**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-K**

**x  ANNUAL REPORT PURSUANT TO SECTION 13 OR15 (d)OF THE SECURITIES EXCHANGE ACT OF 1934**

**Forthe fiscal year ended December 31, 2004**

**OR**

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

**Forthe transition period from            to            **

**CommissionFile Number 000-30654**

**APROPOS TECHNOLOGY, INC.**

(Exact name of registrantas specified in its charter)

| **Illinois**  (State or other jurisdiction of  incorporation or organization) |   | **36-3644751**  (I.R.S. Employer  Identification No.) |
|-------------------------------------------------------------------------------|--------|-------------------------------------------------------|

 

**One Tower Lane, 28thFloor**

**Oakbrook Terrace, Illinois60181**

(Address of principalexecutive offices, including zip code)

**(630) 472-9600**

(Registrant’s telephonenumber, including area code)

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

Securities registered pursuant to Section 12 (g) ofthe Act:

**Common Shares, par value $0.01 per share**

(Title of Class)

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15 (d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports) and (2) has been subject to such filing requirementsfor the past 90 days. Yes xNo o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-Kis not contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendments tothe Form 10-K. x

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Act). Yes oNo x

The aggregate market valueof the registrant’s voting shares held by non-affiliates of theregistrant (based upon the per share closing sale price of $3.90 on June 30,2004, and for the purpose of this calculation only, the assumption that all ofthe registrant’s directors and executive officers are affiliates) wasapproximately $36,000,000.

The number of sharesoutstanding of the registrant’s Common Shares, par value $0.01 per share, as ofMarch 1, 2005, was 17,834,513.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following documents are incorporatedby reference into this report:

Notice of AnnualMeeting of Shareholders and Proxy Statement for the Annual Meeting ofShareholders (the “2005 Proxy Statement”) (Part III)

 

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**FORWARD-LOOKING STATEMENTS**

Except for historicalinformation, the matters discussed in this Annual Report on Form 10-Kare forward-looking statements made pursuant to the safe harborprovisions for forward-looking statements described in the Private SecuritiesLitigation Reform Act of 1995. These forward-looking statements are basedon the Company’s current expectations and are subject to a number of risks,uncertainties, and assumptions relating to the Company’s operations, financialcondition, and results of operations. Should one or more of these risks oruncertainties materialize, or should the underlying assumptions proveincorrect, actual results may differ significantly from results expressed orimplied in any forward-looking statement made by the Company in thisAnnual Report. These and other risks are detailed elsewhere in this AnnualReport under “Risk Factors Associated with Apropos’ Business and FutureOperating Results.” The Company does not undertake any obligation to revisethese forward-looking statements to reflect future events orcircumstances.

**Part I**

**ITEM 1. BUSINESS.**

**The Company**

Apropos Technology, Inc. (“Apropos” or the “Company”)develops, markets, and supports a leading real-time, multi-channelinteraction management application platform for managing customer interactionsacross a variety of communications channels, including E-mail, Fax, Web,and Voice. Apropos’ solution enhances customer relationship managementapplications, such as sales, marketing, and service, through intelligent, value-basedmanagement of all interactions. The Company’s product offers on-linecustomers the flexibility to interact with businesses over the Internet,through E-mail or Web Collaboration, and also provides real-time accessto human assistance through either an interactive Web Chat or Voiceinteraction, to help in completing a sales or service transaction.

The Company’s interaction management software enablescustomers to prioritize, route, and respond to customer interactions acrossmultiple communications channels based on a single set of business rules.Apropos’ customers can establish business rules to manage customerinteractions based on their business value or service level. For example,customers can, on a real-time basis; (1) route specific types ofcustomer interactions to an agent based on that agent’s particular skills and (2) adjustthe number of interactions and agents assigned to a queue to ensure maximumresponsiveness to the customer. Customers can also monitor the status of eachinteraction and the performance of each contact center agent. Apropos’ solutionprovides comprehensive real-time and historical reporting on eachcustomer interaction and on the contact center resources necessary to managethose interactions.

The Company commenced operations in 1989. Frominception until 1995, the Company generated modest revenues from consultingservices while its primary operating activities consisted of research anddevelopment. In March 1995, the Company began shipping its first softwareproduct. The Company’s customers utilize its solution for a variety ofapplications such as sales, customer service, help desk, and field service. TheCompany has a diverse customer base in excess of 300 customers located in over20 countries.

The Company was incorporatedin 1989 in Illinois. Its principal executive offices are located at One TowerLane, 28th Floor, Oakbrook Terrace, Illinois 60181, and itstelephone number at that address is (630) 472-9600. Aproposmaintains a Web site at *www.apropos.com.*Information contained on the Company’s Web site is not incorporated into thisAnnual Report.

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**The Apropos Solution**

*Introduction*

The Companybelieves that to provide superior service and enhance customer loyalty andretention, businesses need to offer customers the maximum flexibility inchoosing how they interact with their business. Businesses need a multi-channelsolution that can support their business initiatives while maintaining orimproving service levels. As a result, businesses face significant challengesin managing and optimizing traditional Voice and Internet-based customerinteractions. These challenges include:

·       managingthe complexity of receiving and responding to customer interactions across avariety of communication channels;

·       providingand managing the resources to respond to E-mail and Web-basedinteractions;

·       respondingto customer demands for increasing service quality regardless of thecommunication channels used; and

·       improving insight into theoverall performance of the contact center and the increased number and type ofcustomer interactions.

*Capabilities*

The Company’s product is designed to interoperate withleading communications systems and business applications, with scalability tosupport high interaction volume. Apropos has a patented “universal queuing”capability, which allows voice, email and other communication media to beblended into a single queuing environment. Each interaction type may beprioritized uniquely based on the business value of each interaction.

The Company believes that a comprehensive solutionthat provides high quality service across multiple communication channels isrequired for businesses to meet the emerging needs of customer contact centers.The Company’s solution provides the following benefits to its customers:

*Seamless management of multiple communicationchannels through one business rules driven interface.  *Apropos’solution is designed to allow customers to manage customer interactions on areal-time basis across a variety of communication channels, through onebusiness rules driven interface. Customers can establish business rules tomanage customer interactions based on their business value or service levelwith the assurance that these business rules will operate consistentlyacross all interaction types.

*Comprehensive real-time information.  *Apropos’solution provides real-time information on the overall performance of thecontact center. Supervisors receive information that enables them to reactimmediately to changing business conditions. For example, if one or more agentsare servicing E-mail interactions and a supervisor is notified that aqueue of incoming Voice calls has exceeded pre-defined thresholds, thesupervisor can reassign these E-mail agents to handle the Voice callswith a simple mouse click.

*Integrated decision management reportingcapabilities.  *Apropos’ Decision Manager applicationenables customers to view historical reports through an advanced Web-basedinterface, providing information on critical aspects of the contact center’soperation, including agent performance, interaction volume, interaction types,and interaction disposition. Decision Manager provides “cradle-to-grave”reporting on each interaction, from initial customer contact to closure,allowing customers to better understand the entire interaction cycle. Theapplication also combines customer interaction information across multiplecommunication channels in a single integrated report allowing customers tobetter understand and manage their business.

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*Interoperability.  *Apropos’solution is designed to operate within the existing infrastructure of anenterprise, including traditional Voice and VoIP systems, E-mail, and Webservers. The product also allows access to system functionality through acomprehensive suite of Application Programming Interfaces (“APIs”). As industryconsolidation continues, the Company believes that the capacity to interoperatewith a variety of different communications environments and applicationsprovides a significant benefit to its customers.

*Modularity.  *The modulardesign of Apropos’ solution allows its customers to add functionality as theirneeds evolve. For example, customers may initially choose to implement theCompany’s solution for their traditional voice-based call center and then addother media types, such as E-mail and Web, as they further develop theirbusiness strategies. The Company believes the ability to easily addfunctionality is extremely important to its customers as they transition fromtraditional Voice-based call centers to multi-channel contact centers.

*Scalability.  *Apropos’solution is designed to allow for scalability, providing a variety of systemconfigurations that can complement the deployment needs of its customer base.The Apropos solution uses proprietary internal messaging technology to enablethe distribution of various system applications across wide area, local area,and IP-based networks. As a customer’s business grows, the Company’ssolution can be configured for additional capacity with demonstratedcapabilities supporting up to 10,000 concurrent agents.

*Rapid implementation.  *Aproposhas developed a repeatable consulting, design, and delivery methodology (“AproposMethods”) that is followed by its application consultants, professionalservices team, and partners, based on Apropos’ experience in implementingmulti-channel contact centers. Apropos Methods allows the Company’s customersto accurately estimate the resources required to implement their multi-channelcontact center solution. In addition, the Company provides several unique toolsto insure rapid implementation and integration with its customers’ businessapplications. Apropos Methods also allows the Company to quickly andeffectively train its partners in the implementation requirements of itssolution.

*Flexibility.  *A customer canconfigure and administer Apropos’ solution through its Web-basedapplication interface. This approach is easier and more cost-effectivethan traditional hardware-based systems, which may require codemodifications and recompilation. Customers can configure the Company’s solutionover a number of locations and can connect remote users, such as agents workingfrom home.

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

*Support of converged Voice anddata networks.  *Apropos’ solution supports its customers’desires to transition from traditional circuit-switched communicationsinfrastructure to IP-based infrastructures. The ability to support bothtraditional circuit-switched voice and IP-based voice enables the Company’scustomers to take advantage of the benefits of high performance converged Voiceand data networks, without requiring total displacement of their existinginfrastructure.

**Software Products**

The Company provides its solution via a suite ofsoftware applications that provide access to interaction managementfunctionality, data, and operational performance information. Theseapplications have been continuously refined over multiple product releases tomaximize ease of use and access to value-added features.

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Over the past decade, Apropos has delivered innovativeproducts and solutions. With Apropos Version 6.5, released in December 2004,Apropos has enhanced the business continuity of their customer supportoperations while avoiding the high costs associated with system, network, orother failures. Apropos Version 6.5 also provides for the operation of adistributed, fault-tolerant contact center architecture across any number ofsites that can continue to run and serve customers under virtually any failurescenario. With advanced new features for interaction handling, system monitoring,and reporting, Apropos continues to offer one of the most innovative solutionsavailable in the market today.

Apropos Version 6.5is a comprehensive enterprise software suite of modular interaction managementproducts designed to handle real-time interactions both inside and outside thecontact center. Features of the product include:

·       *Universal Queue*: Apropos Version 6.5 manages all interactions in a single universalqueuing environment. This allows interactions, such as calls, E-Mail, Webchats, Web requests, faxes, voice mail and tasks to be consistently prioritizedbased on the value of the customer, regardless of media channel.

·       *Support for multi-site configurations*:  The product can be deployed across any numberof physical locations, supporting virtual queuing and routing, real-timemanagement, and centralized administration.

·       *Enterprise class scalability*:  The product supports configurations thatscale to a large number of users, at very high interaction volumes.

·       *Switch independence and support*:  The product interfaces to a number andcombination of switches, including many traditional circuit-switched PBXs,central office (CO), and Centrex systems, and major IP telephony platforms.

·       *Standards-based open architecture*:  The product has Java APIs through aJ2EE-based open architecture, which allows interaction events and control to beaccessed by a variety of devices, such as wireless or desktop, or third-partyapplication.

The APIs allow theconstruction of custom-built user interfaces, the embedding of Aproposfunctionality into other applications, and the creation of interfaces betweenApropos and any other enterprise application. This open architecture allowsApropos to manage interactions and tasks for contact centers or any otherenterprise environment where the management and tracking of contacts isrequired.

·       *Packaged integrations*: The product supports certified, pre-packaged integrations to a number ofexternal applications, including CRM applications and databases, ERPapplications and databases, quality monitoring applications, call loggingapplications, readerboards, and workforce management applications.

·       *Flexible levels of fault tolerance*:  A number of different configurations aresupported to provide for customer specification of the appropriate level offault tolerance and recovery, from disk mirroring to system failover to trulyredundant constant computing

·       *Internationalization*: The user interfaces and documentation support localization, includingdouble-byte encoded languages such as Japanese and Chinese.

Version 6.5 usesApropos’ patented universal queue technology and a highly scalable interactionprocessing engine to provide self-service options, intelligent prioritized**routing and queuing, and interactionmanagement for all types of media and contact types:

·       *Voice:*  Managinginbound calls, outbound calls, scheduled and abandoned callbacks, and voicemail. Apropos Voice applications include ACD, IVR, CTI, advanced speechprocessing (speech 

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recognition,text-to-speech), outbound dialing, softphone, queued voice mail, and many voicemedia productivity tools.

·       *E-Mail:*Managing inbound and outbound E-mail. Apropos E-Mailapplications include intelligent classification or keyword classification,auto-acknowledgement, auto-response, auto-suggestions for agents, multi-partye-mail, multi-language e-mail support, and many e-mail media productivitytools.

·       *Web:*Managing web chat, web collaboration, and web callbackinteractions. Apropos Web applications include multiple chats per agent, chatmonitoring and barge, page push, page and form collaboration, webrequests and scheduled callbacks, and many web media productivity tools.

·       *FAX: *Managing inboundand outbound FAX. Apropos FAX applications include FAX routing, IVR-directedFAX-back, static outbound FAX, dynamic outbound FAX, and various FAX tools forthe agent.

·       *Task: *Queuing androuting any work-related item from any business application (e.g., CRM servicerequests, escalated work records, etc). Task interactions may be blended andprioritized in queue along with all other interactions, allowing work to beassigned to a skilled group rather than an individual. When an agent in thecontact center or a worker in the enterprise takes a task, Apropos can pop anddeliver data from any application to the desktop to facilitate the completionof this queued work.

Version 6.5 has sevendesktop applications that can be categorized by user, management andadministrative functions:

*User Applications*

·       *Apropos Agent,*a real-time application to control andmonitor interactions. This application includes a real-time visual queue, mediahandling tools for a variety of interaction types, softphone, response library,agent availability controls, and agent productivity charts.

·       *Apropos Interaction Vault,* a browser-based interactionarchival and query application that allows access to specific historical dataon individual interactions and all related interactions handled through thesystem. This application contains a query tool that provides access tointeractions for a designated time period for a specific customer, agent, mediatype, or any configurable piece of business data (e.g., service request, etc.)Specific interaction history is displayed, along with linked interactions(e.g., a reply e-mail to a call), and drill-down access to individualinteraction transcripts (voice mail, e-mail transcripts, web chat transcripts,CRM records, etc.)

*ManagementApplications*

·       *Apropos Resource Manager,*a real-time application thatprovides tabular and graphical information on the real-time performance of thecontact center, and allows control over resource assignments in the system. Thisapplication contains over 60 charts and graphs to monitor performance, allowsprogrammable alarms, provides easy-to-use tools for agent/group skillassignments, and provides real-time visibility into service levels, queuestatistics, and agent statistics.

·       *Apropos Decision Manager,* a browser-based application thatallows reports to be scheduled, run, exported, displayed, and printed forhistorical data on the performance of the overall operation, agents/workgroups,queues/queue-groups, IVR ports, and other resources in the system. Each reportis highly customizable , allowing access to thousands of different reportingviews into operational data.

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*AdministrativeApplications*

·       *Apropos Configuration Manager,* a browser-based applicationthat provides setup and administrative control over users, queues, groups,business rules, and displayable data in the system. This application provideseasy-to-use tools for configuring the system, including wizards forstep-by-step execution of complex tasks.

·       *Apropos System Manager,* a real-time application thatprovides visibility and control of processes in one or more Apropos systems. Thisapplication allows start/stop/scheduling control of processes, controls processparameters and connections, and exposes alert/alarm conditions throughconfigurable actions, including SNMP traps to external network managementtools.

·       *Apropos Application Designer,* a graphical application thatsupports the creation and modification of Voice and E-mail interaction flowsand corresponding business rules in the system. This application allowsthe construction of IVR call flows, including prompting, menu-driven accessthrough DTMF entry or speech recognition, message-of-the-day, auto-attendantfunctions, data-directed self-service, data-directed routing, and many otherfeatures. The application also allows the construction of E-mail flows withauto-acknowledgement, data-directed auto-response, keyword-based or intelligentclassification, data-directed routing, and knowledgebase-driven automaticsuggestions.

*Technology*

The Company’s Version 6.5 software is based on Apropos’proprietary interaction management system, which integrates, prioritizes anddistributes electronic communications across a variety of formats and media oftransmission. The technologies that provide these capabilities includemulti-channel integration technologies, an interaction distribution engine,specific technologies to manage different media types (voice, e-mail, web,etc.), messaging software, application integration software, decisionmanagement and reporting software, and administration and configurationtechnology.

Apropos Version 6.5 architectureis build on open industry standards and employs leading technologies, such asthe C++ and Java programming languages, with foundation software from Microsoft(Microsoft Foundation Classes) and Java (Java SDK 1.4x).

*Third PartySoftware*

The Company sellsthird party software, which is included with its product. This softwareincludes:

·       CrystalClear, a software package used to create report templates;

·       NetMerge,switch-link software used to integrate with external phone systems;

·       Nuance,a software package used for speech recognition capabilities;

·       PCAnywhere, an off-the-shelf communications package used for remotetroubleshooting;

·       FACSys,an off-the-shelf software package used to support the solutionsfaxing capabilities; and

·       RealSpeak,a software package used for text to speech capabilities.

The Company has commercialagreements with iNet Software (Crystal Clear); Intel Corporation (NetMerge);Nuance Software; Scansoft (RealSpeak); and emFast Software (FACSys) for thepurchase and distribution of their respective software. The Company purchasesPC Anywhere from a third party reseller. If one or more of these third partiesceases to sell their software, the Company will need to modify its product touse an alternative supplier or eliminate the affected product function, eitherof which could have a material adverse effect on its business, financialcondition and results of operations.

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*Product Offerings*

The Company’s current product is Apropos Version 6.5Multi-Channel Interaction Management Suite Enterprise Edition. Likeprevious versions, Version 6.5 provides management of customer interactionswithin a single, fully-integrated solution that provides businesscontinuity options along with significant improvements in fault tolerance anddisaster recovery capabilities. The Apropos solution provides business-rules drivenprioritization and escalation, so companies can individually manage eachinteraction based on its value to the business. In addition, Apropos providesreal-time information on all interaction types to enable contact centermanagers to better manage, monitor, and report on contact center activity. Keynew features include secured Web chat and collaboration, speech recognition,and vastly improved agent scalability. This version is now built on a J2EEarchitecture with a complete set of Java based APIs. These open APIs enable ourproduct to be embedded within existing business applications.

In order to furtherpenetrate global markets, the Company’s current version of its software providesa localization kit for the agent and resource manager applications. Thislocalization kit will allow the Company’s customers and resellers to developtheir own localized version of the Apropos product.

**Services**

*ProfessionalServices*

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

In addition to its software offerings, the Companyprovides its customers with a full range of professional services to assist thecustomer in implementing and utilizing the software. The Company has developedan implementation methodology, Apropos Methods, which is focused on deliveringhigh quality solutions to its customers. Through the use of Apropos Methods,each project is delivered in a consistent and repeatable manner. Thismethodology helps manage the risk of project overruns, budget overages, and thedelivery of a solution that does not meet the Company’s customer’sexpectations.

The Company espouses theproper implementation and execution of its product suite through its ownlearning center. The Company provides instructor-led technical educationabout its core and related technology. Apropos offers courses that supportperformance requirements of customers, partners, and employees. The Companyalso provides Internet-based and instructor-led courses to itscustomers’ contact center management, supervisors, and agents.

*Customer Supportand Enhancement Services*

The Company providessupport for its solution as well as support for its customer’s specificintegration of the Apropos solution. Apropos’ customer service professionalscan be reached via phone, fax, E-mail, or Web-based communications.The Company provides product support for the current version plus the previousversion of the Company’s products. Customers on older versions are encouragedto upgrade to the current version. The center is staffed with trainedprofessionals who have experience in the software and communicationsindustries. The Company uses its solution to manage its own multi-channelcontact center, so the Company can understand its customer’s needs from a user’sperspective. The Company generally has annual renewable support agreements withits customers. As of December 31, 2004, approximately 84% of Apropos’customers had an active support agreement.

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**Sales and Distribution**

The Company sells its products and services tocustomers directly and indirectly via resellers and original equipmentmanufacturers (OEMs). Under these indirect selling arrangements, the Companytypically does not provide services to the end-customer.

*Direct sales force.  *TheCompany has a direct sales force in the United States that consists of regionalsales managers and application consultants. Regional sales managers have directresponsibility for selling and account management, while applicationconsultants provide analysis and design of the solution to ensure the salesproposal covers all aspects of the customers’ needs.

