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

FORM 10-K

ý    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For
the fiscal year ended December 31, 2002

OR

o    TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For
the transition period from 
to

Commission
File Number 000-30654

APROPOS TECHNOLOGY, INC.(Exact name of registrant as specified in its charter)

Illinois
(State or other jurisdiction of incorporation or organization)

36-3644751
(I.R.S. Employer Identification No.)


One Tower Lane, 12th Floor
Oakbrook Terrace, Illinois 60181
(Address of principal executive offices, including zip code)

(630) 472-9600
(Registrant's telephone number, including area code)

Securities
registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Shares, par value $0.01 per share
(Title of Class)

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

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to the Form 10-K. / /

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

The
aggregate market value of the registrant's voting shares held by non-affiliates of the registrant (based upon the per share closing sale price of $2.05 on June 28, 2002, and for the purpose
of this calculation only, the assumption that all of the registrant's directors and executive officers are affiliates) was approximately $27,000,000.

The
number of shares outstanding of the registrant's Common Shares, par value $0.01 per share, as of March 14, 2003, was 16,683,424.

DOCUMENTS
INCORPORATED BY REFERENCE

Portions
of the following documents are incorporated by reference into this report:
Notice of Annual Meeting of Shareholders and Proxy Statement for the Annual Meeting of Shareholders
(the "2003 Proxy Statement") (Part III)

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FORWARD-LOOKING STATEMENTS

Except for historical information, the matters discussed in this Annual Report on Form 10-K are forward-looking statements made pursuant to the safe harbor provisions for
forward-looking statements described in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on the Company's current expectations and are subject to a
number of risks, uncertainties, and assumptions relating to the Company's operations, financial condition, and results of operations. Should one or more of these risks or uncertainties materialize, or
should the underlying assumptions prove incorrect, actual results may differ significantly from results expressed or implied in any forward-looking statement made by the Company in this Annual Report.
These and other risks are detailed elsewhere in this Annual Report under "Risk Factors Associated With Apropos' Business and Future Operating Results." The Company does not undertake any obligation to
revise these forward-looking statements to reflect future events or circumstances.

Part I

ITEM 1.    BUSINESS.

The Company

Apropos Technology, Inc. ("Apropos" or the "Company") develops, markets, and supports a leading real-time, multi-channel interaction management application platform for managing
customer interactions across a variety of communications channels, including E-mail, Fax, Web, and Voice. Apropos' solution enhances customer relationship management applications, such as sales,
marketing, and service, through intelligent, value-based management of all interactions. The Company's product offers on-line customers the flexibility to interact with businesses over the Internet,
through E-mail, or Web Collaboration, and also provides access to human assistance through either an interactive Web Chat or Voice interaction, to help in completing a sales or service transaction.

The
Company's customer interaction management software enables customers to prioritize, route, and respond to customer interactions across multiple communications channels based on a single set of
business rules. Apropos' customers can establish business rules to manage customer interactions based on their business value or service level. For example, customers can, on a real-time basis;
(1) route specific types of customer interactions to an agent based on that agent's particular skills and (2) adjust the number of interactions and agents assigned to a queue to ensure maximum
responsiveness to the customer. Customers can also monitor the status of each interaction
and the performance of each contact center agent. Apropos' solution provides comprehensive real-time and historical reporting on each customer interaction and on the contact center resources necessary
to manage those interactions.

The
Company commenced operations in 1989. From inception to 1995, the Company generated modest revenues from consulting services while its primary operating activities consisted of research and
development. In March 1995, the Company began shipping its first software product. The Company's customers utilize its solution for a variety of applications such as sales, customer service and
support; help desk, and field service. The Company has a diverse customer base in excess of 300 customers located in over 20 countries.

The
Company was incorporated in 1989 in Illinois. Its principal executive offices are located at One Tower Lane, 12th Floor, Oakbrook Terrace, Illinois 60181, and its telephone number at
that address is (630) 472-9600. Apropos maintains a Web site atwww.apropos.com.Information contained on the Company's Web site is not incorporated into
this Annual Report.

The
Company makes available free of charge on its website, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those
reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. The Company's Internet website and the information
contained therein are not incorporated into this Annual Report on Form 10-K.

The Apropos Solution

Introduction

The Company believes that in order to provide superior service and enhance customer loyalty and retention, businesses need to provide customers with a variety of choices in how
they interact with their business. Businesses need a multi-channel solution that can support their business initiatives while maintaining or improving service levels. As a result, businesses face
significant challenges in managing and optimizing traditional Voice and new Internet-based customer interactions. These challenges include:



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Capabilities

The Company's product is designed to be interoperable with most communications systems and business applications and scaleable through its modular architecture. Apropos has a
patented "universal queuing" capability, which allows voice, email and other communication media to be blended into a single queuing environment. Each interaction type may be prioritized uniquely
based on the business value of each interaction.

The
Company believes that in order for businesses to meet the needs of emerging multi-channel customer contact centers, they need a comprehensive solution that enables them to provide high quality
service across multiple communication channels. The Company's solution provides the following benefits to its customers:

Seamless management of multiple communication channels through one business rules driven interface.Apropos' solution is designed to allow
customers to manage customer interactions on a real-time basis across a variety of communication channels, through one business rules driven interface. Customers can establish business rules to manage
customer interactions based on their business value or service level regardless of whether the customer made the contact via the Internet or telephone.

Comprehensive real-time information.Apropos' solution provides real-time information on the overall performance of the contact center.
Supervisors receive information that enables them to immediately react to changing business conditions. For example, if one or more agents are servicing E-mail interactions and a supervisor is
notified that a queue of incoming Voice calls has exceeded pre-defined thresholds, the supervisor can reassign these E-mail agents to handle the Voice calls with a simple mouse click.

Integrated decision management reporting capabilities.Apropos' decision management application enables its customers to view historical
reports through an advanced Web-based interface. It provides information on contact center performance by the hour, shift, day, or month. The Company's solution reports on critical aspects of the
contact center's operation, including agent performance, interaction volume, interaction types, and interaction disposition. It provides "cradle-to-grave" reporting on each interaction, from initial
customer contact to closure, allowing customers to better understand the entire interaction cycle. The decision management application also combines customer interaction information across multiple
communication channels in a single integrated report allowing customers to better understand and manage their business.

Interoperability.Apropos' solution is designed to operate within the existing infrastructure of an enterprise, including traditional Voice
and VoIP systems, E-mail, and Web servers. The Company's solution is also interoperable with most customer business applications, thereby providing the necessary integration between the incoming
interaction, business application, and historical customer data. As the trend of consolidation within industries continues, the Company believes that the ability of its solution to operate within a
variety of different communications environments and applications provides a significant benefit to its customers as they integrate new businesses.

Modularity.The modular design of Apropos' solution allows its customers to add functionality as their needs evolve. For example, customers
may initially choose to implement the Company's solution for their traditional voice-based call center and then add other media types, such as E-mail and Web, as they further develop their business
strategies. The Company believes the ability to easily add functionality is extremely important to its customers as they transition from traditional Voice-based call centers to multi-channel contact
centers.

Scalability.Apropos' solution is designed to allow for maximum scalability, providing a variety of system configurations that can complement
the deployment needs of its customer base. The solution uses internal messaging software to enable the distribution of various system applications across wide area, local area, and IP-based networks.
As a customer's business grows, the Company's solution can be configured for additional capacity, currently up to 1000 agents.

Rapid implementation.Apropos has developed a repeatable consulting, design, and delivery methodology ("Apropos Methods") that is followed by
its application consultants, professional services team, and partners, based on Apropos' experience in implementing multi-channel contact centers. Apropos Methods allows the Company's customers to
accurately estimate the resources required to implement their multi-channel contact center solution. In addition, the Company's software is designed with several unique tools to insure rapid

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implementation and integration with its customers' business applications. Apropos Methods also allows the Company to quickly and effectively train its partners in the implementation requirements of
its solution.

Flexibility.A customer can configure and administer Apropos' solution through its Web-based application interface. This approach is easier
and more cost-effective than traditional hardware-based systems, which may require code modifications and recompilation. Customers can configure the Company's solution over a number of locations and
can connect remote users, such as agents working from home. For example, when a hurricane disabled a customer's contact center, the Company's solution permitted its customer to rapidly establish full
service at another geographic location.

Lower total cost of ownership.Apropos' integrated software-based solution results in a lower total cost of ownership in comparison to
multiple point products, which require integration and maintenance of various and disparate hardware and software products.

Support of converged Voice and data networks.Apropos' solution supports its customers' desires to transition from traditional circuit-
switched communications infrastructure to IP-based infrastructures. The ability to support both traditional circuit-switched voice and IP-based voice enables the Company's customers to take advantage
of the benefits of high performance converged Voice and data networks, without requiring total displacement of their existing infrastructure.

Software Products

The Company provides its solution via a product suite consisting of seven integrated system components. The components of Apropos' Multi-Channel Interaction Management Suite
include Apropos Interaction Manager, Apropos Management Tools (Apropos Resource Manager, Apropos Decision Manager, Apropos Administrator and Application Designer) and Apropos User Applications
(Apropos Agent and Interaction Vault).

Apropos Interaction Manager



Management Tools



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User Applications



Technology

The Company's Version 5 software is based on its proprietary distributed application-based architecture. The architecture of the Company's software relies upon industry
standards and employs several leading technologies, such as the following programming languages: Java, C++, Microsoft Foundation Class, or MFC, and Active Server Pages, or ASP. The Company's
architecture provides a unified method for managing incoming and outgoing multi-channel interactions. The technologies providing this capability include multi-channel integration technologies, an
interaction distribution engine, messaging software, business application integration software, comprehensive decision management reporting software, real-time resource management software, and
administration technology.

Third Party Software

The Company sells third party software, which is included with its product. This software includes:



The
Company has commercial agreements with Crystal Decisions; Intel Corporation (CT Connect); Anywhere Solutions, Inc.; Sybase, Inc.; and Optus Software (FACSys) for the purchase and
distribution of their respective software. The Company purchases PC Anywhere from a third party reseller. If one or more of these third parties ceases to sell their software, the Company will need to
modify its product to use an alternative supplier or eliminate the affected product function, either of which could have a material adverse effect on its business, financial condition and results of
operations.

Product Offerings

Product offering for calendar 2002 was:



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In
order to further penetrate global markets, the Company developed new internationalized versions of its software for use outside of North America. The Company has adapted its software to provide a
platform for foreign language versions of its software, including full support for multi-byte characters such as Chinese and Japanese. The Company expects to continue to develop and release additional
language versions of its software as its international customer base grows.

In
2002, the Company released an updated version of its Version 5 Multi-Channel Interaction Management Suite that includes complete native support for many of the industry's leading VoIP platforms.
This updated version supports the use of TAPI/WAV, a communication protocol that implements the voice and data path over IP data packets. This allows an interface between the Apropos product and
various IP-Telephony products thereby providing a pure standalone software solution to intelligently route voice traffic over the corporate data network.

Throughout
2002 and the first quarter of 2003, the Company has been developing its next version release which will provide an open, web-architected application platform, with increased scalability,
fully embeddable desktop controls, and greater system-level reliability for large scale multi-site contact centers. The Company anticipates release of its new product version in mid 2003.

Services and Hardware

Professional Services

The Company believes the professional services used to implement its product are paramount to customer satisfaction. The Company provides application consulting, project
management, integration services, installation services, and training to its customers.

In
addition to its software offerings, the Company provides its customers with a full range of professional services to assist the customer in implementing and utilizing the software. The Company has
developed an implementation methodology, Apropos Methods, which is focused on delivering high quality solutions to its customers. Through the use of Apropos Methods, each project is delivered in a
consistent and repeatable manner. This methodology helps manage the risk of project overruns, budget overages, and the delivery of a solution that does not meet the Company's customer's expectations.

The
Company ensures the proper implementation and execution of its product suite through its own learning center. The Company provides instructor-led technical education about its core and related
technology. Apropos offers courses that support performance requirements of customers, partners, and employees. The Company also provides Internet-based and instructor-led courses to its customers'
contact center management, supervisors, and agents.

Customer Support and Enhancement Services

The Company provides support for its solution as well as support for its customer's specific integration of the Apropos solution. Apropos' customer service professionals can be
reached via phone, fax, E-mail, or Web-based communications. The Company has historically provided product support for the current version plus the previous version of the Company's products.
Customers on older versions are encouraged to upgrade to the current version. The center is staffed with trained professionals who have experience in the software and communications industries. The
Company uses its solution to manage its own multi-channel contact center, so the Company can understand its customer's needs from a user's perspective. The Company typically establishes a support
agreement for a period of one year with its customers. As of December 31, 2002, approximately 86.0% of Apropos' customers had an active support agreement.

Hardware

The Company also provides certain third party hardware products, such as telephony cards, required to implement its solution. Revenue from the sale of hardware constituted 0.8%,
0.5%, and 3.9% of the Company's total revenue for 2002, 2001 and 2000, respectively, and is included in revenue from services and other. Management made a decision in late 1999 to de-emphasize direct
sales of hardware and instead outsource these requirements to certified systems integrators.

Sales and Distribution

The Company sells its products and services directly to its customers. In addition, the Company's products are sold indirectly to customers via resellers and original equipment
manufacturers (OEMs). Under these indirect selling arrangements, the Company typically does not provide services to the end-customer.

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Direct sales force.The Company has a direct sales force in the United States that consists of regional sales managers and application
consultants. Regional sales managers have direct responsibility for selling and account management, while application consultants provide analysis and design of the solution to ensure the sales
proposal covers all aspects of the customers' needs. Application consultants also provide the foundation for the implementation and delivery of the solution to ensure customer satisfaction.

The
Company currently has regional sales managers in California, New Jersey, North Carolina, Texas, and Virginia, in addition to its corporate headquarters in Illinois. The Company currently has
application consultants to support the direct sales force. The Company's international direct sales are managed from its offices in Buckinghamshire, United Kingdom and Singapore. The Company's
international sales force as of December 31, 2002 includes four salespersons and four application consultants.

Resellers.The Company currently has a network of 7 resellers that distribute and implement its solution. The Company's value-added
resellers, or VARs, are an extension of its direct sales force and have taken the Company's solution into their portfolio. The VARs have extensive experience in the contact center market and customer
relationship management industry. The Company currently has resellers in the following countries: Canada, China (Hong Kong), Japan, the Netherlands and South Africa.

OEMs.The Company currently has three partners who brand its solution under their corporate name. Mitel Corporation sells and markets the
Company's solution under the name Mitel Call Center Commander. 3Com Corporation and J. D. Edwards and Co. sell and market the Company's solution under their own respective names.

The
Company will continue its emphasis on developing and selling software and de-emphasize sales of services, which has significantly lower profit margins. The Company plans to continue to outsource
the implementation function to VARs, OEMs, and system integrators as the Company develops and expands its strategic partners.

The
Company plans to expand the number of VAR and OEM partners in North America, Europe, Asia, and Australia. In addition, the Company plans to focus its expansion efforts on developing strategic
partnerships with system integrators. The Company believes these efforts will result in increased sales and market penetration of its solution.

Marketing

The Company's marketing efforts are focused on developing and executing sales lead generation programs that result in qualified customer leads, developing market awareness of
its products and services, and developing marketing programs that support its strategic partners.

The
Company has developed several marketing programs to accomplish these goals, including:



The
Company's Global Alliance Program provides a wide array of opportunities to expand and enhance the product and service offerings of the Company's strategic partners. The Company targets enterprise
application companies and system integrators to participate in the program. In some cases, the Company participates in similar programs sponsored by these partners. The programs provide for joint
software development or joint marketing opportunities to generate sales leads and referrals. The Company's application partners consist of enterprise software providers, such as Onyx Software
Corporation, Peregrine Systems, Inc., PeopleSoft, Inc., Remedy, a BMC software company, SAP, Siebel Systems, Inc and XP Systems, Inc. Service partners consist of system
integrators that provide professional services resources to implement the Company's solution.

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The
Company believes building market and brand awareness of Apropos and its product will be essential, as it competes against larger traditional contact center suppliers. The Company intends to
continue to build its market and brand awareness by expanding its channel and partnership efforts.

Customers

The Company has a diverse base of over 300 customers that utilize its solution for a variety of applications, such as customer service and support, help desks, and field service
management. During 2002, approximately 56.0% of the Company's software revenues were derived from new customers. Notable new customers for 2002 include Agile Software Corporation, Associated News,
Open University and the Canadian Wheat Board. Contributors to 2002 revenues from the Company's existing customer base include Nokia Corporation, Australian Administration Services, Veritas Software
Corporation, Depository Trust Corporation, and ABN AMRO Service Company. The Company has customers in many different industries and is not dependent on any specific industry. The Company had no
customers during 2002 or 2001 that represented more than 10% of its total revenues. In 2000, one customer accounted for 11.5% of the Company's total revenues.

New
orders for the Company's product increasingly include Voice and Internet-based functionality, such as E-mail and Web. During 2002, approximately 71.0% of new customers selected the Company's
multi-channel product solution.

