10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended September 30, 2004

OR

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

For the transition period from              to               

Commission File number 000-30654

APROPOS TECHNOLOGY, INC.

(Exact name of registrant as specified in its charter)

Illinois	36-3644751
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
One Tower Lane, 28th Floor Oakbrook Terrace, Illinois 60181
(Address of principal executive offices, including zip code)
(630) 472-9600
(Registrant’s telephone number, including area code)

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

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

The number of shares outstanding of the registrant’s Common Shares, par value $0.01 per share, as of October 22, 2004, was 17,511,432.

APROPOS TECHNOLOGY, INC.

TABLE OF CONTENTS

Part I.	Financial Information
Item 1.	Financial Statements (Unaudited)
	Condensed consolidated balance sheets at September 30, 2004 and December 31, 2003
	Condensed consolidated statements of operations for the three and nine months ended September 30, 2004 and 2003
	Condensed consolidated statements of cash flows for the nine months ended September 30, 2004 and 2003
	Notes to condensed consolidated financial statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
Part II.	Other Information
Item 1.	Legal Proceedings
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.	Defaults Upon Senior Securities
Item 4.	Submission of Matters to a Vote of Security Holders
Item 5.	Other Information
Item 6.	Exhibits
Signatures

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Part I.     Financial Information.

Item 1.    Financial Statements.

Apropos Technology, Inc.

Condensed Consolidated Balance Sheets

In thousands, except share and per share amounts

	September 30 2004			December 31 2003
	(Unaudited)			(Note 1)
Assets
Current assets :
Cash and cash equivalents	$	38,076		$	38,265
Short-term investments	3,008			1,000
Accounts receivable, less allowances for doubtful accounts of $187 at September 30, 2004 and $265 at December 31, 2003	2,859			2,895
Inventory	81			73
Prepaid expenses and other current assets	467			588
Total current assets	44,491			42,821
Equipment, net	618			921
Other assets	21			199
Total assets	$	45,130		$	43,941
Liabilities and shareholders’ equity
Current liabilities :
Accounts payable	$	137		$	81
Accrued expenses	1,129			1,179
Accrued compensation and related accruals	812			377
Accrued restructuring, current portion	798			438
Advance payments from customers	118			186
Deferred revenues	3,610			3,296
Total current liabilities	6,604			5,557
Accrued restructuring, less current portion	390			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, 17,511,432 shares issued and outstanding at September 30, 2004; 17,257,225 issued and 16,946,114 outstanding at December 31, 2003	175			173
Additional paid-in capital	102,872			102,263
Treasury stock, at cost	—			(392		)
Accumulated deficit	(64,911		)	(64,220		)
Total shareholders’ equity	38,136			37,824
Total liabilities and shareholders’ equity	$	45,130		$	43,941

See notes to condensed consolidated financial statements.

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Apropos Technology, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

In thousands, except per share amounts

	Three months ended September 30						Nine months ended September 30
	2004			2003			2004			2003
Revenue
Software licenses	$	1,731		$	1,677		$	5,357		$	5,326
Services and other	3,249			3,034			9,751			9,199
Total revenue	4,980			4,711			15,108			14,525
Cost of goods and services
Cost of software	172			91			459			294
Cost of services and other	897			1,003			2,769			3,336
Total cost of goods and services	1,069			1,094			3,228			3,630
Gross margin	3,911			3,617			11,880			10,895
Operating expenses
Sales and marketing	1,887			1,628			5,320			5,836
Research and development	1,021			1,117			3,105			4,312
General and administrative	1,132			1,475			3,175			4,466
Stock compensation charge	—			75			—			225
Restructuring and other charges	836			2,427			1,291			2,875
Total operating expenses	4,876			6,722			12,891			17,714
Loss from operations	(965		)	(3,105		)	(1,011		)	(6,819		)
Other income (expense)
Interest income	145			99			347			382
Other, net	5			5			(27		)	2
Total other income (expense)	150			104			320			384
Net loss	$	(815	)	$	(3,001	)	$	(691	)	$	(6,435	)
Basic and diluted net loss per share	$	(0.05	)	$	(0.18	)	$	(0.04	)	$	(0.38	)
Weighted average shares outstanding	17,343			16,842			17,240			16,749

See notes to condensed consolidated financial statements.

