   | — |   |   |
| Denominator for diluted  earnings per share—adjusted weighted—average shares |       |                        | 12,007     |   |   |   | 9,621 |   |   |   | 8,163 |   |   |

 

For the years endedDecember 31, 2005 and 2004, potentially dilutive shares totaled 60,014 and87,389, respectively. For the year ended December 31, 2003 810,566 stockoptions were anti-dilutive.

**5.   Concentrationsof Credit Risk**

During the year ended December 31,2005, one single customer, Lucent Technologies Inc. accounted for 13% ofthe Company’s total revenue. During the year ended December 31, 2004 and2003, one customer, Microsoft Corporation, accounted for 11% and 19%, respectively,of the Company’s total revenue.

As of December 31,2005, no one customer accounted for 10% of the Company’s gross trade accountsreceivable.  As of December 31, 2004one customer, Microsoft Corporation, made up 16% of the Company’s gross tradeaccounts receivable.

F-21

----

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

**6.**   Propertyand Equipment

Propertyand equipment is comprised of the following:

| ** **                                      | ** ** | **December 31,**   | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|
| ** **                                      | ** ** | **2005**                | ** ** | **2004** | ** ** |
| ** **                                      | ** ** | **(in thousands)** | ** ** |
| Equipment,  automobiles, furniture and fixtures |       | $                       | 3,355      |   | $ | 1,334 |   |
| Leased equipment                                |       | —                  |       | 1,779 |   |
| Computer software                               |       | 1,541                   |       | 732 |   |
| Leasehold  improvements                         |       | 203                     |       | 138 |   |
|                                            |       | 5,099                   |       | 3,983 |   |
| Less accumulated  depreciation and amortization |       | (2,334                  | )          | (3,113 | ) |
| Net property and  equipment                     |       | $                       | 2,765      |   | $ | 870 |   |

 

Accumulated amortizationrelated to capitalized leased equipment was $1.8 million as of December 31,2005 and 2004.

**7.**   Restructuring

In 2005, the Company made the final lease payments,totaling $79,000, related to the remaining lease commitments on excess officespace. Accordingly, there is no reserve for restructuring as of December 31,2005.

During 2004, the Company determined that $121,000 ofrestructuring accruals were no longer needed as all employee severance had beenpaid out and no further obligations existed. Therefore, the Company reversedthis accrual. As of December 31, 2004, the Company’s restructuring accrualrelated to remaining lease commitments on excess office space.

In the quarter ended June 30, 2003, the Companycontinued to execute its restructuring plan following the Allegis acquisition.As part of this plan, certain redundant costs were eliminated. These actionsresulted in the termination of 15 employees primarily in the professionalservices, support and research and development departments. All of theseemployees were terminated in the second quarter of 2003. The Company also consolidatedoffice space and included an additional restructuring charge for the remaininglease payments on the Company’s excess office space located in Chicago andBoston. The restructuring costs of $2,378,000 recorded during the first sixmonths of 2003 are detailed below. In the third quarter of 2003, the Companyreached a settlement with the landlord for its vacant office space in Chicagothat resulted from its consolidation efforts in the second quarter. Thisagreement resulted in the cancellation of the Company’s original leaseobligation in exchange for a $900,000 cash payment. As of June 30, 2003,the total cost of this lease was estimated at $1,865,000 and was included inthe restructuring charge and accrual recorded during the second quarter of 2003.Accordingly, the Company reversed $965,000 of the restructuring accrual in thequarter ended September 30, 2003 as a result of the lease settlement. Thisreversal amount was netted against restructuring and other charges in thestatement of operations for the year ended December 31, 2003.

F-22

----

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

**7.**   Restructuring (Continued)

The following tablecontains the significant components of the restructuring charge.

| ** **                | ** ** | **Accrual at  December 31,  2004** | ** ** | **2005 cash  payments** | ** ** | **Balance at  December 31,  2005** | ** ** |
|---------------------------|------------|----------------------------------------------|------------|------------------------------|------------|----------------------------------------------|------------|
| ** **                | ** ** | **(in thousands)**                      | ** ** |
| Facilities  related costs |       |                                         | 79         |                         |       |                                         | (79        | ) |   |   | — |   |   |
| Total                     |       |                                         | $          | 79                           |       |                                         |       | $ | (79 | ) |   |   | $ | — |   |   |
|                           |            |                                              |            |                              |            |                                              |            |  |  |  |  |  |  |  |  |  |