The Company currently has regional sales managers inCalifornia, Missouri, New Jersey, North Carolina, and Virginia, in addition toits corporate headquarters in Illinois. The Company has application consultantsto support the direct sales force. The Company’s international direct sales aremanaged from its offices in Windsor, United Kingdom. The Company’sinternational sales force as of December 31, 2004 includes five salespersons.

*Resellers.  *The Companycurrently has a network of resellers that distribute and implement itssolution. The Company’s value-added resellers, or VARs, are an extensionof its direct sales force and have taken the Company’s solution into theirportfolio. The VARs have extensive experience in the contact center market andcustomer relationship management industry. The Company currently has resellersin the following countries: Australia, Canada, China, Japan, Korea, SouthAfrica, United Kingdom and the United States.

*OEMs.  *The Company currentlyhas two partners who brand its solution under their corporate name. MitelCorporation sells and markets the Company’s solution under the name Mitel CallCenter Commander. PeopleSoft sells and markets the Company’s solution under itsown name.

The Company plans to expand the number of VAR and OEMpartners in North America, Europe, Asia, and Australia. The Company believesthese efforts will result in increased sales and market penetration of itssolution.

The Company will continueits emphasis on developing and selling software and de-emphasizing salesof services, which has significantly lower profit margins. As the Companydevelops and expands its strategic partners, it will pursue outsourcing theimplementation function to VARs, OEMs, and system integrators.

**Marketing**

The Company’s marketingefforts are focused on developing and executing sales lead generation programsthat result in qualified customer leads, developing market awareness of itsproducts and services, and developing marketing programs that support itsstrategic partners.

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

·       Aco-marketing program through the Apropos Global Alliance Program;

·       Aglobal web-based seminar series;

·       Coverageby market research firms;

·       Directmarketing programs;

·       Publicrelations activities;

·       Traditionalprint and online advertising;

·       Website marketing; and

·       Editorialplacements.

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The Company’s Global Alliance Program provides a widearray of opportunities to expand and enhance the product and service offeringsof the Company’s strategic partners. The Company targets enterprise applicationcompanies and system integrators to participate in the program. In some cases,the Company participates in similar programs sponsored by these partners. Theprograms provide for joint software development or joint marketingopportunities to generate sales leads and referrals. The Company’s applicationpartners consist of enterprise software providers, such as PeopleSoft, Inc.,a subsidiary of Oracle, Inc.; Peregrine Systems, Inc.; Remedy, a BMCsoftware company; SAP; Siebel Systems, Inc and XP Systems, Inc. Servicepartners consist of system integrators that provide professional servicesresources to implement the Company’s solution.

The Company has focusedits marketing efforts around customer support in high technology companies andthe financial services sector and produced packaged product offerings for bothof these markets. The Company believes building market and brand awareness ofApropos and its product in these vertical markets will be essential, as itcompetes against larger traditional contact center suppliers. The Company alsointends to continue to build its market and brand awareness by expanding itschannel and partnership efforts.

**Customers**

The Company has a diverse base of over 300 customersthat utilize its solution for a variety of applications, such as customerservice and support, help desks, and field service management. During 2004,approximately 45% of the Company’s software revenues were derived from newcustomers. Notable new customers for 2004 include Affinity Federal CreditUnion, Ashland, Inc., Birch Telecom, First Card and the US TreasuryDepartment. Contributors to 2004 revenues from the Company’s existing customerbase include Ace Hardware, Freightliner Corporation, GE Fanuc Automation,Mellon Global Investment and Unisys Corporation. The Company has customers inmany different industries and is not dependent on any specific industry. TheCompany had no customers during 2004, 2003 or 2002 that represented more than10% of its total revenues.

New orders for the Company’s product include Voice andInternet-based functionality, such as E-mail and Web. During 2004,approximately 60% of new customers selected the Company’s multi-channel productsolution.

Revenues from the Company’s international sales as apercentage of total revenue were 18.2%, 23.0%, and 27.3% in 2004, 2003 and2002, respectively.

The Company intends toexpand its customer base by, among other things, expanding the number of itsstrategic partners and leveraging their distribution capabilities to sell theCompany’s product and increasing the Company’s co-marketing activitieswith its strategic partners.

**Competition**

Competitive global markets and the increasingacceptance of the Internet as an important medium for business and customerinteraction have led to greater customer demands for higher levels of service,responsiveness, convenience, personalization, and quality. With the growth ofInternet-based communications and commerce, businesses must provideconsistent high quality customer care and service across a variety ofcommunications media. Providing an appropriate level of service in thisenvironment is more complex than in the past when customer interactions wereprimarily voice-based and businesses provided service to their customersthrough traditional voice call centers. In the future, the Company believesthat an increasing number of customer interactions will be through Internet-basedcommunications, such as E-mail and Web-based contacts.

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

·       Platformproviders such as Aspect Telecommunications Corporation, Avaya Inc., CiscoSystems, Inc., Nortel Networks Corporation, Rockwell InternationalCorporation, and Siemens Corporation;

·       Interactionmanagement solution providers such as Genesys Telecommunications Laboratories, Inc.,a subsidiary of Alcatel SA, and Interactive Intelligence, Inc.;

·       Pointsolution providers such as eGain Communications Corporation and LivePerson, Inc.;and

·       Otherregional solution providers.

The Company believes that the principal competitivefactors in its market include product performance and features, quality ofcustomer support and service, time to implement, product scalability, sales anddistribution capabilities, and overall cost of ownership. The Company believesthat its solution currently competes favorably with respect to these factors. TheCompany may not be able to maintain its competitive position against currentand potential competitors, especially those with greater financial, marketing,service, support, and technical resources.

Many of the Company’scurrent and potential competitors have longer operating histories, greaterfinancial, technical, marketing, customer service and other resources, greatername recognition, and a larger installed base of customers than Apropos does.In the past several years, large, well-capitalized companies haveacquired or invested in a number of the Company’s current and potentialcompetitors. As a result, these competitors may be able (1) to respond tonew or emerging technologies and changes in customer requirements faster andmore effectively than Apropos can, and (2) to devote greater resources tothe development, promotion, and sale of products than Apropos can. Currentcompetitors have merged with or acquired other competitors or establishedcooperative relationships with other competitors to increase and expand thefeatures and capabilities of their products. If these competitors were toacquire additional market share, it could have a material adverse effect on theCompany’s business, financial condition, and results of operations.

**Research and Development**

The Company believes that its product developmentcapabilities are essential to its strategy of maintaining a leading technologyposition. As of December 31, 2004, the Company’s engineering team consistsof 29 engineers and software developers with experience in Voice communications,E-mail, and Web technology. The Company believes the combination ofdiverse technical and communications expertise contributes to the highlyintegrated functionality of its product. The Company spent $4.1 million,$5.3 million, and $7.9 million in 2004, 2003 and 2002, respectively,on research and development.

The Company has investedsignificant time and resources in creating a structured process for undertakingall product development. A formal product introduction process is used as aframework for defining, developing, and delivering products to the market.

**IntellectualProperty and Other Proprietary Rights**

To protect theCompany’s proprietary rights, it relies primarily on a combination of:

·       Patent,copyright, trademark and trade secret laws;

·       Confidentialityagreements with employees and third parties; and

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·       Protectivecontractual provisions such as those contained in license and other agreementswith consultants, suppliers, strategic partners, resellers, and customers.

The Company has not signed agreements containingprotective contractual provisions in every case and the contractual provisionsthat are in place and the protection they provide vary and may not provide theCompany with adequate protection in all circumstances. Despite the Company’sefforts to protect its proprietary rights, unauthorized parties may copyaspects of its products and obtain and use information that the Company regardsas proprietary. Other parties may breach confidentiality agreements and otherprotective contracts entered into with the Company, and the Company may notbecome aware of these breaches or have adequate remedies for them.

Apropos generally requires its employees to enter intoconfidentiality agreements containing non-disclosure, non-competition,and non-solicitation provisions. When they begin employment, the Company’semployees also generally sign offer letters specifying the basic terms andconditions of their employment.

Apropos currentlyhas nine patents granted in the United States and one patent granted in each ofIreland, the Netherlands, and the United Kingdom. These patents cover a systemand method for:

·       Distributingand routing calls as electronic interactions and allowing agents to selectcalls from a visible queue at their desktop;

·       Collectingand grouping caller identifications and associating them with third partydatabases;

·       Recordingcalls along with information related to the calls which is used to retrieve therecorded calls; and

·       Blendingelectronic interactions, such as voice mail, outbound calls, E-mail, Web-basedcommunications, and fax, for queuing and distribution to agents.

The Company also has two pending U.S. patentapplications that relate to the systems and methods described above. None ofthe Company’s patents expire before June 2012.

The Company has severalpending U.S. trademark applications.

**Employees**

As of December 31, 2004, Apropos had 99 employeesworldwide, including 29 in sales and marketing, 29 in research and development,28 in service and support, and 13 in finance and administration.

The Company’s futuresuccess also depends on its continuing ability to attract, train, and retainhighly qualified technical, sales, and managerial personnel. The Company cangive 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 notexperienced any work stoppages and considers its relations with itsemployees to be good.

**Executive Officers of the Company.**

*David McCrabb; age 57; ChiefExecutive Officer and President.*

Mr. McCrabb joined Apropos in August 2004 asinterim Chief Executive Officer and President. Prior to joining Apropos, Mr. McCrabbwas Chief Executive Officer of CETEC, a privately held enterprise softwarecompany, from 2003 to 2004. Prior to joining CETEC, Mr. McCrabb was ChiefExecutive Officer of NewMonics, a venture backed embedded software-toolscompany, from 2001 to 2003. Prior to joining NewMonics, Mr. McCrabb heldvarious senior executive marketing and sales positions and President of theUnix division at SCO, an infrastructure software company, from 1995 to 2001.

12

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The Company has retained asearch firm and is looking for an individual to become CEO and President on apermanent basis. Mr. McCrabb has agreed to assist in any transition.

*Francis J. Leonard; age 49; ChiefFinancial Officer and Vice President.*

Mr. Leonard joinedApropos in July 2000 as Chief Financial Officer. Prior to joining Apropos,Mr. Leonard was employed at BT Office Products, a distributor of officeproducts and furniture, from 1995 to 2000. Mr. Leonard served as VPFinance, Chief Financial Officer from 1997 to 2000, and prior to that asCorporate Controller, Chief Accounting Officer.

*Dick Cotter; age 51; Senior VicePresident of Sales.*

Mr. Cotter joinedApropos in August 2004 as Senior Vice President of Sales. Prior to joiningApropos, Mr. Cotter was Regional Vice President of Sales at YOUcentric, aCRM software company, which was acquired by JD Edwards, an enterprise softwarecompany, in 2000, from 2000 to 2004. In November 2002, Mr. Cotter wasnamed Director of Financial Services CRM Sales at JD Edwards, which wasacquired by PeopleSoft in 2003. Prior to joining YOUcentric, Mr. Cotterwas Area Sales Vice President at Platinum Technology, a provider of informationsolutions, which was acquired by Computer Associates in 1999, from 1997 to2000.

**SEC Filings**

The Company makesavailable 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 allamendments to those reports as soon as reasonably practicable after suchmaterial is electronically filed with or furnished to the Securities andExchange Commission. The Company’s website address is *www.apropos.com*.The Company’s Internet website and the information contained therein are notincorporated into this Annual Report on Form 10-K.

**ITEM 2.**                DESCRIPTIONOF PROPERTY.

The Company leases approximately 43,100 square feet ofoffice space in its headquarters building in Oakbrook Terrace, Illinois. Thelease expires in May 2006. As of December 31, 2004, future minimumlease payments under this lease approximated $1.8 million. During thethird quarter of 2003, the Company ceased using approximately 22,000 squarefeet of this space and is currently attempting to sublease the space. TheCompany leases approximately 800 square feet for its European headquarters inWindsor, United Kingdom. This lease expires in January 2006. As of December 31,2004, future minimum lease payments under this lease approximated$0.1 million.

Apropos believes thefacilities currently being utilized are adequate for its needs and thatadditional space will be available as needed.

**ITEM 3.**                LEGALPROCEEDINGS.

In November 2001, the Company was named as adefendant in several shareholder class action lawsuits that were filed infederal court in Chicago against the Company, certain of its current and formerdirectors and officers, and the underwriters of the Company’s initial publicoffering (“IPO”). These litigations areallegedly brought on behalf of purchasers of the Company’s stock, and assertthat the Company violated the federal securities laws by making misstatementsand omissions in its Registration Statement and Prospectus in connection withthe Company’s initial public offering in February 2000. The plaintiffsseek unspecified damages. In April 2002 an amended consolidated complaintwas filed which supersedes the original, separate complaints. In February 2004,the parties agreed to settle the case in exchange for a payment on behalf ofall defendants of $4.5 million, with all settlement amounts paid by the 

13

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Company’s director andofficer liability insurance carrier. In August 2004, the court entered afinal judgment dismissing the action.

The Company was named as a nominal defendant in ashareholder derivative action filed in February 2002 against certain ofits present and former directors and officers. The complaint was ostensiblybrought on the Company’s behalf and sought no relief directly from the Company.The complaint, subsequently amended in August 2002, alleged, among otherthings, that the alleged conduct challenged in the securities cases pendingagainst the Company in Chicago (described above) constituted a breach of thedefendants’ fiduciary duties to the Company. In September 2004, on theparties’ joint motion, the Court dismissed the action without prejudice. Theparties subsequently agreed to a settlement under which the defendants paid theplaintiff $65,000, $32,500 of which was paid by the Company’s director andofficer liability insurance policy and $32,500 was paid by the Company, inexchange for the plaintiff’s release of the defendants from any and all claimsrelating to the allegations asserted in the action.

In November 2001, the Company was named as a defendantin shareholder class action litigation that has been filed in federal court inNew York City against the Company and certain of its current and formerofficers and the underwriters of the Company’s IPO. This lawsuit alleges, amongother things, that the underwriters of the Company’s IPO improperly requiredtheir customers to pay the underwriters excessive commissions and to agree tobuy additional shares of the Company’s stock in the aftermarket as conditionsof receiving shares in the Company’s IPO. The lawsuit further claims that thesesupposed practices of the underwriters should have been disclosed in theCompany’s IPO prospectus and registration statement. In April 2002, anamended complaint was filed which, like the original complaint, allegesviolations of the registration and antifraud provisions of the federalsecurities laws and seeks unspecified damages. The Company understands thatvarious other plaintiffs have filed substantially similar class action casesagainst approximately 300 other publicly traded companies and their publicoffering underwriters in New York City, which along with the case against theCompany have all been transferred to a single federal district judge forpurposes of coordinated case management.

In July 2002, the Company, together with theother issuers named as defendants in these coordinated proceedings, filed acollective motion to dismiss the consolidated amended complaints against themon various legal grounds common to all or most of the issuer defendants. In October 2002,the Court approved a stipulation providing for the dismissal of the individualdefendants without prejudice. In February 2003, the Court issued adecision granting in part and denying in part the motion to dismiss thelitigation filed by the Company and the other issuer defendants. The claimsagainst the Company under the antifraud provisions of the securities laws weredismissed with prejudice; the claims under the registration provisions of thesecurities laws were not dismissed as to the Company or virtually any otherissuer defendant. The Court also denied the underwriter defendants’ motion todismiss in all respects.

In June 2003, the Company elected to participatein a proposed settlement agreement with the plaintiffs in this litigation. Ifultimately approved by the Court, this proposed settlement would result in adismissal, with prejudice, of all claims in the litigation against the Companyand against any of the other issuer defendants who elect to participate in theproposed settlement, together with the current or former officers and directorsof participating issuers who were named as individual defendants. The proposedsettlement does not provide for the resolution of any claims against theunderwriter defendants, and the litigation as against those defendants iscontinuing. The proposed settlement provides that the class members in theclass action cases brought against the participating issuer defendants will beguaranteed a recovery of $1 billion by insurers of the participating issuerdefendants. If recoveries totaling $1 billion or more are obtained by theclass members from the underwriter defendants, however, the monetaryobligations to the class members under the proposed settlement will besatisfied. In addition, the Company and any other participating issuerdefendants will be required to assign to the class members certain claims thatthey may have against the underwriters of their IPOs.

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The proposed settlement contemplates that any amountsnecessary to fund the settlement or settlement-related expenses would come fromparticipating issuers’ directors and officers liability insurance policyproceeds as opposed to funds of the participating issuer defendants themselves.A participating issuer defendant could be required to contribute to the costsof the settlement if that issuer’s insurance coverage were insufficient to paythat issuer’s allocable share of the settlement costs. The Company expects thatits insurance proceeds will be sufficient for these purposes and that it willnot otherwise be required to contribute to the proposed settlement.

Consummation of the proposed settlement is conditionedupon obtaining both preliminary and final approval by the Court. Formalsettlement documents were submitted to the Court in June 2004, togetherwith a motion asking the Court topreliminarily approve the form of settlement. Certain underwriters whowere named as defendants in the settling cases, and who are not parties to theproposed settlement, opposed preliminary approval of the proposed settlement ofthose cases. The Court has issued an order preliminarily approving the proposedsettlement in all respects but one. The plaintiffs and the issuer defendantsare in the process of assessing whether to proceed with the proposed settlement,as modified by the Court. If the**plaintiffs and the issuer defendants elect to proceed withthe**proposedsettlement, as modified by the Court, they will submit revised settlementdocuments to the Court. The underwriter defendants may then have an opportunityto object to the revised settlement documents. If the Court approves therevised settlement documents, it will direct that notice of the terms ofthe proposed settlement be published in a newspaper and mailed to all proposedclass members and schedule a fairness hearing, at which objections to theproposed settlement will be heard. Thereafter, the Court will determine whetherto grant final approval to the proposed settlement.

If the proposed settlement described above is notconsummated, the Company intends to continue to defend the litigationvigorously. Moreover, if the proposed settlement is not consummated, theCompany believes that the underwriters may have an obligation to indemnify itfor the legal fees and other costs of defending this suit. While the Companycannot guarantee the outcome of the above proceedings, the Company believesthat the final result of these actions will have no material effect on itsconsolidated financial condition, results of operations or cash flows.

The Company is a party invarious other disputes and litigation that have arisen in the course of theCompany’s business. In the opinion of management, although legal proceedingscan not be predicted with certainty, the ultimate outcome of these disputes andlawsuits are not expected to have a material impact on the Company’s financialcondition or results of operations, or cash flows.

**ITEM 4.**                SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

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**Part II**

**ITEM 5.**                MARKETFOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES.

**Market information**

Apropos’Common Shares trade on the Nasdaq National Market under the symbol “APRS.” Thefollowing table sets forth for the periods indicated the high and low saleprices of the Company’s Common Shares, as reported by Nasdaq. Such quotationsreflect inter-dealer prices without markup, markdown or commissions andmay not necessarily represent actual transactions.
| ** **     | ** ** | **Price range of Common Shares** | ** ** |
|----------------|------------|------------------------------------------------------|------------|
| ** **     | ** ** | **2004**                                             | ** ** | **2003** | ** ** |
| ** **     | ** ** | **High**                                             | ** ** | **Low** | ** ** | **High** | ** ** | **Low** | ** ** |
| First quarter  |       | $                                                    | 5.94       |   | $ | 3.46 |   | $ | 1.97 |   | $ | 1.20 |   |
| Second quarter |       | 6.61                                                 |       | 3.40 |   | 3.00 |   | 1.71 |   |
| Third quarter  |       | 4.08                                                 |       | 2.63 |   | 3.65 |   | 2.25 |   |
| Fourth quarter |       | 3.75                                                 |       | 2.57 |   | 4.19 |   | 2.30 |   |
|                |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |

 

**Shareholder information**

At March 1, 2005,there were 108 shareholders of record and 17,834,513 Common Shares outstanding.

**Dividend Policy**

The Company has not paidany dividends in the past and does not intend to pay cash dividends on itsCommon Shares for the foreseeable future. Instead, the Company intends toretain any earnings for use in the operation and expansion of its business. TheCompany’s board of directors will make any future determination of the paymentof dividends based upon various factors then existing, including, but notlimited to, the Company’s financial condition, operating results, and currentand anticipated cash needs. The payment of dividends may be limited by capitaland financing agreements that the Company may enter into in the future.

**Purchasesof Equity Securities by the Issuer**

During the fourth quarterof 2004, no purchase of Apropos’ Common Shares were made by or on behalf of theissuer or any affiliated purchaser. On September 15, 2004, the Companyaccepted 160,969 shares in payment of the exercise price and withholding taxesapplicable to the exercise of stock options granted under the Company’s 2000Omnibus Incentive Plan for 331,285 shares exercised by a former employee. Theshares were accepted at their fair market value of $3.39 per share.