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Apropos Technology, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

In thousands

	Nine months ended September 30
	2004			2003
Cash flows from operating activities
Net loss	$	(691	)	$	(6,435	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	353			845
Provision for doubtful accounts	—			36
Stock compensation charge	—			225
Non-cash restructuring charge	519			392
Changes in operating assets and liabilities:
Accounts receivable	36			353
Inventory	(8		)	35
Prepaid expenses and other current assets	120			422
Other assets	9			8
Accounts payable	57			7
Accrued expenses	(50		)	(177		)
Accrued compensation and related accruals	436			(387		)
Accrued restructuring	188			812
Advanced payments from customers	(68		)	(116		)
Deferred revenue	314			689
Net cash provided by (used in) operating activities	1,215			(3,291		)
Cash flows from investing activities
Maturities and sales of short-term investments	1,000			27,039
Purchases of short-term investments	(3,008		)	(5,470		)
Purchases of equipment	(152		)	(123		)
Net cash provided by (used in) investing activities	(2,160		)	21,446
Cash flows from financing activities
Proceeds from exercise of options	692			211
Proceeds from employee stock purchase plan	64			54
Net cash provided by financing activities	756			265
Net change in cash and cash equivalents	(189		)	18,420
Cash and cash equivalents, beginning of period	38,265			19,333
Cash and cash equivalents, end of period	$	38,076		$	37,753

See notes to condensed consolidated financial statements.

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Apropos Technology, Inc.

Notes To Condensed Consolidated Financial Statements

(Unaudited)

1.Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X.  Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed, or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  In management’s opinion, the statements include all adjustments necessary (which are of a normal and recurring nature) for the fair presentation of the results of the interim periods presented.

The balance sheet at December 31, 2003, has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

These financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2003, included with its Annual Report on Form 10-K filed with the SEC on March 30, 2004.  The results of operations for the interim periods presented are not necessarily indicative of the results of operations to be expected for any other interim period or for the full fiscal year.

2.Loss Per Share

Basic net loss per share is based upon the net loss and upon the weighted-average number of Common Shares outstanding during the period.  Diluted net loss per common share adjusts for the effect of common share equivalents, such as convertible securities, stock options, and stock warrants, only in the periods presented in which such effect would have been dilutive.  Diluted net loss per share is not presented separately, as the effect of the common share equivalents is anti-dilutive for each of the periods presented.  Accordingly, diluted net loss per share is the same as basic net loss per share.

3.Stock based compensation

The Company has elected to determine the value of stock-based compensation arrangements under the provisions of Accounting Principles Board, or APB, Opinion No. 25 “Accounting for Stock Issued to Employees.” The pro forma disclosures required under Statement of Financial Accounting Standards, or SFAS, No. 148, “Accounting for Stock Based Compensation Transition and Disclosure–an Amendment of SFAS, No. 123” are included below. SFAS, No. 123, “Accounting for Stock Based Compensation” permits the use of either a fair value based method or the intrinsic value method to measure the expense associated with stock-based compensation arrangements.

In accordance with the interim disclosure provisions of SFAS No. 148, the pro forma effect on the Company’s net income (loss) had compensation expense been recorded for the three and nine months ended September 30, 2004 and 2003, respectively, as determined under the fair value method, is shown below.

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	Three months ended September 30						Nine months ended September 30
In thousands, except per share amounts	2004			2003			2004			2003
Net loss, as reported	$	(815	)	$	(3,001	)	$	(691	)	$	(6,435	)
Add: Stock-based employee compensation expense included in reported net loss	246			75			246			225
Less: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects	(457		)	(296		)	(890		)	(995		)
Net loss, pro forma	$	(1,026	)	$	(3,222	)	$	(1,335	)	$	(7,205	)
Basic and diluted loss per share, as reported	$	(0.05	)	$	(0.18	)	$	(0.04	)	$	(0.38	)
Basic and diluted loss per share, pro forma	$	(0.06	)	$	(0.19	)	$	(0.08	)	$	(0.43	)

Options to purchase 2,009,678 Common Shares with exercise prices of $0.10 to $22.00 per share were outstanding as of September 30, 2004, and options to purchase 2,690,615 Common Shares with exercise prices of $0.10 to $22.00 per share were outstanding as of September 30, 2003.