 

| ** **                                      | ** ** | **Accrual at  December 31,  2003** | ** ** | **Adjustment to  previous accrual** | ** ** | **2004 cash  payments** | ** ** | **Balance at  December 31,  2004** | ** ** |
|-------------------------------------------------|------------|----------------------------------------------|------------|-----------------------------------------------|------------|------------------------------|------------|----------------------------------------------|------------|
| ** **                                      | ** ** | **(in thousands)**                      | ** ** |
| Employee severance,  benefits and related costs |       |                                         | $          | 121                                           |       |                         |       | $                                            | (121       | ) |   |   | $ | — |   |   |   | $ | — |   |   |
| Facilities  related costs                       |       |                                         | 152        |                                          |       |                         | —     |                                         |       |   | (73 | ) |   |   | 79 |   |   |
| Legal costs and  other                          |       |                                         | 30         |                                          |       |                         | —     |                                         |       |   | (30 | ) |   |   | — |   |   |
| Total                                           |       |                                         | $          | 303                                           |       |                         |       | $                                            | (121       | ) |   |   | $ | (103 | ) |   |   | $ | 79 |   |   |

 

| ** **                                      | ** ** | **Accrual at  December 31,  2002** | ** ** | **Additional  restructuring  charges in 2003** | ** ** | **Adjustment to  previous accrual** | ** ** | **2003 cash  payments** | ** ** | **Balance at  December 31,  2003** | ** ** |
|-------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------------------|------------|-----------------------------------------------|------------|------------------------------|------------|----------------------------------------------|------------|
| ** **                                      | ** ** | **(in thousands)**                      | ** ** |
| Employee  severance, benefits and related costs |       |                                         | $          | 252                                                      |       |                                          |       | $                            | 182        |                                         |       |   | $ | — |   |   |   | $ | (313 | ) |   |   | $ | 121 |   |   |
| Facilities  related costs                       |       |                                         | —     |                                                     |       |                                          | 2,144      |                         |       |                                         | (965       | ) |   |   | (1,027 | ) |   |   | 152 |   |   |
| Legal costs and  other                          |       |                                         | 30         |                                                     |       |                                          | 30         |                         |       |                                         | —     |   |   |   | (30 | ) |   |   | 30 |   |   |
| Total                                           |       |                                         | $          | 282                                                      |       |                                          |       | $                            | 2,356      |                                         |       |   | $ | (965 | ) |   |   | $ | (1,370 | ) |   |   | $ | 303 |   |   |

 

**8.**   Impairment ofAssets

In 2003, in conjunctionwith its reviews of redundant cost structures, the Company wrote-off certainthird party licenses related to products that had no projected sales and noplans for further development. A charge of $582,000 was recorded as “Impairmentof third party licenses” in cost of revenues in the accompanying statements ofoperations and comprehensive income (loss). During the same year, the Companyrecorded an additional impairment charge of $1,005,000 included inRestructuring and other charges. This charge related to leasehold improvementsassociated with excess office space, a redundant computer system and excessequipment and was recorded in restructuring and other charges in the statementof operations. The Company also recorded a recovery of $18,000 related topreviously impaired assets. This recovery was netted against restructuring andother charges in the statement of operations and comprehensive income (loss)for the year ended December 31, 2003.

**9.**   Lease Commitments

The Company is obligatedas lessee under certain noncancelable operating leases for equipment, cars andoffice space, and is also obligated to pay insurance, maintenance and otherexecutory costs associated with the leases. Rent expense, net of subleaserental income, was $1.5 million, $0.7 million and $0.7 million for the yearsended December 31, 2005, 2004 and 2003, respectively. Future minimumpayments under 

F-23

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

**9.**   Lease Commitments (Continued)

noncancelable lease obligations with initial orremaining terms in excess of one year, net of estimated sublease rental income,are as follows as of December 31, 2005:

| ** **                           | ** ** | **Operating  leases(1)** | ** ** |
|--------------------------------------|------------|--------------------------|------------|
| ** **                           | ** ** | **(in thousands)**  | ** ** |
| 2006                                 |       |                     | $          | 3,267 |   |   |
| 2007                                 |       |                     | 1,433      |   |   |
| 2008                                 |       |                     | 1,206      |   |   |
| 2009                                 |       |                     | 844        |   |   |
| 2010                                 |       |                     | 486        |   |   |
| Thereafter                           |       |                     | —     |   |   |
| Total future minimum  lease payments |       |                     | $          | 7,236 |   |   |

----

(1)   The Company has sub-lease commitments of $610 pertaining to theselease obligations.