Revenues
from the Company's international sales as a percentage of total revenue were 27.3%, 21.0%, and 22.3% in 2002, 2001 and 2000, respectively.

The
Company intends to expand its customer base by, among other things, expanding the number of its strategic partners and leveraging their distribution capabilities to sell the Company's product,
increasing the Company's co-marketing activities with its strategic partners and increasing its market and brand awareness.

Competition

Competitive global markets and the increasing acceptance of the Internet as an important medium for business and customer interaction have led to greater customer demands for
higher levels of service, responsiveness, convenience, personalization, and quality. With the growth of Internet-based communications and commerce, businesses must provide consistent high quality
customer care and service across a variety of communications media. Providing an appropriate level of service in this environment is more complex than in the past when customer interactions were
primarily voice-based and businesses provided service to their customers through traditional voice call centers. In the future, the Company believes that an increasing number of customer interactions
will be through Internet-based communications, such as E-mail and Web-based contacts.

The
market for the Company's product is highly competitive. The Company makes no assurance that it will be able to compete successfully against current and future competitors. The Company's
competition comes from several different market segments, including:



The
Company believes that the principal competitive factors in its market include product performance and features, quality of customer support and service, time to implement, product scalability,
sales and distribution capabilities, and overall cost of ownership. Although the Company believes that its solution currently competes favorably with respect to these factors, the Company's market is
relatively new and evolving rapidly. The Company may not be able to maintain its competitive position against current and potential competitors, especially those with greater financial, marketing,
service, support, and technical resources.

Many
of the Company's current and potential competitors have longer operating histories, greater financial, technical, marketing, customer service and other resources, greater name recognition, and a
larger installed base of customers than Apropos does. In the past several years, large, well-capitalized companies have acquired or invested in a number of the Company's current and potential
competitors. As a result, these competitors may be able (1) to respond to new or emerging technologies and changes in customer requirements faster and more effectively than Apropos can, and (2) to
devote greater resources to the development, promotion, and sale

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of products than Apropos can. Current competitors have merged with or acquired other competitors or established cooperative relationships with other competitors to increase and expand the features
and capabilities of their products. If these competitors were to acquire additional market share, it could have a material adverse effect on the Company's business, financial condition, and results of
operations.

Research and Development

The Company believes that its product development capabilities are essential to its strategy of expanding its leading technology position. The Company's engineering team
consists of 60 engineers and software developers with experience in Voice communications, E-mail, and Web technology. The Company believes the combination of diverse technical and communications
expertise contributes to the highly integrated functionality of its product. The Company spent $7.9 million, $8.1 million, and $7.2 million in 2002, 2001 and 2000, respectively, on research and
development.

The
Company has invested significant time and resources in creating a structured process for undertaking all product development. A formal product introduction process is used as a framework for
defining, developing, and delivering products to the market.

Intellectual Property and Other Proprietary Rights

To protect the Company's proprietary rights, it relies primarily on a combination of:



The
Company has not signed agreements containing protective contractual provisions in every case and the contractual provisions that are in place and the protection they provide vary and may not
provide the Company with adequate protection in all circumstances. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may copy aspects of its products and obtain and
use information that the Company regards as proprietary. Other parties may breach confidentiality agreements and other protective contracts entered into with the Company, and the Company may not
become aware of these breaches or have adequate remedies for them.

Apropos
generally requires its employees to enter into confidentiality agreements containing non-disclosure, non-competition, and non-solicitation provisions. When they begin employment, the Company's
employees also generally sign offer letters specifying the basic terms and conditions of their employment.

Apropos
currently has nine patents granted in the United States and one patent granted in each of Ireland, the Netherlands, and the United Kingdom. These patents cover a system and method for:



The
Company also has two pending U.S. patent applications that relate to the systems and methods described above. None of the Company's patents expire before June 2012.

The
Company has several pending U.S. trademark applications.

See
"Item 3. Legal Proceedings" for a description of a claim received by the Company from a competitor claiming that the Company's product utilizes technologies pioneered and patented by such
competitor.

Employees

As of December 31, 2002, Apropos had 163 employees worldwide, including 49 in sales and marketing, 60 in research and development, 32 in service and support, and 22 in finance
and administration.

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The
Company's future success also depends on its continuing ability to attract, train, and retain highly qualified technical, sales, and managerial personnel. The Company can give no assurance that it
can retain or attract key personnel in the future. None of its employees are represented by a labor union. The Company has not experienced any work stoppages and considers its relations with its
employees to be good.

Executive Officers of the Company.

Kevin
G. Kerns; age 44; Chief Executive Officer and President.

Mr.
Kerns joined Apropos in January 1996 as President and Chief Operating Officer. He was appointed as a director in 1996. In 1998, Mr. Kerns was named Chief Executive Officer. From 1989 through 1995,
Mr. Kerns established and led a strategic software consulting firm, Mandalay Associates, based in Dallas, Texas.

Francis
J. Leonard; age 47; Chief Financial Officer and Vice President.

Mr.
Leonard joined Apropos in July 2000 as Chief Financial Officer. Prior to joining Apropos, Mr. Leonard was employed at BT Office Products, a distributor of office products and furniture, from 1995
to 2000. Mr. Leonard served as VP Finance, Chief Financial Officer from 1997 to 2000, and prior to that as Corporate Controller, Chief Accounting Officer.

David
Ashworth; age 53; Senior Vice President, EMEA Operations.

Mr.
Ashworth joined Apropos in November 2001 as Senior Vice President, EMEA Operations. Prior to joining Apropos, Mr. Ashworth was employed at BEA Systems, an enterprise application infrastructure
software company, from 1999 to 2001. Mr. Ashworth initially served as UK Managing Director of BEA Systems, Ltd. and later as Vice President of Global Accounts. Prior to BEA Systems, Mr. Ashworth spent
five years with Sybase Corporation, a provider of client-server software, as the Channel Sales Director for Northern EMEA and Strategic Alliance Director for EMEA.

Jeffry
Finochiaro; age 43; Senior Vice President of Sales and ServicesAmericas.

Mr.
Finochiaro joined Apropos in January 2002 as Senior Vice President of SalesAmericas. Prior to joining Apropos, Mr. Finochiaro, a Director at Deloitte Consulting, was responsible for
business development for the firm's energy/utility practice for the North and South America region from 2000 to 2002. Prior to Deloitte Consulting, Mr. Finochiaro was Vice President of Business
Development for NeoForma, a healthcare supply chain solutions company, from 1999 to 2000. At McHugh Software, a provider of logistics software solutions, Mr. Finochairo was the Senior Vice President
of Worldwide Sales from 1996 to 1999.

ITEM 2. FACILITIES.

The Company leases approximately 43,100 square feet of office space in its headquarters building in Oakbrook Terrace, Illinois. The lease expires in May 2006. As of
December 31, 2002, future minimum lease payments under this lease approximated $4.4 million. The Company leases space for its European headquarters in Buckinghamshire, United Kingdom, which
consists of approximately 3,600 square feet. This lease expires April 2005. As of December 31, 2002, future minimum lease payments under this lease approximated $1.0 million. The Company also leases
space for selected sales offices. These leases are short-term leases.

Apropos
believes that its existing facilities are adequate for its current needs and that additional space will be available as needed.

ITEM 3. LEGAL PROCEEDINGS.

In June 1999 and August 2000, the Company received letters from Rockwell Electronic Commerce Corporation claiming that the Company's product utilizes technologies pioneered and
patented by that competitor and suggesting that the Company discuss the terms of a potential license of their technologies. In January 2000, Rockwell filed a complaint in the United States District
Court for the Northern District of Illinois asserting that the Company had infringed four of its patents identified in Rockwell's previous correspondence. The complaint sought a permanent injunction
and unspecified damages. The Court held a hearing in February 2001 to construe key terms in the claims of Rockwell's patents. In January 2002, the Court issued its "Findings of Fact and Conclusions of
Law After Trial" in which it construed the key terms of the claims. In November 2002, Rockwell and the Company settled the patent claims by entering into cross licensing agreements utilizing selected
patents from each of their portfolios. These agreements settle all litigation between the parties with

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no prior or future license fees payable by the Company. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of OperationsRisk Factors Associated With
Apropos' Business and Future Operating Results'Infringement claims could adversely affect the Company."'

In
November 2001, the Company was named as a defendant in several shareholder class action litigations that have been filed in federal court in Chicago against the Company, certain of its current and
former directors and officers, and the underwriters of the Company's initial public offering. These litigations are allegedly brought on behalf of purchasers of the Company's stock, and assert that
the Company violated the federal securities laws by making misstatements and omissions in its Registration Statement and Prospectus in connection with the Company's initial public offering in February
2000. These litigations seek unspecified damages. In April 2002 an amended consolidated complaint was filed which supersedes the original, separate complaints. The Company has moved to dismiss that
complaint in its entirety on various legal grounds, and its motion is currently pending. Although legal proceedings are inherently uncertain
and their ultimate outcome cannot be predicted with certainty, the Company believes the allegations are without merit and intends to defend the litigation vigorously. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of OperationsOther Risks'If the Company's share price continues to be weak or volatile, it may become subject to
securities litigation, which is expensive and could divert its resources."'

The
Company has been named as a nominal defendant in a shareholder derivative action filed on February 26, 2002 against certain of its present and former directors and officers. The complaint alleges,
among other things, that the alleged conduct challenged in the securities cases pending against the Company in Chicago (described above) constitutes a breach of the defendants' fiduciary duties to the
Company. The Complaint seeks unspecified money damages and other relief ostensibly on behalf of the Company. On August 27, 2002, the plaintiffs filed an Amended Complaint. Because the allegations in
this action are similar to those in the federal securities case described above, the parties have jointly moved the court for an order staying this derivative action pending the federal court's
decision of the Company's motion to dismiss. If the joint stay motion is allowed no further response to the lawsuit will be due from the defendants until the federal court decides the motion to
dismiss.

In
November 2001, the Company was named as a defendant in shareholder class action litigation that has been filed in federal court in New York City against the Company and certain of its current and
former officers and the underwriters of the Company's initial public offering ("IPO"). This lawsuit, alleges, among other things, that the underwriters of the Company's IPO improperly required their
customers to pay the underwriters excessive commissions and to agree to buy additional shares of the Company's stock in the aftermarket as conditions of receiving shares in the Company's IPO. The
lawsuit further claims that these supposed practices of the underwriters should have been disclosed in the Company's IPO prospectus and registration statement. In April 2002, an amended complaint was
filed which, like the original complaint, alleges violations of the registration and antifraud provisions of the federal securities laws and seeks unspecified damages. The Company understands that
various other plaintiffs have filed substantially similar class action cases against approximately 300 other publicly traded companies and their public offering underwriters in New York City, which
along with the case against the Company have all been transferred to a single federal district judge for purposes of coordinated case management. On July 15, 2002, the Company, together with
the other issuers named as defendants in these coordinated proceedings, filed a collective motion to dismiss the consolidated amended complaints against them on various legal grounds common to all or
most of the issuer defendants. This motion is currently pending. On October 9, 2002, the Court approved a stipulation between the plaintiffs and all of the individual defendants providing for the
dismissal of the individual defendants without prejudice. Although legal proceedings are inherently uncertain and their ultimate outcome cannot be predicted with certainty, the Company believes that
the claims against the Company are without merit, and intends to defend the litigation vigorously. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of
OperationsOther Risks'If the Company's share price continues to be volatile, it may become subject to securities litigation, which is expensive and could divert its
resources."'

The
Company is a party in various other disputes and litigation that have arisen in the course of the Company's business. In the opinion of management, based upon consultation with legal counsel,
although legal proceedings cannot be predicted with certainty, the ultimate outcome of these disputes and lawsuits are not expected to have a material impact on the Company's financial position or
results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

11

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Part II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.

Apropos' Common Shares trade on the Nasdaq National Market under the symbol "APRS." The following table sets forth for the periods indicated the high and low sale prices of the
Company's Common Shares, as reported by Nasdaq. Such quotations reflect inter-dealer prices without markup, markdown or commissions and may not necessarily represent actual transactions.

| |                | Price range of Common Shares
| | -------------- | ----------------------------
|
|
|
|
|
| |                |                             
| | First quarter  |                             
| | Second quarter |                             
| | Third quarter  |                             
| | Fourth quarter |                             
|

At March 14, 2003, there were 124 shareholders of record and 16,683,424 Common Shares outstanding.

The
Company has not paid any dividends in the past and does not intend to pay cash dividends on its Common Shares for the foreseeable future. Instead, the Company intends to retain all earnings for
use in the operation and expansion of its business. The Company's board of directors will make any future determination of the payment of dividends based upon various factors then existing, including,
but not limited to, the Company's financial condition, operating results, and current and anticipated cash needs. The payment of dividends may be limited by capital and financing agreements that the
Company may enter into in the future.

On
February 23, 2000, Apropos consummated its initial public offering of its Common Shares, $0.01 par value. The 3,977,500 Common Shares sold in the offering at $22.00 per Share were registered under
the Securities Act of 1933, as amended, on a Registration Statement on Form S-1 (Reg. No. 333-90873) that was declared effective by the SEC on February 16, 2000. The net offering proceeds to Apropos,
after deducting underwriter discounts and commissions and expenses payable by the Company, were approximately $79.3 million. From the effective date of such Registration Statement to December 31,
2002, approximately $10.2 million of the net proceeds were used for the repayment of debt and approximately $27.1 million were used for general corporate purposes including operating losses, working
capital, and capital expenditures. The balance of the net proceeds was held primarily in commercial paper and government obligations at December 31, 2002. Other than repayment of approximately $2.0
million in the aggregate of debt in favor of William Blair Capital Partners V, L.P., ARCH Venture Fund III, L.P., and The Ohio Partners, Ltd., none of the Company's expenses or use of proceeds from
this Offering were direct or indirect payments to directors, officers, general partners of the Company or its associates, persons owning 10.0% or more of any class of equity securities in the Company,
or affiliates of the Company.

During
August 2000, the Company issued 24,068 Common Shares to ARCH Venture Fund III, L.P., upon exercise by ARCH of a warrant to purchase Common Shares. In accordance with the terms of the warrant,
ARCH forfeited warrants to purchase 2,182 Common Shares with a fair market value on the date of exercise of approximately $23,000. No underwriters were involved in connection with the issuance of the
Common Shares upon exercise of the warrant. The Common Shares were issued on reliance upon the exemption from registration available under Section 4(2) of the Securities Act of 1933, including
Regulation D promulgated thereunder, as a transaction by an issuer not involving a public offering and the transaction involved the issuance and sale of Common Shares to a financially sophisticated
entity who represented that it was aware of the Company's activities and business and financial condition, and who took the Common Shares for investment purposes and understood the ramifications of
its actions. ARCH represented that it acquired the Common Shares for investment for its own account and not for distribution. The certificate representing the Common Shares issued has a legend stating
that the shares have not been registered under the Securities Act of 1933 and cannot be transferred until properly registered under the Securities Act of 1933 or an exemption therefrom applies.

ITEM 6.    SELECTED FINANCIAL DATA.

The following selected consolidated financial data should be read in conjunction with "Item 8. Financial Statements and Supplementary Data" and "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operation," both included herein. The

12

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consolidated statement of operations data and the consolidated balance sheet data are derived from the audited consolidated financial statements of the Company.

|                                                         |                                 | Year ended December 31 |       
|-------------------------------------------------------- | ------------------------------- | ---------------------- | ------
|
|
|                                                         |                                 |                        |       
|Consolidated Statement of Operations Data:               |                                 |                        |       
|Revenue:                                                 |                                 |                        |       
|                                                         | Software licenses               |                        | $8,259
|                                                         | Services and other (1)          |                        | 12,635
|                                                         |                                
|Total revenue                                            |                                 | 20,894                 |       
|Cost of goods and services:                              |                                 |                        |       
|                                                         | Cost of software                |                        | 380   
|                                                         | Cost of services and other (1)  |                        | 5,744 
|                                                         |                                
|Total cost of goods and services                         |                                 | 6,124                  |       
|                                                         |                                
|Gross margin                                             |                                 | 14,770                 |       
|Operating expenses:                                      |                                 |                        |       
|                                                         | Sales and marketing             |                        | 13,471
|                                                         | Research and development        |                        | 7,878 
|                                                         | General and administrative      |                        | 8,115 
|                                                         | Stock compensation charge       |                        | 425   
|                                                         | Restructuring and other charges |                        | 869   
|                                                         |                                
|Total operating expenses                                 |                                 | 30,758                 |       
|                                                         |                                
|Operating loss                                           |                                 | (15,988                | )     
|Other income (expense)                                   |                                 | 947                    |       
|                                                         |                                
|Net loss                                                 |                                 | $(15,041               | )     
|                                                         |                                
|Basic and diluted loss per common share                  |                                 | $(0.90                 | )     
|Weighted-average number of Common Shares outstanding (2) |                                 | 16,723                 |       
|                                                         |                                

|                                                  |  | December 31 | 
|------------------------------------------------- |  | ----------- | 
|
|
|                                                  |  |             | 
|Consolidated Balance Sheet Data:                  |  |             | 
|Cash, cash equivalents and short-term investments |  | $42,051     | 
|Working capital (deficit)                         |  | 40,396      | 
|Total assets                                      |  | 48,512      | 
|Debt and capital lease obligations (3)            |  |            | 
|Convertible preferred shares                      |  |            | 
|Total shareholders' equity (deficit)              |  | 42,810      | 
|                                                  | 

(1)  2001 - 1998 have been restated to include rebillable travel costs as revenue and cost of services.