4.Geographic Information

Revenues derived from customers outside of North America accounted for 20.8% and 21.7% of the Company’s total revenues in the three months ended September 30, 2004 and 2003, respectively.  Revenues derived from customers outside of North America accounted for 19.0% and 24.8% of the Company’s total revenues in the nine months ended September 30, 2004 and 2003, respectively.

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

5.Litigation and contingencies

The Company was named as a nominal defendant in a shareholder derivative action filed in February 2002 against certain of its present and former directors and officers.  The complaint alleges, among other things, that the defendants breached duties owed to the Company in connection certainly allegedly false and misleading statements in the Company’s Registration Statement and Prospectus in connection with the Company’s initial public offering.  The complaint, which was amended in August 2002, sought unspecified money damages and other relief ostensibly on behalf of the Company.  In September 2004, the action was dismissed without prejudice.

In November 2001, the Company was named as a defendant in shareholder class action litigation that has been filed in federal court in New York City against the Company and certain of its current and former officers and the underwriters of the Company’s initial public offering (“IPO”).  This lawsuit alleges, among other things, that the underwriters of the Company’s IPO improperly required their customers to pay the underwriters excessive commissions and to agree to buy additional shares of the Company’s stock in the aftermarket as conditions of receiving shares in the Company’s IPO.  The lawsuit further claims that these supposed practices of the underwriters should have been disclosed in the Company’s IPO prospectus and registration statement. In April 2002, an amended complaint was filed which, like the original complaint, alleges violations of the registration and antifraud provisions of the federal securities laws and seeks unspecified damages.  The Company understands that various other plaintiffs have filed substantially similar class action cases against approximately 300 other publicly traded companies and their public offering underwriters in New York City, which along with the case against the Company have all been transferred to a single federal district judge for purposes of coordinated case management.

In July 2002, the Company, together with the other issuers named as defendants in these coordinated proceedings, filed a collective motion to dismiss the consolidated amended complaints against them on various legal grounds common to all or most of the issuer defendants.  In October 2002, the Court approved a stipulation providing for the dismissal of the individual defendants without prejudice.  In February 2003, the Court issued a decision granting in part

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and denying in part the motion to dismiss the litigation filed by the Company and the other issuer defendants.  The claims against the Company under the antifraud provisions of the securities laws were dismissed with prejudice; the claims under the registration provisions of the securities laws were not dismissed as to the Company or virtually any other issuer defendant.

In June 2003, the Company elected to participate in a proposed settlement agreement with the plaintiffs in this litigation.  If ultimately approved by the Court, this proposed settlement would result in a dismissal, with prejudice, of all claims in the litigation against the Company and against any of the other issuer defendants who elect to participate in the proposed settlement, together with the current or former officers and directors of participating issuers who were named as individual defendants. The proposed settlement does not provide for the resolution of any claims against the underwriter defendants, and the litigation as against those defendants is continuing. The proposed settlement provides that the class members in the class action cases brought against the participating issuer defendants will be guaranteed a recovery of $1 billion by insurers of the participating issuer defendants.  If recoveries totaling $1 billion or more are obtained by the class members from the underwriter defendants, however, the monetary obligations to the class members under the proposed settlement will be satisfied. In addition, the Company and any other participating issuer defendants will be required to assign to the class members certain claims that they may have against the underwriters of their IPOs.

The proposed settlement contemplates that any amounts necessary to fund the settlement or settlement-related expenses would come from participating issuers’ directors and officers liability insurance policy proceeds as opposed to funds of the participating issuer defendants themselves. A participating issuer defendant could be required to contribute to the costs of the settlement if that issuer’s insurance coverage were insufficient to pay that issuer’s allocable share of the settlement costs. The Company expects that its insurance proceeds will be sufficient for these purposes and that it will not otherwise be required to contribute to the proposed settlement.

Formal settlement documents, including a stipulation of settlement and related documents, have now been filed with the Court.  The plaintiffs in the cases against us, along with the plaintiffs in the other related cases in which issuer defendants have agreed to the proposed settlement, have requested preliminary approval by the Court of the proposed settlement, including the form of the notice of the proposed settlement that will be sent to members of the proposed classes in each settling case.  Certain underwriters who were named as defendants in the settling cases, and who are not parties to the proposed settlement, have filed an opposition to preliminary approval of the proposed settlement of those cases.  In mid-September, the Court asked lead counsel for the plaintiffs and for the issuer defendants for additional information concerning the adequacy of the settlement amount and how plaintiffs intend to allocate any consideration paid under the settlement among the more than 300 separate class actions that are included in the settlement.  Counsel for the plaintiffs and for the issuer defendants are in the process of providing to the Court the information that it has requested.