**10.**   Income Taxes

Incometax expense consists of:

| ** **                          | ** ** | **Current**             | ** ** | **Deferred** | ** ** | **Total** | ** ** |
|-------------------------------------|------------|-------------------------|------------|--------------|------------|-----------|------------|
| ** **                          | ** ** | **(in thousands)** | ** ** |
| Year ended  December 31, 2005: |       |                    |       |         |       |      |       |   |   |
| U.S. Federal                        |       |                    | $          | 390          |       |      | $          | (5,466 | ) | $ | (5,076 | ) |
| State                               |       |                    | 473        |         |       | (796      | )          | (323 | ) |
| Year ended  December 31, 2004: |       |                    |       |         |       |      |       |   |   |
| U.S. Federal                        |       |                    | $          | —       |       |      | $          | — |   | $ | — |   |
| State                               |       |                    | —     |         |       | —    |       | — |   |
| Year ended  December 31, 2003: |       |                    |       |         |       |      |       |   |   |
| U.S. Federal                        |       |                    | $          | —       |       |      | $          | — |   | $ | — |   |
| State                               |       |                    | —     |         |       | —    |       | — |   |

 

Theincome tax expense (benefit) differs from the amounts computed by applying theU.S. Federal income tax rate of 34% to the income (loss) before income taxes asa result of the following:

| ** **                                                                 | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| U.S. Federal  statutory rate (benefit)                                     |       | 34.0     | %          | 34.0     | %          | (34.0    | )%         |
| State income  taxes, net of Federal income tax                             |       | 4.2      |       | 5.1      |       | (4.2     | )          |
| Non-deductible  expenses                                                   |       | 0.4      |       | 0.9      |       | 2.0      |       |
| Stock option  compensation                                                 |       | (1.2     | )          | 0.1      |       | (0.8     | )          |
| Increase(decrease)  in valuation allowance (net of effect of acquisitions) |       | (69.2    | )          | (40.1    | )          | 37.1     |       |
| Amortization                                                               |       | 6.9      |       | —   |       | —   |       |
| Write-off investment  in foreign subsidiary                                |       | (11.6    | )          | —   |       | —   |       |
| Other                                                                      |       | (1.8     | )          | —   |       | (0.1     | )          |
|                                                                       |       | (38.3    | )%         | 0        | %          | 0        | %          |

 

F-24

----

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

**10.    IncomeTaxes (Continued)**

Thetax effects of temporary differences that give rise to significant portions ofthe deferred tax assets (liabilities) at December 31, 2005 and 2004 arepresented below: 

| ** **                     | ** ** | **2005**                | ** ** | **2004** | ** ** |
|--------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                     | ** ** | **(in thousands)** | ** ** |
| Deferred tax liabilities       |       |                    |       |     |       |
| Depreciation                   |       | $                       | (846       | )        | $          | — |   |
| Total deferred tax liabilities |       | (846                    | )          | —   |       |
|                                |            |                         |            |          |            |  |  |

 

| ** **                   | ** ** | **(in thousands)** | ** ** |
|------------------------------|------------|--------------------|------------|
| Deferred tax assets:         |       |               |       |   |   |
| Accounts receivable          |       | $                  | 499        |   | $ | 201 |   |
| Accrued compensation expense |       | 715                |       | 174 |   |
| Net operating loss           |       | 98,998             |       | 7,988 |   |
| Depreciation                 |       | (462               | )          | (13 | ) |
| Restructuring reserve        |       | —             |       | 31 |   |
| Amortization                 |       | 851                |       | (266 | ) |
| Accrued expenses             |       | 1,523              |       | 200 |   |
| Tax credits                  |       | 7,686              |       | 338 |   |
| Other                        |       | 382                |       | 64 |   |
| Gross deferred tax assets    |       | 110,192            |       | 8,717 |   |
| Valuation allowance          |       | (103,076           | )          | (8,717 | ) |
| Total deferred tax  assets   |       | $                  | 7,116      |   | $ | — |   |

 

At December 31, 2005, the Company estimates thatit had for U.S. federal income tax purposes gross net operating losses ofapproximately $239.8 million, which begin to expire in 2014 to the extentnot limited under Section 382 of the Internal Revenue Code, research andexperimentation credits of approximately $7.3 million and minimum tax creditsof approximately $390,000. The Company’s ability to benefit from certain netoperating loss and tax credit carryforwards associated with its acquisitions islimited under Sections 382 and 383 of the Internal Revenue Code. Accordingly,approximately $9.0 million of the $239.8 million of U.S. net operating losscarryforwards, $1.1 million of the $7.3 million of research and experimentationcredits and all of the minimum tax credits are available currently to offsettaxable income that the Company may recognize in the future.