**EquityPlan Compensation 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     |       |       | 2,235,383  |                                                                                                                                                 |       |                                                                                                             | $          | 2.95                                                                                        |       |   |   | 1,906,649 |   |   |
| Equity compensation plans not approved by security  holders |       |       | —     |                                                                                                                                                 |       |                                                                                                             | —     |                                                                                        |       |   | — |   |   |
| Total                                                       |       |       | 2,235,383  |                                                                                                                                                 |       |                                                                                                             | $          | 2.95                                                                                        |       |   |   | 1,906,649 |   |   |

 

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**ITEM 6.**                SELECTEDFINANCIAL DATA.

Thefollowing selected consolidated financial data shown below should be read inconjunction with “Item 7. Management’s Discussion and Analysis of FinancialCondition and Results of Operations” and “Item 8. Financial Statements andSupplementary Data” both included herein. The consolidated statements ofoperations data for the year-ended December 31, 2004 and the consolidatedbalance sheet data at December 31, 2004 are derived from the consolidatedfinancial statements audited by Grant Thornton LLP that are included herein.The consolidated statements of operations data for the two years ended December 31,2003 and the consolidated balance sheet data at December 31, 2003 arederived from the consolidated financial statements audited by Ernst &Young LLP that are included herein. The consolidated statements of operationsdata for the years ended December 31, 2001 and 2000 and the balance sheetdata at December 31, 2002, 2001, and 2000 are derived from auditedfinancial statements that are not included herein. The historical results arenot necessarily indicative of results to be expected for any future period.
| ** **                                            | ** ** | **Year ended December 31**                        | ** ** |
|-------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                            | ** ** | **2004**                                                         | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                            | ** ** | **in thousands, except per share data** | ** ** |
| Consolidated Statement of Operations Data:            |       |                                                             |       |   |   |   |   |   |   |   |   |
| Revenue:                                              |       |                                                             |       |   |   |   |   |   |   |   |   |
| Software licenses                                     |       | $                                                                | 7,415      |   | $ | 7,903 |   | $ | 8,259 |   | $ | 10,226 |   | $ | 19,359 |   |
| Services and other(1)                                 |       | 13,158                                                           |       | 12,232 |   | 12,635 |   | 12,182 |   | 12,236 |   |
| Total revenue                                         |       | 20,573                                                           |       | 20,135 |   | 20,894 |   | 22,408 |   | 31,595 |   |
| Cost of goods and services:                           |       |                                                             |       |   |   |   |   |   |   |   |   |
| Cost of software                                      |       | 649                                                              |       | 407 |   | 380 |   | 490 |   | 681 |   |
| Cost of services and  other(1)                        |       | 3,859                                                            |       | 4,227 |   | 5,744 |   | 7,259 |   | 8,038 |   |
| Total cost of  goods and services                     |       | 4,508                                                            |       | 4,634 |   | 6,124 |   | 7,749 |   | 8,719 |   |
| Gross margin                                          |       | 16,065                                                           |       | 15,501 |   | 14,770 |   | 14,659 |   | 22,876 |   |
| Operating expenses:                                   |       |                                                             |       |   |   |   |   |   |   |   |   |
| Sales and marketing                                   |       | 7,363                                                            |       | 7,519 |   | 13,471 |   | 16,569 |   | 15,672 |   |
| Research and development                              |       | 4,073                                                            |       | 5,349 |   | 7,878 |   | 8,076 |   | 7,160 |   |
| General and  administrative                           |       | 4,148                                                            |       | 5,611 |   | 8,115 |   | 7,458 |   | 9,002 |   |
| Stock compensation charge                             |       | —                                                           |       | 282 |   | 425 |   | 668 |   | 998 |   |
| Restructuring and other  charges                      |       | 1,291                                                            |       | 2,875 |   | 869 |   | 1,298 |   | — |   |
| Total operating  expenses                             |       | 16,875                                                           |       | 21,636 |   | 30,758 |   | 34,069 |   | 32,832 |   |
| Operating loss                                        |       | (810                                                             | )          | (6,135 | ) | (15,988 | ) | (19,410 | ) | (9,956 | ) |
| Other income                                          |       | 474                                                              |       | 461 |   | 947 |   | 2,661 |   | 1,814 |   |
| Net loss                                              |       | $                                                                | (336       | ) | $ | (5,647 | ) | $ | (15,041 | ) | $ | (16,749 | ) | $ | (8,142 | ) |
| Basic and diluted  loss per common share              |       | $                                                                | (0.02      | ) | $ | (0.34 | ) | $ | (0.90 | ) | $ | (1.02 | ) | $ | (0.57 | ) |
| Weighted-average  number of Common Shares outstanding |       | 17,324                                                           |       | 16,787 |   | 16,723 |   | 16,483 |   | 14,360 |   |

 
| ** **                                         | ** ** | **December 31**  | ** ** |
|----------------------------------------------------|------------|-----------------------|------------|
| ** **                                         | ** ** | **2004**              | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                         | ** ** | **in thousands** | ** ** |
| Consolidated Balance Sheet Data:                   |       |                  |       |   |   |   |   |   |   |   |   |
| Cash, cash  equivalents and short-term investments |       | $                     | 41,158     |   | $ | 39,265 |   | $ | 42,051 |   | $ | 53,897 |   | $ | 63,731 |   |
| Working capital                                    |       | 38,434                |       | 37,264 |   | 40,396 |   | 53,156 |   | 68,569 |   |
| Total assets                                       |       | 45,288                |       | 43,941 |   | 48,512 |   | 63,724 |   | 81,303 |   |
| Debt and capital  lease obligations(2)             |       | —                |       | — |   | — |   | — |   | 73 |   |
| Convertible  preferred shares                      |       | —                |       | — |   | — |   | — |   | — |   |
| Total  shareholders’ equity                   |       | 38,775                |       | 37,824 |   | 42,810 |   | 57,562 |   | 73,273 |   |
|                                                    |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

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*(1)**          2001– 2000 have been restated to include rebillable travel costs as revenue andcost of services.*

*(2)**          Includescurrent portions.*

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**ITEM 7**.                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion should be read in conjunctionwith the Company’s consolidated financial statements and notes to thoseconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States of America. Thepreparation of these financial statements requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities andthe disclosure of contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenue and expenses duringthe reporting period.

Management bases itsestimates and judgments on historical experience and on various other factorsthat are believed to be reasonable under the circumstances, the results ofwhich form the basis for making judgments about the carrying values of assetsand liabilities that are not readily apparent from other sources. Actualresults may differ from these estimates under different assumptions orconditions. Management believes the following critical accounting policies,among others, affect its more significant judgments and estimates used in thepreparation of its consolidated financial statements.

**Overview**

The Company develops, markets, and supports a leadingreal-time, multi-channel interaction management application formanaging customer interactions across a variety of communication channels,including E-mail, Fax, Web, and Voice. Apropos’ solution enhancescustomer relationship management applications, such as sales, marketing, andservice, through intelligent, value-based management of all interactions.The Company’s product offers on-line customers the flexibility tointeract with businesses over the Internet, through E-mail or Webcollaboration, and also provides access to human assistance through either aninteractive Web Chat or Voice interaction, to help in completing a sales orservice transaction.

The Company’s operationscommenced in January 1989, and, from inception to early 1995, operatingactivities consisted primarily of research and development and consulting. Asan 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.

**CriticalAccounting Policies and Estimates**

*Revenue recognition.  *TheCompany recognizes revenue from the sale of software licenses upon delivery.The Company recognizes revenue from fees for professional services when theyare completed. The Company recognizes support and maintenance services ratablyover the term of its maintenance contracts, which are typically annualcontracts. Training services are recognized as such services are completed.

The Company derives revenue principally from the saleof software licenses and from fees for implementation, technical support, andtraining services.

The Company markets its solution to its customersprimarily through its direct sales force, value-added resellers, andoriginal equipment manufacturers, or OEMs, in North America, Europe, SouthAmerica, Asia, Africa, and Australia. Revenue generated via resellers andOEMs accounted for 23.9%, 24.7%, and 19.5% of the Company’s total revenuefor 2004, 2003 and 2002, respectively. Management expects that revenue derivedfrom sales to resellers and OEMs may increase as a percentage of totalrevenue as the Company expands its product capabilities and focuses its salesefforts on its distribution channels.

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The Company relieson its customers and resellers to submit purchase orders for its product andservices. In addition, the Company enters into general sales contracts with itscustomers and resellers; however, none of its customers or resellers isobligated to purchase its product or its services pursuant to these contracts.All of the Company’s sales contracts contain provisions regarding thefollowing:

·       paymentterms and conditions;

·       warrantiesand repair procedures; and

·       supportand training obligations.

Typically, these contracts provide that the exclusiveremedy for breach of the Company’s specified warranty is either a refund of theprice paid or modification of the product to satisfy the warranty.

The Company hasgenerally experienced a product sales cycle of six to nine months. The Companyconsiders the life of the sales cycle to begin on the first face-to-facemeeting with the prospective customer and end when product is shipped. Thelength of the sales cycle for customer orders depends on a number of factors,including:

·       acustomer’s awareness of the capabilities of the type of solutions Apropos sellsand the amount of customer education required;

·       concernsthat the Company’s customer may have about its limited operating history andtrack record and the Company’s size compared to many of its larger competitors;

·       acustomer’s budgetary constraints;

·       thetiming of a customer’s budget cycles;

·       concernsof the Company’s customer about the introduction of new products by the Companyor its competitors that would render its current product noncompetitive orobsolete; and

·       downturnsin general economic conditions, including reductions in demand for contactcenter services.

The Company’s OEM contracts contain additionalprovisions regarding product technical specifications, labeling instructions,and other instructions regarding customization and rebranding. The Company’sOEM contracts contain volume discounts.

Sales to customers outsidethe United States accounted for 18.2%, 23.0%, and 27.3% of the Company’s totalrevenue during 2004, 2003 and 2002, respectively. Management expects theportion of the Company’s total revenue derived from sales to customers outsidethe United States to be comparable in the foreseeable future.

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

·       paymentsfor third party software used with the Company’s product;

·       thecost of compensation for technical support, education, and professionalservices personnel;

·       othercosts related to facilities and office equipment for technical support,education, and professional services personnel; and

·       thecost of reimbursable travel included in revenue.

The Company recognizes costs of software,implementation services, support and training services as they are incurred.

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*Operating expenses.  *TheCompany generally recognizes its operating expenses as they are incurred. Salesand marketing expenses consist primarily of compensation, commission, andtravel 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 expensesfor personnel and, to a lesser extent, independent contractors. General andadministrative expenses consist primarily of compensation for administrative,financial, and information technology personnel and a number of non-allocablecosts, including professional fees, legal fees, accounting fees, and bad debts.

*Capitalization of certain softwaredevelopment costs.  *Research and developmentexpenditures are charged to operations as incurred. SFAS No. 86, “Accountingfor the Costs of Computer Software To Be Sold, Leased, or Otherwise Marketed,”requires capitalization of certain software development costs subsequent to theestablishment of technological feasibility. Based on the Company’s productdevelopment process, technological feasibility is established upon completionof a working model. Costs incurred by the Company between completion of theworking model and the point at which the product is ready for general releasehave not been significant. Through December 31, 2004, all softwaredevelopment costs have been expensed.

*Allowance for doubtful accounts.  *TheCompany maintains an allowance for doubtful accounts to reflect the expecteduncollectability of accounts receivable based on past collection history andspecific risks identified among uncollected accounts. Accounts receivable arecharged to the allowance for doubtful accounts when the Company has determinedthat the receivable will not be collected. Accounts receivable balances aredetermined to be delinquent when the amount is past due based on thecontractual terms with the customer.

*Stock compensation charge.  *Stockcompensation charge represents the difference at the grant date between theexercise price and the pre-IPO deemed fair value of the Common Sharesunderlying the options. This amount was amortized over the vesting period ofthe individual options, which is typically four years and was fully amortizedby the end of 2003. Subsequent to the IPO, the exercise price of all optionsgranted is equal to the fair market value of the underlying Common Shares,resulting in no compensation charge.

*Incometaxes.  *The Company provides for income taxes under theliability method, which requires recognition of deferred tax liabilities andassets for the expected future tax consequences of events that have beenincluded in the financial statements or tax returns. Under this method, avaluation allowance is required against net deferred tax assets if, based uponthe available evidence, it is more likely than not that some or all of thedeferred tax assets will not be realized. Management regularly evaluates therecoverability of the deferred tax assets and the level of the valuationallowance. At such time as it is determined that it is more likely than notthat deferred tax assets are realizable, the valuation allowance will beappropriately reduced.

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**Results of Operations**

**Summary table**

Thefollowing table sets forth, for the periods indicated, the percentage of totalrevenue represented by certain items included in the Company’s “ConsolidatedStatements of Operations” in the consolidated financial statements. Percentagesare calculated from operating results rounded to the nearest thousand and maynot equal calculations from the numbers referenced below in this section whichmay be rounded to the nearest hundred thousand. Operating performance for anyperiod is not necessarily indicative of performance for any future periods.
| ** **                        | ** ** | **Year ended December 31** | ** ** |
|-----------------------------------|------------|-------------------------------------------|------------|
| ** **                        | ** ** | **2004**                                  | ** ** | **2003** | ** ** | **2002** | ** ** |
| Revenue:                          |       |                                      |       |   |   |   |   |
| Software licenses                 |       | 36.0                                      | %          | 39.3 | % | 39.5 | % |
| Services and other                |       | 64.0                                      |       | 60.7 |   | 60.5 |   |
| Total revenue                     |       | 100.0                                     |       | 100.0 |   | 100.0 |   |
| Cost of goods and services:       |       |                                      |       |   |   |   |   |
| Cost of software                  |       | 3.1                                       |       | 2.0 |   | 1.8 |   |
| Cost of services and other        |       | 18.8                                      |       | 21.0 |   | 27.5 |   |
| Total cost of  goods and services |       | 21.9                                      |       | 23.0 |   | 29.3 |   |
| Gross margin                      |       | 78.1                                      |       | 77.0 |   | 70.7 |   |
| Operating expenses:               |       |                                      |       |   |   |   |   |
| Sales and marketing               |       | 35.8                                      |       | 37.3 |   | 64.5 |   |
| Research and development          |       | 19.8                                      |       | 26.6 |   | 37.7 |   |
| General and administrative        |       | 20.1                                      |       | 27.9 |   | 38.8 |   |
| Stock compensation charge         |       | 0.0                                       |       | 1.4 |   | 2.0 |   |
| Restructuring and other charges   |       | 6.3                                       |       | 14.3 |   | 4.2 |   |
| Total operating  expenses         |       | 82.0                                      |       | 107.5 |   | 147.2 |   |
| Operating loss                    |       | (3.9                                      | )          | (30.5 | ) | (76.5 | ) |
| Other income                      |       | 2.3                                       |       | 2.3 |   | 4.5 |   |
| Net loss                          |       | (1.6                                      | )%         | (28.2 | )% | (72.0 | )% |

 

**YearEnded December 31, 2004, Compared to Year Ended December 31, 2003**

*Revenue.  *Total revenueincreased 2.2% to $20.6 million in 2004, from $20.1 million in 2003.Revenue from international sales decreased by 19.1% to $3.7 million in2004, from $4.6 million in 2003. The Company attributes these changesprimarily to sales organizational changes implemented during 2003.

Revenue from software licenses decreased 6.2% to $7.4million in 2004, from $7.9 million in 2003. The Company attributes thisdecrease primarily to lower purchases from existing customers which totaled 55%in 2004 compared to 65% in 2003. Existing customer purchases tend to vary basedon the timing of system expansions and availability of budgeted capitalexpenditure funds. The Company added fewer new customers in the year ended December 31,2004 compared to the year ended December 31, 2003, however, the Companydid experience an increase of 26.8% in the average selling price of these newsystems.

Revenue from services and other, consisting ofprofessional services, customer support and rebillable expenses, increased 7.6%to $13.2 million in 2004, from $12.2 million in 2003. The Company primarilyattributes this increase to increased customer support revenue as a result ofthe Company’s expanding customer base, and to increased professional servicesrevenue due to increasing demand for implementing system upgrades.

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*Gross margin.  *Gross marginsincreased to 78.1% of total revenue in 2004, from 77.0% of total revenue in2003. This increase is due primarily to improved utilization of implementationand customer support staff.

Gross margins from software licenses represented 91.2%of software revenue in 2004, and 94.9% of software revenue in 2003. The cost ofsoftware licenses consists primarily of third party software included in theCompany’s software offerings. The decrease in 2004 is principally related tothe Company offering a new complementary product that expanded the capabilitiesof the Company’s offerings.

Gross margins from services and other represented70.7% of services and other revenue in 2004, and 65.4% of services and otherrevenue in 2003. This increase is due primarily to improved utilization ofimplementation and customer support staff.

*Operating expenses.  *Operatingexpenses decreased 22.0% to $16.9 million in 2004, from $21.6 millionin 2003. Restructuring and other charges of $1.3 million in 2004 decreased from$2.9 million in 2003. In addition, the overall decrease reflects lower averagestaffing levels, facility costs and depreciation charges in 2004 compared to2003. Average headcount, as computed using month-end totals, was 20% lower for2004 than 2003. As a percentage of total revenue, operating expenses were 82.0%in 2004 and 107.5% in 2003. Total operating headcount increased slightly to 71employees at December 31, 2004, from 70 employees at December 31,2003.

Sales and marketing expenses decreased 2.1% to$7.4 million in 2004, from $7.5 million in 2003. The decrease insales and marketing expenses resulted primarily from lower personnel costs, asa result of fewer personnel, offset to a lesser extent by higher commissions.

Research and development expenses decreased 23.9% to$4.1 million in 2004, from $5.3 million in 2003. The decrease inresearch and development expenses related primarily from reductions inpersonnel, and to a lesser extent by a decreased use of outside consultants.

General and administrative expenses decreased 26.1% to$4.1 million in 2004, from $5.6 million in 2003. The decreases ingeneral and administrative expenses were primarily due to lower facility costsrelated to the consolidation of the corporate facility, lower legal fees, lowerinsurance costs, depreciation and lower personnel costs, as a result of fewerpersonnel.

Stock compensation charge decreased 100% to $0 in2004, from $282,000 in 2003. The decrease was due to all options issued priorto the IPO having become fully vested. Stock compensation charge represents thedifference at the grant date between the exercise price and the pre-IPO deemedfair value of the Common Shares underlying the options. This amount wasamortized over the vesting period of the individual options, which is typicallyfour years.

Restructuring and other charges decreased 55.1% to$1.3 million in 2004, from $2.9 million for 2003. In the first three quartersof 2004, the Company recorded charges of $1.3 million. In the third quarter of2004, the Company recorded a charge of $555,000 related to the separationagreement with the Company’s former CEO, which consisted of three components. Thefirst component was severance totaling $239,000 from the pre-existingemployment agreement; the second component was stock compensation charge of$246,000 for the acceleration of option vesting; and the third component wasrelated legal fees of $70,000. In the first and third quarters of 2004, theCompany recorded charges related to the relocation of the U.K. operations. Inlate January 2004, the U.K. operations moved into new premises that weremore suitable for their current staffing levels. The old facility, which had alease through March 2005, was in use until the move. The U.K. leasetermination charge of approximately $357,000, consisted of forfeiture of therent deposit, abandonment of assets, cancellation of certain telephonycontracts and other direct disposal costs. Additionally, the Company hasrecorded adjustments to increase the reserve related to the consolidation ofthe corporate headquarters in the first, second and third quarters totaling$379,000. These adjustments are due to the fact the Company has been unable tofind a tenant to sublet the excess facility space and 

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believes that in thecurrent market the Company is unlikely to find a tenant to sublease the spacethrough the end of the lease term of May 2006. In the first and thirdquarters of 2003, the Company recorded charges of $2.9 million. In the thirdquarter of 2003, the Company conducted an extensive review of its operations tobetter align its operating cost structure with current revenue levels. Thisreview focused on staffing levels, facility needs and long-lived assetsutilized in the business. As a result of this review, the Company recorded aRestructuring and other charges of $2.4 million. This charge was comprised ofthree components: a charge related to staff reductions of $0.7 million, afacility termination charge of $1.3 million and an asset impairment charge of$0.4 million. In the first quarter of 2003, the Company recorded a charge of$448,000. This charge related to staff reductions of 30 persons.

*Other income and expense.  *Interestincome was $0.5 million in 2004, and $0.5 million in 2003. The slightincrease in interest income is a result of higher cash, cash equivalents, andshort-term investment balances and a slight increase in investment yields.