Consummation of the proposed settlement remains conditioned upon receipt of both preliminary and final court approval.  If the Court preliminarily approves the proposed settlement, it will direct that notice of the terms of the proposed settlement be published in a newspaper and mailed to all proposed class members and schedule a fairness hearing, at which objections the proposed settlement will be heard. Thereafter, the Court will determine whether to grant final approval to the proposed settlement.

If the proposed settlement described above is not consummated, the Company intends to continue to defend the litigation vigorously.  Moreover, if the proposed settlement is not consummated, the Company believes that the underwriters may have an obligation to indemnify it for the legal fees and other costs of defending this suit.

While the Company cannot guarantee the outcome of the above proceedings, the Company believes that the final result of these actions will have no material effect on its consolidated financial condition, results of operations or cash flows.

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

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6.Restructuring and other charges

In the third quarter of 2004, the Company recorded a charge of $836,000 related to the separation agreement with the Company’s former Chief Executive Officer, exit costs related to the relocation of the Company’s EMEA headquarters and the consolidation of the corporate headquarters.  The separation agreement costs of $555,000 consisted of three components.  The first component was severance totaling $239,000 from the pre-existing employment agreement; the second component was stock compensation charge of $246,000 for the acceleration of option vesting; and the third component was related legal fees of $70,000.  The exit costs of $49,000 for the relocation of the Company’s EMEA headquarters related to the cancellation of certain telephony contracts.  The existing reserve for the corporate headquarters vacated space was increased by $232,000 due to the fact the Company has been unable to find a tenant to sublet the excess facility space and believes that in the current market the Company is unlikely to find a tenant to sublease the space through the end of the lease term of May 2006.

In the second quarter of 2004, the Company recorded a charge of $88,000 related to the consolidation of the corporate headquarters.  This adjustment to the existing reserve was due to the fact the Company has been unable to find a tenant to sublet the excess facility space and thereby delayed the start of anticipated sublet income by six months.

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

In the third quarter of 2003, the Company conducted an extensive review of its operations to better align its operating cost structure with current revenue levels.  This review focused on staffing levels, facility needs and long-lived assets utilized in the business.  As a result of this review, the Company recorded a Restructuring and other charges of $2.4 million.  This charge was comprised of three components:  a charge related to staff reductions of $738,000, a facility termination charge of $1.3 million and an asset impairment charge of $345,000.  The staff reduction charge related to staff reductions of 33 persons in July 2003.  The charge for staff reductions was based on the severance payments and residual benefits to be paid.  The facility termination charge related to leased space that the Company ceased use on August 31, 2003.  This facility termination charge is comprised of future lease obligations and related expenses offset by anticipated income from subletting the space.  This facility termination charge also includes $47,000 related to disposal of assets that were abandoned as part of the exit plan.  The asset impairment charge related to software infrastructure systems and furniture and fixtures.  As a result of these staff reductions, these assets no longer provided benefit to the Company and therefore abandoned.  The asset impairment charge was based on the net book value of the assets as of September 30, 2003, the date of abandonment.

In the first quarter of 2003, the Company recorded a charge of $448,000.  This charge related to staff reductions of 30 persons.

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A summary of the restructuring and other charge, is as follows:

In thousands	Employee termination costs			Facility termination costs			Asset impairment charge			Other			Total
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	(1,552		)	(106		)	—			(13		)	(1,671		)
2003 Non-cash charge offs	—			(47		)	(345		)	—			(392		)
Balance as of September 30, 2003	$	30		$	1,191		$	—		$	11		$	1,232

In thousands	Employee termination costs			Facility termination costs			Asset impairment charge			Other			Total
Balance as of December 31, 2003	$	6		$	981		$	—		$	11		$	998
2004 Provision	485			253			104			70			912
2004 Adjustments	—			379			—			—			379
2004 Cash Payments	—			(512		)	—			(70		)	(582		)
2004 Non-cash charge offs	(246		)	(169		)	(104		)	—			(519		)
Balance as of September 30, 2004	$	245		$	932		$	—		$	11		$	1,188

Included in Accrued restructuring at September 30, 2004 is approximately $17,000 related to the staff reductions in the third quarter of 2002, which the Company estimates will be disbursed over the next quarter.  In addition there is approximately, $239,000 related to the former CEO separation agreement, which the Company estimates will be disbursed over the next four quarters.  The remaining $932,000, of which $390,000 is classified as non-current, relates to the facility termination costs, which the Company estimates will be disbursed over remaining life of the lease through the second quarter of 2006.