The Company’s fourthquarter and full year results include a reversal of a portion of its netdeferred tax asset valuation allowance. A valuation allowance, originallyestablished in 2001 and adjusted annually thereafter, was recorded as theCompany had determined that the realization of those tax assets did not meet themore-likely-than-not criteria under accounting rules. In the fourth quarter of2005, based on an evaluation of the Company’s most recent ten quarters ofprofitability and the expectation of continued net income, a $5.4 million taxbenefit was recognized as the Company determined that it has met themore-likely-than-not criteria related to certain net deferred tax assets. TheCompany continues to maintain a valuation allowance in the amount of $103.1million for certain other net deferred tax assets primarily associated withaccumulated tax loss carry-forwards and other deferred tax assets from itsacquisitions. The Company recorded a net increase in the valuation allowance of$94.4 million due to its acquisitions (net of 

F-25

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

**10.    Income Taxes (Continued)**

thereversal of the valuation allowance not related to the acquisitions) in 2005and a reduction in the valuation allowance of $3.7 million in 2004, and anadditional valuation allowance of $1.4 million in 2003. The Company’s taxvaluation allowance was $103.1 million and $8.7 million at December 31,2005 and 2004, respectively.

**11.   Shareholders’Equity**

On May 1, 2003, theCompany announced that its Board of Directors had declared a special cashdividend in the amount of $2.50 per share of the Company’s common stock (“SpecialDividend”). The Special Dividend was paid on June 4, 2003 to shareholdersof record as of May 20, 2003. As of May 20, 2003, the Company had8,136,643 shares of common stock outstanding, which resulted in a total SpecialDividend payment of $20,342,000.

**12.   Employeeand Director Stock Option and Stock Award Plans**

In October 1998, the Company’s Board of Directorsadopted the Click Commerce, Inc. Stock Option and Stock Award Plan (“theEmployee Plan”), pursuant to which the Board may grant stock options and stockappreciation rights to officers and key employees. The Employee Plan originallyauthorized grants of options to purchase up to 899,502 shares of authorizedcommon stock. On February 14, 2000, the Board of Directors approved anamendment to the Employee Plan, which increased the number of options availablefor grant to 986,168. Pursuant to the Employee Plan, which allows for anadjustment of the number of options available for grant upon changes incapitalization, the number of options authorized for grant was subsequentlyincreased to 1,556,169 in contemplation of the Company’s IPO. Stock options aregranted at an exercise price equal to the stock’s fair value at the date ofgrant. All stock options have ten-year terms and generally vest over three tofive years from the date of grant. At December 31, 2005, there were 229,065shares reserved for future grants under the Employee Plan. Stock optionsoutstanding as of December 31, 2005 include options to purchase up to913,042 shares of common stock, which have been granted to individualsunder option agreements from the Employee Plan.

The Company’s Directors’ Stock Option and Stock AwardPlan (the “Directors’ Plan”) provides for the grant of non-qualified stockoptions and stock awards to non-employee directors. The Directors’ Planprovides for the issuance of up to 600,000 shares of common stock. Beginning in2003 and for each subsequent year, non-employee directors are automaticallygranted an option to purchase 12,000 shares of the Company’s common stock onthe date of each annual shareholders’ meeting. Stock options are granted at anexercise price equal to the stock’s fair value at the date of grant. All stockoptions have ten-year terms and vest at the date of grant. Prior to 2004,non-employee directors of the Company also received an automatic grant eachyear of shares of the Company’s common stock equal in value to $25,000 based onthe fair market value of the common stock on the date of grant. At December 31,2005, there were 275,875 shares reserved for future issuance of common stock.Stock options outstanding and deferred shares of common stock at December 31,2005 total 287,258. For the year ended December 31, 2005, the Companygranted 84,000 options to purchase shares of the Company’s common stock, and12,000 options were exercised. No stock grants were issued to directors in2005, 2004 or 2003.

F-26

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

**12.   Employee and Director Stock Option and StockAward Plans (Continued)**

Stock option transactionsare summarized as follows:

| ** **                                                                | ** ** | **December 31,**      | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                | ** ** | **2005**                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                | ** ** | **Number of  shares** | ** ** | **Weighted  average  exercise  prices** | ** ** | **Number of  shares** | ** ** | **Weighted  average  exercise  price** | ** ** | **Number of  shares** | ** ** | **Weighted  average  exercise  prices** | ** ** |
| Outstanding at  beginning of  year                                        |       | 1,067,207                  |       |   | $ | 7.93 |   |   | 810,566 |   |   | $ | 8.58 |   |   |   | 431,371 |   |   |   | $ | 32.73 |   |   |
| Granted                                                                   |       | 286,666                    |       |   | 17.40 |   |   | 534,000 |   |   | 6.14 |   |   |   | 960,675 |   |   |   | 1.91 |   |   |
| Exercised                                                                 |       | (68,908                    | )          |   | 3.65 |   |   | (67,299 | ) |   | $ | 2.05 |   |   |   | (268,582 | ) |   |   | 1.76 |   |   |
| Cancelled                                                                 |       | (84,665                    | )          |   | 7.28 |   |   | (210,060 | ) |   | 7.78 |   |   |   | (312,898 | ) |   |   | 26.95 |   |   |
| Outstanding at  end of year                                               |       | 1,200,300                  |       |   | 9.94 |   |   | 1,067,207 |   |   | $ | 7.93 |   |   |   | 810,566 |   |   |   | $ | 8.58 |   |   |
| Options  exercisable at end of year                                  |       | 818,055                    |       |   | 12.29 |   |   | 354,028 |   |   | $ | 14.64 |   |   |   | 177,078 |   |   |   | $ | 25.90 |   |   |
| Weighted average per  share fair value of options granted during the year |       |                       |       |   | 11.33 |   |   |   |   |   | $ | 3.63 |   |   |   |   |   |   |   | $ | 1.76 |   |   |