(2)  1999 and 1998 have been restated to reflect a seven-for-four stock split effective upon the consummation of the Company's initial public offering.

(3)  Includes current portions.

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ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion should be read in conjunction with the Company's consolidated financial statements and notes to those consolidated financial statements included
elsewhere in this Annual Report.

Overview

The Company develops, markets, and supports a leading real-time, multi-channel interaction management application for managing customer interactions across a variety of
communication channels, including E-mail, Fax, Web, and Voice. Apropos' solution enhances customer relationship management applications, such as sales, marketing, and service, through intelligent,
value-based management of all interactions. The Company's product offers on-line customers the flexibility to interact with businesses over the Internet, through E-mail or Web collaboration, and also
provides access to human assistance through either an interactive Web Chat or Voice interaction, to help in completing a sales or service transaction.

The
Company's operations commenced in January 1989, and, from inception to early 1995, operating activities consisted primarily of research and development and consulting. As an integral part
of the Company's growth strategy, during February 2000, the Company completed an initial public offering of 3,977,500 Common Shares (the "IPO") resulting in net proceeds to the Company of
approximately $79.3 million.

Critical Accounting Policies

Revenue.The Company recognizes revenue from the sale of software and hardware upon delivery. The Company recognizes revenue from fees for
implementation services using the percentage of completion method. The Company calculates percentage of completion based on the estimated total number of hours of service required to complete specific
tasks in an implementation project and the specific tasks completed. The Company recognizes support and maintenance services ratably over the term of its maintenance contracts, which are typically
annual contracts. Training services are recognized as such services are completed.

The
Company derives revenue principally from the sale of software licenses and from fees for implementation, technical support, and training services. The Company also derives revenue from the sale of
certain third party hardware products, such as telephony cards,
required to implement its solution. Revenue from the sale of hardware constituted 0.8%, 0.5%, and 3.9% of the Company's total revenue for 2002, 2001 and 2000, respectively, and is included in revenue
from services and other.

The
Company markets its solution to its customers primarily through its direct sales force, value-added resellers, and original equipment manufacturers, or OEMs, in North America, Europe, South
America, Asia, Africa, and Australia. Revenue generated via resellers and OEMs accounted for 19.5%, 21.0%, and 23.3% of the Company's total revenue for 2002, 2001 and 2000, respectively. Management
expects that revenue derived from sales to resellers and OEMs may increase as a percentage of total revenue as the Company expands its product capabilities and focuses its sales efforts on its
distribution channels.

The
Company relies on its customers and resellers to submit purchase orders for its product and services. In addition, the Company enters into general sales contracts with its customers and resellers;
however, none of its customers or resellers is obligated to purchase its product or its services pursuant to these contracts. All of the Company's sales contracts contain provisions regarding the
following:



Typically,
these contracts provide that the exclusive remedy for breach of the Company's specified warranty is either a refund of the price paid or modification of the product to satisfy the warranty.

The
Company has generally experienced a product sales cycle of six to nine months. The Company considers the life of the sales cycle to begin on the first face-to-face meeting with the prospective
customer and end when product is shipped. The length of the sales cycle for customer orders depends on a number of factors including:



14

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The
Company's OEM contracts contain additional provisions regarding product technical specifications, labeling instructions, and other instructions regarding customization and rebranding. The
Company's OEM contracts contain volume discounts.

Sales
to customers outside the United States accounted for 27.3%, 21.0%, and 22.3% of the Company's total revenue during 2002, 2001 and 2000, respectively. Management expects the portion of the
Company's total revenue derived from sales to customers outside the United States to be comparable in the foreseeable future.

Cost of goods and services.Cost of goods and services consists primarily of:



The
Company recognizes costs of software, maintenance, support and training services, and hardware as they are incurred. Costs of implementation services are recognized using the percentage of
completion method described above.

Operating expenses.The Company generally recognizes its operating expenses as they are incurred. Sales and marketing expenses consist
primarily of compensation, commission, and travel expenses along with other marketing expenses, including trade shows, public relations, telemarketing campaigns, and other promotional expenses.
Research and development expenses consist primarily of compensation expenses for personnel and, to a lesser extent, independent contractors who adapt the Company's product for specific countries.
General and administrative expenses consist primarily of compensation for administrative, financial, and information technology personnel and a number of non-allocable costs, including professional
fees, legal fees, accounting fees, and bad debts.

The
Company maintains an allowance for doubtful accounts to reflect the expected uncollectablility of accounts receivable based on past collection history and specific risks identified among
uncollected accounts. Accounts receivable are charged to the allowance for doubtful accounts when the Company has determined that the receivable will not be collected. Accounts receivable balances are
determined to be delinquent when the amount is past due based on the contractual terms with the customer.

Stock compensation charge.Stock compensation charge represents the difference at the grant date between the exercise price and the pre-IPO
deemed fair value of the Common Shares underlying the options. This amount is being amortized over the vesting period of the individual options, which is typically four years. This non-cash expense
results in a corresponding increase to Additional paid in capital. Subsequent to the IPO, the exercise price of all options granted is equal to the fair market value of the underlying Common Shares,
resulting in no compensation charge.

Other income and expenses.Other income and expense relates primarily to interest earned and/or owed. Interest income is generated by the
investment of cash raised in rounds of equity financing, most notably the IPO in February 2000. Interest expense is generated primarily from a charge for the fair market value of warrants issued in
connection with 1999 financing arrangements and amounts owed under various financing arrangements. In February 2000, the Company retired all of its then outstanding debt with the net proceeds from the
IPO, with the exception of capital leases.

Income taxes.The Company provides for income taxes under the liability method, which requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, a valuation allowance is required against net deferred
tax assets if, based upon the available evidence, it is more likely than

15

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not that some or all of the deferred tax assets will not be realized. Management evaluates the recoverability of the deferred tax assets and the level of the valuation allowance. At such time as it
is determined that it is more likely than not that deferred tax assets are realizable, the valuation allowance will be appropriately reduced.

Results of Operations

The following table sets forth, for the periods indicated, the percentage of total revenue represented by certain items included in the Company's "Consolidated Statements of
Operations" in the consolidated financial statements. Percentages are calculated from operating results rounded to the nearest thousand and may not equal calculations from the numbers referenced below
in this section which may be rounded to the nearest hundred thousand. Operating performance for any period is not necessarily indicative of performance for any future periods.

|                                 |                                 | Year ended December 31 |     
|-------------------------------- | ------------------------------- | ---------------------- | ----
|
|
|                                 |                                 |                        |     
|Revenue:                         |                                 |                        |     
|                                 | Software licenses               |                        | 39.5
|                                 | Services and other              |                        | 60.5
|                                 |                                
|Total revenue                    |                                 | 100.0                  |     
|Cost of goods and services:      |                                 |                        |     
|                                 | Cost of software                |                        | 1.8 
|                                 | Cost of services and other      |                        | 27.5
|                                 |                                
|Total cost of goods and services |                                 | 29.3                   |     
|                                 |                                
|Gross margin                     |                                 | 70.7                   |     
|Operating expenses:              |                                 |                        |     
|                                 | Sales and marketing             |                        | 64.5
|                                 | Research and development        |                        | 37.7
|                                 | General and administrative      |                        | 38.8
|                                 | Stock compensation charge       |                        | 2.0 
|                                 | Restructuring and other charges |                        | 4.2 
|                                 |                                
|Total operating expenses         |                                 | 147.2                  |     
|                                 |                                
|Operating loss                   |                                 | (76.5                  | )   
|Other income                     |                                 | 4.5                    |     
|                                 |                                
|Net loss                         |                                 | (72.0                  | )%  
|                                 |                                

Year Ended December 31, 2002, Compared to Year Ended December 31, 2001

Revenue.Total revenue decreased 6.8% to $20.9 million in 2002, from $22.4 million in 2001. Revenue from international sales increased by
21.3% to $5.7 million in 2002, from $4.7 million in 2001.

Revenue
from software licenses decreased 19.2% to $8.3 million in 2002, from $10.2 million in 2001. The Company attributes this decrease in revenue principally to continued weakness in the economic
environment in 2002. Indicative of the lower activity, total new system purchases were 36 and 39 for 2002 and 2001, respectively. Revenue from software licenses from new customers totaled 56% for 2002
compared to 49% for 2001. The Company also believes that revenue was impacted by an increasing emphasis on customers meeting only current needs with limited funding and limited expansion of
infrastructure.

Revenue
from services and other, consisting of professional services, customer support, hardware and rebillable expenses, increased 3.7% to $12.6 million in 2002, from $12.1 million in 2001. An
increase in customer support revenue to $7.9 million in 2002 from $6.4 million in
2001 as a result of the Company's expanding customer base was principally offset by lower professional services due to fewer customers purchasing new systems and a related decrease in rebillable
travel revenue.

16

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Gross margin.Gross margins increased to 70.7% of total revenue in 2002, from 65.4% of total revenue in 2001. This increase was the result of
higher staff utilization for professional services and customer support. Both periods include rebillable travel, which has no gross margin.

Gross
margins from software licenses represented 95.4% of software revenue in 2002, and 95.2% of software revenue in 2001. The cost of software licenses consists primarily of third party software used
in conjunction with the Company's software.

Gross
margins from services and other represented 54.5% of services and other revenue in 2002, and 40.4% of services and other revenue in 2001. This improvement is due primarily to improved
utilization of the streamlined professional services organization, including customer support.

Operating expenses.Operating expenses decreased 9.7% to $30.8 million in 2002, from $34.1 million in 2001. This decrease is primarily the
result of reduced staffing levels. As a percentage of total revenue, operating expenses were 147.2% in 2002 and 152.0% in 2001. Total operating headcount decreased by 8.4% to 131 employees at December
31, 2002, from 143 employees at December 31, 2001.

Sales
and marketing expenses decreased 18.7% to $13.5 million in 2002, from $16.6 million in 2001. The decrease in sales and marketing expenses resulted primarily from lower personnel costs and
reduced marketing activities, including tradeshows, public relations activities, and advertisements.

Research
and development expenses decreased 2.5% to $7.9 million in 2002, from $8.1 million in 2001. The decrease in research and development expenses related primarily to lower consulting,
recruiting and travel expenses. This decrease was offset to a lesser extent by higher facility allocation costs.

General
and administrative expenses increased 8.8% to $8.1 million in 2002, from $7.5 million in 2001. The increase was due primarily to higher insurance costs, increased professional service fees,
compensation costs related to loan forgiveness and higher facility allocation costs. This increase was offset to a lesser extent by lower legal fees and bad debt expense.

Stock
compensation charge decreased 36.4% to $425,000 in 2002, from $668,000 in 2001. The decrease from the prior period primarily reflects the impact of cancelled options resulting from employees
that are no longer employed by the Company. The stock compensation charge primarily represents the difference at the grant date between the exercise price and the pre-IPO deemed fair value of the
Common Shares underlying the options. This amount is being amortized over the vesting period of the individual options, which is typically four years. This non-cash expense results in a corresponding
increase to Additional paid in capital.

Restructuring
and other charges decreased 33.1% to $869,000 in 2002, from $1,298,000 for 2001. The charge in 2002 related to staff reductions, including involuntary terminations of three senior level
positions with contractual obligations, and former employee settlement costs. As of December 31, 2002, there was approximately $420,000 included in Accrued expenses for undisbursed payments related to
the restructuring charge. The Company estimates these funds will be disbursed over the next two quarters. A charge was recorded in third quarter of 2001 of $1,298,000 to decrease its operating expense
structure. The restructuring component of the 2001 charge was $879,000 and related principally to severance and other transition costs associated with the workforce reduction of 77 persons, or 30% of
the then worldwide workforce. The other component of the charge of $419,000 related to assets written off that were no longer considered strategic or no longer provided future benefit to the Company.
All the costs associated with the restructuring charge were disbursed by December 31, 2001.

Other income and expense.Interest income was $1.0 million in 2002, and $2.7 million in 2001. The decrease in interest income is a result of
lower cash, cash equivalents, and short-term investment balances and the impact of interest rate reductions initiated by the Federal Reserve Board since January 1, 2001.

Income taxes.There has been no provision or benefit for income taxes for any period since 1995 due to the Company's operating losses. As of
December 31, 2002, the Company had approximately $48.8 million of domestic net operating loss carryforwards for federal income tax purposes, which expire beginning 2011 through 2022 and foreign
operating losses of approximately $7.6 million with no carry forward limits. The Company's use of these net operating losses may be limited in future periods.

17

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Net loss per share.Net loss per share decreased 11.8% to $0.90 in 2002, from $1.02 in 2001. This decrease in the loss per share is the
result of lower operating expenses; offset by lower revenue and lower investment income. The number of shares used to compute net loss per share increased 1.5% to 16.7 million in 2002, from 16.5
million in 2001. This increase was from shares issued in connection with the Company's employee stock purchase plan and stock option exercises.

Year Ended December 31, 2001, Compared to Year Ended December 31, 2000

Revenue.Total revenue decreased 29.1% to $22.4 million in 2001, from $31.6 million in 2000. Revenue from international sales decreased by
32.9% to $4.7 million in 2001, from $7.0 million in 2000.

Revenue
from software licenses decreased 47.2% to $10.2 million in 2001, from $19.4 million in 2000. The Company attributes this decrease in revenue principally to weakness in the economic environment
in 2001. Indicative of the lower activity, total new system purchases were 39 and 80 for calendar 2001 and calendar 2000, respectively. The Company also believes that revenue from new customers was
impacted by an increasing emphasis on more significant system sales, and the related changes in the sales organization structure and personnel. Revenue from software licenses from new customers
totaled 49% for calendar 2001 compared to 50% for calendar 2000.

Revenue
from services and other, consisting of professional services, customer support, and hardware, decreased fractionally to $12.2 million in 2001, from $12.2 million in 2000. An increase in
customer support revenue to $6.4 million in 2001 from $4.1 million in 2000 as a result of the Company's expanding customer base was principally offset by lower professional services revenue due to
fewer customers purchasing new systems.

Gross margin.Gross margins decreased to 65.4% of total revenue in 2001, from 72.4% of total revenue in 2000. This is a result of a lower
level of revenue from software licenses, 45.6% of total revenue in 2001, compared to 61.3% of total revenue in 2000. This decrease was offset, to a lesser extent, by higher staff utilization for
professional services and lower hardware sales.

Gross
margins from software licenses represented 95.2% of software revenue in 2001, and 96.5% of software revenue in 2000. The cost of software licenses consists primarily of third party software used
in conjunction with the Company's software.

Gross
margins from services and other represented 40.4% of services and other revenue in 2001, and 34.3% of services and other revenue in 2000. This improvement is due primarily to lower hardware
sales, which has the lowest profit contribution, and improved utilization of the streamlined professional services organization.

Operating expenses.Operating expenses increased 3.8% to $34.1 million in 2001, from $32.8 million in 2000. This increase is primarily the
result of the restructuring charge of $1.3 million as the Company took steps in July 2001 to decrease its operating cost structure to better align its operating expenses with lower revenues. As a
percentage of total revenue, operating expenses were 152.0% in 2001 and 103.9% in 2000. The new operating cost structure resulted in decreasing total operating headcount by 25.9% to 143 employees at
December 31, 2001, from 193 employees at December 31, 2000. While year over year staffing levels are lower, the calendar 2001 average staffing totals were higher than average calendar 2000 headcount
totals due to the dynamics of rapid staff expansion throughout calendar 2000, static staffing levels in the first six months of 2001, and reduced staffing levels after the restructuring in the second
six months of 2001.

Sales
and marketing expenses increased 5.7% to $16.6 million in 2001, from $15.7 million in 2000. The increase in sales and marketing expenses resulted primarily from the average sales and marketing
personnel headcount increasing 23%. This increase was offset by lower sales commissions associated with lower revenues; lower recruiting costs associated with fewer hires and less reliance on
executive search consultants; and reduced marketing activities, including tradeshows, public relations activities, and advertisements.

Research
and development expenses increased 12.8% to $8.1 million in 2001, from $7.2 million in 2000. The increase in research and development expenses related primarily to the average staffing level
increasing 13%.