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

Except for historical information, the matters discussed in this Quarterly Report on Form 10-Q are forward-looking statements made pursuant to the safe harbor provisions for forward-looking statements described in the Private Securities Litigation Reform Act of 1995.  These forward-looking statements are based on the Company’s current expectations and are subject to a number of risks, uncertainties, and assumptions relating to the Company’s operations, financial condition, and results of operations.  Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from results expressed or implied in any forward-looking statement made by the Company in this Quarterly Report.  These and other risks are detailed under the caption “Risk Factors Associated with Apropos’ Business and Future Operating Results” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, as filed with the Securities and Exchange Commission.  The Company does not undertake any obligation to revise these forward-looking statements to reflect future events or circumstances or for any other reason.

The following discussion should be read in conjunction with the Company’s condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report.

Overview

The Company develops, markets, and supports a leading real-time, multi-channel interaction management application for managing customer interactions across a variety of communications media, including E-mail, Fax, Web, and Voice.  The Company’s solution enhances customer relationship management applications, such as sales, marketing, and service, through intelligent, value-based management of all interactions.

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

Critical Accounting Policies

Revenue.  The Company recognizes revenue from the sale of software upon delivery. The Company recognizes revenue from fees for professional services when they are completed.  The Company recognizes support and maintenance services ratably over the term of its maintenance contracts, which are typically annual contracts. Training services are recognized as such services are completed.

The Company derives revenue principally from the sale of software licenses and from fees for implementation, technical support, and training services.

The Company markets its solution to its customers primarily through its direct sales force, value-added resellers, and original equipment manufacturers, or OEMs, in North America, Europe, South America, Asia, Africa, and Australia. Revenue generated via resellers and OEMs accounted for 23.4% and 28.7% of the Company’s total revenue for the three months ended September 30, 2004 and 2003, respectively. Revenue generated via resellers and OEMs accounted for 26.7% and 26.8% of the Company’s total revenue for the nine months ended September 30, 2004 and 2003, respectively. Management expects that revenue derived from sales to resellers and OEMs to be comparable in the foreseeable future.

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

•product features and pricing;

•order dates, rescheduling, and cancellations;

•warranties and repair procedures; and

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•support and training obligations.

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

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

•a customer’s awareness of the capabilities of the type of solutions Apropos sells and the amount of customer education required;

•concerns that the Company’s customer may have about its limited operating history and track record and the Company’s size compared to many of its larger competitors;

•a customer’s budgetary constraints;

•the timing of a customer’s budget cycles;

•concerns of the Company’s customer about the introduction of new products by the Company or its competitors that would render its current product noncompetitive or obsolete; and

•downturns in general economic conditions, including reductions in demand for contact center services.

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

Revenues derived from customers outside of North America accounted for 20.8% and 21.7% of the Company’s total revenues in the three months ended September 30, 2004 and 2003, respectively.  Revenues derived from customers outside of North America accounted for 19.0% and 24.8% of the Company’s total revenues in the nine months ended September 30, 2004 and 2003, respectively.  Management expects the portion of the Company’s total revenue derived from sales to customers outside the United States to be comparable in the foreseeable future.

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

•payments for third party software used with the Company’s product;

•the cost of compensation for technical support, education, and professional services personnel;

•other costs related to facilities and office equipment for technical support, education, and professional services personnel; and

•the cost of reimbursable travel included in revenue.

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

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

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

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Other income and expenses.  Other income and expense relates primarily to interest earned and/or owed. Interest income is generated by the investment of cash raised in rounds of equity financing, most notably the IPO in February 2000. Interest expense is generated primarily from outstanding debt and certain capitalized obligations, including any capital leases.