                                                                                                                                                

| ** **                                                       | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **Exercise Prices**                                         | ** ** | ** **                   | ** ** | **Number of  shares**   | ** ** | **Weighted  average remaining  contractual life** | ** ** | **Weighted  average  exercise price** | ** ** | **Number of  shares** | ** ** | **Weighted  average  exercise prices** | ** ** |
| $    0.000  - $    1.800 |       | 79,897                       |       |                         | 6.8 Years  |   |   |   | $ | 1.07 |   |   |   | 52,980 |   |   |   | $ | 0.70 |   |   |
| $    1.801  - $    2.050 |       | 302,650                      |       |                         | 7.5 Years  |   |   |   | 1.90 |   |   |   | 176,275 |   |   |   | 1.89 |   |   |
| $    2.051  - $    5.500 |       | 139,001                      |       |                         | 7.7 Years  |   |   |   | 4.32 |   |   |   | 138,501 |   |   |   | 4.33 |   |   |
| $    5.501  - $    6.250 |       | 119,334                      |       |                         | 8.6 Years  |   |   |   | 6.03 |   |   |   | 56,003 |   |   |   | 6.03 |   |   |
| $    6.251  - $  15.000            |       | 233,792                      |       |                         | 8.2 Years  |   |   |   | 6.82 |   |   |   | 73,670 |   |   |   | 6.49 |   |   |
| $  15.001  - $  25.000                       |       | 265,666                      |       |                         | 9.4 Years  |   |   |   | 17.57 |   |   |   | 260,666 |   |   |   | 17.58 |   |   |
| $  25.001  - $  50.000                       |       | 29,294                       |       |                         | 4.7 Years  |   |   |   | 42.61 |   |   |   | 29,294 |   |   |   | 42.61 |   |   |
| $  50.001  - $100.000                                  |       | 25,066                       |       |                         | 5.2 Years  |   |   |   | 68.01 |   |   |   | 25,066 |   |   |   | 68.01 |   |   |
| $100.001 - $150.000                                              |       | 3,100                        |       |                         | 4.2 Years  |   |   |   | 109.51 |   |   |   | 3,100 |   |   |   | 109.51 |   |   |
| $150.001 - $200.000                                              |       | 2,500                        |       |                         | 5.1 Years  |   |   |   | 158.05 |   |   |   | 2,500 |   |   |   | 158.05 |   |   |
|                                                             |       | 1,200,300                    |       |                         |       |   |   |   |   |   |   |   | 818,055 |   |   |   |   |   |   |
|                                                                  |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**13.  CreditFacility**

On March 31, 2005,the Company entered into a $10.0 million revolving line of credit agreementmaturing on April 1, 2008. The borrowing under the line of credit carriesan interest rate based on the LIBOR average rate with a weighted averageinterest rate of 5.4% for the year ended December 31, 2005. The unusedportion is subject to a fee of 0.3%. At December 31, 2005, the Companyborrowings under this revolving line of credit were $6.5 million and wereclassified as long-term debt. The proceeds were used to pay off the debt andcertain liabilities assumed in the Optum and Xelus acquisitions. Of theremaining $3.6 million, up to $2.0 million may be used for the Company’sletters of credit. As of December 31, 2005, the Company has $0.6 millionoutstanding under various letters of credit. The line of credit contains termsthat, among other provisions, require the Company to maintain certain minimumnet worth and other 

F-27

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

**13.  Credit Facility (Continued)**

financialratios and specific limits or restrictions on additional indebtedness, liensand continuity of business. Provisions under this line of credit are notconsidered restrictive to normal operations. The entire balance of this creditfacility is payable in full on April 1, 2008. The Company has noobligation to make principal payments on this credit agreement until April 1,2008 unless it violates any loan covenants stated in the agreement. The Companywas not in violation of any loan covenants at December 31, 2005.

**14.   RetirementSavings Plan**

The Company’s employeesparticipate in the Administaff of Texas, Inc. 401(k) plan (“the Plan”)that covers substantially all employees. The Plan provides for discretionarycontributions by the Company based on a percentage of participant compensation,subject to limitations imposed by applicable government regulations. There wereno contributions made to the Plan by the Company in 2005, 2004 and 2003.