*Income taxes.  *Therehas been no provision or benefit for income taxes for any period since 1995 dueto the Company’s operating losses. As of December 31, 2004, the Companyhad approximately $54.2 million of domestic net operating losscarryforwards for federal income tax purposes, which expire beginning 2011through 2024 and foreign operating losses of approximately $3.8 million with nocarry forward limits. The Company’s use of these net operating losses may belimited in future periods.

**YearEnded December 31, 2003, Compared to Year Ended December 31, 2002**

*Revenue.  *Total revenuedecreased 3.6% to $20.1 million in 2003, from $20.9 million in 2002.Revenue from international sales decreased by 18.9% to $4.6 million in2003, from $5.7 million in 2002.

Revenue from software licenses decreased 4.3% to $7.9million in 2003, from $8.3 million in 2002. The Company attributes thisdecrease primarily to general market conditions within the Company’s businesssegment. The Company added fewer new customers in the year ended December 31,2003 compared to the year ended December 31, 2002. Revenue from softwarelicenses from new customers totaled 35% for 2003 compared to 56% for 2002.

Revenue from services and other, consisting ofprofessional services, customer support and rebillable expenses, decreased 3.2%to $12.2 million in 2003, from $12.6 million in 2002. An increase in customersupport revenue to $9.0 million in 2003 from $7.9 million in 2002 as a resultof the Company’s expanding customer base was principally offset by lowerprofessional services due to fewer customers purchasing new systems and arelated decrease in rebillable travel revenue.

*Gross margin.  *Gross marginsincreased to 77.0% of total revenue in 2003, from 70.7% of total revenue in2002. This improvement is due primarily to a smaller professional servicesorganization with higher utilization rates. This improvement was also due to alesser extent by lower rebillable travel costs, which provides no gross margin.

Gross margins from software licenses represented 94.9%of software revenue in 2003, and 95.4% of software revenue in 2002. The cost ofsoftware licenses consists primarily of third party software used inconjunction with the Company’s software.

Gross margins from services and other represented65.4% of services and other revenue in 2003, and 54.5% of services and otherrevenue in 2002. This improvement is due primarily to a smaller professionalservices organization with higher utilization rates. This improvement was alsodue to a lesser extent by lower rebillable travel costs, which provides nogross margin.

*Operating expenses.  *Operatingexpenses decreased 29.7% to $21.6 million in 2003, from $30.8 millionin 2002. This decrease is primarily the result of reduced staffing levels. As apercentage of total revenue, operating expenses were 107.5% in 2003 and 147.2%in 2002. Offsetting this decrease to a lesser extent was 

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an increase in restructuringand other charges to $2.4 million in 2003 from $0.9 million in 2002. Totaloperating headcount decreased by 46.6% to 70 employees at December 31,2003, from 131 employees at December 31, 2002.

Sales and marketing expenses decreased 44.2% to$7.5 million in 2003, from $13.5 million in 2002. The decrease insales and marketing expenses resulted primarily from lower personnel costs, asa result of fewer personnel, and streamlined marketing programs.

Research and development expenses decreased 32.1% to $5.3 millionin 2003, from $7.9 million in 2002. The decrease in research anddevelopment expenses related primarily from reductions in personnel, and to alesser extent by a decreased use of outside consultants.

General and administrative expenses decreased 30.9% to$5.6 million in 2003, from $8.1 million in 2002. The decrease ingeneral and administrative expenses was primarily due to lower personnel costsrelated to fewer personnel and compensation charge related to the 2002 loanforgiveness, lower bad debt expense, lower professional fees, lower facilitycosts and lower depreciation. These decreases were offset to a lesser extent byhigher insurance costs.

Stock compensation charge decreased 33.6% to $282,000in 2003, from $425,000 in 2002. The decrease from the prior period primarilyreflects cancelled options resulting from employees that are no longer employedby the Company and full vesting of the underlying options. The stockcompensation charge primarily represents the difference at the grant date betweenthe exercise price and the pre-IPO deemed fair value of the Common Sharesunderlying the options. This amount is being amortized over the vesting periodof the individual options, which is typically four years.

Restructuring and other charges increased 230.8% to$2.9 million in 2003, from $0.9 million for 2002. In 2003, the Companyconducted two reviews of its operations to better align its operating coststructure with its revenue levels. Both the first and third quarter reviewsfocused on staffing levels while the third quarter review also focused onfacility needs and long-lived assets utilized in the business. As a result ofthese reviews, the Company recorded a charge of $2.9 million during 2003. Thischarge was comprised of three components: a charge related to staff reductionsof $1.2 million, a facility termination charge of $1.3 million and an assetimpairment charge of $0.4 million. The charge for staff reductions impacting 63people was based on the severance payments and residual benefits to be paid. Thefacility termination charge related to leased space that the Company ceasedusing on August 31, 2003. This facility termination charge is comprised offuture lease obligations and related expenses offset by anticipated income fromsubletting the space. This facility termination charge also includes $47,000related to disposal of assets that were abandoned as part of the exit plan. Theasset impairment charge related to software infrastructure systems andfurniture and fixtures. As a result of these staff reductions, these assets nolonger provided benefit to the Company and therefore were abandoned. The assetimpairment charge of $345,000 was based on the net book value of the assets asof September 30, 2003, the date of abandonment. In the third quarter of2002, the Company recorded a Restructuring and other charges of $869,000. Thischarge related to staff reductions of 18 persons, including involuntaryterminations of three senior level positions with contractual obligations, andformer employee settlement costs.

*Other income and expense.  *Interestincome was $0.5 million in 2003, and $1.0 million in 2002. The decrease ininterest income is a result of lower cash, cash equivalents, and short-terminvestment balances and a decline in investment yields.

*Income taxes.  *Therehas been no provision or benefit for income taxes for any period since 1995 dueto the Company’s operating losses. As of December 31, 2003, the Companyhad approximately $53.0 million of domestic net operating losscarryforwards for federal income tax purposes, which expire beginning 2011through 2023 and foreign operating losses of approximately $8.5 million with nocarry forward limits. The Company’s use of these net operating losses may belimited in future periods.

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**Liquidity andCapital Resources**

The Company’s annual operatingactivities resulted in net cash inflows of $1.1 million in 2004, which is theCompany’s first year of net cash inflows generated from operating activities. Thiscompares to net operating cash outflows of $3.1 million in 2003 and$11.8 million in 2002. This improvement in cash generated from operationsfrom 2003 to 2004 and 2002 to 2003 resulted primarily from a reduction of netlosses in each respective year. The decreases in net losses over these periodswere the result of lower operating expenses due to fewer personnel andincreased gross margins due to improved staff utilization. Completelyoffsetting the net loss in 2004, the operating cash inflows benefited primarilyfrom non-cash expenses, increases to accrued compensation and deferred revenuebillings and a decrease in prepaid expenses, offset to a lesser extent by anincrease to accounts receivable. The operating cash outflows for 2003 and 2002were primarily impacted by net losses experienced by the Company. In additionto lower operating expenses, operating activities in 2003 were offset by anon-cash charge of $0.4 million, which related to asset impairment and $1.3million for facility termination costs. Operating activities for 2003 and 2002were offset by non-cash charges for amortization of stock-basedcompensation and depreciation.

The Company’s investingactivities resulted in net cash inflows of $203,000 in 2004 and $13.3 millionin 2002 and net cash outflows of $6.7 million in 2003. The inflows in 2004 and2002 were primarily the result of the maturity of short-term investments offsetby the purchase of short-term investments and capital expenditures. The outflowin 2003 was primarily the result of the purchase of short-term investments, andto a lesser extent capital expenditures, offset by the maturity of short-terminvestments.

Financing activitiesgenerated net inflows of $1,041,000, $406,000 and $256,000 for 2004, 2003,2002, respectively. The inflows in 2004, 2003 and 2002 were from proceeds fromthe sale of stock through the Company’s stock option plan and employee stockpurchase plan.

As of December 31,2004, the Company had no long-term obligations other than operating leasesrelated to facilities utilized by the Company. The following table summarizesthe minimum lease payments for these operating leases as of December 31,2004:
| ** **                         | ** ** | **Total**             | ** ** | **Less than 1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than 5 years** | ** ** |
|------------------------------------|------------|-----------------------|------------|-------------------------------------|------------|--------------------|------------|--------------------|------------|--------------------------------------|------------|
| ** **                         | ** ** | **in thousands** | ** ** |
| Operating leases                   |       | $                     | 1,949      |                                |       | $                  | 1,403      |               |       |                                 | $          | 546 |   |   |   | None |   |   |   | None |   |   |
| Total contractual cash obligations |       | $                     | 1,949      |                                |       | $                  | 1,403      |               |       |                                 | $          | 546 |   |   |   | None |   |   |   | None |   |   |

 

The Company believes thatits capital requirements, in large part, depend on future results of operationsand, ultimately, achievement of profitability. The Company expects to devoteresources to research and development efforts, expand sales channels, marketinglead generation programs, fund capital expenditures, and provide for workingcapital and other general corporate purposes. Management believes that theexisting cash and short-term investment balances will be sufficient to meet theworking capital and capital expenditure requirements for at least the nexttwelve months.

**RecentlyIssued Accounting Standards**

In December 2004, theFASB issued FAS No. 123(R), “Share-Based Payment” (FAS 123(R)). Thisstatement requires that the compensation cost relating to share based paymenttransactions be recognized in the financial statements. Compensation cost is tobe measured based on the estimated fair value of the equity-based compensationawards issued as of the grant date. The related compensation expense will bebased on the estimated number of awards expected to vest and will be recognizedover the requisite service period (often the vesting period) for each grant.The statement requires the use of assumptions and judgments about future eventsand some of the inputs to the valuation models will require considerablejudgment by management. FAS No. 123(R) replaces FAS No. 123, “Accountingfor Stock Based Compensation,” and supersedes APB 25, “Accounting for StockIssued to Employees.” The provisions of 

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FAS 123(R) arerequired to be applied by public companies as of the first interim or annualreporting period that begins after June 15, 2005, which is third quarter2005 for Apropos. Apropos intends to continue applying APB 25 to equity-basedcompensation awards until the effective date of FAS 123(R). At the effectivedate of FAS 123(R), Apropos expects to use the modified prospective applicationtransition method without restatement of prior interim periods in the year of adoption.This will result in recognizing compensation cost based on the requirements ofFAS 123(R) for all equity-based compensation awards issued after July 1,2005. For all equity-based compensation awards that are unvested as of July 1,2005, compensation cost will be recognized for the unamortized portion ofcompensation cost not previously included in the FAS No. 123 pro formafootnote disclosure. The impact on the Company’s results of operations orfinancial position as of the adoption of this pronouncement is not expected tobe materially different from the pro-forma results included in Note 3 of theConsolidated Financial Statements.

**Inflation**

The impact of inflation onthe Company’s operating results has been moderate in recent years, reflectinggenerally lower rates of inflation in the economy. While inflation has not hada material impact on operating results, there is no assurance that the Company’sbusiness will not be affected by inflation in the future.

**RiskFactors Associated With Apropos’ Business and Future Operating Results**

Apropos’ future operatingresults may vary substantially from period to period. The price of the Company’sCommon Shares has and will fluctuate in the future, and an investment in theCompany’s Common Shares is subject to a variety of risks, including but notlimited to the specific risks identified below. Inevitably, some investors inthe Company’s securities will experience gains, while others will experiencelosses depending on the prices at which they purchase and sell the Company’ssecurities. Prospective and existing investors are strongly urged to carefullyconsider the various cautionary statements and risks set forth in this AnnualReport.

**RisksRelated To The Company’s Business**

*TheCompany has not been profitable since 1994.*

While the Company hasreported a profit for four of the last five quarters, it has not reported anannual profit since 1994. The Company incurred net losses in the most recentyears of $0.3 million in 2004, $5.7 million in 2003, and $15.0 millionin 2002. The Company intends to continue to make necessary investments in itsresearch and development, marketing, and sales operations. As a result, theCompany may experience losses and negative cash flow from its operations infuture periods. Even if it does achieve profitability, the Company makes noassurance that it will be able to sustain or increase profitability on aquarterly or annual basis in the future.

*TheCompany has only recently been able to fully fund operations from cashgenerated by its business, and it may not be able to do so in the future.*

While the Company was ableto fully fund operations from cash generated by its business in 2004, it hasnot been able to fully fund its annual operations from 1995 through 2003. TheCompany has principally financed its operations through the private placementof convertible preferred shares, bank borrowings, short-term loans, andmost recently through its IPO. If the Company does not generate sufficient cashresources from its business to fund operations, its growth could be limitedunless it is able to obtain additional capital through equity or debtfinancings. The Company’s inability to grow as planned may reduce its chancesof achieving profitability, which, in turn, could have a material adverseeffect on the market price of its Common Shares.

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*The Company’s lengthy sales cycle has contributed andmay continue to contribute to the quarter-to-quarter variabilityand unpredictability of its revenue and operating results which could adverselyaffect the market price of its Common Shares.*

The Company has generally experienced a lengthyproduct sales cycle, averaging approximately six to nine months. The Companyconsiders the life of the sales cycle to begin on the first face-to-facemeeting with the prospective customer and end when the product is delivered.The Company’s prospective customers’ decisions to license its product oftenrequire significant investment and executive level decision-making, anddepend on a number of factors.

The lengthy sales cycle isone 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 fromquarter to quarter, which makes it difficult for the Company to forecastsoftware license revenue and could cause volatility in the market price of itsCommon Shares. Excessive delay in the product sales cycle could materially andadversely affect the Company’s business, financial condition, and results ofoperations.

*The Company’s future business prospects depend in parton the Company’s ability to maintain and improve its current product and todevelop new products and product features.*

The Company believes thatits future business prospects depend in large part on its ability to maintainand improve its current product and to develop new products and productfeatures on a timely basis. The Company’s product will have to achieve marketacceptance, maintain technological competitiveness, and meet an expanding rangeof customer requirements. As a result of the complexities inherent in theCompany’s product, major new products and product features require longdevelopment and testing periods. The Company may not be successful indeveloping and marketing, on a timely and cost effective basis, new products orproduct features that respond to technological change involving industrystandards or customer requirements. Significant delays in the generalavailability of new releases of the Company’s product or significant problemsin the installation or implementation of new releases of its product could havea material adverse effect on the Company’s business, financial condition, andresults of operations.

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

Future versions ofhardware and software platforms embodying new technologies and the emergence ofnew industry standards could render the Company’s product obsolete ornoncompetitive. The market for the Company’s product is characterized by:

·       rapidtechnological change;

·       significantdevelopment costs;

·       frequentnew product introductions;

·       changesin the requirements of the Company’s customers and their clients; and

·       evolvingindustry standards.

The Company’s product isdesigned to work in conjunction with and on a variety of hardware and softwareplatforms used by its customers. However, the Company’s software may notoperate correctly on evolving versions of hardware and software platforms,programming languages, database environments, and other systems that itscustomers may choose to use. Also, the Company must constantly modify andimprove its product to keep pace with changes made to these platforms and todatabase systems and other applications. This may result in uncertaintyrelating to the timing and nature of new product announcements, introductions,or modifications, which may cause confusion in the market and harm the Company’sbusiness. If the Company fails to promptly modify or improve its products inresponse to 

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evolvingindustry standards or customer demands, its product could rapidly becomeobsolete, which would materially and adversely affect the Company’s business,financial condition, and results of operations.

*Competition couldreduce the Company’s market share and decrease its revenue.*

The market for the Company’s product is highlycompetitive and the Company expects competition to increase in the future. Inaddition, because the Company’s industry is evolving and characterized by rapidtechnological change, it is difficult for the Company to predict whether, when,and by whom new competing technologies or new competitors may be introducedinto its markets. Currently, the Company’s competition comes from platformproviders, interaction management solution providers, and stand-alonepoint solution providers.

The Company makes noassurance that it will be able to compete successfully against current orfuture competitors. In addition, increased competition or other competitivepressures may result in price reductions, reduced profit margins, or loss ofmarket share, each of which could have a material adverse effect on the Company’sbusiness, financial condition, and results of operations.

*Demand for communications and interaction managementsoftware for multi-channel contact centers may grow more slowly than the Companycurrently anticipates.*

The Company’s revenue hasbeen generated from licenses of its product and related support andprofessional services. If the demand for communications and interactionmanagement software does not continue to grow as anticipated within the Company’stargeted markets, the Company’s ability to expand its business as planned couldbe materially and adversely affected.

*If the Company fails to establish and maintainstrategic relationships, the Company’s ability to increase its revenue andprofitability will suffer.*

The Companycurrently has strategic relationships with resellers, original equipmentmanufacturers, or OEMs, system integrators, and enterprise applicationproviders. Apropos depends on these relationships to:

·       distributeits products;

·       generatesales leads;

·       buildbrand and market awareness; and

·       implementand support its solution.

The Company believes thatits success depends, in part, on its ability to develop and maintain strategicrelationships with resellers, OEMs, system integrators, and enterpriseapplication providers. The Company generally does not have long-term orexclusive agreements with these strategic partners. If any of the Company’sstrategic relationships are discontinued, sales of its products and servicesand its ability to maintain or increase its customer base may be substantiallydiminished.

*If the Company’s strategic partners fail to marketApropos’ product and services effectively or provide poor customer service, theCompany’s reputation will suffer and it could lose customers.*

If the Company’s strategicpartners fail to market Apropos’ product and services effectively, the Companycould lose market share. Some of the Company’s strategic partners also provideprofessional services to Apropos’ customers in connection with theimplementation of its product. Additionally, if a strategic partner providespoor customer service, the value of the Company’s brand could be diminished.Therefore, the Company must maintain relationships with strategic partners throughoutthe world that are capable of providing high-quality sales and serviceefforts. If the Company loses a strategic partner in a key 

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market,or if a current or future strategic partner fails to adequately providecustomer service, the Company’s reputation will suffer and sales of its productand services could be substantially diminished.

*The Company may have difficulties successfullymanaging its growth, which may reduce its chances of achieving and maintainingprofitability.*

The Company’s revenuesincreased to $20.5 million in 2004 from $9.4 million in 1998. TheCompany’s goal is to expand its business operations in the future. The Company’sexisting management, operational, financial, and human resources, andmanagement information systems and controls may be inadequate to support futuregrowth. If the Company is not able to manage its growth successfully, it willnot grow as planned and the Company’s business could be adversely affected.

*Infringement of the Company’s proprietary rights couldaffect its competitive position, harm its reputation or increase its operatingcosts.*

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

*Infringement claimscould adversely affect the Company.*

A third party could claimthat the Company’s technology infringes its proprietary rights. As the numberof software products in the Company’s target market increases and thefunctionality of these products overlap, the Company believes that softwaredevelopers may face infringement claims. Although the Company does not believethat its product infringes any patents, if certain software and technologypatents were interpreted broadly, claims of infringement against the Company,if successful, could have a material adverse effect on its business, financialcondition, and results of operations. Infringement claims, even if withoutmerit, can be time consuming and expensive to defend. A third party assertinginfringement claims against the Company or its customers with respect to theCompany’s current or future products may require the Company to enter into costlyroyalty arrangements or litigation, or otherwise materially and adverselyaffect its business, financial condition, and results of operations. If anegotiated resolution of any matter is required, it could involve payment oflicense fees, which would increase the Company’s costs. The Company makes noassurance that the terms of any licensing arrangement would be favorable to theCompany. A resolution could also require a redesign of the Company’s product orthe removal of some of the Company’s product features. If a negotiatedresolution were not achieved, Apropos would vigorously defend itself. If theCompany did not prevail, damages could be awarded and an injunction could beissued requiring Apropos to cease certain activities. If infringement is deemedto be willful, a court may triple the awarded damages. Any of these activitiescould have a material adverse effect on the Company’s business, 

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financialcondition, and results of operations. Regardless of the outcome, litigation mayresult in substantial expense and significant diversion of the Company’smanagement and technical personnel.

*The Company may notbe able to hire and retain the personnel it needs to sustain its business.*

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

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

The Company’s financialsuccess depends to a large degree on the ability of its direct sales force toincrease sales. Therefore, the Company’s ability to increase revenue in thefuture depends considerably upon its success in recruiting, training, andretaining direct sales personnel. Also, it may take a new salesperson a numberof months before he or she becomes a productive member of the Company’s directsales force. The Company’s business will be harmed if it fails to hire andretain qualified sales personnel, or if newly hired salespersons fail todevelop the necessary sales skills or develop these skills more slowly than theCompany anticipates.