Income taxes. The Company provides for income taxes under the liability method, which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns.  Under this method, a valuation allowance is required against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.  Management evaluates the recoverability of the deferred tax assets and the level of the valuation allowance. At such time as it is determined that it is more likely than not that deferred tax assets are realizable, the valuation allowance will be appropriately reduced.

Results of Operations

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

	Three months ended September 30				Nine months ended September 30
	2004		2003		2004		2003
Revenue
Software licenses	34.8	%	35.6	%	35.5	%	36.7	%
Services and other	65.2	%	64.4	%	64.5	%	63.3	%
Total revenue	100.0	%	100.0	%	100.0	%	100.0	%
Costs of goods and services
Cost of software	3.5	%	1.9	%	3.0	%	2.0	%
Cost of services and other	18.0	%	21.3	%	18.4	%	23.0	%
Total costs of goods and services	21.5	%	23.2	%	21.4	%	25.0	%
Gross margin	78.5	%	76.8	%	78.6	%	75.0	%
Operating expenses
Sales and marketing	37.9	%	34.6	%	35.2	%	40.2	%
Research and development	20.5	%	23.7	%	20.6	%	29.7	%
General and administrative	22.7	%	31.3	%	21.0	%	30.7	%
Stock compensation charge	0.0	%	1.6	%	0.0	%	1.5	%
Restructuring and other charges	16.8	%	51.5	%	8.5	%	19.8	%
Total operating expenses	97.9	%	142.7	%	85.3	%	121.9	%
Operating income (loss)	(19.4	)%	(65.9	)%	(6.7	)%	(46.9	)%
Other income (expense)	3.0	%	2.2	%	2.1	%	2.6	%
Net income (loss)	(16.4	)%	(63.7	)%	(4.6	)%	(44.3	)%

Quarter Ended September 30, 2004, Compared to Quarter Ended September 30, 2003

Revenue. Revenue increased 5.7% to $5.0 million in the quarter ended September 30, 2004, from $4.7 million in the quarter ended September 30, 2003.

Revenue from software licenses increased 3.2% to $1.73 million in the quarter ended September 30, 2004, from $1.68 million in the quarter ended September 30, 2003.  The Company primarily attributes this increase in software revenue to more orders from existing customers in the third quarter of 2004 compared to the third quarter of 2003.

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Revenue from services and other, consisting of professional services, customer support and rebillable costs, increased 7.1% to $3.2 million in the quarter ended September 30, 2004, from $3.0 million in the quarter ended September 30, 2003.  The Company primarily attributes this increase to increased customer support revenue as a result of the Company’s expanding customer base, and to increased professional services revenue due to increasing demand for implementing system upgrades.

Gross margin. Gross margins improved to 78.5% of total revenue in the quarter ended September 30, 2004, from 76.8% of total revenue in the quarter ended September 30, 2003. This increase is due primarily to improved utilization of implementation and customer support staff .

Gross margins from software licenses decreased to 90.0% of software revenue in the quarter ended September 30, 2004 from 94.6% of software revenue in the quarter ended September 30, 2003. Product costs consist primarily of third party software used in conjunction with the Company’s software.

Gross margin from services and other represented 72.4% of services and other revenue in the quarter ended September 30, 2004, and 66.9% of services and other revenue in the quarter ended September 30, 2003.  This increase is due to improved utilization of implementation and customer support staff offset to a lesser extent by higher use of subcontracted services.

Operating expenses. Operating expenses decreased 27.5% to $4.9 million in the quarter ended September 30, 2004, from $6.7 million in the quarter ended September 30, 2003.  This decrease primarily due to lower restructuring charges in the third quarter 2004 compared to the third quarter 2003. Total operating headcount increased by 2.9% to 72 employees at September 30, 2004, from 70 employees at September 30, 2003. As a percentage of total revenue, operating expenses were 97.9% in the quarter ended September 30, 2004, and 142.7% in the quarter ended September 30, 2003.

Sales and marketing expenses increased 15.9% to $1.9 million in the quarter ended September 30, 2004, from $1.6 million in the quarter ended September 30, 2003.  The increases in sales and marketing expenses were primarily due to higher personnel costs and marketing programs.