**15.   Related-partyTransactions**

Michael W. Ferro, Jr., the Company’s founder andchief executive officer, is also the founder, a director and majorityshareholder of WarrantyCheck.com, Inc. (“WarrantyCheck”). During 2003, theCompany incurred third party contractor costs to Warranty Check of $100,000.There were no costs incurred in 2005 and 2004.

During 2002, the Company entered into a softwarelicense purchase agreement with a customer whose Chairman also serves as adirector of the Company. In 2005, 2004 and 2003, revenues earned by the Companyfor software and implementation services totaled $0, $324,000 and $0,respectively. During 2003, the Company entered into a sublease with thecustomer for a fractional share of a sporting venue skybox. During 2005, 2004and 2003, amounts paid under this agreement totaled $29,000, $41,000 and$39,000 respectively.

An individual who was thecorporate secretary through May 2, 2003 and a shareholder of the Companyis associated with a law firm that has rendered various legal services to theCompany. For the year ended December 31, 2003, the Company incurred legalexpenses with that firm of $192,000 during the period the individual served as corporatesecretary.

F-28

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

**16.**   QuarterlyResults of Operations (Unaudited)

Thefollowing table sets forth the Company’s unaudited quarterly operating resultsfor the eight quarters ended December 31, 2005, as well as that dataexpressed as a percentage of total revenue for each quarter. This informationhas been derived from the Company’s condensed consolidated unaudited financialstatements which have been prepared on the same basis as the auditedconsolidated financial statements and include all adjustments, consisting onlyof normal recurring adjustments necessary for a fair presentation of suchinformation. Historical quarterly operating results are not indicative ofresults to be achieved in succeeding quarters or years and should not be reliedupon as an indication of future performance.

| ** **                                    | ** ** | **Three months ended**         | ** **        |
|-----------------------------------------------|------------|------------------------------------------|-------------------|
| ** **                                    | ** ** | **Dec. 31,  2005**                  | ** **        | **Sep. 30,  2005** | ** ** | **June 30,  2005** | ** ** | **Mar. 31,  2005** | ** ** | **Dec. 31,  2004** | ** ** | **Sep. 30,  2004** | ** ** | **June 30,  2004** | ** ** | **Mar. 31,  2004** | ** ** |
| ** **                                    | ** ** | **(in thousands) (unaudited)** | ** **        |
| Revenue                                       |       |                                     | $ 18,231     |   |   |   | 16,205 |   |   |   | $ 13,349 |   |   |   | $ 10,925 |   |   |   | $ 7,213 |   |   |   | $ 7,036 |   |   |   | $ 6,208 |   |   |   | $ 5,272 |   |   |
| Cost of  revenues(a)                          |       |                                     | 6,289             |   |   |   | 5,947 |   |   |   | 5,171 |   |   |   | 4,187 |   |   |   | 2,076 |   |   |   | 2,651 |   |   |   | 2,344 |   |   |   | 2,467 |   |   |
| Gross profit                                  |       |                                     | 11,942            |   |   |   | 10,258 |   |   |   | 8,178 |   |   |   | 6,738 |   |   |   | 5,137 |   |   |   | 4,385 |   |   |   | 3,864 |   |   |   | 2,805 |   |   |
| Operating expenses:                           |       |                                     |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sales and  marketing(a)                       |       |                                     | 2,482             |   |   |   | 2,058 |   |   |   | 1,602 |   |   |   | 1,146 |   |   |   | 1,102 |   |   |   | 1,084 |   |   |   | 680 |   |   |   | 598 |   |   |
| Research and  development                     |       |                                     | 2,329             |   |   |   | 1,822 |   |   |   | 1,666 |   |   |   | 1,209 |   |   |   | 841 |   |   |   | 1,007 |   |   |   | 654 |   |   |   | 411 |   |   |
| General and  administrative                   |       |                                     | 1,923             |   |   |   | 1,596 |   |   |   | 1,282 |   |   |   | 1,006 |   |   |   | 1,553 |   |   |   | 856 |   |   |   | 1,200 |   |   |   | 915 |   |   |
| Amortization of  intangible assets            |       |                                     | 748               |   |   |   | 810 |   |   |   | 505 |   |   |   | 720 |   |   |   | 180 |   |   |   | 172 |   |   |   | 85 |   |   |   | 40 |   |   |
| Amortization of  stock-based compensation     |       |                                     | —            |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 13 |   |   |   | 8 |   |   |
| Restructuring and  other charges (recoveries) |       |                                     | —            |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (121 | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Total operating  expenses                     |       |                                     | 7,482             |   |   |   | 6,286 |   |   |   | 5,055 |   |   |   | 4,081 |   |   |   | 3,555 |   |   |   | 3,119 |   |   |   | 2,632 |   |   |   | 1,972 |   |   |
| Operating income                              |       |                                     | 4,460             |   |   |   | 3,972 |   |   |   | 3,123 |   |   |   | 2,657 |   |   |   | 1,582 |   |   |   | 1,266 |   |   |   | 1,232 |   |   |   | 833 |   |   |
| Other income  (expense), net                  |       |                                     | 34                |   |   |   | (185 | ) |   |   | 89 |   |   |   | (27 | ) |   |   | 195 |   |   |   | 104 |   |   |   | (54 | ) |   |   | 19 |   |   |
| Income before  income tax benefit             |       |                                     | 4,494             |   |   |   | 3,787 |   |   |   | 3,212 |   |   |   | 2,630 |   |   |   | 1,777 |   |   |   | 1,370 |   |   |   | 1,178 |   |   |   | 852 |   |   |
| Income tax  (benefit)                         |       |                                     | (5,399            | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Net income                                    |       |                                     | $ 9,893      |   |   |   | $ 3,787 |   |   |   | 3,212 |   |   |   | $ 2,630 |   |   |   | $ 1,777 |   |   |   | $ 1,370 |   |   |   | $ 1,178 |   |   |   | $ 852 |   |   |
| Basic income per  common share                |       |                                     | $  0.84 |   |   |   | $  0.33 |   |   |   | $  0.28 |   |   |   | $  0.25 |   |   |   | $ 0.18 |   |   |   | $ 0.14 |   |   |   | $ 0.13 |   |   |   | $ 0.10 |   |   |
| Diluted income per  common share              |       |                                     | $  0.79 |   |   |   | $  0.31 |   |   |   | $  0.27 |   |   |   | $  0.23 |   |   |   | $ 0.17 |   |   |   | $ 0.14 |   |   |   | $ 0.13 |   |   |   | $ 0.10 |   |   |