General
and administrative expenses decreased 17.2% to $7.5 million in 2001, from $9.0 million in 2000. The decrease was due primarily to lower legal costs, which include a charge of
$950,000 recorded in the second quarter of 2000 for an arbitration settlement related to a dispute with a former reseller. Also contributing to the decrease were lower recruiting costs and lower
professional service fees associated with accounting, banking and investor relations services.

18

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Stock
compensation charge decreased 33.1% to $668,000 in 2001, from $998,000 in 2000. The stock compensation charge primarily represents the difference at the grant date between the exercise price and
the pre-IPO deemed fair value of the Common Shares underlying the options. This amount is being amortized over the vesting period of the individual options, which is typically four years. This
non-cash expense results in a corresponding increase to Additional paid in capital. The decrease from the prior period primarily reflects the impact of cancelled options resulting from employees that
are no longer employed by the Company.

Restructuring
and other charges. In the third quarter of 2001, the Company recorded a restructuring and other charge of $1,298,000 as it took steps to decrease its operating expense structure in order
to offset lower revenues over the short-term. The review of operating expenses focused on staff reductions, lower facility commitments, streamlined marketing programs and non-productive assets. The
restructuring component of the charge was $879,000 and related principally to severance and other transition costs associated with the workforce reduction of 77 persons, or 30% of the then worldwide
workforce. The other component of the charge of $419,000 relates to assets written off that were no longer considered strategic or no longer provide future benefit to the Company. All the costs
associated with the restructuring charge were disbursed by December 31, 2001.

Other income and expense.Interest income was $2.7 million in 2001, and $3.6 million in 2000. The decrease in interest income is a result of
lower cash, cash equivalents, and short-term investment balances and the impact of interest rate reductions initiated by the Federal Reserve Board since January 1, 2001.

Income taxes.There has been no provision or benefit for income taxes for any period since 1995 due to the Company's operating losses. As of
December 31, 2001, the Company had approximately $36.6 million of domestic net operating loss carryforwards for federal income tax purposes, which expire beginning 2011 through 2022. The Company's use
of these net operating losses may be limited in future periods.

Net loss per share.Net loss per share increased 79.2% to $1.02 in 2001, from $0.57 in 2000. This increase in the loss per share is the
result of lower revenue, higher operating expenses and lower investment income. The number of shares used to compute net loss per share increased 14.8% to 16.5 million in 2001, from 14.4 million in
2000. This increase was from shares issued in connection with the Company's employee stock purchase plan and stock option exercises and the full year impact in 2001 of common shares issued in
conjunction with the Company's IPO.

Liquidity and Capital Resources

In February 2000, the Company sold 3,977,500 Common Shares in its IPO and realized net proceeds of approximately $79.3 million. Prior to the offering, the Company had financed
its operations primarily from the private sales of convertible preferred shares totaling $16.1 million, proceeds from banking arrangements, a bridge loan and subordinated convertible promissory notes,
and to a lesser extent, from lease financing.

The
Company's operating activities resulted in net cash outflows of $11.8 million in 2002, $9.2 million in 2001, and $5.6 million in 2000. The operating cash outflows for 2002 and 2001 were primarily
impacted by net losses experienced by the Company from declining revenues offset to a lesser extent by a realigned operating cost structure. Collection of prior year receivable balances and an
improvement in receivables management, as evidenced by a decrease in days sales outstanding, led to cash being provided from accounts receivable of $1.3 million and $6.0 million in 2002 and 2001,
respectively. The operating cash outflows for 2000 resulted primarily from net losses as the
Company continued to invest in product development, expansion of its sales force and infrastructure to support growth. The cash used in operations for all three years was offset by non-cash charges
for amortization of stock-based compensation and depreciation, and also in 2000 by charges for the fair market value of warrants issued in connection with 1999 financing arrangements.

The
Company's investing activities resulted in net cash inflows of $13.3 million in 2002 and $16.6 million in 2001. This inflow was primarily the result of a decision by management to reduce the
length of maturity on the Company's investments. The decision caused many investments to be classified as cash and cash equivalents instead of short-term investments. The inflow for 2002 and 2001 were
offset by capital expenditures of $285,000 and $936,000, respectively. Investing activities for 2000 consisted of $3.7 million for capital expenditures to support the Company's growing number of
employees and infrastructure development and $53.9 million of net purchases of short-term investments utilizing funds remaining from the Company's IPO.

Financing
activities generated net inflows of $256,000, $297,000 and $69.6 million for 2002, 2001, 2000, respectively. The inflows in 2002 and 2001 were primarily from proceeds from the sale of stock
through the Company's stock option plan and employee stock purchase

19

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plan. The inflows in 2001 were offset by payments of capital lease obligations. In 2000, the net inflows were primarily from the net proceeds of the Company's IPO offset by repayments of debt.

The
Company believes that its capital requirements, in large part, depend on future results of operations and, ultimately, achievement of profitability. The Company expects to devote resources to
research and development efforts, expand sales channels, marketing lead generation programs, fund capital expenditures, and provide for working capital and other general corporate purposes. Management
believes that the existing cash and short-term investment balances will be sufficient to meet the working capital and capital expenditure requirements for at least the next twelve months.

Recently Issued Accounting Standards

In January 2002, the Financial Accounting Standards Board's (FASB) Emerging Issues Task Force issued Issue 01-14, "Income Statement Characterization of Reimbursements Received
for 'Out-of-Pocket' Expenses Incurred," stating these costs should be characterized as revenue in the income statement. The Company was required to adopt this change beginning in calendar 2002 and has
reclassified prior periods in the comparative financial statements. The Company has historically treated these reimbursable costs, principally incurred in the Company's professional services
organization, as rebillable invoices to the respective customer and not included in the statements of operations. The Company has included these out-of-pocket reimbursable expenses in the Statement of
Operations for 2002, 2001 and 2000 of $392,000, $644,000 and $544,000, respectively, as Revenue from services and other and a corresponding amount of Cost of services and other.

In
July 2002, the Financial Accounting Standards Board (FASB) issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." For financial statements issued after
December 31, 2002, this Statement requires recognition of exit plan costs, such as one-time termination benefits and certain other costs associated with an exit plan to be recognized at fair value in
the period the event occurs. SFAS No. 146 also changes the recording of severance pay when future services is required as part of the exit plan. The Company has adopted SFAS No. 146 effective January
1, 2003. The amounts recorded in 2002 and 2001 as Restructuring and other charges would not have to be restated had SFAS No. 146 been in effect during those periods.

In
December 2002, the Financial Accounting Standards Board (FASB) issued Statement No. 148, "Accounting for Stock-Based CompensationTransition and Disclosure." For financial statements
issued after December 15, 2002, this Statement amends SFAS No. 123, "Accounting for Stock-Based Compensation," to require disclosure in the summary of accounting policies the effects of the
Company's accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements.

Inflation

The impact of inflation on the Company's operating results has been moderate in recent years, reflecting generally lower rates of inflation in the economy. While inflation has
not had a material impact on operating results, there is no assurance that the Company's business will not be affected by inflation in the future.

Risk Factors Associated With Apropos' Business and Future Operating Results

Apropos' future operating results may vary substantially from period to period. The price of the Company's Common Shares has and will fluctuate in the future, and an investment
in the Company's Common Shares is subject to a variety of risks, including but not limited to the specific risks identified below. Inevitably, some investors in the Company's securities will
experience gains while others will experience losses depending on the prices at which they purchase and sell the Company's securities. Prospective and existing investors are strongly urged to
carefully consider the various cautionary statements and risks set forth in this Annual Report.



The Company's limited operating history makes evaluating the Company's business difficult.

The
Company's limited operating history makes it difficult to forecast its future operating results. The Company commenced operations in January 1989, but did not begin shipping its principal product
and generating revenue from that product until March 1995. Therefore, the Company has only a limited operating history upon which investors may evaluate its business. Prospective and existing
investors must

20

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consider the numerous risks and uncertainties an early stage company like Apropos faces in a rapidly changing software and technology industry. These risks include the Company's inability to:



If
the Company is unsuccessful in addressing these risks, sales of its product and services, as well as its ability to maintain or increase its customer base, will be substantially diminished.

The Company has not been profitable since 1994.

The Company has not operated profitably since 1994. The Company incurred net losses of $15.0 million in 2002, $16.7 million in 2001, and $8.1 million in 2000. The Company
intends to continue to make necessary investments in its research and development, marketing, and sales operations. The Company anticipates that these expenses would precede any revenues generated by
the increased spending. As a result, the Company may experience losses and negative cash flow from its operations in future periods. The Company will need to generate significant revenue to achieve
profitability and it may not be able to do so. Even if it does achieve profitability, the Company makes no assurance that it will be able to sustain or increase profitability on a quarterly or annual
basis in the future.

The Company has never been able to fully fund operations from cash generated by its business, and it may not be able to do so in the future.

The Company has not operated profitably since 1994. The Company has principally financed its operations through the private placement of convertible preferred shares, bank
borrowings, short-term loans, and most recently through its IPO. If the Company does not generate sufficient cash resources from its business to fund operations, its growth could be limited unless it
is able to obtain additional capital through equity or debt financings. The Company's inability to grow as planned may reduce its chances of achieving profitability, which, in turn, could have a
material adverse effect on the market price of its Common Shares.

The Company's lengthy sales cycle has contributed and may continue to contribute to the quarter-to-quarter variability and unpredictability of its revenue and operating results
which could adversely affect the market price of its Common Shares.

The Company has generally experienced a lengthy product sales cycle, averaging approximately six to nine months. The Company considers the life of the sales cycle to begin on
the first face-to-face meeting with the prospective customer and end when the product is delivered. The Company's prospective customers' decisions to license its product often require significant
investment and executive level decision-making, and depend on a number of factors.

The
lengthy sales cycle is one of the factors that has caused, and may in the future continue to cause, the Company's software revenue and operating results to vary significantly from quarter to
quarter, which makes it difficult for the Company to forecast software license revenue and could cause volatility in the market price of its Common Shares. Excessive delay in the product sales cycle
could materially and adversely affect the Company's business, financial condition, and results of operations.

The Company's future business prospects depend in part on the Company's ability to maintain and improve its current product and to develop new products and product features.

The Company believes that its future business prospects depend in large part on its ability to maintain and improve its current product and to develop new products and product
features on a timely basis. The Company's product will have to achieve market acceptance, maintain technological competitiveness, and meet an expanding range of customer requirements. As a result of
the complexities inherent in the Company's product, major new products and product features require long development and testing periods. The Company may not be successful in developing and marketing,
on a timely and cost effective basis, new products or product features that respond to technological change involving industry standards or customer requirements. Significant delays in the general
availability of new releases of the Company's product or significant problems in the installation or implementation of new releases of its product could have a material adverse effect on the Company's
business, financial condition, and results of operations.

21

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The Company may not be able to modify its product in a timely and cost effective manner to respond to technological change.

Future versions of hardware and software platforms embodying new technologies and the emergence of new industry standards could render the Company's product obsolete or
noncompetitive. The market for the Company's product is characterized by:



The
Company's product is designed to work in conjunction with and on a variety of hardware and software platforms used by its customers. However, the Company's software may not operate correctly on
evolving versions of hardware and software platforms, programming languages, database environments, and other systems that its customers use. Also, the Company must constantly modify and improve its
product to keep pace with changes made to these platforms and to database systems and other applications. This may result in uncertainty relating to the timing and nature of new product announcements,
introductions, or modifications, which may cause confusion in the market and harm the Company's business. If the Company fails to promptly modify or improve its products in response to evolving
industry standards or customer demands, its product could rapidly become obsolete, which would materially and adversely affect the Company's business, financial condition, and results of operations.

Competition could reduce the Company's market share and decrease its revenue.

The market for the Company's product is highly competitive and the Company expects competition to increase in the future. In addition, because the Company's industry is new and
evolving and characterized by rapid technological change, it is difficult for the Company to predict whether, when, and by whom new competing technologies or new competitors may be introduced into its
markets. Currently, the Company's competition comes from platform providers, interaction management solution providers, and stand-alone point solution providers.

The
Company makes no assurance that it will be able to compete successfully against current or future competitors. In addition, increased competition or other competitive pressures may result in price
reductions, reduced profit margins, or loss of market share, each of which could have a material adverse effect on the Company's business, financial condition, and results of operations.

Demand for communications and interaction management software for multi-channel contact centers may grow more slowly than the Company currently anticipates.

The majority of the Company's revenue has been generated from licenses of its product and related support and professional services, and it expects this trend to continue for
the foreseeable future. The market for the Company's product and services is still emerging. If the demand for communications and interaction management software does not continue to grow as
anticipated within the Company's targeted markets, the Company's ability to expand its business as planned could be materially and adversely affected.

If the Company fails to establish and maintain strategic relationships, the Company's ability to increase its revenue and profitability will suffer.

The Company currently has strategic relationships with resellers, original equipment manufacturers, or OEMs, system integrators, and enterprise application providers. Apropos
depends on these relationships to:



The
Company believes that its success depends, in part, on its ability to develop and maintain strategic relationships with resellers, OEMs, system integrators, and enterprise application providers.
In addition, the Company intends to train and certify more strategic partners to provide the professional services required to implement its solution in an effort to expand its customer base. The
Company generally does

22

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not have long-term or exclusive agreements with these strategic partners. If any of the Company's strategic relationships are discontinued, sales of its products and services and its ability to
maintain or increase its customer base may be substantially diminished.

If the Company's strategic partners fail to market Apropos' product and services effectively or provide poor customer service, the Company's reputation will suffer and it could
lose customers.

If the Company's strategic partners fail to market Apropos' product and services effectively, the Company could lose market share. Some of the Company's strategic partners also
provide professional services to Apropos' customers in connection with the implementation of its product. Additionally, if a strategic partner provides poor customer service, the value of the
Company's brand could be diminished. Therefore, the Company must maintain relationships with strategic partners throughout the world that are capable of providing high-quality sales and service
efforts. If the Company loses a strategic partner in a key market, or if a current or future strategic partner fails to adequately provide customer service, the Company's reputation will suffer and
sales of its product and services could be substantially diminished.

The Company may have difficulties successfully managing its growth, which may reduce its chances of achieving and maintaining profitability.

The Company's revenues increased to $20.9 million in 2002 from $4.1 million in 1997. The Company's goal is to expand its business operations in the future. The Company has also
increased its number of employees over this five-year period; however, over the past two years the numbers of employees has actually declined. The Company's existing management, operational,
financial, and human resources, and management information systems and controls may be inadequate to support future growth. If the Company is not able to manage its growth successfully, it will not
grow as planned and the Company's business could be adversely affected.

Infringement of the Company's proprietary rights could affect its competitive position, harm its reputation or increase its operating costs.

The Company considers its products to be proprietary. In an effort to protect its proprietary rights, the Company relies primarily on a combination of patent, copyright,
trademark and trade secret laws, as well as licensing and other agreements with consultants, suppliers, strategic partners, resellers, and its customers, and employee and third party non-disclosure
agreements. These laws and agreements provide only limited protection of Apropos' proprietary rights. In addition, the Company has not signed agreements containing these types of protective provisions
in every case, and the contractual provisions that are in place and the protection they provide vary and may not provide the Company with adequate protection in all circumstances. Although the Company
has patented or filed patent applications for some of the inventions embodied in its software, the Company's means of protecting its proprietary rights may not be adequate. It may be possible for a
third party to copy or otherwise obtain and use the Company's technology without authorization and without its detection and without infringing its patents. A third party could also develop similar
technology independently. In addition, the laws of some countries in which the Company sells its product do not protect its software and intellectual property rights to the same extent as the laws of
the United States. Unauthorized copying, use, or reverse engineering of the Company's product could materially adversely affect its business, financial condition, and results of operations.

Infringement claims could adversely affect the Company.

A third party could claim that the Company's technology infringes its proprietary rights. As the number of software products in the Company's target market increases and the
functionality of these products overlap, the Company believes that software developers may face infringement claims. Although the Company does not believe that its product infringes any patents, if
certain software and technology patents were interpreted broadly, claims of infringement against the Company, if successful, could have a material adverse effect on its business, financial condition,
and results of operations. Infringement claims, even if without merit, can be time consuming and expensive to defend. A third party asserting infringement claims against the Company or its customers
with respect to the Company's current or future products may require the Company to enter into costly royalty arrangements or litigation, or otherwise materially and adversely affect its business,
financial condition, and results of operations. If a negotiated resolution of any matter is required, it could involve payment of license fees, which would increase the Company's costs. The Company
makes no assurance that the terms of any licensing arrangement would be favorable to the Company. A resolution could also require a redesign of the Company's product or the removal of some of the
Company's product features. If a negotiated resolution were not achieved, Apropos would vigorously defend itself. If the Company did not prevail, damages could be awarded and an injunction could be
issued requiring Apropos to cease certain activities. If infringement is deemed to be willful, a court may triple the awarded damages. Any of these activities could have a material adverse effect on
the Company's business, financial condition, and results of operations. Regardless of the outcome, litigation may result

23

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in substantial expense and significant diversion of the Company's management and technical personnel. See "Item 3. Legal Proceedings" for a description of a claim received by the Company from a
competitor claiming that the Company's product utilizes technologies pioneered and patented by such competitor.