Research and development expenses decreased 8.6% to $1.0 million in the quarter ended September 30, 2004, from $1.1 million in the quarter ended September 30, 2003.  The decrease in research and development expenses related primarily from reductions in personnel.

General and administrative expenses decreased 23.2% to $1.1 million in the quarter ended September 30, 2004, from $1.5 million in the quarter ended September 30, 2003.  The decreases in general and administrative expenses were primarily due to lower facility costs related to the consolidation of the corporate facility, lower legal fees, lower insurance costs, offset to a lesser extent by higher personnel costs.

Stock compensation charge decreased 100% to $0 in the quarter ended September 30, 2004, from $75,000 in the quarter ended September 30, 2003. The decrease was due to all options issued prior to the IPO having become fully vested.  Stock compensation charge represents the difference at the grant date between the exercise price and the pre-IPO deemed fair value of the Common Shares underlying the options.  This amount was amortized over the vesting period of the individual options, which is typically four years.

Restructuring and other charges.  In the third quarter of 2004, the Company recorded a charge of $836,000 related to the separation agreement with the Company’s former Chief Executive Officer, exit costs related to the relocation of the Company’s EMEA headquarters and the consolidation of the corporate headquarters.  The separation agreement costs of $555,000 consisted of three components.  The first component was severance totaling $239,000 from the pre-existing employment agreement; the second component was stock compensation charge of $246,000 for the acceleration of option vesting; and the third component was related legal fees of $70,000.  The exit costs of $49,000 for the relocation of the Company’s EMEA headquarters related to the cancellation of certain telephony contracts.  The existing reserve for the corporate headquarters vacated space was increased by $232,000 due to the fact the Company has been unable to find a tenant to sublet the excess facility space and believes that in the current market the Company is unlikely to find a tenant to sublease the space through the end of the lease term of May 2006.  In the third quarter of 2003, the Company conducted an extensive review of its operations to better align its operating cost structure with

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current revenue levels.  This review focused on staffing levels, facility needs and long-lived assets utilized in the business.  As a result of this review, the Company recorded a Restructuring and other charges of $2.4 million.  This charge was comprised of three components:  a charge related to staff reductions of $0.7 million, a facility termination charge of $1.3 million and an asset impairment charge of $0.4 million.

Other income and expense. Interest income was $145,000 in the quarter ended September 30, 2004, and $99,000 in the quarter ended September 30, 2003. The increase in interest income is the result of an increase in investment yields.

Income taxes.  There has been no provision or benefit for income taxes for any period since 1995 due to the Company’s operating losses.  At September 30, 2004, the Company had approximately $52.8 million of domestic operating loss carryforwards for federal income tax purposes, which expire beginning in 2011through 2023.  Based on Internal Revenue Code regulations relating to changes in ownership in the Company, utilization of a portion of the net operating loss carryforwards is subject to annual limitations.  At September 30, 2004, the Company had foreign operating losses of approximately $8.8 million, which may be limited.  The Company’s use of these net operating losses may be limited in future periods.

Nine months ended September 30, 2004, Compared to Nine months ended September 30, 2003

Revenue. Revenue increased 4.0% to $15.1 million in the nine months ended September 30, 2004, from $14.5 million in the nine months ended September 30, 2003.

Revenue from software licenses increased 0.6% to $5.4 million in the nine months ended September 30, 2004, from $5.3 million in the nine months ended September 30, 2003.

Revenue from services and other, consisting of professional services, customer support and rebillable costs, increased 6.0% to $9.8 million in the nine months ended September 30, 2004, from $9.2 million in the nine months ended September 30, 2003.  The Company attributes this increase to increased customer support revenue as a result of the Company’s expanding customer base.

Gross margin. Gross margins improved to 78.6% of total revenue in the nine months ended September 30, 2004, from 75.0% of total revenue in the nine months ended September 30, 2003. This increase is due primarily to improved utilization of implementation and customer support staff.

Gross margins from software licenses decreased to 91.4% of software revenue in the nine months ended September 30, 2004 from 94.5% of software revenue in the nine months ended September 30, 2003. Product costs consist primarily of third party software used in conjunction with the Company’s software.

Gross margin from services and other represented 71.6% of services and other revenue in the nine months ended September 30, 2004, and 63.7% of services and other revenue in the nine months ended September 30, 2003.  This increase is due to improved utilization of implementation and customer support staff.