*The Company’sinternational operations and expansion involve financial and operational risks.*

The Company intends to maintain its internationaloperations, which may include entry into additional international markets. Thepossible expansion of the Company’s international operations will requiremanagement attention and financial resources to establish additional foreignoperations, hire additional personnel, and recruit additional internationalresellers. Revenue from international expansion may be inadequate to cover theexpenses of international expansion.

The Company’s possible expansion into newinternational markets may take longer than anticipated and could directlyimpact how quickly the Company increases product sales into these markets.International markets may take additional time and resources to penetratesuccessfully. The Company’s product needs to be conformed to the language andinfrastructure requirements of other countries. In addition, the acceptance ofnew technologies, such as E-mail and Web-based forms ofcommunication, may not occur as rapidly as in North America. This could have amaterial adverse impact on the Company’s business, financial condition, andresults of operations.

Other risks theCompany may encounter in conducting international business activities generallycould include the following:

·       economicand political instability;

·       unexpectedchanges in foreign regulatory requirements and laws;

·       tariffsand other trade barriers;

·       timing,cost, and potential difficulty of adapting Apropos’ product to the locallanguage standards in those foreign countries that do not use the Englishalphabet;

·       longersales cycles and accounts receivable cash receipts cycles;

·       potentiallyadverse tax consequences;

·       fluctuationsin foreign currencies; and

·       restrictions on therepatriation of funds.

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*The Company’s product and the third party software itsells with its product could have defects for which the Company is potentiallyliable and that could result in loss of revenue, increased costs, loss of theCompany’s credibility, or delay in acceptance of the Company’s product in themarketplace.*

The Company’s product, including applications suppliedby others, may contain errors or defects, especially when first introduced orwhen new versions are released. Despite internal product testing, the Companyhas in the past discovered software errors in some of the versions of its productafter their introduction to the marketplace. Errors in new products or versionscould be found after commencement of commercial shipments, and this couldresult in additional development costs, diversion of technical and otherresources from the Company’s other development efforts, or the loss ofcredibility with current or future customers. This could result in a loss ofrevenue or delay in market acceptance of the Company’s product, which couldhave a material adverse effect on its business, financial condition, andresults of operations.

In addition, the Company has warranted to some of itscustomers, resellers, and OEMs that its software is free of viruses. If avirus infects a customer’s computer software, the customer could assert claimsagainst the Company that could be costly and could have a material adverseeffect on the Company’s business, financial condition, and results ofoperations. The Company’s license agreements with its customers typicallycontain provisions designed to limit its exposure to potential productliability and some contract claims.

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

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

*The Company depends on Microsoft Corporationtechnologies and other third party software on which its product relies.*

The Company’s software almost exclusively runs onMicrosoft Windows NTÔ and Windows 2000Ôservers. A decline in market acceptance for Microsoft technologies or theincreased acceptance of other server technologies could cause the Company toincur significant development costs and could have a material adverse effect onthe Company’s ability to market its current product. Although the Companybelieves that Microsoft technologies will continue to be widely used bybusinesses, the Company cannot assure prospective and existing investors thatbusinesses will adopt these technologies as anticipated or will not in thefuture migrate to other computing technologies that the Company does notcurrently support. In addition, the Company’s products and technologies mustcontinue to be compatible with new developments in Microsoft technologies.

The Company sells thirdparty software with its product. If one or more of these third parties ceasesto sell their software, the Company will need to modify its product to use analternative supplier or eliminate 

31

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theaffected product function, either of which could have a material adverse effecton the Company’s business, financial condition, and results of operations.

*The Company may notbe able to obtain adequate financing to implement its growth strategy.*

Successful implementation of the Company’s growthstrategy will likely require continued access to capital. If it does notgenerate sufficient cash from operations, the Company’s growth could be limitedunless the Company is able to obtain capital through additional debt or equityfinancings. The Company makes no assurance that debt or equity financings willbe available as required to fund growth and other needs.

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

*If the Company’s customers do not perceive its productor services to be effective or of high quality, its brand and name recognitionwould suffer.*

The Company believes thatestablishing and maintaining brand and name recognition is critical forattracting and expanding its targeted customer base. The Company also believesthat the importance of reputation and name recognition will increase ascompetition in its market increases. Promotion and enhancement of the Company’sname will depend on the effectiveness of its marketing and advertising effortsand on its success in continuing to provide high-quality products andservices, neither of which can be assured. If the Company’s customers do notperceive its product or services to be effective or of high-quality, theCompany’s brand and name recognition would suffer which would have a materialadverse effect on its business.

*The growth of theCompany’s business may be impeded without increased use of the Internet.*

The use of the Internet asa commercial marketplace is still evolving. Demand and market acceptance forrecently introduced products and services available over the Internet is stilluncertain. In addition, governmental regulation of the Internet, such asimposing sales and other taxes, access charges, pricing controls, andinhibiting cross-border commerce, may reduce the use of the Internet bybusinesses for their electronic commerce and customer service needs. To date,governmental regulations have not materially restricted commercial use of theInternet. However, the legal and regulatory environment that pertains to theInternet is uncertain and may change. New regulations could reduce the use ofthe Internet by the Company’s customers and their customers. The lack ofacceptance of the Internet as a forum for conducting business could reducegrowth in demand for the Company’s product and limit the growth of its revenue.

**Other Risks**

*The Company’s shareprice has been and may continue to be highly volatile and could dropunexpectedly.*

The price for theCompany’s Common Shares has been and may continue to be highly volatile andsubject to wide fluctuations in response to the following factors:

·       quarterlyvariations in the Company’s operating results due to prolonged sales cycles anddeviations between actual and expected sales;

·       announcementsof technical innovations, new products, or new services by the Company or itscompetitors;

·       changesin investor perception of the Company or the market for its product;

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·       changesin financial estimates by securities analysts; and

·       changesin general economic and market conditions.

The shares of manytechnology companies have experienced significant fluctuations in trading priceand volume. Often these fluctuations have been unrelated to operatingperformance. Declines in the market price of the Company’s Common Shares couldalso materially and adversely affect employee morale and retention, the Company’saccess 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 coulddivert its resources.*

In the past, followingperiods of market volatility in the price of a company’s securities, securityholders have instituted class action litigation. Many companies in the Company’sindustry have been subject to this type of litigation. The Company has becomeinvolved in this type of litigation and may get involved again in the future,and regardless of the outcome, it could incur substantial legal costs andmanagement’s attention could be diverted, causing the Company’s business tosuffer. See “Item 3. Legal Proceedings” for a description of claimsreceived by the Company relating to shareholder class action litigation.

**ITEM 7A.**        QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

**Interest Rate Risk**

The Company’s exposure tomarket risk for changes in interest rates relate primarily to the change in theamount of interest income the Company can earn on its investments. The Companydoes not use derivative financial instruments in its investment portfolio. TheCompany considers all investments with original maturities of less than oneyear, but greater than 90 days, from the respective balance sheet date to beshort-term investments. The Company had invested balances, which includesshort-term investments and other investments with original maturities of lessthan ninety days, classified as cash equivalents, of $41.2 million at December 31,2004. The Company’s short-term investments consist primarily of readilymarketable debt securities. These investments are subject to interest rate riskand will fall in value if market interest rates increase. The Company believesa hypothetical increase in market interest rates by 10.0% from levels at December 31,2004, would cause the fair value of these short-term investments to fallby an immaterial amount. Since the Company has shortened its average maturityholding period and would not likely have to sell any investments beforematurity, the Company has the ability to avoid realizing losses on theseinvestments 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 andsells these products in North America, Europe, South America, Asia, Africa, andAustralia. As a result, its financial results could be affected by variousfactors, including changes in foreign currency exchange rates or weak economicconditions in foreign markets. As sales are generally made in U.S. dollars orBritish pound sterling, a strengthening of the dollar or pound could make theCompany’s products less competitive in foreign markets. Given the level ofincome the Company currently derives from its foreign operations, the Companyconsiders this exposure to be minimal. The Company believes a 10.0% change inexchange rates would not have a significant impact on its future earnings.

33

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**ITEM 8.**                FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA.

**Reportof Independent Registered Public Accounting Firm**

Shareholders and Board of DirectorsApropos Technology, Inc.

We have audited the accompanying consolidated balancesheet of Apropos Technology, Inc. as of December 31, 2004 and therelated consolidated statements of operations, shareholders’ equity, and cashflows for the year ended December 31, 2004. Our audit also included thefinancial statement schedule listed in the Index at Item 15(a). These financialstatements and schedule are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements andschedule based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.The Company is not required to have, nor were we engaged to perform an audit ofits internal control over financial reporting. Our audit included considerationof internal control over financial reporting as a basis for designing auditprocedures that are appropriate in the circumstances, but not for the purposeof expressing an opinion on the effectiveness of the Company’s internal controlover financial reporting. Accordingly, we express no such opinion. Anaudit also includes examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements, assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudit provides a reasonable basis for our opinion.

In ouropinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of Apropos Technology, Inc.at December 31, 2004, and the results of their operations and their cashflows for the year ended December 31, 2004, in conformity with accountingprinciples generally accepted in the United States of America. Also, in ouropinion, the related financial statement schedule, when considered in relationto the basic consolidated financial statements taken as a whole, presentsfairly in all material respects the information set forth therein.
|                       | /s/ Grant Thornton  LLP |   |
|-----------------------|------------------------------|--------|
| Chicago, Illinois     |                         |
| January 26, 2005 |                         |

 

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**Report of Independent Registered Public AccountingFirm**

Shareholders and Board of DirectorsApropos Technology, Inc.

We have audited the accompanying consolidated balancesheet of Apropos Technology, Inc. as of December 31, 2003, and therelated consolidated statements of operations, shareholders’ equity, and cashflows for each of the years in the two-year period ended December 31,2003. Our audits also included the financial statement schedule listed in theIndex at Item 15(a) with respect to the information included therein forthe years ended December 31, 2003 and 2002. These financial statements andschedule are the responsibility of the Company’s management. Our responsibilityis to express an opinion on these financial statements and schedule based onour audits.

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

In ouropinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of Apropos Technology, Inc.at December 31, 2003, and the results of their operations and their cashflows for each of the two years in the period ended December 31, 2003, inconformity with U.S. generally accepted accounting principles. Also, in ouropinion, the related financial statement schedule, when considered in relationto the basic consolidated financial statements taken as a whole, presentsfairly in all material respects the information set forth therein.
|                       | /s/ Ernst & Young LLP |
|-----------------------|--------------------------------|
| Chicago, Illinois     |                           |
| January 29, 2004 |                           |

 

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**AproposTechnology, Inc.Consolidated Balance Sheets**
| ** **                                                                                                                                                                                                                 | ** ** | **December 31**                                                                | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                                                                                                                 | ** ** | **2004**                                                                            | ** ** | **2003** | ** ** |
| ** **                                                                                                                                                                                                                 | ** ** | **in thousands, except share  and per share amounts** | ** ** |
| Assets                                                                                                                                                                                                                     |       |                                                                                |       |   |   |
| Current assets:                                                                                                                                                                                                            |       |                                                                                |       |   |   |
| Cash and cash equivalents                                                                                                                                                                                                  |       | $                                                                                   | 12,291     |   | $ | 9,971 |   |
| Short-term investments                                                                                                                                                                                                     |       | 28,867                                                                              |       | 29,294 |   |
| Accounts receivable, less allowances for doubtful  accounts of $219 at December 31, 2004 and $265 at December 31, 2003                                                                                           |       | 3,155                                                                               |       | 2,895 |   |
| Inventory                                                                                                                                                                                                                  |       | 34                                                                                  |       | 73 |   |
| Prepaid expenses and other current assets                                                                                                                                                                                  |       | 355                                                                                 |       | 588 |   |
| Total current  assets                                                                                                                                                                                                      |       | 44,702                                                                              |       | 42,821 |   |
| Equipment, net                                                                                                                                                                                                             |       | 565                                                                                 |       | 921 |   |
| Other assets                                                                                                                                                                                                               |       | 21                                                                                  |       | 199 |   |
| Total assets                                                                                                                                                                                                               |       | $                                                                                   | 45,288     |   | $ | 43,941 |   |
| Liabilities and  shareholders’ equity                                                                                                                                                                                 |       |                                                                                |       |   |   |
| Current liabilities:                                                                                                                                                                                                       |       |                                                                                |       |   |   |
| Accounts payable                                                                                                                                                                                                           |       | $                                                                                   | 155        |   | $ | 81 |   |
| Accrued expenses                                                                                                                                                                                                           |       | 1,134                                                                               |       | 1,179 |   |
| Accrued compensation and related accruals                                                                                                                                                                                  |       | 821                                                                                 |       | 377 |   |
| Accrued restructuring, current portion                                                                                                                                                                                     |       | 720                                                                                 |       | 438 |   |
| Advance payments from customers                                                                                                                                                                                            |       | 35                                                                                  |       | 186 |   |
| Deferred revenue                                                                                                                                                                                                           |       | 3,403                                                                               |       | 3,296 |   |
| Total current  liabilities                                                                                                                                                                                                 |       | 6,268                                                                               |       | 5,557 |   |
| Accrued restructuring, less  current portion                                                                                                                                                                               |       | 245                                                                                 |       | 560 |   |
| 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, 17,638,400 shares issued and  outstanding at December 31, 2004; 17,257,225 issued and 16,946,114  outstanding at December 31, 2003 |       | 176                                                                                 |       | 173 |   |
| Additional paid-in capital                                                                                                                                                                                                 |       | 103,155                                                                             |       | 102,263 |   |
| Treasury stock, at cost                                                                                                                                                                                                    |       | —                                                                              |       | (392 | ) |
| Accumulated deficit                                                                                                                                                                                                        |       | (64,556                                                                             | )          | (64,220 | ) |
| Total shareholders’ equity                                                                                                                                                                                            |       | 38,775                                                                              |       | 37,824 |   |
| Total liabilities  and shareholders’ equity                                                                                                                                                                           |       | $                                                                                   | 45,288     |   | $ | 43,941 |   |

 

See notes to consolidated financial statements.

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**AproposTechnology, Inc.Consolidated Statements of Operations**
| ** **                                     | ** ** | **Year Ended December 31**                           | ** ** |
|------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **    2004    **            | ** ** | **    2003    ** | ** ** | **       2002       ** | ** ** |
| ** **                                     | ** ** | **in thousands, except per share amounts** | ** ** |
| Revenue:                                       |       |                                                                |       |   |   |   |   |   |   |
| Software licenses                              |       | $                                                                   | 7,415      |   | $ | 7,903 |   |   | $ | 8,259 |   |   |
| Services and other                             |       | 13,158                                                              |       | 12,232 |   |   | 12,635 |   |   |
| Total revenue                                  |       | 20,573                                                              |       | 20,135 |   |   | 20,894 |   |   |
| Cost of goods and  services:                   |       |                                                                |       |   |   |   |   |   |   |
| Cost of software                               |       | 649                                                                 |       | 407 |   |   | 380 |   |   |
| Cost of services and other                     |       | 3,859                                                               |       | 4,227 |   |   | 5,744 |   |   |
| Total cost of goods and services               |       | 4,508                                                               |       | 4,634 |   |   | 6,124 |   |   |
| Gross margin                                   |       | 16,065                                                              |       | 15,501 |   |   | 14,770 |   |   |
| Operating  expenses:                           |       |                                                                |       |   |   |   |   |   |   |
| Sales and marketing                            |       | 7,363                                                               |       | 7,519 |   |   | 13,471 |   |   |
| Research and development                       |       | 4,073                                                               |       | 5,349 |   |   | 7,878 |   |   |
| General and administrative                     |       | 4,148                                                               |       | 5,611 |   |   | 8,115 |   |   |
| Stock compensation charge                      |       | —                                                              |       | 282 |   |   | 425 |   |   |
| Restructuring and other charges                |       | 1,291                                                               |       | 2,875 |   |   | 869 |   |   |
| Total operating expenses                       |       | 16,875                                                              |       | 21,636 |   |   | 30,758 |   |   |
| Loss from operations                           |       | (810                                                                | )          | (6,135 | ) |   | (15,988 | ) |   |
| Other income (expense):                        |       |                                                                |       |   |   |   |   |   |   |
| Interest income                                |       | 536                                                                 |       | 482 |   |   | 961 |   |   |
| Interest expense                               |       | (17                                                                 | )          | — |   |   | — |   |   |
| Other, net                                     |       | (45                                                                 | )          | (21 | ) |   | (14 | ) |   |
| Total other income                             |       | 474                                                                 |       | 461 |   |   | 947 |   |   |
| Net loss                                       |       | $                                                                   | (336       | ) | $ | (5,674 | ) |   | $ | (15,041 | ) |   |
| Basic and diluted net loss per share           |       | $                                                                   | (0.02      | ) | $ | (0.34 | ) |   | $ | (0.90 | ) |   |
| Weighted-average  number of shares outstanding |       | 17,324                                                              |       | 16,787 |   |   | 16,723 |   |   |

 

See notes to consolidated financial statements.

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**AproposTechnology, Inc.Consolidated Statements of Shareholders’ Equity**
| ** **                          | ** ** | ** **                                                    | ** ** | **  Additional  ** | ** ** | ** **   | ** ** | ** **      | ** ** | ** **             | ** ** |
|-------------------------------------|------------|---------------------------------------------------------------|------------|----------------------------------------|------------|--------------|------------|-----------------|------------|------------------------|------------|
| ** **                          | ** ** | **Common Shares**                                        | ** ** | **paid-in**                            | ** ** | **Treasury** | ** ** | **Accumulated** | ** ** | **Shareholders’** | ** ** |
| ** **                          | ** ** | **Issued**                                                    | ** ** | **Outstanding**                        | ** ** | **Amount**   | ** ** | **capital**     | ** ** | **stock**              | ** ** | **deficit** | ** ** | **Equity** | ** ** |
| ** **                          | ** ** | **in thousands, except share quantities** | ** ** |
| Balance at December 31,  2001  |       | 16,626,072                                                    |       | 16,626,072                             |       |         | $          | 166             |       |                   |       | $ | 100,901 |   |   |   | — |   |   |   | $ | (43,505 | ) |   |   | $ | 57,562 |   |   |
| Issuance of Common  Shares:         |       |                                                          |       |                                   |       |         |       |            |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Exercise of options                 |       | 232,766                                                       |       | 232,766                                |       |         | 3          |            |       |                   | 92         |   |   |   |   |   |   |   |   |   |   |   | 95 |   |   |
| Employee stock purchase plan        |       | 113,102                                                       |       | 113,102                                |       |         | 1          |            |       |                   | 160        |   |   |   |   |   |   |   |   |   |   |   | 161 |   |   |
| Treasury stock acquired             |       |                                                          |       | (311,111                               | )          |         |       |            |       |                   |       |   |   |   | (392 | ) |   |   |   |   |   |   | (392 | ) |   |
| Stock compensation charge           |       |                                                          |       |                                   |       |         |       |            |       |                   | 425        |   |   |   |   |   |   |   |   |   |   |   | 425 |   |   |
| Net loss                            |       |                                                          |       |                                   |       |         |       |            |       |                   |       |   |   |   |   |   |   |   | (15,041 | ) |   |   | (15,041 | ) |   |
| Balance at December 31,  2002  |       | 16,971,940                                                    |       | 16,660,829                             |       |         | 170        |            |       |                   | 101,578    |   |   |   | (392 | ) |   |   | (58,546 | ) |   |   | 42,810 |   |   |
| Issuance of Common  Shares:         |       |                                                          |       |                                   |       |         |       |            |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Exercise of options                 |       | 210,930                                                       |       | 210,930                                |       |         | 2          |            |       |                   | 289        |   |   |   |   |   |   |   |   |   |   |   | 291 |   |   |
| Employee stock purchase plan        |       | 74,355                                                        |       | 74,355                                 |       |         | 1          |            |       |                   | 114        |   |   |   |   |   |   |   |   |   |   |   | 115 |   |   |
| Stock compensation charge           |       |                                                          |       |                                   |       |         |       |            |       |                   | 282        |   |   |   |   |   |   |   |   |   |   |   | 282 |   |   |
| Net loss                            |       |                                                          |       |                                   |       |         |       |            |       |                   |       |   |   |   |   |   |   |   | (5,674 | ) |   |   | (5,674 | ) |   |
| Balance at December 31,  2003  |       | 17,257,225                                                    |       | 16,946,114                             |       |         | 173        |            |       |                   | 102,263    |   |   |   | (392 | ) |   |   | (64,220 | ) |   |   | 37,824 |   |   |
| Issuance of Common  Shares:         |       |                                                          |       |                                   |       |         |       |            |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Exercise of options                 |       | 340,194                                                       |       | 651,305                                |       |         | 3          |            |       |                   | 523        |   |   |   | 392 |   |   |   |   |   |   |   | 918 |   |   |
| Employee stock purchase plan        |       | 40,981                                                        |       | 40,981                                 |       |         | —     |            |       |                   | 123        |   |   |   |   |   |   |   |   |   |   |   | 123 |   |   |
| Non-cash restructuring  charge      |       |                                                          |       |                                   |       |         |       |            |       |                   | 246        |   |   |   |   |   |   |   |   |   |   |   | 246 |   |   |
| Net loss                            |       |                                                          |       |                                   |       |         |       |            |       |                   |       |   |   |   |   |   |   |   | (336 | ) |   |   | (336 | ) |   |
| Balance at  December 31,  2004 |       | 17,638,400                                                    |       | 17,638,400                             |       |         | $          | 176             |       |                   |       | $ | 103,155 |   |   |   | — |   |   |   | $ | (64,556 | ) |   |   | $ | 38,775 |   |   |

 

See notes to consolidated financial statements.