The Company may not be able to hire and retain the personnel it needs to sustain its business.

The Company depends on the continued services of its executive officers and other key personnel. The loss of services of any of the Company's executive officers or key personnel
could have a material adverse effect on its business, financial condition, and results of operations.

The
Company needs to attract and retain highly-skilled technical and managerial personnel. If the Company is unable to attract and retain qualified technical and managerial personnel, its results of
operations could suffer and the Company may never achieve profitability.

The
Company's financial success depends to a large degree on the ability of its direct sales force to increase sales. Therefore, the Company's ability to increase revenue in the future depends
considerably upon its success in recruiting, training, and retaining direct sales personnel. Also, it may take a new salesperson a number of months before he or she becomes a productive member of the
Company's direct sales force. The Company's business will be harmed if it fails to hire and retain qualified sales personnel, or if newly hired salespersons fail to develop the necessary sales skills
or develop these skills more slowly than the Company anticipates.

The Company's international operations and expansion involve financial and operational risks.

The Company intends to continue to expand its international operations, which may include entry to additional international markets. The expansion of the Company's international
operations will require management attention and financial resources to establish additional foreign operations, hire additional personnel, and recruit additional international resellers. Revenue from
international expansion may be inadequate to cover the expenses of international expansion.

The
Company's expansion into new international markets may take longer than anticipated and could directly impact how quickly the Company increases product sales into these markets. International
markets may take additional time and resources to penetrate successfully. The Company's product needs to be conformed to the language and infrastructure requirements of other countries. In addition,
the acceptance of new technologies, such as E-mail and Web-based forms of communication, may not occur as rapidly as in North America. This could have a material adverse impact on the Company's
business, financial condition, and results of operations.

Other
risks the Company may encounter in conducting international business activities generally could include the following:



The Company's product and the third party software it sells with its product could have defects for which the Company is potentially liable and that could result in loss of
revenue, increased costs, loss of the Company's credibility, or delay in acceptance of the Company's product in the marketplace.

The Company's product, including applications supplied by others, may contain errors or defects, especially when first introduced or when new versions are released. Despite
internal product testing, the Company has in the past discovered software errors in some of the versions of its product after their introduction to the marketplace. Errors in new products or versions
could be found after commencement of commercial shipments, and this could result in additional development costs, diversion of technical and other resources

24

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from the Company's other development efforts, or the loss of credibility with current or future customers. This could result in a loss of revenue or delay in market acceptance of the Company's
product, which could have a material adverse effect on its business, financial condition, and results of operations.

In
addition, the Company has warranted to some of its customers, resellers, and OEMs that its software is free of viruses. If a virus infects a customer's computer software, the customer could assert
claims against the Company that could be costly and could have a material adverse effect on the Company's business, financial condition, and results of operations. The Company's license agreements
with its customers typically contain provisions designed to limit its exposure to potential product liability and some contract claims.

The
Company's license agreements also typically limit its customer's entire remedy to either a refund of the price paid or modification of the Company's product to satisfy the warranty. However, not
all of these agreements contain these types of provisions, and, where present, these provisions vary as to their terms and may not be effective under the laws of some jurisdictions. The Company also
does not have executed license agreements with all of its customers. A product liability, warranty, or other claim brought against the Company could have a material adverse effect on the Company's
business, financial condition, and results of operations. Performance interruptions at the Company's customer's system, most of which currently do not have back-up systems, could negatively affect
demand for Apropos' products or give rise to claims against the Company.

The
third party software the Company sells with its product may also contain errors or defects. Typically, the Company's license agreements transfer any warranty from the original manufacturer of
third party software to its customers to the extent permitted, but in some cases the Company provides warranties regarding third party software. Product liability, warranty, or other claims brought
against the Company with respect to such warranties could have a material adverse affect on its business, financial condition, and results of operations.

The Company depends on Microsoft Corporation technologies and other third party software on which its product relies.

The Company's software currently runs only on Microsoft Windows NT and Windows 2000 servers. A decline in market acceptance for Microsoft technologies
or the increased acceptance of other server technologies could cause the Company to incur significant development costs and could have a material adverse effect on the Company's ability to market its
current product. Although the Company believes that Microsoft technologies will continue to be widely used by businesses, the Company cannot assure prospective and existing investors that businesses
will adopt these technologies as anticipated or will not in the future migrate to other computing technologies that the Company does not currently support. In addition, the Company's products and
technologies must continue to be compatible with new developments in Microsoft technologies.

The
Company sells third party software with its product. If one or more of these third parties ceases to sell their software, the Company will need to modify its product to use an alternative supplier
or eliminate the affected product function, either of which could have a material adverse effect on the Company's business, financial condition, and results of operations.

The Company may not be able to obtain adequate financing to implement its growth strategy.

Successful implementation of the Company's growth strategy will likely require continued access to capital. If it does not generate sufficient cash from operations, the
Company's growth could be limited unless the Company is able to obtain capital through additional debt or equity financings. The Company makes no assurance that debt or equity financings will be
available as required to fund growth and other needs.

Even
if financing is available, it may not be on terms that are favorable to the Company or sufficient for its needs. If the Company is unable to obtain sufficient financing, it may be unable to fully
implement its growth strategy.

If the Company's customers do not perceive its product or services to be effective or of high quality, its brand and name recognition would suffer.

The Company believes that establishing and maintaining brand and name recognition is critical for attracting and expanding its targeted customer base. The Company also believes
that the importance of reputation and name recognition will increase as competition in its market increases. Promotion and enhancement of the Company's name will depend on the effectiveness of its
marketing and advertising

25

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efforts and on its success in continuing to provide high-quality products and services, neither of which can be assured. If the Company's customers do not perceive its product or services to be
effective or of high-quality, the Company's brand and name recognition would suffer which would have a material adverse effect on its business.

The growth of the Company's business may be impeded without increased use of the Internet.

The use of the Internet as a commercial marketplace is at an early stage of development. Demand and market acceptance for recently introduced products and services available
over the Internet is still uncertain. In addition, governmental regulation of the Internet, such as imposing sales and other taxes, access charges, pricing controls, and inhibiting cross-border
commerce, may reduce the use of the Internet by businesses for their electronic commerce and customer service needs. To date, governmental regulations have not materially restricted commercial use of
the Internet. However, the legal and regulatory environment that pertains to the Internet is uncertain and may change. New regulations could reduce the use of the Internet by the Company's customers
and their customers. The lack of acceptance of the Internet as a forum for conducting business could reduce growth in demand for the Company's product and limit the growth of its revenue.

Natural MicroSystems, Inc. may become unwilling or unable to continue to supply the Company with Voice processing boards, requiring it to find a substitute supplier that could
prove difficult or costly.

Natural MicroSystems, Inc. is currently the Company's sole supplier of the Voice processing boards that are necessary for the operation of its product. If Natural MicroSystems
becomes unable or unwilling to continue to supply these Voice processing boards in the volume, at the price and with the technical specifications the Company requires, then the Company would have to
adapt its product to perform with the Voice processing boards of a substitute supplier. Introducing a new supplier of Voice processing boards could result in unforeseen additional product development
or customization costs and could also introduce hardware and software compatibility problems. These problems could affect product shipments, be costly to correct, or damage the Company's reputation in
the markets in which it operates, and could have a material adverse affect on its business, financial condition, and results of operations.



The Company's share price has been and may continue to be highly volatile and could drop unexpectedly.

The
price for the Company's Common Shares has been and may continue to be highly volatile and subject to wide fluctuations in response to the following factors:



The
shares of many technology companies have experienced significant fluctuations in trading price and volume. Often these fluctuations have been unrelated to operating performance. Declines in the
market price of the Company's Common Shares could also materially and adversely affect employee morale and retention, the Company's access to capital, and other aspects of its business.

If the Company's share price continues to be volatile, it may become subject to securities litigation, which is expensive and could divert its resources.

In the past, following periods of market volatility in the price of a company's securities, security holders have instituted class action litigation. Many companies in the
Company's industry have been subject to this type of litigation. The Company has become involved in this type of litigation and may get involved again in the future, and regardless of the outcome, it
could incur substantial legal costs and management's attention could be diverted, causing the Company's business to suffer. See "Item 3. Legal Proceedings" for a description of claims received by the
Company relating to shareholder class action litigation.

26

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ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Interest Rate Risk

The Company's exposure to market risk for changes in interest rates relate primarily to the change in the amount of interest income the Company can earn on its investments. The
Company does not use derivative financial instruments in its investment portfolio. The Company considers all investments with original maturities of less than one year, but greater than 90 days, from
the respective balance sheet date to be short-term investments. The Company had invested balances, which includes short-term investments and other investments with original maturities of less than
ninety days, classified as cash equivalents, of $42.1 million at December 31, 2002. The Company's short-term investments consist primarily of readily marketable debt securities. These investments are
subject to interest rate risk and will fall in value if market interest rates increase. The Company believes a hypothetical increase in market interest rates by 10.0% from levels at December 31, 2002,
would cause the fair value of these short-term investments to fall by an immaterial amount. Since the Company has shortened its average maturity holding period and would not likely have to sell any
investments before maturity, the Company has the ability to avoid realizing losses on these investments due to a sudden change in market interest rates. On the other hand, declines in the interest
rates will reduce interest income.

Foreign Currency Risk

The Company develops products in the United States and sells these products in North America, Europe, South America, Asia, Africa, and Australia. As a result, its financial
results could be affected by various factors, including changes in foreign currency exchange rates or weak economic conditions in foreign markets. As sales are generally made in U.S. dollars or
British pound sterling, a strengthening of the dollar or pound could make the Company's products less competitive in foreign markets. Given the level of income the Company currently derives from its
foreign operations, the Company considers this exposure to be minimal. The Company believes a 10.0% change in exchange rates would not have a significant impact on its future earnings.

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Report of Independent Auditors

Shareholders and Board of Directors
Apropos Technology, Inc.

We
have audited the accompanying consolidated balance sheets of Apropos Technology, Inc. as of December 31, 2002 and 2001, and the related consolidated statements of operations, shareholders' equity,
and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial
statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Apropos Technology, Inc. at December 31, 2002 and 2001, and
the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.

/s/    Ernst &
Young LLP

Chicago,
Illinois
January 31, 2003

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Apropos Technology, Inc.  Consolidated Balance Sheets

|                                           |                                                                                                                                                                                                       | December 31 |        
|------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------- | -------
|
|
|                                           |                                                                                                                                                                                                       |             |        
|Assets                                     |                                                                                                                                                                                                       |             |        
|Current assets:                            |                                                                                                                                                                                                       |             |        
|                                           | Cash and cash equivalents                                                                                                                                                                             |             | $19,333
|                                           | Short-term investments                                                                                                                                                                                |             | 22,718 
|                                           | Accounts receivable, less allowances for doubtful accounts of $474 at December 31, 2002 and $677 at December 31, 2001                                                                                 |             | 2,837  
|                                           | Inventory                                                                                                                                                                                             |             | 194    
|                                           | Prepaid expenses and other current assets                                                                                                                                                             |             | 1,016  
|                                           |                                                                                                                                                                                                      
|Total current assets                       |                                                                                                                                                                                                       | 46,098      |        
|Equipment, net                             |                                                                                                                                                                                                       | 2,174       |        
|Notes receivable from officers             |                                                                                                                                                                                                       |            |        
|Other assets                               |                                                                                                                                                                                                       | 240         |        
|                                           |                                                                                                                                                                                                      
|Total assets                               |                                                                                                                                                                                                       | $48,512     |        
|                                           |                                                                                                                                                                                                      
|Liabilities and shareholders' equity       |                                                                                                                                                                                                       |             |        
|Current liabilities:                       |                                                                                                                                                                                                       |             |        
|                                           | Accounts payable                                                                                                                                                                                      |             | $127   
|                                           | Accrued expenses                                                                                                                                                                                      |             | 1,935  
|                                           | Accrued compensation and related accruals                                                                                                                                                             |             | 658    
|                                           | Advance payments from customers                                                                                                                                                                       |             | 235    
|                                           | Deferred revenue                                                                                                                                                                                      |             | 2,747  
|                                           |                                                                                                                                                                                                      
|Total current liabilities                  |                                                                                                                                                                                                       | 5,702       |        
|Commitments and contingencies              |                                                                                                                                                                                                       |            |        
|Shareholders' equity:                      |                                                                                                                                                                                                       |             |        
|                                           | Preferred shares, $0.01 par value, 5,000,000 shares authorized, no shares issued and outstanding                                                                                                      |             |       
|                                           | Common shares, $0.01 par value, 60,000,000 shares authorized, 16,971,940 shares issued and 16,660,829 shares outstanding at December 31, 2002; 16,626,072 issued and outstanding at December 31, 2001 |             | 170    
|                                           | Additional paid-in capital                                                                                                                                                                            |             | 101,578
|                                           | Treasury stock, at cost                                                                                                                                                                               |             | (392   
|                                           | Accumulated deficit                                                                                                                                                                                   |             | (58,546
|                                           |                                                                                                                                                                                                      
|Total shareholders' equity                 |                                                                                                                                                                                                       | 42,810      |        
|                                           |                                                                                                                                                                                                      
|Total liabilities and shareholders' equity |                                                                                                                                                                                                       | $48,512     |        
|                                           |                                                                                                                                                                                                      

See notes to consolidated financial statements.

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Apropos Technology, Inc.  Consolidated Statements of Operations

|                                              |                                 | Year Ended December 31 |       
|--------------------------------------------- | ------------------------------- | ---------------------- | ------
|
|
|                                              |                                 |                        |       
|Revenue:                                      |                                 |                        |       
|                                              | Software licenses               |                        | $8,259
|                                              | Services and other              |                        | 12,635
|                                              |                                
|Total revenue                                 |                                 | 20,894                 |       
|Cost of goods and services:                   |                                 |                        |       
|                                              | Cost of software                |                        | 380   
|                                              | Cost of services and other      |                        | 5,744 
|                                              |                                
|Total cost of goods and services              |                                 | 6,124                  |       
|                                              |                                
|Gross margin                                  |                                 | 14,770                 |       
|Operating expenses:                           |                                 |                        |       
|                                              | Sales and marketing             |                        | 13,471
|                                              | Research and development        |                        | 7,878 
|                                              | General and administrative      |                        | 8,115 
|                                              | Stock compensation charge       |                        | 425   
|                                              | Restructuring and other charges |                        | 869   
|                                              |                                
|Total operating expenses                      |                                 | 30,758                 |       
|                                              |                                
|Loss from operations                          |                                 | (15,988                | )     
|Other income (expense):                       |                                 |                        |       
|                                              | Interest income                 |                        | 961   
|                                              | Interest expense                |                        |      
|                                              | Other, net                      |                        | (14   
|                                              |                                
|Total other income                            |                                 | 947                    |       
|                                              |                                
|Net loss                                      |                                 | $(15,041               | )     
|                                              |                                
|Basic and diluted net loss per share          |                                 | $(0.90                 | )     
|Weighted-average number of shares outstanding |                                 | 16,723                 |       
|                                              |                                

See notes to consolidated financial statements.