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(a)*    *Excludes amortization of stock-based compensationpresented in a separate caption, as described in Note 2. The followingtable contains the amortization expense attributable to each noted expensecaption above.

| ** **                                                  | ** ** | **Three months ended**         | ** **    |
|-------------------------------------------------------------|------------|------------------------------------------|---------------|
| ** **                                                  | ** ** | **Dec. 31,  2005**                  | ** **    | **Sep. 30,  2005** | ** ** | **June 30,  2005** | ** ** | **Mar. 31,  2005** | ** ** | **Dec. 31,  2004** | ** ** | **Sep. 30,  2004** | ** ** | **June 30,  2004** | ** ** | **Mar. 31,  2004** | ** ** |
| ** **                                                  | ** ** | **(in thousands) (unaudited)** | ** **    |
| Stock-based employee  compensation expense attributable to: |       |                                     |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of revenues                                            |       |                                     | $ — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | $ — |   |   |   | $ — |   |   |   | $ 11 |   |   |   | $   2 |   |   |
| Sales and marketing                                         |       |                                     | —        |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 2 |   |   |   | 6 |   |   |
| Total                                                       |       |                                     | $ — |   |   |   | $ — |   |   |   | $ — |   |   |   | $ — |   |   |   | $ — |   |   |   | $ — |   |   |   | $ 13 |   |   |   | $   8 |   |   |

 

F-29

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

**17.**   Commitments andContingencies

In November 2002, the FASB issued FIN 45, “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others.” Under the Company’s standard softwarelicense agreements, the Company agrees to indemnify, defend and hold harmlessits licensees’ use of Company software from and against certain losses, damagesand costs arising from claims alleging the licensees’ use of Company softwareinfringes on the intellectual property rights of a third party. Theindemnification is contingent upon (a) the customer providing the Companywith prompt written notice of such claims; (b) the customer providingreasonable cooperation to the Company in the defense and settlement of suchclaim, at the Company’s expense; and (c) the Company having sole authorityto defend or settle the claim. Historically, the Company has not been requiredto pay material amounts in connection with claims asserted under theseprovisions, and accordingly, the Company has not recorded a liability relatingto such provisions.

In 2004 the Company was notified by the taxauthorities in the Netherlands that the Company had a potential tax liability. Inthe fourth quarter of 2005, the Company received a determination letter fromthe tax authorities in the Netherlands that asserted tax deficiencies and penaltiesand interest based on audits of the years 2000, 2001 and 2002 in the amount ofEURO 2.3 million, or approximately $3.2 million. The asserted taxdeficiencies relate to certain wage tax amounts, including amounts related tovested employee stock options, that the tax inspector believes should have beenwithheld by the Company on behalf of several employees. The Company believesthat it has meritorious legal defenses to a significant portion of thesedeficiencies. The Company recorded an accrual of $650,000 in the year ended December 31,2004 for its assessment of the most probable outcome of this matter. Thisreserve is recorded in accrued expenses and other current liabilities on the December 31,2004 and 2005 consolidated balance sheets and is recorded in general andadministrative expenses in the consolidated statement of operations andcomprehensive income (loss) for the year ended December 31, 2004.