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**AproposTechnology, Inc.Consolidated Statements of Cash Flows**
| ** **                                                                                 | ** ** | **Year Ended December 31** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2004**                                  | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                 | ** ** | **in thousands**                     | ** ** |
| **Cash flows used in operating  activities**                                               |       |                                      |       |   |   |   |   |
| Net loss                                                                                   |       | $                                         | (336       | ) | $ | (5,674 | ) | $ | (15,041 | ) |
| Adjustments to reconcile  net loss to net cash provided by (used in) operating activities: |       |                                      |       |   |   |   |   |
| Depreciation                                                                               |       | 476                                       |       | 998 |   | 1,405 |   |
| Stock compensation charge                                                                  |       | —                                    |       | 282 |   | 425 |   |
| Provision for doubtful accounts                                                            |       | 32                                        |       | 35 |   | 315 |   |
| Non-cash compensation for loan forgiveness                                                 |       | —                                    |       | — |   | 256 |   |
| Non-cash portion of restructuring and other charges                                        |       | 519                                       |       | 392 |   | — |   |
| Changes in  operating assets and liabilities:                                              |       |                                      |       |   |   |   |   |
| Accounts receivable                                                                        |       | (292                                      | )          | (93 | ) | 1,297 |   |
| Inventory                                                                                  |       | 39                                        |       | 121 |   | 75 |   |
| Prepaid and other current assets                                                           |       | 233                                       |       | 429 |   | (253 | ) |
| Notes receivable from officers                                                             |       | —                                    |       | — |   | 14 |   |
| Other assets                                                                               |       | 9                                         |       | 41 |   | 74 |   |
| Accounts payable                                                                           |       | 74                                        |       | (46 | ) | (456 | ) |
| Accrued expenses                                                                           |       | (45                                       | )          | (336 | ) | (242 | ) |
| Accrued restructuring                                                                      |       | (33                                       | )          | 578 |   | 420 |   |
| Accrued compensation and related accruals                                                  |       | 444                                       |       | (281 | ) | (95 | ) |
| Advance payments from customers                                                            |       | (151                                      | )          | (48 | ) | (148 | ) |
| Deferred revenue                                                                           |       | 107                                       |       | 548 |   | 137 |   |
| **Net  cash provided by (used in) operating activities**                                   |       | 1,076                                     |       | (3,054 | ) | (11,817 | ) |
| **Cash  flows provided by (used in) investing activities**                                 |       |                                      |       |   |   |   |   |
| Proceeds from  maturities and sales of short-term investments                              |       | 6,600                                     |       | 31,013 |   | 48,443 |   |
| Purchases of  short-term investments                                                       |       | (6,173                                    | )          | (37,589 | ) | (34,812 | ) |
| Purchases of  equipment                                                                    |       | (224                                      | )          | (138 | ) | (285 | ) |
| **Net  cash provided by (used in) investing activities**                                   |       | 203                                       |       | (6,714 | ) | 13,346 |   |
| **Cash  flows provided by financing activities**                                           |       |                                      |       |   |   |   |   |
| Proceeds from  exercise of options                                                         |       | 918                                       |       | 291 |   | 95 |   |
| Proceeds from  employee stock purchase plan                                                |       | 123                                       |       | 115 |   | 161 |   |
| **Net  cash provided by financing activities**                                             |       | 1,041                                     |       | 406 |   | 256 |   |
| Net increase (decrease) in cash and cash equivalents                                       |       | 2,320                                     |       | (9,362 | ) | 1,785 |   |
| Cash and cash  equivalents, beginning of year                                              |       | 9,971                                     |       | 19,333 |   | 17,548 |   |
| Cash and cash equivalents, end of year                                                     |       | $                                         | 12,291     |   | $ | 9,971 |   | $ | 19,333 |   |
| Supplemental disclosures  of cash flow information:                                        |       |                                      |       |   |   |   |   |
| Cash paid for interest                                                                     |       | $                                         | 17         |   | $ | — |   | $ | — |   |
| Fair value of  Common shares received as collateral for Note receivable from officer       |       | $                                         | —     |   | $ | — |   | $ | 392 |   |

 

See notes to consolidated financial statements.

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**AproposTechnology, Inc.Notes to Consolidated Financial Statements**

**1. NATURE OF BUSINESS**

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

Principal operations ofthe Company commenced during 1995. During 1997, the Company established awholly-owned subsidiary in the United Kingdom, Apropos Technology,Limited. The purpose of this entity is to market and distribute the Company’sproduct throughout Europe.

**2. SIGNIFICANTACCOUNTING POLICIES**

**Consolidation**

The consolidated financialstatements include the accounts and transactions of the Company and its wholly-ownedsubsidiaries. All significant intercompany accounts and transactions have beeneliminated in consolidation.

**Auctionrate securities reclassification**

Certain prior period amounts related to auction ratesecurities have been reclassified to conform to the 2004 presentation. Prior toDecember 31, 2004, the Company had classified its holdings of auction ratesecurities as cash equivalents. After considering new accounting literatureconcerning auction rate securities, the Company has concluded its holdings ofauction rate securities should not be classified as cash equivalents. As of December 31,2003, the Company had $28,294,000 of auction rate securities that have beenreclassified on the Balance Sheet from Cash and cash equivalents to Short-terminvestments. The Statement of Cash Flows for the year ended 2003 has beenadjusted and the impact of the reclassification is shown in the table below. TheCompany had no investment in auction rate securities in 2002.
| ** **                                                    | ** ** | **As  previously  reported** | ** ** | **Reclassification** | ** ** | **As  currently  reported** | ** ** |
|---------------------------------------------------------------|------------|------------------------------|------------|----------------------|------------|-----------------------------|------------|
| ** **                                                    | ** ** | **in thousands**        | ** ** |
| Proceeds from  maturities and sales of short-term investments |       |                         | 27,188     |                 |       |                        | 3,825      |   |   | 31,013 |   |
| Purchases of short-term investments                           |       |                         | (5,470     | )                    |       |                        | (32,119    | ) |   | (37,589 | ) |
| Net cash provided by (used in) investing activities           |       |                         | 21,580     |                 |       |                        | (28,294    | ) |   | (6,714 | ) |
| Net increase (decrease) in cash and cash equivalents          |       |                         | 18,932     |                 |       |                        | (28,294    | ) |   | (9,362 | ) |
| Cash and cash  equivalents, end of year                       |       |                         | 38,265     |                 |       |                        | (28,294    | ) |   | 9,971 |   |

 

**Use of Estimates**

In order to prepare theCompany’s financial statements in conformity with accounting principlesgenerally accepted in the United States, management is required to makeestimates and assumptions that affect the amounts reported in the financialstatements and related notes. Actual results could differ from those estimates.

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**FinancialInstruments and Concentrations of Credit Risk**

Financial instruments,which potentially subject the Company to concentrations of credit risk, consistprincipally of cash, short-term investments, accounts receivable, andaccounts payable, which have fair values that approximate their respectivecarrying amounts. The Company invests its excess cash primarily in readilymarketable debt securities. The Company performs periodic credit evaluations ofits customers’ financial condition and generally does not require collateral.

**Cash Equivalents**

The Company considers allhighly liquid investments with an original maturity of 90 days or less tobe cash equivalents.

**Short-Term Investments**

The Company considers allinvestments regardless of original maturities as available-for-sale.Available-for-sale investments are carried at fair value, with the unrealizedgains and losses, net of applicable taxes, recorded as a separate component ofother comprehensive income on the consolidated statements of comprehensive income(loss). Quoted market values, when available, are used to determine the fairvalue of debt securities. The specific identification method is used todetermine gains and losses. Net realized gains and losses on debt securitiesare recognized in investment income on the consolidated statements ofoperations. Available-for-sale investments are evaluated for other thantemporary impairment on an ongoing basis in accordance with Statement ofFinancial Accounting Standards (“SFAS”) No. 115, “Accounting for CertainInvestments in Debt and Equity Securities”. Available-for-sale securities areavailable to meet the Company’s current operational needs and accordingly areclassified as short-term. The Company’s short-term investment portfolio,including instruments with original maturities less than 90 days, consistsprimarily of highest-grade commercial paper, auction rate securities, bankcertificate of deposits, government agency bonds and money market accounts.

**Accounts Receivable**

Accounts receivableconsist primarily of amounts due to us from our normal business activities. TheCompany maintains an allowance for doubtful accounts to reflect the expecteduncollectability of accounts receivable based on past collection history andspecific risks identified among uncollected accounts. Accounts receivable arecharged to the allowance for doubtful accounts when the Company has determinedthat the receivable will not be collected. Accounts receivable balances aredetermined to be delinquent when the amount is past due based on thecontractual terms with the customer.

**Inventory**

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

**Equipment**

Equipment is carried atcost, less accumulated depreciation. Depreciation is determined using thestraight-line method over the estimated useful lives of the assets of twoto seven years. Repairs and maintenance costs are charged to expense asincurred.

**AdvancePayments From Customers and Deferred Revenues**

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

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**Income Taxes**

The Company provides forincome taxes under the liability method, which requires recognition of deferredtax liabilities and assets for the expected future tax consequences of eventsthat have been included in the financial statements or tax returns. Deferredtax liabilities and assets are determined based on the difference between thefinancial statement basis of assets and liabilities using enacted tax rates ineffect for the year in which the differences are expected to reverse. Underthis method, a valuation allowance is required against net deferred tax assetsif, based upon the available evidence, it is more likely than not that some orall of the deferred tax assets will not be realized.

Management evaluates therecoverability of the deferred tax assets and the level of the valuationallowance. At such time as it is determined that it is more likely than notthat deferred tax assets are realizable, the valuation allowance will beappropriately reduced.

**Revenue Recognition**

The Company generates software revenues from licensingthe right to use its software products and also generates service revenues fromimplementation and installation services, ongoing maintenance (post-contracttechnical support and product upgrades), training services, and professionalservices performed for resellers and its customers. The Company provides awarranty for 90 days on all software licenses, which runs concurrent withthe customer maintenance agreement. The Company’s policy is to not allow returnsof software licenses. The Company issues product upgrades on a when and ifavailable basis.

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

·       persuasiveevidence of an arrangement exists;

·       sufficientvendor-specific objective evidence exists to support allocating the totalfee to all elements of the arrangement;

·       thefee is fixed or determinable; and

·       collectionis probable.

Shipment is further defined in certain contracts asdelivery of the product master or first copy for noncancelable productlicensing arrangements under which the reseller has certain softwaredistribution rights. Software licenses are shipped to resellers upon receipt ofa purchase order from an end customer. The Company recognizes revenue from thesale of software licenses placed through a reseller upon shipment of thelicense to the reseller or the end customer. The reseller is the Company’scustomer and is obligated to pay for the software license upon shipment. As aresult, the reseller assumes any credit risk from the reseller’s end customerand any risk that the end customer declines receipt of the software license.

Revenue from ongoing customer maintenance isrecognized ratably over the post-contract support term, which is typicallytwelve months. Revenue from training services and professional services arerecognized when the services are completed. Implementation and installationservices are typically completed within 120 days. Amounts received priorto revenue recognition and for prepaid customer support and enhancementservices are classified as deferred revenue.

The Company provides amaster copy of its software license to its OEMs. Generally, the Companyrecognizes revenue from an OEM upon notification from the OEM that delivery ofthe software license to an end customer has occurred. In cases where minimumguaranteed payment terms are in excess of twelve months, the Company recognizesrevenue from the arrangements as the payments become due.

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**Advertising**

Advertising costs aregenerally expensed as incurred. Advertising expenses were approximately$31,000, $18,000, and $147,000 for the years ended December 31, 2004, 2003and 2002, respectively.

**Research and Development**

Research and development expendituresare charged to operations as incurred. SFAS No. 86, “Accounting for theCosts of Computer Software To Be Sold, Leased, or Otherwise Marketed,” requirescapitalization of certain software development costs subsequent to theestablishment of technological feasibility. Based on the Company’s productdevelopment process, technological feasibility is established upon completionof a working model. Costs incurred by the Company between completion of theworking model and the point at which the product is ready for general releasehave not been significant. Through December 31, 2004, all softwaredevelopment costs have been expensed.

**Stock-Based Compensation**

At December 31, 2004,the Company has one stock-based employee compensation plan and one employeestock purchase plan, which are described more fully in Note 8. The Companyaccounts for these plans under the recognition and measurement principles ofAccounting Principles Board (APB) Opinion No. 25, “Accounting for StockIssued to Employees,” and related interpretations. No compensation cost isrecognized for shares purchased under the Employee Stock Purchase Plan or forstock options issued under the stock-based employee compensation plan, as alloptions granted after the IPO under this plan have an exercise price equal tothe market value of the underlying common stock on the date of grant. The tablein Note 3 illustrates the effect on net income and earnings per share if theCompany had applied the fair value recognition provisions of SFAS No. 123,“Accounting for Stock-Based Compensation,” to stock-based employeecompensation.

**Foreign Currency Translation**

The functional currency ofthe Company’s foreign subsidiaries is the United States dollar. Foreignmonetary assets and liabilities are translated at the current exchange rates ateach balance sheet date. Nonmonetary balance sheet accounts are measured andrecorded at the rate in effect at the date of the transaction. Revenues andexpenses are translated at weighted average exchange rates in effect during theyear. The effects of foreign currency remeasurement are reported in currentoperations and have not been material to date.

**Basicand Diluted Net Loss Per Common Share**

Basic net loss per commonshare is based upon the net loss and upon the weighted-average number ofcommon shares outstanding during the period. Diluted net loss per common shareadjusts for the effect of common share equivalents, such as convertiblesecurities, stock options and warrants, only in the periods presented in whichsuch effect would have been dilutive. The weighted-average number ofshares from outstanding options and warrants to purchase Common Shares usingthe treasury stock method for 2004, 2003 and 2002 were 1,042,145, 888,952 and419,272, respectively. Diluted net loss per share is not presented separatelyas the effect of the common share equivalents is anti-dilutive for eachof the years presented. Accordingly, diluted net loss per common share is thesame as basic net loss per common share.

**Recently IssuedAccounting Standards**

In December 2004, theFASB issued FAS No. 123(R), “Share-Based Payment” (FAS 123(R)). Thisstatement requires that the compensation cost relating to share based paymenttransactions be recognized in the financial statements. Compensation cost is tobe measured based on the estimated fair value of the 

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equity-basedcompensation awards issued as of the grant date. The related compensationexpense will be based on the estimated number of awards expected to vest andwill be recognized over the requisite service period (often the vesting period)for each grant. The statement requires the use of assumptions and judgmentsabout future events and some of the inputs to the valuation models will requireconsiderable judgment by management. FAS No. 123(R) replaces FAS No. 123,“Accounting for Stock Based Compensation,” and supersedes APB 25, “Accountingfor Stock Issued to Employees.” The provisions of FAS 123(R) are requiredto be applied by public companies as of the first interim or annual reportingperiod that begins after June 15, 2005, which is third quarter 2005 forApropos. Apropos intends to continue applying APB 25 to equity-basedcompensation awards until the effective date of FAS 123(R). At the effectivedate of FAS 123(R), Apropos expects to use the modified prospective applicationtransition method without restatement of prior interim periods in the year ofadoption. This will result in recognizing compensation cost based on therequirements of FAS 123(R) for all equity-based compensation awards issuedafter July 1, 2005. For all equity-based compensation awards that areunvested as of July 1, 2005, compensation cost will be recognized for theunamortized portion of compensation cost not previously included in the FAS No. 123pro forma footnote disclosure. The impact on the Company’s results ofoperations or financial position as of the adoption of this pronouncement isnot expected to be materially different from the pro-forma results included inNote 3 below.

**3. STOCK-BASEDCOMPENSATION**

At December 31, 2004,the Company has one stock-based employee compensation plan and one employeestock purchase plan, which are described more fully in Note 8. The Companyaccounts for these plans under the recognition and measurement principles ofAccounting Principles Board (APB) Opinion No. 25, “Accounting for StockIssued to Employees,” and related interpretations. No compensation cost isrecognized for shares purchased under the Employee Stock Purchase Plan or forstock options issued under the stock-based employee compensation plan, as alloptions granted after the IPO under this plan have an exercise price equal tothe market value of the underlying common stock on the date of grant. Thefollowing table illustrates the effect on net income and earnings per share ifthe Company had applied the fair value recognition provisions of SFAS No. 123,“Accounting for Stock-Based Compensation,” to stock-based employeecompensation.
| ** **                                                                                                                                     | ** ** | **Year ended December 31**                            | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                                                                                                     | ** ** | **     2004     ** | ** ** | **     2003     ** | ** ** | **       2002       ** | ** ** |
| ** **                                                                                                                                     | ** ** | **in thousands, except per share amounts**  | ** ** |
| Net loss, as reported                                                                                                                          |       |                                                                 | $          | 336 |   |   |   | $ | 5,674 |   |   |   | $ | 15,041 |   |   |
| Less: Stock-based  employee compensation expense included in reported net loss                                                                 |       |                                                                 | —     |   |   |   | (282 | ) |   |   | (425 | ) |   |
| Add: Total stock-based  employee compensation expense determined under the fair value based method  for all awards, net of related tax effects |       |                                                                 | 876        |   |   |   | 1,256 |   |   |   | 1,345 |   |   |
| Net loss, pro forma                                                                                                                            |       |                                                                 | $          | 1,212 |   |   |   | $ | 6,648 |   |   |   | $ | 15,961 |   |   |
| Basic and diluted net  loss per share, as reported                                                                                             |       |                                                                 | $          | 0.02 |   |   |   | $ | 0.34 |   |   |   | $ | 0.90 |   |   |
| Basic and diluted net loss per share, pro forma                                                                                                |       |                                                                 | $          | 0.07 |   |   |   | $ | 0.40 |   |   |   | $ | 0.95 |   |   |

 

**4. NOTESRECEIVABLE FROM RELATED PARTIES**

During the second quarter of 2001, the Company madeloans totaling $722,000 to two executives who were subject to personalalternative minimum tax liabilities resulting from the exercise of incentivestock options. One executive with an outstanding balance was involuntarilyterminated at September 30, 2002 and the respective loan balance wasadjusted to the net realizable value of $61,000. This loan was repaid in thefirst quarter of 2003. The amount realized in excess of the September 30,2002 net realizable value was credited to restructuring and other charges.

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On December 27,2002, by resolution of the Board of Directors, the loan for the one remainingexecutive was terminated. As part of the loan termination agreement, theexecutive assigned all of the original collateral of 311,111 shares to theCompany. The value of the original collateral consideration of 311,111 shareswas $392,000 at the date of the loan termination agreement. This considerationwas not sufficient to offset the original loan amount resulting in loanforgiveness of $256,000. The loan termination agreement also provided for a taxequalization payment. The loan forgiveness charge and related tax equalizationpayment totaled $465,000, which has been included in General and administrativecharges in the 2002 Statement of Operations.

**5. EQUIPMENT**

Equipmentconsisted of the following:
| ** **                      | ** ** | ** **                 | ** **   | **December 31** | ** ** |
|---------------------------------|------------|----------------------------|--------------|----------------------|------------|
| ** **                      | ** ** | **Depreciable lives** | ** **   | **2004**             | ** ** | **2003** | ** ** |
| ** **                      | ** ** | **in thousands**      | ** **   |
| Computer equipment              |       |                       | 2 to 3 years |                 |       | $ | 3,049 |   | $ | 3,004 |   |
| Software                        |       |                       | 3 to 5 years |                 |       | 1,239 |   | 1,231 |   |
| Furniture and fixtures          |       |                       | 5 to 7 years |                 |       | 1,025 |   | 1,228 |   |
| Office equipment                |       |                       | 3 to 5 years |                 |       | 446 |   | 453 |   |
| Leasehold improvements          |       |                       | 5 to 7 years |                 |       | 35 |   | 183 |   |
|                            |       |                       |         |                 |       | 5,794 |   | 6,099 |   |
| Less: Accumulated  depreciation |       |                       |         |                 |       | (5,229 | ) | (5,178 | ) |
| Equipment, net                  |       |                       |         |                 |       | $ | 565 |   | $ | 921 |   |

 

**6. WARRANTS AND DEBT INSTRUMENTS**

During 1999, the Company amended its 1998 creditagreement (the “Revolving Agreement”) with a bank that provided for a securedrevolving 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.Pursuant to the amendment, the Company issued detachable warrants to the bank,expiring in May 2006, allowing the bank to purchase 30,625 Common Sharesat an exercise price of $3.97 per share. These warrants were not exercised asof December 31, 2004.