30

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Apropos Technology, Inc.  Consolidated Statements of Shareholders' Equity

|in thousands, except share quantities           |                                                  | Common Shares |           | Additional paid-in capital |           | Treasury stock |    | Accumulated deficit |        | Shareholders' equity (deficit) |  
|----------------------------------------------- | ------------------------------------------------ | ------------- | --------- | -------------------------- | --------- | -------------- | -- | ------------------- | ------ | ------------------------------ | -
|
|
|                                                |                                                  |               |           |                            |           |                |    |                     |        |                                |  
|Balance at December 31, 1999                    |                                                  | 3,055,883     |           | 3,055,883                  |           | 53             |    | 2,932               |        |                               |  
|Issuance of Common Shares:                      |                                                  |               |           |                            |           |                |    |                     |        |                                |  
|                                                | Initial public offering, net of related expenses |               | 3,977,500 |                            | 3,977,500 |                | 40 |                     | 79,236 |                                | 
|                                                | Exercise of options                              |               | 2,252,099 |                            | 2,252,099 |                | 23 |                     | 420    |                                | 
|                                                | Employee stock purchase plan                     |               | 40,948    |                            | 40,948    |                |   |                     | 248    |                                | 
|                                                | Exercise of warrant                              |               | 24,068    |                            | 24,068    |                |   |                     |       |                                | 
|Conversions into Common Shares:                 |                                                  |               |           |                            |           |                |    |                     |        |                                |  
|Convertible Preferred Shares                    |                                                  | 6,992,095     |           | 6,992,095                  |           | 70             |    | 16,009              |        |                               |  
|Stock compensation charge                       |                                                  |              |           |                           |           |               |    | 998                 |        |                               |  
|Conversion of no-par shares to $0.01 par shares |                                                  |              |           |                           |           | (23            | )  | 23                  |        |                               |  
|Net loss                                        |                                                  |              |           |                           |           |               |    |                    |        |                               |  
|                                                |                                                 
|Balance at December 31, 2000                    |                                                  | 16,342,593    |           | 16,342,593                 |           | 163            |    | 99,866              |        |                               |  
|Issuance of Common Shares:                      |                                                  |               |           |                            |           |                |    |                     |        |                                |  
|                                                | Exercise of options                              |               | 162,964   |                            | 162,964   |                | 2  |                     | 121    |                                | 
|                                                | Employee stock purchase plan                     |               | 120,515   |                            | 120,515   |                | 1  |                     | 246    |                                | 
|                                                | Stock compensation charge                        |               | 668       |                            |          |                |   |                     | 668    |                                |  
|Net loss                                        |                                                  |               |           |                            |           |                |    |                     |        |                                |  
|                                                |                                                 
|Balance at December 31, 2001                    |                                                  | 16,626,072    |           | 16,626,072                 |           | 166            |    | 100,901             |        |                               |  
|Issuance of Common Shares:                      |                                                  |               |           |                            |           |                |    |                     |        |                                |  
|                                                | Exercise of options                              |               | 232,766   |                            | 232,766   |                | 3  |                     | 92     |                                |  
|                                                | Employee stock purchase plan                     |               | 113,102   |                            | 113,102   |                | 1  |                     | 160    |                                |  
|Stock compensation charge                       |                                                  |               |           |                            |           |                |    | 425                 |        |                                |  
|Treasury stock acquired                         |                                                  |               |           | (311,111                   | )         |                |    |                     |        | (392                           | )
|Net loss                                        |                                                  |               |           |                            |           |                |    |                     |        |                                |  
|                                                |                                                 
|Balance at December 31, 2002                    |                                                  | 16,971,940    |           | 16,660,829                 |           | $170           |    | $101,578            |        | $(392                          | )
|                                                |                                                 

See notes to consolidated financial statements.

31

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Apropos Technology, Inc.  Consolidated Statements of Cash Flows

|                                                                                    |                                                     | Year Ended December 31                    |      
|----------------------------------------------------------------------------------- | --------------------------------------------------- | ----------------------------------------- | -----
|
|
|                                                                                    |                                                     |                                           |      
|Cash flows used in operating activities                                             |                                                     |                                           |      
|Net loss                                                                            |                                                     | $(15,041                                  | )    
|Adjustments to reconcile net loss to net cash used in operating activities:         |                                                     |                                           |      
|                                                                                    | Amortization of debt discount                       |                                           |     
|                                                                                    | Depreciation                                        |                                           | 1,405
|                                                                                    | Stock compensation charge                           |                                           | 425  
|                                                                                    | Provision for doubtful accounts                     |                                           | 315  
|                                                                                    | Non-cash compensation for loan forgiveness          |                                           | 256  
|                                                                                    | Non-cash portion of restructuring and other charges |                                           |     
|                                                                                    | Changes in operating assets and liabilities:        |                                           |      
|                                                                                    |                                                     | Accounts receivable                       |      
|                                                                                    |                                                     | Inventory                                 |      
|                                                                                    |                                                     | Prepaid and other current assets          |      
|                                                                                    |                                                     | Notes receivable from officers            |      
|                                                                                    |                                                     | Other assets                              |      
|                                                                                    |                                                     | Accounts payable                          |      
|                                                                                    |                                                     | Accrued expenses                          |      
|                                                                                    |                                                     | Accrued compensation and related accruals |      
|                                                                                    |                                                     | Advance payments from customers           |      
|                                                                                    |                                                     | Deferred revenue                          |      
|                                                                                    |                                                    
|Net cash used in operating activities                                               |                                                     | (11,817                                   | )    
|                                                                                    |                                                    
|Cash flows provided by (used in) investing activities                               |                                                     |                                           |      
|Proceeds from maturities and sales of short-term investments                        |                                                     | 48,443                                    |      
|Purchases of short-term investments                                                 |                                                     | (34,812                                   | )    
|Purchases of equipment                                                              |                                                     | (285                                      | )    
|                                                                                    |                                                    
|Net cash provided by (used in) investing activities                                 |                                                     | 13,346                                    |      
|                                                                                    |                                                    
|Cash flows provided by financing activities                                         |                                                     |                                           |      
|Payments on revolving line of credit                                                |                                                     |                                          |      
|Payment of bridge loan and detachable warrants                                      |                                                     |                                          |      
|Payment of subordinated convertible promissory notes                                |                                                     |                                          |      
|Payment of long-term debt                                                           |                                                     |                                          |      
|Payments on capital lease obligations                                               |                                                     |                                          |      
|Net proceeds from initial public offering of Common Shares                          |                                                     |                                          |      
|Proceeds from exercise of options                                                   |                                                     | 95                                        |      
|Proceeds from employee stock purchase plan                                          |                                                     | 161                                       |      
|                                                                                    |                                                    
|Net cash provided by financing activities                                           |                                                     | 256                                       |      
|                                                                                    |                                                    
|Net increase in cash and cash equivalents                                           |                                                     | 1,785                                     |      
|Cash and cash equivalents, beginning of year                                        |                                                     | 17,548                                    |      
|                                                                                    |                                                    
|Cash and cash equivalents, end of year                                              |                                                     | $19,333                                   |      
|                                                                                    |                                                    
|Supplemental disclosures of cash flow information:                                  |                                                     |                                           |      
|Cash paid for interest                                                              |                                                     | $                                        |      
|Fair value of Common shares received as collateral for Note receivable from officer |                                                     | $392                                      |      
|                                                                                    |                                                    

See notes to consolidated financial statements.

32

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Apropos Technology, Inc.  Notes to Consolidated Financial Statements

1.    NATURE OF BUSINESS

Apropos Technology, Inc. (the Company) is engaged in one business segment, developing, marketing, and supporting a leading real-time, multi-channel interaction management
application for managing customer interactions across a variety of communication channels, including E-mail, Fax, Web, and Voice. The Company's solution enhances customer relationship management
applications, such as sales, marketing, and service, through intelligent, value-based management of all interactions.

Principal
operations of the Company commenced during 1995. During 1997, the Company established a wholly-owned subsidiary in the United Kingdom, Apropos Technology, Limited. The purpose of this entity
is to market and distribute the Company's product throughout Europe. Other entities have been established in Germany and Australia to market the Company's product.

2.    SIGNIFICANT ACCOUNTING POLICIES

Consolidation

The consolidated financial statements include the accounts and transactions of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.

Use of Estimates

In order to prepare the Company's financial statements in conformity with accounting principles generally accepted in the United States, management is required to make estimates
and assumptions that affect the amounts reported in the financial statements and related notes. Actual results could differ from those estimates.

Financial Instruments and Concentrations of Credit Risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash, short-term investments, accounts receivable, and
accounts payable, which have fair values that approximate their respective carrying amounts. The Company invests its excess cash primarily in readily marketable debt securities. The Company performs
periodic credit evaluations of its customers' financial condition and generally does not require collateral.

The
Company had no customers during 2002 or 2001 that represented more than 10.0% of its total revenues. The Company had one customer during 2000 that represented 11.5% of its total revenues.

Cash Equivalents

The Company considers all highly liquid investments with an original maturity of 90 days or less to be cash equivalents.

Short-Term Investments

The Company considers all investments with original maturities of less than one year, but greater than 90 days, from the respective balance sheet date to be short-term
investments. In accordance with Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the Company has categorized its
marketable securities as "available-for-sale." The amortized cost of all securities approximates the fair value of the securities at December 31, 2002 and 2001. The Company's short-term investment
portfolio, including instruments with original maturities less than 90 days, consists primarily of highest-grade commercial paper, government agency bonds and money market accounts.

Accounts Receivable

Accounts receivable consist primarily of amounts due to us from our normal business activities. The Company maintains an allowance for doubtful accounts to reflect the expected
uncollectability of accounts receivable based on past collection history and specific risks identified among uncollected accounts. Accounts receivable are charged to the allowance for doubtful
accounts when the Company has determined that the receivable will not be collected. Accounts receivable balances are determined to be delinquent when the amount is past due based on the contractual
terms with the customer.

33

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Inventory

Inventories are stated at the lower of cost (first-in, first-out method) or market. Inventory consists of finished goods, primarily third party software and hardware.

Equipment

Equipment is carried at cost, less accumulated depreciation. Depreciation is determined using the straight-line method over the estimated useful lives of the assets of two to
seven years. Repairs and maintenance costs are charged to expense as incurred.

Advance Payments From Customers and Deferred Revenues

Advance payments from customers represent payments received from customers upon product order. Deferred revenue primarily represents payments received from customers for
customer support and enhancement services prior to revenue recognition.

Income Taxes

The Company provides for income taxes under the liability method, which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of
events that have been included in the financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement basis of assets
and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Under this method, a valuation allowance is required against net deferred tax assets
if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

Management
evaluates the recoverability of the deferred tax assets and the level of the valuation allowance. At such time as it is determined that it is more likely than not that deferred tax assets
are realizable, the valuation allowance will be appropriately reduced.

Revenue Recognition

The Company generates software revenues from licensing the right to use its software products and also generates service revenues from implementation and installation services,
ongoing maintenance (post-contract technical support and product upgrades), training services, and professional services performed for resellers and customers. The Company provides a warranty for 90
days on all software licenses, which runs concurrent with the customer maintenance agreement. The Company's policy is to not allow returns of software licenses. The Company issues product upgrades on
a when and if available basis.

Revenue
from software license agreements is recognized upon shipment of the software if:



Shipment
is further defined in certain contracts as delivery of the product master or first copy for noncancelable product licensing arrangements under which the reseller has certain software
distribution rights. Software licenses are shipped to resellers upon receipt of a purchase order from an end customer. The Company recognizes revenue from the sale of software licenses placed through
a reseller upon shipment of the license to the reseller or the end customer. The reseller is the Company's customer and is obligated to pay for the software license upon shipment. As a result, the
reseller assumes any credit risk from the reseller's end customer and any risk that the end customer declines receipt of the software license.

Revenue
from ongoing customer maintenance is recognized ratably over the post-contract support term, which is typically twelve months. Revenue from training services and professional services are
recognized when the services are completed. Revenue from implementation and installation services is recognized using the percentage of completion method. The Company calculates percentage of
completion based on the estimated total number of hours of service required to complete specific tasks in an implementation project and the specific tasks completed. Implementation and installation
services are typically completed within 120 days. Amounts received prior to revenue recognition and for prepaid customer support and enhancement services are classified as deferred revenue.

The
Company provides a master copy of its software license to its OEMs. Generally, the Company recognizes revenue from an OEM upon notification from the OEM that delivery of the software license to an
end customer has occurred. In cases where minimum

34

---

guaranteed payment terms are in excess of twelve months, the Company recognizes revenue from the arrangements as the payments become due.

Advertising

Advertising costs are generally expensed as incurred. Advertising expenses were approximately $147,000, $265,000, and $445,000 for the years ended December 31, 2002, 2001 and
2000, respectively.

Research and Development

Research and development expenditures are charged to operations as incurred. SFAS No. 86, "Accounting for the Costs of Computer Software To Be Sold, Leased, or Otherwise
Marketed," requires capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based on the Company's product development process, technological
feasibility is established upon completion of a working model. Costs incurred by the Company between completion of the working model and the point at which the product is ready for general release
have not been significant. Through December 31, 2002, all software development costs have been expensed.

Stock-Based Compensation

At December 31, 2002, the Company has one stock-based employee compensation plan and one employee stock purchase plan, which are described more fully in Note 8. The Company
accounts for these plans under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
No compensation cost is recognized for shares purchased under the Employee Stock Purchase Plan or for stock options issued under the stock-based employee compensation plan, as all options granted
after the IPO under this plan have an exercise price equal to the market value of the underlying common stock of the date of grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation.

|                                                                                                                                             |  | Year ended December 31 |  
|-------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | -
|
|
|                                                                                                                                             |  |                        |  
|Net loss, as reported                                                                                                                        |  | $15,041                |  
|Less: Stock-based employee compensation expense included in reported net loss                                                                |  | (425                   | )
|                                                                                                                                             |  |                        |  
|Add: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects |  | 1,345                  |  
|                                                                                                                                             |  |                        |  
|Net loss, pro forma                                                                                                                          |  | $15,961                |  
|                                                                                                                                             |  |                        |  
|Basic and diluted net loss per share, as reported                                                                                            |  | $0.90                  |  
|Basic and diluted net loss per share, pro forma                                                                                              |  | $0.95                  |  
|                                                                                                                                             | 

Foreign Currency Translation

Substantially all of the sales of the Company's foreign subsidiaries are made in U.S. dollars. Because the U.S. dollar is the primary currency in the economic environment in
which the foreign subsidiaries operate, monetary accounts maintained in currencies other than the U.S. dollar (principally cash and liabilities) are reported in U.S. dollars using the foreign exchange
rate at the balance sheet date. Operational accounts and nonmonetary balance sheet accounts are measured and recorded at the rate in effect at the date of the transaction. The effects of foreign
currency remeasurement are reported in current operations and have not been material to date.

Basic and Diluted Net Loss Per Common Share

Basic net loss per common share is based upon the net loss and upon the weighted-average number of common shares outstanding during the period. Diluted net loss per common share
adjusts for the effect of common share equivalents, such as convertible securities, stock options and warrants, only in the periods presented in which such effect would have been dilutive. The
weighted-average number of shares from outstanding options and warrants to purchase Common Shares using the treasury stock method for 2002, 2001 and 2000 were 419,272, 644,526 and 1,960,142,
respectively. Diluted net loss per share is not presented separately as the effect of the common share equivalents is anti-dilutive for each of the years presented. Accordingly, diluted net loss per
common share is the same as basic net loss per common share.

35

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Recently Issued Accounting Standards

In January 2002, the Financial Accounting Standards Board's (FASB) Emerging Issues Task Force issued Issue 01-14, "Income Statement Characterization of Reimbursements Received
for "Out-of-Pocket' Expenses Incurred," stating these costs should be characterized as revenue in the income statement. The Company was required to adopt this change beginning in calendar 2002 and has
reclassified prior periods in the comparative financial statements. The Company has historically treated these reimbursable costs, principally incurred in the Company's professional services
organization, as rebillable invoices to the respective customer and not included in the statements of operations. The Company has included these out-of-pocket reimbursable expenses in the Statement of
Operations for 2002, 2001 and 2000 of $392,000, $644,000 and $544,000, respectively, as Revenue from services and other and a corresponding amount of Cost of services and other.

In
July 2002, the Financial Accounting Standards Board (FASB) issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." For financial statements issued after
December 31, 2002, this Statement requires recognition of exit plan costs, such as one-time termination benefits and certain other costs associated with an exit plan to be recognized at fair value in
the period the event occurs. SFAS No. 146 also changes the recording of severance pay when future services is required as part of the exit plan. The Company has adopted SFAS No. 146 effective January
1, 2003. The amounts recorded in 2002 and 2001 as Restructuring and other charges would not have to be restated had SFAS No. 146 been in effect during those periods.

In
December 2002, the Financial Accounting Standards Board (FASB) issued Statement No. 148, "Accounting for Stock-Based CompensationTransition and Disclosure." For financial statements
issued after December 15, 2002, this Statement amends SFAS No. 123, "Accounting for Stock-Based Compensation," to require disclosure in the summary of accounting policies the effects of the Company's
accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements.

3.    NOTES RECEIVABLE FROM RELATED PARTIES

During the second quarter of 2001, the Company made loans to two executives who were subject to personal alternative minimum tax liabilities resulting from the exercise of
incentive stock options. On March 6, 2002, the loan agreements were amended to delay the commencement of the loan repayments, including any accrued interest, by one year. Under the amended loan
agreement, the loans were to be repaid in eight equal quarterly installments beginning April 1, 2003. At December 31, 2001, the total loan and related accrued interest balances of $722,000 have been
classified as Notes receivable from officers, a non-current asset, based on the amended loan agreements. Interest is calculated at fifty (50) basis points above the 60 to 89 day commercial paper rate
at the beginning of each quarter as quoted in The Wall Street Journal and is due with each principal repayment.

These
loans were initially collateralized by Common Shares owned by the executive equal to 150% of the loan value and subject to additional collateral consideration. The loan amendment on March 6,
2002 also delayed the consideration of additional collateral one year to April 1, 2003. The loans were only with recourse beyond the collateral with respect to the greater of 5% of the loan or the
amount of certain income tax benefits the executive receives in connection with such executive's alternative minimum tax liability, unless the executive's employment is terminated by the Company for
"cause" or by the executive without "good reason", in which case the loan is fully recourse. One executive with an outstanding balance was involuntarily terminated at September 30, 2002 and the
respective loan balance was adjusted to the net realizable value of $61,000.