In 2004, the Companydetermined that an accrual in the amount of $481,000 related to potentialexposures for support fees for third party embedded software was no longerneeded as the Company had ceased using the third party software products in itssoftware products. Accordingly, as of December 31, 2004, the Companyreversed this accrual and recorded the reversal as income in general andadministrative expenses in the consolidated statement of operations andcomprehensive income (loss).

**18.    Subsequent Event**

Effective February 8, 2006, the Company and itswholly-owned subsidiary, Click Procure, Inc. (the “Subsidiary”) enteredinto an Asset Purchase Agreement (the “Purchase Agreement”), with Elance, Inc.(“Elance”) pursuant to which the Subsidiary purchased the assets of the Seller’son-demand e-commerce solutions for services business (the “enterprise softwarebusiness”). The assets acquired by the Subsidiary in the transaction includesoftware, trademarks, customer contracts and lists, product processes, otherintangible assets, cash, receivables and other operating assets, as well as itsobligations under certain contracts related to the enterprise softwarebusiness. The Subsidiary also acquired all of the stock of Elance’ssubsidiaries in the United Kingdom and India engaged in such business. Thetotal consideration paid for the acquisition was approximately $15,250,000,comprised of $3,500,000 in cash and issued 420,123 shares of the Company’scommon stock valued at $27.97 per share to Elance (of which 75,980 shares ofthe Company’s common stock are being held by an escrow agent to satisfy theindemnification obligations of Elance under the agreement). The shares of theCompany’s common stock are expected to be registered for resale on aRegistration Statement on Form S-1.

F-30

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

The Board of Directors and ShareholdersClick Commerce, Inc.: 

Under date of March 21, 2005, we reported on theconsolidated balance sheet of Click Commerce, Inc. (the Company) as ofDecember 31, 2004, and the related consolidated statements of operationsand comprehensive income (loss), shareholders' equity, and cash flows for eachof the years in the two-year period ended December 31, 2004. In connectionwith our audits of the aforementioned consolidated financial statements, wealso audited the related consolidated financial statement Schedule II.This financial statement schedule is the responsibility of the Company'smanagement. Our responsibility is to express an opinion on this financial statementschedule based on our audits. 

In our opinion, such financial statement schedule,when considered in relation to the basic consolidated financial statementstaken as a whole, presents fairly, in all material respects, the informationset forth therein. 

 

/s/ KPMG LLP

Chicago, IllinoisMarch 21, 2005

F-31

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**CLICK COMMERCE, INC.**

**SCHEDULE II**

**VALUATIONAND QUALIFYING ACCOUNTS**

| **Allowance for Doubtful Accounts** | ** ** | ** **              | ** ** | **Beginning  Balance** | ** ** | **Bad Debt  Expense** | ** ** | **Write-Offs** | ** ** | **Ending  Balance** | ** ** |
|----------------------------------------------------|------------|-------------------------|------------|------------------------|------------|----------------------------|------------|----------------|------------|---------------------|------------|
| ** **                                         | ** ** | **(in thousands)** | ** ** |
| Year ended  December 31, 2005                 |       |                    | $          | 514                    |       |                       |       | 421            |       |                |       |   |   |   |   | $ | 935 |   |   |
| Year ended  December 31, 2004                 |       |                    | $          | 323                    |       |                       |       | 240            |       |                |       | (49 | ) |   |   | $ | 514 |   |   |
| Year ended  December 31, 2003                 |       |                    | $          | 175                    |       |                       |       | 149            |       |                |       | (1 | ) |   |   | $ | 323 |   |   |

 

| **Valuation Allowance for Deferred Tax Assets** | ** ** | ** **              | ** ** | **Beginning  Balance** | ** ** | **Additions** | ** ** | **Reductions** | ** ** | **Ending  Balance** | ** ** |
|--------------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|---------------|------------|----------------|------------|---------------------|------------|
| ** **                                                               | ** ** | **(in thousands)** | ** ** |
| Year ended  December 31, 2005                                       |       |                    | $          | 8,717                  |       |          |       | 103,076        |       |                |       | (8,717 | ) |   | $ | 103,076 |   |
| Year ended  December 31, 2004                                       |       |                    | $          | 12,394                 |       |          |       | —         |       |                |       | (3,677 | ) |   | $ | 8,717 |   |
| Year ended  December 31, 2003                                       |       |                    | $          | 10,987                 |       |          |       | 1,407          |       |                |       | — |   |   | $ | 12,394 |   |

 

F-32

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