During 1999, the Company issued subordinatedconvertible promissory notes with a stated interest rate of 10.0%, togetherwith warrants, to certain preferred shareholders. The notes were repaid in fullduring February 2000, with net proceeds received by the Company from itsIPO. The warrants allow the noteholders to purchase an aggregate of 75,649Common Shares at an exercise price of $3.97 per share and expire in June 2009.These warrants were not exercised as of December 31, 2004.

During 1999, a secured bridge loan was made to theCompany by Access Technology Partners, L.P., a fund of investors that ismanaged by an entity associated with J.P. Morgan Chase & Co., and ARCHVenture Fund III, L.P., a common shareholder in the Company. The secured bridgeloan 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 toAccess Technology Partners, L.P. and ARCH Venture Fund III, L.P. warrants topurchase 236,250 and 26,250 Common Shares at an exercise price of $5.34 pershare, respectively. These warrants expire in November 2006. While ARCHVenture Fund III, L.P. exercised its warrants in 2000, Access TechnologyPartners, L.P. has not exercised any of their warrants as of December 31,2004.

The Company has a letterof credit arrangement with a bank that is secured by all assets of the Company.At December 31, 2004 and 2003, outstanding letters of credit were$885,000.

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**7. INCOME TAXES**

The Company is generallysubject to federal income taxes at the U.S. federal statutory rate of 34%. Tothe extent that current and prior year losses can be expected to offset futureyears’ taxable income, a current year income tax benefit may be generallyrecorded in the income statement. However, as discussed below, no futurebenefit of current and prior year losses is recorded for the years ended December 31,2004, 2003 and 2002.

At December 31, 2004,the Company had domestic net operating loss carryforwards aggregatingapproximately $54.2 million expiring in years 2011 through 2024. Based onInternal Revenue Code regulations relating to changes in ownership in theCompany, utilization of a portion of the net operating loss carryforwards issubject to annual limitations. At December 31, 2004, the Company hadforeign net operating loss carryforwards aggregating approximately $3.8million, which may be limited. During 2004, the Company concluded an income taxaudit of one of its foreign subsidiaries resulting in approximately $3.4million of NOL being disallowed. For financial reporting purposes, the entireamount of deferred tax assets has been offset by a valuation allowance due touncertainty regarding the realization of the asset. The valuation allowancedecreased $688,000 during the years ended December 31, 2004 and increased$2,283,000 and $5,858,000 during the years ended December 31, 2003 and2002, respectively. The Company has not paid any income taxes for the yearsindicated.

Significantcomponents of the Company’s deferred tax assets and liabilities are as follows:
| ** **                                        | ** ** | **December 31**  | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|
| ** **                                        | ** ** | **2004**              | ** ** | **2003** | ** ** |
| ** **                                        | ** ** | **In thousands** | ** ** |
| Deferred tax assets:                              |       |                  |       |   |   |
| Net operating loss  carryforwards                 |       | $                     | 22,293     |   | $ | 23,233 |   |
| Research and development  tax credit carryforward |       | 1,907                 |       | 1,717 |   |
| Other                                             |       | 712                   |       | 650 |   |
|                                              |       | 24,912                |       | 25,600 |   |
| Less: Valuation  allowance                        |       | (24,912               | )          | (25,600 | ) |
| Net deferred income tax asset                     |       | $                     | —     |   | $ | — |   |

 

**8. SHAREHOLDERS’EQUITY**

The Company has authorizedtotal capital shares of 65,000,000, of which 60,000,000 shares have beendesignated as common shares and 5,000,000 shares have been designated aspreferred shares. Both classes of shares have a par value of $0.01. The Company’sBoard of Directors has the authority, without shareholder approval, to issueone or more series of preferred shares and to establish the rights andpreferences of such preferred shares.

Treasury stock isaccounted for by the cost method. In December 2002, the Board of Directorsauthorized 311,111 shares originally assigned as loan collateral against a notereceivable from officer, as detailed in Note 3, to be assigned to the Company. In2004, these shares were disbursed in connection with the Company’s stock optionplan. As of December 31, 2004, the Company did not hold any shares inTreasury.

At December 31,2004, the Company had reserved Common Shares for future issuance as follows:
| Stock option plan   |   | 3,189,409 |   |
|---------------------|--------|-----------|--------|
| Stock purchase plan |   | 610,099   |   |
| Warrants            |   | 342,524   |   |
| Total               |   | 4,142,032 |   |

 

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**9. STOCK PLANS**

**Stock Option Plan**

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

Informationrelated to the Plan is as follows:
| ** **                                                   | ** ** | **Year ended December 31** | ** **  |
|--------------------------------------------------------------|------------|-------------------------------------------|-------------|
| ** **                                                   | ** ** | **2004**                                  | ** **  | **2003** | ** ** | **2002** | ** ** |
| ** **                                                   | ** ** | **Options**                               | ** **  | **Weighted-  average  exercise  price** | ** ** | **Options** | ** ** | **Weighted-  average  exercise  price** | ** ** | **Options** | ** ** | **Weighted-  Average  exercise  price** | ** ** |
| Options outstanding,  beginning of period                    |       | 2,535,769                                 |        |   | $ | 2.07 |   |   | 2,238,753 |   |   | $ | 2.50 |   |   | 1,871,742 |   |   | $ | 2.56 |   |   |
| Options granted                                              |       | 693,250                                   |        |   | 3.58 |   |   | 1,167,551 |   |   | 1.45 |   |   | 981,320 |   |   | 2.14 |   |   |
| Options exercised                                            |       | (802,274                                  | )           |   | 1.82 |   |   | (210,930 | ) |   | 1.38 |   |   | (232,766 | ) |   | 0.41 |   |   |
| Options canceled                                             |       | (533,886                                  | )           |   | 2.54 |   |   | (659,605 | ) |   | 2.64 |   |   | (381,543 | ) |   | 3.18 |   |   |
| Options outstanding, end  of period                     |       | 1,892,859                                 |        |   | $ | 2.60 |   |   | 2,535,769 |   |   | $ | 2.07 |   |   | 2,238,753 |   |   | $ | 2.50 |   |   |
| Option price range at  end of period                         |       | $                                         | 0.10-$22.00 |   |   |   |   |   | $ | 0.10-$22.00 |   |   |   |   |   | $ | 0.10-$22.00 |   |   |   |   |   |
| Weighted-average  fair value of options granted in 2004 |       | $                                         | 1.96        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Options available for  grant at period end                   |       | 1,296,550                                 |        |   |   |   |   | 1,455,914 |   |   |   |   |   | 1,963,860 |   |   |   |   |   |
| Exercisable at December 31, 2004                        |       | 988,536                                   |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                              |            |                                           |             |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Theoutstanding options at December 31, 2004, have a weighted-averageremaining contractual life of 7.3 years.
| **Options outstanding**            | ** ** | **Options exercisable** | ** ** |
|-----------------------------------------|------------|------------------------------|------------|
| **Range of  Exercise prices** | ** ** | **Number of  options**  | ** ** | **Weighted-average  remaining  contractual life (in  years)** | ** ** | **Weighted-average  exercise price** | ** ** | **Exercisable  options as of  12/31/04** | ** ** | **Weighted-average  exercise price** | ** ** |
| $0.10                                   |       | 2,625                        |       |   | 1.8 |   |   |   | $ | 0.10 |   |   |   | 2,625 |   |   |   | $ | 0.10 |   |   |
| $0.21                                   |       | 15,844                       |       |   | 2.8 |   |   |   | $ | 0.21 |   |   |   | 15,844 |   |   |   | $ | 0.21 |   |   |
| $0.40                                   |       | 17,517                       |       |   | 3.7 |   |   |   | $ | 0.40 |   |   |   | 17,517 |   |   |   | $ | 0.40 |   |   |
| $0.63-0.91                              |       | 57,926                       |       |   | 3.9 |   |   |   | $ | 0.67 |   |   |   | 57,926 |   |   |   | $ | 0.67 |   |   |
| $0.95-1.39                              |       | 535,795                      |       |   | 6.1 |   |   |   | $ | 1.25 |   |   |   | 270,879 |   |   |   | $ | 1.26 |   |   |
| $1.50-2.22                              |       | 335,981                      |       |   | 7.3 |   |   |   | $ | 2.00 |   |   |   | 221,564 |   |   |   | $ | 2.08 |   |   |
| $2.28-3.42                              |       | 505,359                      |       |   | 8.6 |   |   |   | $ | 2.71 |   |   |   | 233,389 |   |   |   | $ | 2.49 |   |   |
| $3.48-5.07                              |       | 318,574                      |       |   | 9.1 |   |   |   | $ | 3.94 |   |   |   | 71,595 |   |   |   | $ | 3.85 |   |   |
| $5.69-8.13                              |       | 79,938                       |       |   | 5.6 |   |   |   | $ | 6.80 |   |   |   | 73,897 |   |   |   | $ | 6.86 |   |   |
| $8.81-13.00                             |       | 12,800                       |       |   | 4.7 |   |   |   | $ | 9.90 |   |   |   | 12,800 |   |   |   | $ | 9.90 |   |   |
| $20.44-22.00                            |       | 10,500                       |       |   | 5.2 |   |   |   | $ | 21.93 |   |   |   | 10,500 |   |   |   | $ | 21.93 |   |   |
|                                    |       | 1,892,859                    |       |   |   |   |   |   |   |   |   |   | 988,536 |   |   |   |   |   |   |

 

47

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The Company accounts for this plan under therecognition and measurement principles of APB Opinion No. 25, “Accountingfor Stock Issued to Employees,” and related Interpretations. No stock-basedemployee compensation cost is reflected in the net income, as all optionsgranted under this plan have an exercise price equal to the market value of theunderlying common stock on the date of grant. The table in Note 3 illustratesthe effect on net loss and loss per share if the Company had applied the fairvalue recognition provisions of SFAS No. 123, “Accounting for Stock-BasedCompensation,” to stock-based employee compensation. Had the Company appliedthe fair value recognition provisions of SFAS No. 123, the Company wouldhave recorded additional expense of $829,000, $933,000 and $862,000 for 2004,2003 and 2002 respectively.

Thefair value of stock options used to compute the pro forma net loss is theestimated fair value at the grant date using the Black-Scholes method forvaluing stock options with the following assumptions:
| **Weighted Average Assumptions** | ** ** | ** ** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Dividend yield                             |       | 0.0        | %          | 0.0      | %          | 0.0      | %          |
| Risk-free  interest rate                   |       | 3.0        | %          | 2.5      | %          | 3.8      | %          |
| Volatility factor                          |       | 70.0       | %          | 71.0     | %          | 76.0     | %          |
| Expected holding period  (in years)        |       | 4.0        |       | 4.0      |       | 4.0      |       |

 

The stock compensationcharge included in the Statement of operations primarily represents thedifference at the grant date between the exercise price and the pre-IPO deemedfair value of the Common Shares underlying the options. This amount is beingamortized over the vesting period of the individual options, which is typicallyfour years. Utilizing the intrinsic value method of APB Opinion No. 25,the Company recognized $0, $282,000, and $425,000 of stock compensation expenseduring the years ended December 31, 2004, 2003 and 2002, respectively. Thisnon-cash expense results in a corresponding increase to Additional paidin capital. Subsequent to the IPO, the exercise price of all options granted isequal to the fair market value of the underlying Common Shares, resulting in nocompensation charge.

**Employee Stock Purchase Plan**

Under the Company’s Employee Stock Purchase Plan,eligible employees are given the opportunity to purchase the Company’s CommonShares at 85% of the closing price of the Company’s Common Stock on the NasdaqNational Market on either the first or last day of the offering period,whichever is lower. The offering periods begin on January 1 and July 1of each year and conclude on June 30 and December 31, respectively.From an authorization of 1,000,000 shares, a total of 389,901 shares have beenissued through December 31, 2004, of which 40,981, 74,355 and 113,102 wereissued during 2004, 2003 and 2002 respectively.

UnderAPB Opinion No. 25, no compensation cost is recognized for sharespurchased under this plan. The table in Note 3 illustrates the effect on netincome and earnings per share if the Company has applied the fair valuerecognition provisions of SFAS No. 123, to the employee purchase rightsunder this plan. Had the Company applied the fair value recognition provisionsof SFAS No. 123, the Company would have recorded additional expense of$47,000, $41,000 and $58,000 for 2004, 2003 and 2002 respectively. The fairvalue of employee purchase rights was estimated using the Black-Scholes optionpricing model for 2004, 2003 and 2002, respectively:
| **Weighted Average Assumptions** | ** ** | ** ** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Dividend yield                             |       | 0.0        | %          | 0.0      | %          | 0.0      | %          |
| Risk-free  interest rate                   |       | 1.3        | %          | 1.8      | %          | 4.3      | %          |
| Volatility factor                          |       | 70.0       | %          | 64.0     | %          | 88.0     | %          |
| Expected holding period  (in years)        |       | 0.0        |       | 0.0      |       | 0.0      |       |

 

48

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**10. RESTRUCTURINGAND OTHER CHARGES**

In the third quarter of 2004, the Company recorded acharge of $836,000 related to the separation agreement with the Company’sformer Chief Executive Officer, exit costs related to the relocation of theCompany’s EMEA headquarters and the consolidation of the corporate headquarters.The separation agreement costs of $555,000 consisted of three components. Thefirst component was severance totaling $239,000 from the pre-existingemployment agreement; the second component was stock compensation charge of$246,000 for the acceleration of option vesting; and the third component wasrelated legal fees of $70,000. The exit costs of $49,000 for the relocation ofthe Company’s EMEA headquarters related to the cancellation of certaintelephony contracts. The existing reserve for the corporate headquartersvacated space was increased by $232,000 due to the fact the Company has beenunable to find a tenant to sublet the excess facility space and believes thatin the current market the Company is unlikely to find a tenant to sublease thespace through the end of the lease term of May 2006.

In the second quarter of 2004, the Company recorded acharge of $88,000 related to the consolidation of the corporate headquarters. Thisadjustment to the existing reserve was due to the fact the Company has beenunable to find a tenant to sublet the excess facility space and thereby delayedthe start of anticipated sublet income by six months.

In the first quarter of 2004, the Company recorded acharge of $368,000. In late January 2004, the U.K. operations moved intonew premises that are more suitable for their current staffing levels. The oldfacility, which had a lease through March 2005, was in use until the move.The U.K. lease termination charge of approximately $309,000, consisted offorfeiture of the rent deposit, abandonment of assets, and other directdisposal costs. Additionally, the Company recorded an adjustment of $59,000 forthe reserve related to the consolidation of the corporate headquarters. Thisadjustment was due to the fact the Company has been unable to find a tenant tosublet the excess facility space and thereby delayed the start of anticipatedsublet income by three months.

In the third quarter of 2003, the Company conducted anextensive review of its operations to better align its operating cost structurewith current revenue levels. This review focused on staffing levels, facilityneeds and long-lived assets utilized in the business. As a result of thisreview, the Company recorded a Restructuring and other charges of $2.4 million.This charge was comprised of three components: a charge related to staffreductions of $738,000, a facility termination charge of $1.3 million and anasset impairment charge of $345,000. The staff reduction charge related tostaff reductions of 33 persons in July 2003. The charge for staffreductions was based on the severance payments and residual benefits to be paid.The facility termination charge related to leased space that the Company ceasedusing on August 31, 2003. This facility termination charge is comprised ofthe present value of future lease obligations and related expenses offset byanticipated income from subletting the space. This facility termination chargealso includes $47,000 related to disposal of assets that were abandoned as partof the exit plan. The asset impairment charge related to softwareinfrastructure systems and furniture and fixtures. As a result of these staffreductions, these assets no longer provided benefit to the Company andtherefore were abandoned. The asset impairment charge of $345,000 was based onthe net book value of the assets as of September 30, 2003, the date ofabandonment.

In the first quarter of 2003, the Company recorded acharge of $448,000. This charge related to staff reductions of 30 persons. Asof December 31, 2004, these funds were fully disbursed.

In the third quarter of 2002, the Company recorded aRestructuring and other charges of $869,000. This charge related to staffreductions of 18 persons, including involuntary terminations of three seniorlevel positions with contractual obligations, and former employee settlementcosts. As of December 31, 2004, these funds were fully disbursed.

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Asummary of the restructuring and other charge, is as follows:
| ** **                            | ** ** | **Employee  termination costs** | ** ** | **Facility  termination costs** | ** ** | **Asset  impairment  charge** | ** ** | **Other** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|-------------------------------|------------|-----------|------------|-----------|------------|
| ** **                            | ** ** | **In thousands**                | ** ** |
| Balance as of  December 31, 2001 |       |                                 | $          | —                               |       |                          |       | $         | —     |      |       |   | $ | — |   |   | $ | — |   | $ | — |   |
| 2002 Provision                        |       |                                 | 790        |                                 |       |                          | —     |      |       |      | —     |   |   | 79 |   | 869 |   |
| 2002 Cash  Payments                   |       |                                 | (394       | )                                    |       |                          | —     |      |       |      | —     |   |   | (55 | ) | (449 | ) |
| 2002 Non-cash  charge offs            |       |                                 | —     |                                 |       |                          | —     |      |       |      | —     |   |   | — |   | — |   |
| Balance as of December 31, 2002  |       |                                 | 396        |                                 |       |                          | —     |      |       |      | —     |   |   | 24 |   | 420 |   |
| 2003 Provision                        |       |                                 | 1,186      |                                 |       |                          | 1,344      |      |       |      | 345        |   |   | 30 |   | 2,905 |   |
| 2003 Adjustments                      |       |                                 | —     |                                 |       |                          | —     |      |       |      | —     |   |   | (30 | ) | (30 | ) |
| 2003 Cash  Payments                   |       |                                 | (1,576     | )                                    |       |                          | (316       | )         |       |      | —     |   |   | (13 | ) | (1,905 | ) |
| 2003 Non-cash  charge offs            |       |                                 | —     |                                 |       |                          | (47        | )         |       |      | (345       | ) |   | — |   | (392 | ) |
| Balance as of December 31, 2003  |       |                                 | 6          |                                 |       |                          | 981        |      |       |      | —     |   |   | 11 |   | 998 |   |
| 2004 Provision                        |       |                                 | 485        |                                 |       |                          | 253        |      |       |      | 104        |   |   | 70 |   | 912 |   |
| 2004 Adjustments                      |       |                                 | —     |                                 |       |                          | 379        |      |       |      | —     |   |   | — |   | 379 |   |
| 2004 Cash  Payments                   |       |                                 | (64        | )                                    |       |                          | (660       | )         |       |      | —     |   |   | (81 | ) | (805 | ) |
| 2004 Non-cash  charge offs            |       |                                 | (246       | )                                    |       |                          | (169       | )         |       |      | (104       | ) |   | — |   | (519 | ) |
| Balance as of  December 31, 2004 |       |                                 | $          | 181                                  |       |                          |       | $         | 784        |      |       |   | $ | — |   |   | $ | — |   | $ | 965 |   |

 

Included in Accruedrestructuring at December 31, 2004 is approximately $181,000 related tothe separation agreement with the Company’s former Chief Executive Officer,which the Company estimates will be disbursed over the next three quarters. Theremaining $784,000, of which $245,000 is classified as non-current, related tothe facility termination costs which the Company estimates will be disbursedover remaining life of the lease through the second quarter of 2006.

**11. LEASE COMMITMENTS**

At December 31,2004, the Company was obligated for future minimum lease payments underoperating leases that have initial or remaining noncancelable terms in excessof one year, as follows:
| ** ** | ** ** | **Operating leases** | ** ** |
|------------|------------|---------------------------|------------|
| ** ** | ** ** | **in thousands**     | ** ** |
| 2005       |       |                      | $          | 1,403 |   |   |
| 2006       |       |                      | 546        |   |   |
|       |       |                      | $          | 1,949 |   |   |

 

Rent expense for operating leases was approximately $816,000,$1,467,000, and $1,949,000 for the years ended December 31, 2004, 2003 and2002, respectively.