On
December 27, 2002, by resolution of the Board of Directors, the loan for the one remaining executive was terminated. As part of the loan termination agreement, the executive assigned all of the
original collateral of 311,111 shares to the Company, which is currently being held as treasury shares. In addition, the Company retained rights to certain future alternative minimum tax recoveries
although not estimable at this time. The value of the original collateral consideration of 311,111 shares was $392,000 at the date of the loan termination agreement. This consideration was not
sufficient to offset the original loan amount of $616,000 and related accrued interest of $32,000, resulting in loan forgiveness of $256,000. In order to neutralize the impact of the non-cash taxable
income accruing to the executive as a result of the loan forgiveness, the loan termination agreement provided for a tax equalization payment. The loan forgiveness charge and related tax totaled
$465,000 which has been included in General and administrative charges in the 2002 Statement of Operations.

36

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4.    EQUIPMENT

Equipment consisted of the following:

|                               |  |              |  | December 31 |  
|------------------------------ |  | ------------ |  | ----------- | -
|
|
|
|                               |  |              |  |             |  
|Computer equipment             |  | 2 to 3 years |  | $2,977      |  
|Software                       |  | 3 to 5 years |  | 1,820       |  
|Furniture and fixtures         |  | 5 to 7 years |  | 1,420       |  
|Office equipment               |  | 3 to 5 years |  | 453         |  
|Leasehold improvements         |  | 5 to 7 years |  | 192         |  
|                               | 
|                               |  |              |  | 6,862       |  
|Less: Accumulated depreciation |  |              |  | (4,688      | )
|                               | 
|Equipment, net                 |  |              |  | $2,174      |  
|                               | 

5.    WARRANTS AND DEBT INSTRUMENTS

During 1999, the Company amended its 1998 credit agreement (the "Revolving Agreement") with a bank that provided for a secured revolving line of credit facility with interest at
the prime rate plus 1.0%. Borrowings under the Revolving Agreement were repaid in full during February 2000, with net proceeds received by the Company from its IPO. Pursuant to the amendment, the
Company issued detachable warrants to the bank, expiring in May 2006, allowing the bank to purchase 30,625 Common Shares at an exercise price of $3.97 per share. These warrants were not exercised as
of December 31, 2002. The value of these warrants was recorded as deferred financing costs with a corresponding charge to interest expense of $8,000 for 2000.

During
1999, the Company issued subordinated convertible promissory notes with a stated interest rate of 10.0%, together with warrants, to certain preferred shareholders. The notes were repaid in full
during February 2000, with net proceeds received by the Company from its IPO. The warrants allow the noteholders to purchase an aggregate of 75,649 Common Shares at an exercise price of $3.97 per
share and expire in June 2009. These warrants were not exercised as of December 31, 2002. The value of these warrants was recorded as a debt discount, increasing the effective interest rate on the
subordinated convertible promissory notes to 15.0%, with a corresponding charge to interest expense of $27,000 for 2000.

During
1999, a secured bridge loan was made to the Company by Access Technology Partners, L.P., a fund of investors that is managed by an entity associated with J.P. Morgan Chase & Co., formerly
Hambrecht & Quist LLC, one of the managing underwriters of the Company's IPO, and ARCH Venture Fund III, L.P., a common shareholder in the Company. The secured bridge loan with a stated interest rate
of 9.25% was repaid in full during February 2000, with net proceeds received by the Company from its IPO. The Company granted to Access Technology Partners, L.P. and ARCH Venture Fund III, L.P.
warrants to purchase 236,250 and 26,250 Common Shares at an exercise price of $5.34 per share, respectively. These warrants expire in November 2006. Access Technology Partners, L.P. has not exercised
any of these warrants as of December 31, 2002. ARCH Venture Fund III, L.P. exercised warrants to purchase 24,068 Common Shares during August 2000, forfeiting warrants to purchase 2,182 Common Shares
in lieu of cash payment of the exercise price. The value of these warrants was recorded as a debt discount, increasing the effective interest rate on the bridge loan to 121.0%, with a corresponding
charge to interest expense of $1,515,000 for 2000.

The
warrants referenced above were valued utilizing the Black-Scholes method. In applying the Black-Scholes method, the Company utilized an expected dividend yield of 0.0%, a risk-free interest rate
of 5.0%, a volatility factor of 136.0%, and a fair value of the underlying Common Shares of $4.32 for warrants issued with the line of credit and the subordinated convertible promissory notes and
$14.00 for warrants issued with the bridge loan. The lives utilized to value each of the warrants was based on the term of each respective warrant as described above.

The
Company has a letter of credit arrangement with a bank that is secured by all assets of the Company. At December 31, 2002 and 2001, outstanding letters of credit were $885,000.

37

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6.    INCOME TAXES

The difference between the amount of income tax benefit recorded and the amount of income tax benefit calculated using the U.S. federal statutory rate of 34.0% is due to net
operating losses not being benefited. Accordingly, there is no provision for income taxes for the years ended December 31, 2002, 2001 and 2000.

At
December 31, 2002, the Company had domestic net operating loss carryforwards aggregating approximately $48.8 million expiring in years 2011 through 2022. Based on Internal Revenue Code regulations
relating to changes in ownership in the Company, utilization of the net operating loss carryforwards may be subject to annual limitations. At December 31, 2002, the Company had foreign net operating
loss carryforwards aggregating approximately $7.6 million, which have no carryforward limits. For financial reporting purposes, the entire amount of deferred tax assets related principally to the net
operating loss carryforwards has been offset by a valuation allowance due to uncertainty regarding the realization of the asset. The valuation allowance increased $5,858,000, $6,657,000 and $4,261,000
during the years ended December 31, 2002, 2001 and 2000, respectively. The Company has not paid any income taxes for the years indicated.

Significant
components of the Company's deferred tax assets and liabilities are as follows:

|                              |                                                  | December 31 |        
|----------------------------- | ------------------------------------------------ | ----------- | -------
|
|
|                              |                                                  |             |        
|Deferred tax assets:          |                                                  |             |        
|                              | Net operating loss carryforwards                 |             | $21,321
|                              | Research and development tax credit carryforward |             | 1,475  
|                              | Other                                            |             | 521    
|                              |                                                 
|                              |                                                  | 23,317      |        
|                              | Less: Valuation allowance                        |             | (23,317
|                              |                                                 
|Net deferred income tax asset |                                                  | $          |        
|                              |                                                 

7.    SHAREHOLDERS' EQUITY

During February 2000, the Company's Board of Directors adopted and the shareholders approved an increase in the number of authorized capital shares from 11,689,867, of which
7,694,384 were designated as common shares and 3,995,483 were designated as convertible preferred shares, to 65,000,000. For the newly authorized shares, 60,000,000 were designated as common shares
and 5,000,000 were designated as preferred shares. Both classes of shares have a par value of $0.01. The Company's Board of Directors has the authority, without shareholder approval, to issue one or
more series of preferred shares and to establish the rights and preferences of such preferred shares.

Immediately
prior to the Company's IPO on February 17, 2000, the then issued and outstanding convertible preferred shares were converted to Common Shares as follows:

|in thousands, except share amounts |  | Convertible
Preferred shares |  | Converted to
Common Shares |  | Amount
(net of issuance costs)
|---------------------------------- |  | ---------------------------- |  | -------------------------- |  | ------------------------------
|
|                                   |  |                              |  |                            |  |                               
|Series A, issued March 1997        |  | 1,242,858                    |  | 2,175,002                  |  | $2,119                        
|Series B, issued December 1997     |  | 1,599,888                    |  | 2,799,803                  |  | 5,974                         
|Series C, issued March 1998        |  | 1,152,737                    |  | 2,017,290                  |  | 7,986                         
|                                  
|                                   |  | 3,995,483                    |  | 6,992,095                  |  | $16,079                       
|                                  

In addition, the Board of Directors declared a seven-for-four stock split on all Common Shares concurrent with the IPO. All Common Share and per share amounts and information
concerning stock option plans have been adjusted retroactively to give effect to this stock split. During February 2000, the Company completed an IPO issuing 3,977,500 Common Shares at an offering
price of $22.00 per share. The net proceeds to the Company from the IPO, after deducting the underwriting discounts and commissions and offering expenses payable by the Company, were $79,276,000. The
Company used approximately $10,216,000 to repay principal and interest on debt. The remaining net proceeds are being utilized for operations, working capital, and other general corporate purposes.

38

---

Treasury stock is accounted for by the cost method. In December 2002, the Board of Directors authorized 311,111 shares originally assigned as loan collateral against a note receivable from officer, as
detailed in Note 3, to be assigned to the Company. These shares are held in treasury for use in connection with the Company's stock plans and for general corporate purposes.

With
the Company's Board of Directors recommendation, the shareholders approved, at the Annual Shareholders meeting held in May 2001, an increase in the number of common shares reserved for further
issuance under the 2000 Omnibus Incentive Plan by 2,400,000 shares.

At
December 31, 2002, the Company had reserved Common Shares for future issuance as follows:

|                    |  |          
|------------------- |  | ---------
|
|                    |  |          
|Stock option plan   |  | 4,202,613
|Stock purchase plan |  | 725,435  
|Warrants            |  | 342,524  
|                   
|Total               |  | 5,270,572
|                   

8.    STOCK PLANS

Stock Option Plan

The Company's 2000 Omnibus Incentive Plan (the Plan) provides for the issuance of incentive stock options and nonqualified stock options to eligible directors and employees of
the Company. The options typically have a term of ten years and generally vest ratably over a period of up to four years with initial vesting occurring on the first anniversary from the grant date and
monthly thereafter. The Plan also provides for the issuance of stock appreciation rights, performance stock, performance units, restricted stock, and other stock and cash awards.

Information
related to the Plan is as follows:

|                                                       |  | Year ended December 31
|------------------------------------------------------ |  | ----------------------
|
|
|
|
|                                                       |  |                       
|Options outstanding, beginning of period               |  | 1,871,742             
|Options granted                                        |  | 981,320               
|Options exercised                                      |  | (232,766              
|Options canceled                                       |  | (381,543              
|                                                      
|Options outstanding, end of period                     |  | 2,238,753             
|                                                      
|Option price range at end of period                    |  | $0.10-$22.00          
|Weighted-average fair value of options granted in 2002 |  | $1.26                 
|Options available for grant at period end              |  | 1,963,860             
|Exercisable at December 31, 2002                       |  | 995,369               
|                                                      

39

---

The outstanding options at December 31, 2002, have a weighted-average remaining contractual life of 8.4 years.

|Options outstanding |  | Options exercisable
|------------------- |  | -------------------
|
|
|                    |  |                    
|$0.10               |  | 4,375              
|$0.21               |  | 39,397             
|$0.40               |  | 90,071             
|$0.63-0.91          |  | 152,344            
|$0.95-1.37          |  | 224,775            
|$1.45-2.15          |  | 888,125            
|$2.20-3.30          |  | 612,003            
|$3.88-5.69          |  | 45,500             
|$5.94-8.81          |  | 137,188            
|$9.00-22.00         |  | 44,975             
|                    |  |                    
|                    |  | 2,238,753          
|                    |  |                    

The Company accounts for this plan under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and
related Interpretations. No stock-based employee compensation cost is reflected in the net income, as all options granted under this plan after the IPO have an exercise price equal to the market value
of the underlying common stock of the date of grant. The table in Note 2 illustrates the effect on net income and earnings per share if the Company has applied the fair value recognition provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation. Had the Company applied the fair value recognition provisions of SFAS No. 123, the Company would have
recorded expense of $862,000, $271,000 and $1,697,000 for 2002, 2001 and 2000 respectively.

The
fair value of stock options used to compute the pro forma net loss is the estimated fair value at the grant date using the Black-Scholes method for valuing stock options issued after February 17,
2000, the date of the Company's IPO, or the minimum value option pricing model for stock options issued before February 17, 2000 with the following assumptions:

|Weighted Average Assumptions       |  | 2002 |   | 2001 |   | After February 17, 2000 |   | Before February 17, 2000 |  
|---------------------------------- |  | ---- | - | ---- | - | ----------------------- | - | ------------------------ | -
|
|                                   |  |      |   |      |   |                         |   |                          |  
|Dividend yield                     |  | 0.0  | % | 0.0  | % | 0.0                     | % | 0.0                      | %
|Risk-free interest rate            |  | 3.8  | % | 4.1  | % | 6.1                     | % | 5.0                      | %
|Volatility factor                  |  | 76.0 | % | 88.0 | % | 136.0                   | % | 0.0                      | %
|Expected holding period (in years) |  | 4.0  |   | 4.0  |   | 4.0                     |   | 4.0                      |  
|                                   | 

The stock compensation charge included in the Statement of operations primarily represents the difference at the grant date between the exercise price and the
pre-IPO deemed fair value of the Common Shares underlying the options. This amount is being amortized over the vesting period of the individual options, which is typically four years. Utilizing the
intrinsic value method of APB Opinion No. 25, the Company recognized $425,000, $668,000, and $998,000 of stock compensation expense during the years ended December 31, 2002, 2001 and 2000,
respectively. This non-cash expense results in a corresponding increase to Additional paid in capital. Subsequent to the IPO, the exercise price of all options granted is equal to the fair market
value of the underlying Common Shares, resulting in no compensation charge. Based on the outstanding options at December 31, 2002, the Company will record a stock compensation charge of $300,000 in
2003.

Employee Stock Purchase Plan

Under the Company's Employee Stock Purchase Plan, eligible employees are given the opportunity to purchase the Company's Common Shares at 85% of the closing price of the
Company's Common Stock on the Nasdaq National Market on either the first or last day of the

40

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offering period, whichever is lower. The offering periods begin on January 1 and July 1 of each year and conclude on June 30 and December 31, respectively. From an authorization of 1,000,000 shares,
a total of 274,565 shares have been issued through December 31, 2002, of which 113,102, 120,515 and 40,948 were issued during 2002, 2001 and 2000 respectively.

Under
APB Opinion No. 25, no compensation cost is recognized for shares purchased under this plan. The table in Note 2 illustrates the effect on net income and earnings per share if the Company has
applied the fair value recognition provisions of SFAS No. 123, to the employee purchase rights under this plan. Had the Company applied the fair value recognition provisions of SFAS No. 123, the
Company would have recorded expense of $58,000, $113,000 and $178,000 for 2002, 2001 and 2000 respectively. The fair value of employee purchase rights was estimated using the Black-Scholes option
pricing model for 2002, 2001 and 2000, respectively:

|Weighted Average Assumptions       |  | 2002 |   | 2001 |   | 2000  |  
|---------------------------------- |  | ---- | - | ---- | - | ----- | -
|
|                                   |  |      |   |      |   |       |  
|Dividend yield                     |  | 0.0  | % | 0.0  | % | 0.0   | %
|Risk-free interest rate            |  | 1.8  | % | 4.3  | % | 6.2   | %
|Volatility factor                  |  | 64.0 | % | 88.0 | % | 136.0 | %
|Expected holding period (in years) |  | 0.0  |   | 0.0  |   | 0.0   |  
|                                   | 

9.    RESTRUCTURING AND OTHER CHARGES

In the third quarter of 2002, the Company recorded a charge of $869,000. This charge related to staff reductions of 18 persons, including involuntary terminations of three
senior level positions with contractual obligations, and former employee settlement costs. As of December 31, 2002, there was approximately $420,000 included in Accrued expenses for undisbursed
payments related to the restructuring charge. The Company estimates these funds will be disbursed over the next two quarters.

Reconciliation
of the restructuring liability, as of December 31, 2002, is as follows:

|in thousands               |  | 2002 Charge to the
Statement of
Operations |  | Cash
payments |  | Balance
as of
12/31/02
|-------------------------- |  | ------------------------------------------ |  | ------------- |  | ----------------------
|
|                           |  |                                            |  |               |  |                       
|Employee termination costs |  | $790                                       |  | $394          |  | $396                  
|Other                      |  | 79                                         |  | 55            |  | 24                    
|                          
|                           |  | $869                                       |  | $449          |  | $420                  
|                          

In the third quarter of 2001, the Company recorded a charge of $1,298,000 as it took steps to decrease its operating expense structure. The review of operating
expenses focused on staff reductions, lower facility commitments, streamlined marketing programs and non-productive assets. The restructuring component of the charge was $879,000 and related
principally to severance and other transition costs associated with the workforce reduction of 77 persons, or 30% of the then worldwide workforce. The other component of the charge of $419,000 related
to assets written off that were no longer considered strategic or no longer provide future benefit to the Company. All the costs associated with the restructuring charge were disbursed by December 31,
2001.

41

---

10.    LEASE COMMITMENTS

At December 31, 2002, the Company was obligated for future minimum lease payments under operating leases that have initial or remaining noncancelable terms in excess of one
year, as follows:

|in thousands |  | Operating leases
|------------ |  | ----------------
|
|             |  |                 
|2003         |  | $1,735          
|2004         |  | 1,710           
|2005         |  | 1,428           
|2006         |  | 537             
|            
|             |  | $5,410          
|            

Rent expense for operating leases was approximately $1,949,000, $1,790,000, and $1,211,000 for the years ended December 31, 2002, 2001 and 2000, respectively.

At
December 31, 2002, the Company has no capital lease obligations.

11.    401(k) PROFIT-SHARING PLAN

The Company provides retirement benefits to eligible employees under a 401(k) profit-sharing plan. The Plan provides for deferred salary contributions by the plan participants
and a Company contribution. Company contributions, if any, are at the discretion of the Board of Directors and are not to exceed the amount deductible under applicable income tax laws. No Company
contributions have been made since inception of the Plan.

12.    GEOGRAPHIC INFORMATION

Revenues derived from customers outside of North America accounted for 27.3%, 21.0%, and 22.3% of the Company's total revenues in 2002, 2001 and 2000, respectively.

The
Company attributes its revenues to countries based on the country in which the customer is located. The Company's long-lived assets located outside the United States are not considered material.

13.    LITIGATION AND CONTINGENCIES

In June 1999 and August 2000, the Company received letters from Rockwell Electronic Commerce Corporation claiming that the Company's product utilizes technologies pioneered and
patented by that competitor and suggesting that the Company discuss the terms of a potential license of their technologies. In January 2000, Rockwell filed a complaint in the United States District
Court for the Northern District of Illinois asserting that the Company had infringed four of its patents identified in Rockwell's previous correspondence. The complaint sought a permanent injunction
and unspecified damages. The Court held a hearing in February 2001 to construe key terms in the claims of Rockwell's patents. In January 2002, the Court issued its "Findings of Fact and Conclusions of
Law After Trial" in which it construed the key terms of the claims. In November 2002, Rockwell and the Company settled the patent claims by entering into cross licensing agreements utilizing selected
patents from each of their portfolios. These agreements settle all litigation between the parties with no prior or future license fees payable by the Company.

In
November 2001, the Company was named as a defendant in several shareholder class action litigations that have been filed in federal court in Chicago against the Company, certain of its current and
former directors and officers, and the underwriters of the Company's initial public offering. These litigations are allegedly brought on behalf of purchasers of the Company's stock, and assert that
the Company violated the federal securities laws by making misstatements and omissions in its Registration Statement and Prospectus in connection with the Company's initial public offering in February
2000. These litigations seek unspecified damages. In April 2002 an amended consolidated complaint was filed which supersedes the original, separate complaints. The Company has moved to dismiss that
complaint in its entirety on various legal grounds, and its motion is currently pending. Although legal proceedings are inherently uncertain and their ultimate outcome cannot be predicted with
certainty, the Company believes the allegations are without merit and intends to defend the litigation vigorously.

42

---

The
Company has been named as a nominal defendant in a shareholder derivative action filed on February 26, 2002 against certain of its present and former directors and officers. The complaint alleges,
among other things, that the alleged conduct challenged in the securities
cases pending against the Company in Chicago (described above) constitutes a breach of the defendants' fiduciary duties to the Company. The Complaint seeks unspecified money damages and other relief
ostensibly on behalf of the Company. On August 27, 2002, the plaintiffs filed an Amended Complaint. Because the allegations in this action are similar to those in the federal securities case described
above, the parties have jointly moved the court for an order staying this derivative action pending the federal court's decision of the Company's motion to dismiss. If the joint stay motion is allowed
no further response to the lawsuit will be due from the defendants until the federal court decides the motion to dismiss.

In
November 2001, the Company was named as a defendant in shareholder class action litigation that has been filed in federal court in New York City against the Company and certain of its current and
former officers and the underwriters of the Company's initial public offering ("IPO"). This lawsuit, alleges, among other things, that the underwriters of the Company's IPO improperly required their
customers to pay the underwriters excessive commissions and to agree to buy additional shares of the Company's stock in the aftermarket as conditions of receiving shares in the Company's IPO. The
lawsuit further claims that these supposed practices of the underwriters should have been disclosed in the Company's IPO prospectus and registration statement. In April 2002, an amended complaint was
filed which, like the original complaint, alleges violations of the registration and antifraud provisions of the federal securities laws and seeks unspecified damages. The Company understands that
various other plaintiffs have filed substantially similar class action cases against approximately 300 other publicly traded companies and their public offering underwriters in New York City, which
along with the case against the Company have all been transferred to a single federal district judge for purposes of coordinated case management. On July 15, 2002, the Company, together with the other
issuers named as defendants in these coordinated proceedings, filed a collective motion to dismiss the consolidated amended complaints against them on various legal grounds common to all or most of
the issuer defendants. This motion is currently pending. On October 9, 2002, the Court approved a stipulation between the plaintiffs and all of the individual defendants providing for the dismissal of
the individual defendants without prejudice. Although legal proceedings are inherently uncertain and their ultimate outcome cannot be predicted with certainty, the Company believes that the claims
against the Company are without merit, and intends to defend the litigation vigorously.

The
Company is a party in various other disputes and litigation that have arisen in the course of the Company's business. In the opinion of management, based upon consultation with legal counsel,
although legal proceedings can not be predicted with certainty, the ultimate outcome of these disputes and lawsuits are not expected to have a material impact on the Company's financial position or
results of operations.

14.    QUARTERLY DATA (UNAUDITED)

The following table presents unaudited quarterly operating results for each of the Company's fiscal quarters in 2002 and 2001. This information has been prepared by the Company
on a basis consistent with the Company's audited financial statements. In management's opinion, the quarterly operating results include all adjustments necessary (which are of a normal and recurring
nature) for the fair presentation of the results of the interim periods presented. Basic and diluted loss per share for each quarter is computed using the weighted-average number of shares outstanding
during that quarter while basic and diluted loss per share for the full year is computed using the weighted-average number of shares outstanding during the year. Thus, the sum of the four quarters'
basic and diluted loss per share may not equal the full-year basic and diluted loss per share. In addition, due to rounding of each quarters' operating results, the full-year operating results
disclosed in the consolidated statements of operations may not equal the sum of each quarters' operating results shown below.

|in thousands, except per share amounts        |  | 2002   |   | 2001   |  
|--------------------------------------------- |  | ------ | - | ------ | -
|
|
|
|
|                                              |  |        |   |        |  
|Total revenues                                |  | $5,160 |   | $5,509 |  
|Gross profit                                  |  | 3,738  |   | 3,815  |  
|Net loss                                      |  | (3,761 | ) | (3,846 | )
|Basic and diluted loss per share              |  | $(0.23 | ) | $(0.23 | )
|Weighted-average number of shares outstanding |  | 16,658 |   | 16,694 |  
|                                              |  |        |  

43

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ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

Part III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The information required by Item 405 concerning compliance with Section 16(a) of the Exchange Act is incorporated by reference from the section in the 2003 Proxy Statement
captioned "Section 16(a) Beneficial Ownership Reporting Compliance."

Directors of the Company.

The information in response to this item is incorporated by reference from the "Proposal No. 1Election of Directors" section of the 2003 Proxy Statement.

Executive Officers of the Company.

The information in response to this item is set forth in "Item. 1 Business."

ITEM 11.    EXECUTIVE COMPENSATION.

The information in response to this item is incorporated by reference from the sections of the 2003 Proxy Statement captioned "Executive Compensation," "Report of the
Compensation Committee of the Board of Directors," and "Stock Price Performance Graph."

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The information in response to this item is incorporated by reference from the section of the 2003 Proxy Statement captioned "Securities Beneficially Owned by Principal
Shareholders and Management."

Equity Compensation Plan Information

|Plan Category                                              |  | Number of securities to be
issued upon exercise of
outstanding options, warrants
and rights |  | Weighted average
exercise price of
outstanding options,
warrants and rights |  | Number of securities
remaining available
for future issuance
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- |  | ------------------------------------------------------------
|
|                                                           |  |                                                                                             |  |                                                                             |  |                                                             
|Equity compensation plans approved by security holders     |  | 2,581,277                                                                                   |  | $2.82                                                                       |  | 2,689,295                                                   
|Equity compensation plans not approved by security holders |  |                                                                                            |  |                                                                            |  |                                                            
|Total                                                      |  | 2,581,277                                                                                   |  | $2.82                                                                       |  | 2,689,295                                                   
|                                                          

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information in response to this item is incorporated by reference from the section of the 2003 Proxy Statement entitled "Transactions with Related Parties."

ITEM 14.    CONTROLS AND PROCEDURES.

The Company's Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation within 90 days of the filing date of this report, that the Company's
disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the Company file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. There have been no significant changes in the Company's
internal controls or in other factors that could significantly affect these controls subsequent to the date of the previously mentioned evaluation.

44

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Part IV

ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

A.    Exhibits and Financial Statement Schedules.



All
other schedules are omitted because they are not applicable or not required or because the required information is included in the consolidated financial statements or notes thereto.



|Exhibit No. |        | Description of Exhibit                                                                                                                                                                         
|----------- | ------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|3.1         | *      | Amended and Restated Articles of Incorporation.                                                                                                                                                
|3.2         | ****** | Amended and Restated Bylaws.                                                                                                                                                                   
|4.1         | *      | Specimen Common Share Certificate of the Registrant.                                                                                                                                           
|10.1        | *      | Employment Agreement dated January 1, 2000, between the Registrant and Kevin G. Kerns.                                                                                                         
|10.2        | **     | Amendment No. 1 to Employment Agreement dated December 1, 2000, between the Registrant and Kevin G. Kerns.                                                                                     
|10.3        | *      | 2000 Omnibus Incentive Plan.                                                                                                                                                                   
|10.4        | ****   | Amendment No. 1 to the 2000 Omnibus Incentive Plan, as Amended and Restated.                                                                                                                   
|10.5        | *      | Employee Stock Purchase Plan of 2000.                                                                                                                                                          
|10.6        | *      | Form of Indemnity Agreement.                                                                                                                                                                   
|10.7        | *      | Registration Rights Agreement dated March 19, 1996, between the Registrant and ARCH Venture Fund II, L.P., ARCH II Parallel Fund, L.P. and William Blair Capital Partners V., L.P., as amended.
|10.8        | *      | Amended and Restated Registration Rights Agreement dated November 5, 1999, by and among Silicon Valley Bank, Access Technology Partners, L.P., ARCH Venture Fund III, L.P., and the Registrant.
|10.9        | ***    | Executive Stock Pledge, Security and retention Agreement dated April 18, 2001, between the Registrant and Kevin G. Kerns.                                                                      
|10.10       | ***    | Promissory Note made by Kevin G. Kerns in favor of the Registrant dated April 18, 2001.                                                                                                        
|10.11       | *****  | Amendment to Executive Stock Pledge, Security and Retention Agreement dated March 25, 2002, between Kevin G. Kerns and the Registrant                                                          
|10.12       | ****   | Amended Promissory Note made by Kevin G. Kerns in favor of the Registrant effective March 6, 2002.                                                                                             
|10.13       | #      | Loan Termination Agreement made by Kevin G. Kerns in favor of the Registrant effective December 27, 2002.                                                                                      
|10.14       | ***    | Executive Stock Pledge, Security and retention Agreement dated April 18, 2001, between the Registrant and Brian Derr.                                                                          
|10.15       | ***    | Promissory Note made by Brian Derr in favor of the Registrant dated April 18, 2001.                                                                                                            
|10.16       | *****  | Amendment to Executive Stock Pledge, Security and Retention Agreement dated March 25, 2002, between Brian Derr and the Registrant                                                              
|10.17       | ****   | Amended Promissory Note made by Brian Derr in favor of the Registrant effective March 6, 2002.                                                                                                 
|10.18       | #      | Employment Agreement dated November 26, 2002, between the Registrant and John Repko.                                                                                                           
|10.19       | #      | Employment Agreement dated November 27, 2002, between the Registrant and Frank Leonard.                                                                                                        
|10.20       | #      | Employment Agreement dated November 27, 2002, between the Registrant and Jeffrey K. Cordes.                                                                                                    

45

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|10.21 | # | Contract of Employment with an effective date of February 4, 2003, between the Registrant's wholly-owned subsidiary Apropos Technology Limited and David Ashworth.
|----- | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.22 | # | Employment Agreement dated December 23, 2002, between the Registrant and Jeffry Finochairo.                                                                       
|10.23 | # | Amendment No 2. to Employment Agreement with an effective date of November 7, 2002, between the Registrant and Kevin G. Kerns.                                    
|21    | # | Subsidiaries of the Registrant.                                                                                                                                   
|23    | # | Consent of Ernst & Young LLP.                                                                                                                                     
|99.1  | # | Certification pursuant to 18. U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                           
|     

*  Previously filed with the Commission as an exhibit to the Company's Registration Statement on Form S-1, as amended (File No. 333-90873), and incorporated herein by
reference.

**  Previously filed with the Commission as an exhibit to the Company's Report on Form 10-K on March 29, 2001, and incorporated herein by
reference.

***  Previously filed with the Commission as an exhibit to the Company's Report on Form 10-Q on August 13, 2001, and incorporated herein by
reference.

****  Previously filed with the Commission as an exhibit to the Company's Report on Form 10-K on March 30, 2002, and incorporated herein by
reference.

*****  Previously filed with the Commission as an exhibit to the Company's Report on Form 10-Q on May 14, 2002, and incorporated herein by
reference.

******  Previously filed with the Commission as an exhibit to the Company's Report on Form 10-Q on November 14, 2002, and incorporated herein by
reference.

#  Filed herewith.

B.    Reports on Form 8-K.

The Company did not file any Current Reports on Form 8-K during the fourth quarter of 2002.

C.    Exhibits.

See A.3. of this Item 14.

46

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Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, on March 28, 2003.

| |  | Apropos Technology, Inc.                                       
| |  | ---------------------------------------------------------------
| |  | /s/FRANCIS J. LEONARDChief Financial Officer and Vice President

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities
indicated on March 28, 2003.

|Names and Signatures                    |  | Titles                                                                                 
|--------------------------------------- |  | ---------------------------------------------------------------------------------------
|
|                                        |  |                                                                                        
|/s/KEVIN G. KERNSKevin G. Kerns         |  | Director, Chief Executive Officer and President (Principal Executive Officer)          
|/s/FRANCIS J. LEONARDFrancis J. Leonard |  | Chief Financial Officer and Vice President (Principal Financial and Accounting Officer)
|/s/KENNETH D. BARWICKKenneth D. Barwick |  | Director                                                                               
|/s/DAVID N. CAMPBELLDavid N. Campbell   |  | Director                                                                               
|/s/KEITH L. CRANDELLKeith L. Crandell   |  | Director                                                                               
|/s/JAIME W. ELLERTSONJaime W. Ellertson |  | Director                                                                               
|/s/GEORGE B. KOCHGeorge B. Koch         |  | Director                                                                               

47

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Certifications

I,
Kevin G. Kerns, certify that:





|Date: March 28, 2003 |  |                                                                        
|-------------------- |  | -----------------------------------------------------------------------
|                     |  | /s/ KEVIN G. KERNSKevin G. Kerns, Chief Executive Officer and President

48

---

I, Francis J. Leonard, certify that:





|Date: March 28, 2003 |  |                                                                                     
|-------------------- |  | ------------------------------------------------------------------------------------
|                     |  | /s/ FRANCIS J. LEONARDFrancis J. Leonard, Chief Financial Officer and Vice President

49

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Schedule IIValuation and Qualifying Accounts  Apropos Technology, Inc.

|(in thousands)Description                             |                                 | Balance at beginning of period |      | Additions charged to costs and expenses |     | Charged to other accountsdescribe |   | Deductionsdescribe |      | Balance at end of perioddescribe
|----------------------------------------------------- | ------------------------------- | ------------------------------ | ---- | --------------------------------------- | --- | ---------------------------------- | - | ------------------- | ---- | ---------------------------------
|
|                                                      |                                 |                                |      |                                         |     |                                    |   |                     |      |                                  
|Year ended December 31, 2000                          |                                 |                                |      |                                         |     |                                    |   |                     |      |                                  
|Reserves and allowances deducted from asset Accounts: |                                 |                                |      |                                         |     |                                    |   |                     |      |                                  
|                                                      | Allowance for doubtful accounts |                                | $462 |                                         | 286 |                                    |  |                     | *286 |                                  
|                                                     
|Year ended December 31, 2001                          |                                 |                                |      |                                         |     |                                    |   |                     |      |                                  
|Reserves and allowances deducted from asset Accounts: |                                 |                                |      |                                         |     |                                    |   |                     |      |                                  
|                                                      | Allowance for doubtful accounts |                                | $462 |                                         | 491 |                                    |  |                     | *276 |                                  
|                                                     
|Year ended December 31, 2002                          |                                 |                                |      |                                         |     |                                    |   |                     |      |                                  
|Reserves and allowances deducted from asset Accounts: |                                 |                                |      |                                         |     |                                    |   |                     |      |                                  
|                                                      | Allowance for doubtful accounts |                                | $677 |                                         | 315 |                                    |  |                     | *518 |                                  
|                                                     

* Write-offs, net of recoveries.

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