At December 31, 2004,the Company has no capital lease obligations.

**12. 401(k) PROFIT-SHARING PLAN**

The Company providesretirement benefits to eligible employees under a 401(k) profit-sharingplan. The Plan provides for deferred salary contributions by the planparticipants and a Company contribution. Company contributions, if any, are atthe discretion of the Board of Directors and are not to exceed the amountdeductible under applicable income tax laws. No Company contributions have beenmade since inception of the Plan.

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**13. GEOGRAPHIC INFORMATION**

Revenues derived from customers outside of NorthAmerica accounted for 18.2%, 23.0%, and 27.3% of the Company’s total revenuesin 2004, 2003 and 2002, respectively.

The Company attributes itsrevenues to countries based on the country in which the customer is located.The Company’s long-lived assets located outside the United States are notconsidered material.

**14. LITIGATION AND CONTINGENCIES**

In November 2001, the Company was named as adefendant in several shareholder class action lawsuits that were filed infederal court in Chicago against the Company, certain of its current and formerdirectors and officers, and the underwriters of the Company’s initial publicoffering (“IPO”). These litigations areallegedly brought on behalf of purchasers of the Company’s stock, and assertthat the Company violated the federal securities laws by making misstatementsand omissions in its Registration Statement and Prospectus in connection withthe Company’s initial public offering in February 2000. The plaintiffsseek unspecified damages. In April 2002 an amended consolidated complaintwas filed which supersedes the original, separate complaints. In February 2004,the parties agreed to settle the case in exchange for a payment on behalf ofall defendants of $4.5 million, with all settlement amounts paid by the Company’sdirector and officer liability insurance carrier. In August 2004, thecourt entered a final judgment dismissing the action.

The Company was named as a nominal defendant in ashareholder derivative action filed in February 2002 against certain ofits present and former directors and officers. The complaint was ostensiblybrought on the Company’s behalf and sought no relief directly from the Company.The complaint, subsequently amended in August 2002, alleged, among otherthings, that the alleged conduct challenged in the securities cases pendingagainst the Company in Chicago (described above) constituted a breach of thedefendants’ fiduciary duties to the Company. In September 2004, on theparties’ joint motion, the Court dismissed the action without prejudice. Theparties subsequently agreed to a settlement under which the defendants paid theplaintiff $65,000, $32,500 of which was paid by the Company’s director andofficer liability insurance policy and $32,500 was paid by the Company, inexchange for the plaintiff’s release of the defendants from any and all claimsrelating to the allegations asserted in the action.

In November 2001, the Company was named as adefendant in shareholder class action litigation that has been filed in federalcourt in New York City against the Company and certain of its current andformer officers and the underwriters of the Company’s IPO. This lawsuitalleges, among other things, that the underwriters of the Company’s IPOimproperly required their customers to pay the underwriters excessivecommissions and to agree to buy additional shares of the Company’s stock in theaftermarket as conditions of receiving shares in the Company’s IPO. The lawsuitfurther claims that these supposed practices of the underwriters should havebeen disclosed in the Company’s IPO prospectus and registration statement. In April 2002,an amended complaint was filed which, like the original complaint, allegesviolations of the registration and antifraud provisions of the federalsecurities laws and seeks unspecified damages. The Company understands thatvarious other plaintiffs have filed substantially similar class action casesagainst approximately 300 other publicly traded companies and their publicoffering underwriters in New York City, which along with the case against theCompany have all been transferred to a single federal district judge forpurposes of coordinated case management.

In July 2002, the Company, together with theother issuers named as defendants in these coordinated proceedings, filed acollective motion to dismiss the consolidated amended complaints against themon various legal grounds common to all or most of the issuer defendants. In October 2002,the Court approved a stipulation providing for the dismissal of the individualdefendants without prejudice. In February 2003, the Court issued adecision granting in part and denying in part the motion to dismiss the 

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litigation filed by theCompany and the other issuer defendants. The claims against the Company underthe antifraud provisions of the securities laws were dismissed with prejudice;the claims under the registration provisions of the securities laws were notdismissed as to the Company or virtually any other issuer defendant. The Courtalso denied the underwriter defendants’ motion to dismiss in all respects.

In June 2003, the Company elected to participatein a proposed settlement agreement with the plaintiffs in this litigation. Ifultimately approved by the Court, this proposed settlement would result in adismissal, with prejudice, of all claims in the litigation against the Companyand against any of the other issuer defendants who elect to participate in theproposed settlement, together with the current or former officers and directorsof participating issuers who were named as individual defendants. The proposedsettlement does not provide for the resolution of any claims against theunderwriter defendants, and the litigation as against those defendants iscontinuing. The proposed settlement provides that the class members in theclass action cases brought against the participating issuer defendants will beguaranteed a recovery of $1 billion by insurers of the participatingissuer defendants. If recoveries totaling $1 billion or more are obtainedby the class members from the underwriter defendants, however, the monetaryobligations to the class members under the proposed settlement will besatisfied. In addition, the Company and any other participating issuerdefendants will be required to assign to the class members certain claims thatthey may have against the underwriters of their IPOs.

The proposed settlement contemplates that any amountsnecessary to fund the settlement or settlement-related expenses would come fromparticipating issuers’ directors and officers liability insurance policyproceeds as opposed to funds of the participating issuer defendants themselves.A participating issuer defendant could be required to contribute to the costs ofthe settlement if that issuer’s insurance coverage were insufficient to paythat issuer’s allocable share of the settlement costs. The Company expects thatits insurance proceeds will be sufficient for these purposes and that it willnot otherwise be required to contribute to the proposed settlement.

Consummation of the proposed settlement is conditionedupon obtaining both preliminary and final approval by the Court. Formalsettlement documents were submitted to the Court in June 2004, togetherwith a motion asking the Court topreliminarily approve the form of settlement. Certain underwriters whowere named as defendants in the settling cases, and who are not parties to theproposed settlement, opposed preliminary approval of the proposed settlement ofthose cases. The Court has issued an order preliminarily approving the proposedsettlement in all respects but one. The plaintiffs and the issuer defendantsare in the process of assessing whether to proceed with the proposedsettlement, as modified by the Court. If the plaintiffs and the issuerdefendants elect to proceed with the proposedsettlement, as modified by the Court, they will submit revised settlementdocuments to the Court. The underwriter defendants may then have an opportunityto object to the revised settlement documents. If the Court approves therevised settlement documents, it will direct that notice of the terms ofthe proposed settlement be published in a newspaper and mailed to all proposedclass members and schedule a fairness hearing, at which objections to theproposed settlement will be heard. Thereafter, the Court will determine whetherto grant final approval to the proposed settlement.

If the proposed settlement described above is notconsummated, the Company intends to continue to defend the litigationvigorously. Moreover, if the proposed settlement is not consummated, theCompany believes that the underwriters may have an obligation to indemnify itfor the legal fees and other costs of defending this suit. While the Companycannot guarantee the outcome of the above proceedings, the Company believesthat the final result of these actions will have no material effect on itsconsolidated financial condition, results of operations or cash flows.

The Company is a party invarious other disputes and litigation that have arisen in the course of theCompany’s business. In the opinion of management, although legal proceedingscan not be predicted with 

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certainty,the ultimate outcome of these disputes and lawsuits are not expected to have amaterial impact on the Company’s financial condition or results of operations,or cash flows.

**15. QUARTERLY DATA (UNAUDITED)**

Thefollowing table presents unaudited quarterly operating results for each of theCompany’s fiscal quarters in 2004 and 2003.
| ** **                       | ** ** | **2004**                                                            | ** **   | **2003**               | ** **   |
|----------------------------------|------------|---------------------------------------------------------------------|--------------|------------------------|--------------|
| ** **                       | ** ** | **Quarter ended**                                              | *** *** | **Quarter ended** | *** *** |
| ** **                       | ** ** | **  Mar. 31  **                            | ** **   | **Jun. 30**       | ** **   | **Sep. 30** | ** ** | **Dec. 31** | ** ** | **Mar. 31** | ** ** | **Jun. 30** | ** ** | **Sep. 30** | ** ** | **Dec. 31** | ** ** |
| ** **                       | ** ** | **in thousands, except per share amounts** | ** **   |
| Total revenues                   |       |                                                                | $            | 5,160                  |         |   | $ | 4,968 |   | $ | 4,980 |   | $ | 5,465 |   | $ | 5,157 |   | $ | 4,656 |   | $ | 4,711 |   | $ | 5,610 |   |
| Gross profit                     |       |                                                                | 4,138        |                   |         | 3,832 |   | 3,911 |   | 4,184 |   | 3,930 |   | 3,348 |   | 3,617 |   | 4,606 |   |
| Net income (loss)                |       |                                                                | 15           |                   |         | 109 |   | (815 | ) | 355 |   | (1,971 | ) | (1,464 | ) | (3,001 | ) | 761 |   |
| Basic income  (loss) per share   |       |                                                                | $            | 0.00                   |         |   | $ | 0.01 |   | $ | (0.05 | ) | $ | 0.02 |   | $ | (0.12 | ) | $ | (0.09 | ) | $ | (0.18 | ) | $ | 0.05 |   |
| Diluted income (loss) per  share |       |                                                                | $            | 0.00                   |         |   | $ | 0.01 |   | $ | (0.05 | ) | $ | 0.02 |   | $ | (0.12 | ) | $ | (0.09 | ) | $ | (0.18 | ) | $ | 0.04 |   |

 

**ITEM 9.**                CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

**ITEM 9A.**        CONTROLS AND PROCEDURES.

The Company’s management, with the participation ofthe Company’s Chief Executive Officer and Chief Financial Officer, evaluatedthe effectiveness of the Company’s disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act) as of December 31, 2004. Based on this evaluation, theCompany’s Chief Executive Officer and Chief Financial Officer concluded that,as of December 31, 2004, the Company’s disclosure controls and procedureswere (1) designed to ensure that material information relating to theCompany, including its consolidated subsidiaries, is made known to the Company’sChief Executive Officer and Chief Financial Officer by others within thoseentities, particularly during the period in which this report was beingprepared and (2) effective, in that they provide reasonable assurance thatinformation required to be disclosed by the Company in the reports that itfiles or submits under the Securities Exchange Act is recorded, processed,summarized and reported within the time periods specified in the SEC’s rules andforms.

No change in the Company’sinternal control over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) occurred during the fiscal quarter endedDecember 31, 2004 that has materially affected, or is reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

**ITEM 9A.**        CONTROLS AND PROCEDURES.

None.

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**Part III**

**ITEM 10.**         DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT.

The information required by Item 405 of RegulationS-K  concerning compliance with Section 16(a) ofthe Exchange Act is incorporated by reference from the section in the 2005Proxy Statement captioned “Section 16(a) Beneficial OwnershipReporting Compliance.”

Furthermore, informationregarding the audit committee and the audit committee financial expert is setforth in the Company’s 2005 Proxy Statement (under the caption “Corporate Governance”),and is hereby incorporated by reference.

**Directors of the Company.**

The information requiredby Item 401 of Regulation S-K, as it relates to directors, is incorporated byreference from the “Proposal No. 1—Election of Directors” section of the2005 Proxy Statement.

**Executive Officers of the Company.**

The information required by Item 401 of RegulationS-K, as it relates to executive officers is set forth at the end of “Item. 1Business.”

The Company has adopted acode of ethics that applies to its officers and employees. The Company’s codeof ethics is posted on its Internet website at www.apropos.com. You can alsoreceive a copy free of charge by sending a written request to the Company’sexecutive offices at One Tower Lane, 28th Floor, Oakbrook Terrace,IL  60181.

**ITEM 11.**         EXECUTIVECOMPENSATION.

The information inresponse to this item is incorporated by reference from the sections of the2005 Proxy Statement captioned “Executive Compensation,” “Report of theCompensation Committee of the Board of Directors,” and “Stock Price PerformanceGraph.”

**ITEM 12.**         SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS.

The information inresponse to this Item 403 of Regulation S-K is incorporated by reference fromthe section of the 2005 Proxy Statement captioned “Securities BeneficiallyOwned by Principal Shareholders and Management.”

**EquityCompensation 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     |       |       | 2,235,383  |                                                                                                                                                 |       |                                                                                                                   | $          | 2.95                                                                                                    |       |   |   | 1,906,649 |   |   |
| Equity compensation  plans not approved by security holders |       |       | —     |                                                                                                                                                 |       |                                                                                                                   | —     |                                                                                                    |       |   | — |   |   |
| Total                                                       |       |       | 2,235,383  |                                                                                                                                                 |       |                                                                                                                   | $          | 2.95                                                                                                    |       |   |   | 1,906,649 |   |   |

                                                                                                                                                

**ITEM 13.**         CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS.

The information inresponse to this item is incorporated by reference from the section of the 2005Proxy Statement entitled “Transactions with Related Parties.”

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**ITEM 14.   PRINCIPALACCOUNTANT FEES AND SERVICES.**

The information inresponse to this item and our audit committee’s pre-approval policy for auditservices is incorporated by reference from the sections of the 2005 ProxyStatement entitled “Audit Committee Report” and “Audit and Non-Audit Fees.”

**Part IV**

**ITEM 15.**         EXHIBITSAND FINANCIAL STATEMENT SCHEDULES,.

**A.****             Exhibitsand Financial Statement Schedules.**

1.                Thefollowing consolidated financial statements of the Company and its subsidiariesare filed as part of this Report:

·        IndependentAuditors’ Report;

·        ConsolidatedBalance Sheets as of December 31, 2004 and 2003;

·        ConsolidatedStatements of Operations for the years ended December 31, 2004, 2003 and2002;

·        ConsolidatedStatements of Shareholders’ Equity for the years ended December 31, 2004,2003 and 2002;

·        ConsolidatedStatements of Cash Flows for the years ended December 31, 2004, 2003 and2002; and

·        Notesto the Consolidated Financial Statements.

2.                Thefollowing financial statement schedule is filed as an exhibit to this Report:

·        Schedule II—Valuationand Qualifying Accounts for the years ended December 31, 2004, 2003 and2002.

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

3.                Thefollowing exhibits are filed as part of this Report:
| 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*               |       | 2000  Omnibus Incentive Plan.                                                                                                                                                                                          |
| 10.2**              |       | Amendment  No. 1 to the 2000 Omnibus Incentive Plan, as Amended and Restated.                                                                                                                                     |
| 10.3*               |       | Employee  Stock Purchase Plan of 2000.                                                                                                                                                                                 |
| 10.4*               |       | Form of  Indemnity Agreement with directors.                                                                                                                                                                      |
| 10.5*               |       | 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.                |
| 10.6*               |       | 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. |
| 10.7****            |       | Employment Agreement  dated November 26, 2002, between the Registrant and John Repko.                                                                                                                             |

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| 10.8****  |   | Employment  Agreement dated November 27, 2002, between the Registrant and Frank  Leonard.              |
|-----------|--------|-------------------------------------------------------------------------------------------------------------|
| 10.9***** |   | Separation  and Release Agreement dated September 14, 2004 between the Registrant  and Kevin G. Kerns. |
| 10.10#    |   | Form of  Incentive Stock Option                                                                        |
| 10.11##   |   | Form of  Option for Non-employee Directors                                                             |
| 10.23##   |   | Employment  Agreement dated March 18, 2005, between the Registrant and David  McCrabb.                 |
| 21#       |   | Subsidiaries  of the Registrant.                                                                            |
| 23.1#     |   | Consent  of Grant Thornton LLP.                                                                        |
| 23.2#     |   | Consent  of Ernst & Young LLP                                                                 |
| 31.1#     |   | Certification pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                              |
| 31.2#     |   | Certification pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                              |
| 32.1#     |   | Certification  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                              |

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****                                              Previouslyfiled with the Commission as an exhibit to the Company’s Registration Statementon Form S-1, as amended (File No. 333-90873), andincorporated herein by reference.*

*****                                       Previouslyfiled with the Commission as an exhibit to the Company’s Report on Form 10-Kon March 30, 2002, and incorporated herein by reference.*

******                                Previouslyfiled with the Commission as an exhibit to the Company’s Report on Form 10-Qon November 14, 2002, and incorporated herein by reference.*

*******                         Previouslyfiled with the Commission as an exhibit to the Company’s Report on Form 10-Kon March 31, 2003, and incorporated herein by reference.*

********                  Previouslyfiled with the Commission as an exhibit to the Company’s Report on Form 10-Qon November 14, 2004 and incorporated herein by reference.*

*##**                                 Previouslyfiled with the Commission as an exhibit to the Company’s Report on Form 8-Kon March 23, 2005, and incorporated herein by reference.*

*#**                                           Filedherewith.*

**B.   Exhibits.**

See A.3. of this Item 14.

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**Signatures**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this Report to be signed on itsbehalf by the undersigned, thereunto duly authorized, on March 30, 2005.
|        | APROPOS  TECHNOLOGY, INC.               |
|--------|----------------------------------------------|
|   | /s/ FRANCIS J. LEONARD                       |
|   | *Chief Financial Officer and Vice President* |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the Registrant and in thecapacities indicated on March 30, 2005.
|                        | **Names and Signatures** | ** **                                                                               | ** ** | ** ** | **Titles** | ** ** |
|------------------------|--------------------------|------------------------------------------------------------------------------------------|------------|------------|------------|------------|
| /s/ DAVID MCCRABB      |                     |                                                                                     |
| David McCrabb          |                     | Chief Executive Officer and President (Principal  Executive Officer)                     |
| /s/ FRANCIS J. LEONARD |                     |                                                                                     |
| Francis J. Leonard     |                     | Chief Financial Officer and Vice President  (Principal Financial and Accounting Officer) |
| /s/ KENNETH D. BARWICK |                     |                                                                                     |
| Kenneth D. Barwick     |                     | Director                                                                                 |
| /s/ DAVID N. CAMPBELL  |                     |                                                                                     |
| David N. Campbell      |                     | Director                                                                                 |
| /s/ STEVEN M. CAPELLI  |                     |                                                                                     |
| Steven M. Capelli      |                     | Director                                                                                 |
| /s/ KEITH L. CRANDELL  |                     |                                                                                     |
| Keith L. Crandell      |                     | Director                                                                                 |
| /s/ DONALD DELOACH     |                     |                                                                                     |
| Donald DeLoach         |                     | Director                                                                                 |
| /s/ JOHN M. KRATKY III |                     |                                                                                     |
| John M. Kratky III     |                     | Director                                                                                 |
| /s/ STEPHEN WEBB       |                     |                                                                                     |
| Stephen Webb           |                     | Director                                                                                 |

 

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**ScheduleII—Valuation and Qualifying AccountsApropos Technology, Inc.**
| **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** | ** ** |
|---------------------------------------------------------|------------|-------------------------|------------|------------------------------------------------|------------|----------------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                              | ** ** | **(in thousands)** | ** ** |
| **Year ended December 31,  2002**                  |       |                    |       |                                           |       |                                                     |       |                                                 |       |                           |       |                                                         |       |   |   |   |   |   |   |   |   |
| Reserves and allowances  deducted  from asset Accounts: |       |                    |       |                                           |       |                                                     |       |                                                 |       |                           |       |                                                         |       |   |   |   |   |   |   |   |   |
| Allowance for doubtful accounts                         |       |                    | $          | 677                                            |       |                                                     |       | 315                                                  |       |                           |       | —                                                       |       |   |   | *518 |   |   |   | $ | 474 |   |   |
| **Year ended December 31,  2003**                  |       |                    |       |                                           |       |                                                     |       |                                                 |       |                           |       |                                                         |       |   |   |   |   |   |   |   |   |
| Reserves and allowances  deducted  from asset Accounts: |       |                    |       |                                           |       |                                                     |       |                                                 |       |                           |       |                                                         |       |   |   |   |   |   |   |   |   |
| Allowance for doubtful accounts                         |       |                    | $          | 474                                            |       |                                                     |       | 35                                                   |       |                           |       | —                                                       |       |   |   | *244 |   |   |   | $ | 265 |   |   |
| **Year ended December 31,  2004**                  |       |                    |       |                                           |       |                                                     |       |                                                 |       |                           |       |                                                         |       |   |   |   |   |   |   |   |   |
| Reserves and allowances  deducted  from asset Accounts: |       |                    |       |                                           |       |                                                     |       |                                                 |       |                           |       |                                                         |       |   |   |   |   |   |   |   |   |
| Allowance for  doubtful accounts                        |       |                    | $          | 265                                            |       |                                                     |       | 32                                                   |       |                           |       | —                                                       |       |   |   | *78 |   |   |   | $ | 219 |   |   |

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*                    Write-offs,net of recoveries.

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