Operating expenses. Operating expenses decreased 27.2% to $12.9 million in the nine months ended September 30, 2004, from $17.7 million in the nine months ended September 30, 2003.  This decrease primarily reflects lower relative staffing levels in the first nine months of 2004 compared to the first nine months of 2003. Total operating headcount at September 30, 2004 of 72, which increased by 3 or 2.9% from the beginning of 2004, compared to operating headcount at September 30, 2003 of 70, which decreased by 61 or 47% from the beginning of 2003. As a percentage of total revenue, operating expenses were 85.3% in the nine months ended September 30, 2004, and 121.9% in the nine months ended September 30, 2003.

Sales and marketing expenses decreased 8.8% to $5.3 million in the nine months ended September 30, 2004, from $5.8 million in the nine months ended September 30, 2003.  The decrease in sales and marketing expenses resulted primarily from lower personnel costs, as a result of fewer personnel, and streamlined marketing programs.

Research and development expenses decreased 28.0% to $3.1 million in the nine months ended September 30, 2004, from $4.3 million in the nine months ended September 30, 2003.  The decrease in research and development expenses related primarily from reductions in personnel.

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General and administrative expenses decreased 28.9% to $3.2 million in the nine months ended September 30, 2004, from $4.5 million in the nine months ended September 30, 2003.  The decreases in general and administrative expenses were primarily due to lower facility costs related to the consolidation of the corporate facility, lower legal fees, lower insurance costs, depreciation and lower personnel costs, as a result of fewer personnel.

Stock compensation charge decreased 100% to $0 in the nine months ended September 30, 2004, from $225,000 in the nine months ended September 30, 2003. The decrease was due to all options issued prior to the IPO having become fully vested.  Stock compensation charge represents the difference at the grant date between the exercise price and the pre-IPO deemed fair value of the Common Shares underlying the options.  This amount was amortized over the vesting period of the individual options, which is typically four years.

Restructuring and other charges.  In the nine months ended September 30, 2004, the Company recorded a charge of $1.3 million.  In the third quarter of 2004, the Company recorded a charge of $555,000 related to the separation agreement with the Company’s former CEO, which consisted of three components.  The first component was severance totaling $239,000 from the pre-existing employment agreement; the second component was stock compensation charge of $246,000 for the acceleration of option vesting; and the third component was related legal fees of $70,000.  In the first and third quarters of 2004, the Company recorded charges related to the relocation of the U.K. operations.  In late January 2004, the U.K. operations moved into new premises that are more suitable for their current staffing levels.  The old facility, which had a lease through March 2005, was in use until the move.  The U.K. lease termination charge of approximately $357,000, consisted of forfeiture of the rent deposit, abandonment of assets, cancellation of certain telephony contracts and other direct disposal costs.  Additionally, the Company has recorded adjustments to increase the reserve in the first, second and third quarters totaling $379,000 related to the consolidation of the corporate headquarters.  These adjustments are due to the fact the Company has been unable to find a tenant to sublet the excess facility space and believes that in the current market the Company is unlikely to find a tenant to sublease the space through the end of the lease term of May 2006.  In the third quarter of 2003, the Company conducted an extensive review of its operations to better align its operating cost structure with current revenue levels.  This review focused on staffing levels, facility needs and long-lived assets utilized in the business.  As a result of this review, the Company recorded a Restructuring and other charges of $2.4 million.  This charge was comprised of three components:  a charge related to staff reductions of $0.7 million, a facility 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. Interest income was $347,000 in the nine months ended September 30, 2004, and $382,000 in the nine months ended September 30, 2003. The decrease in interest income is a result of a decline in investment yields.

Income taxes.  There has been no provision or benefit for income taxes for any period since 1995 due to the Company’s operating losses.  At September 30, 2004, the Company had approximately $52.8 million of domestic operating loss carryforwards for federal income tax purposes, which expire beginning in 2011 through 2023.  Based on Internal Revenue Code regulations relating to changes in ownership in the Company, utilization of a portion of the net operating loss carryforwards is subject to annual limitations.  At September 30, 2004, the Company had foreign operating losses of approximately $8.8 million, which may be limited.  The Company’s use of these net operating losses may be limited in future periods.

Liquidity and Capital Resources

The Company’s operating activities resulted in net cash inflows of $1.2 million in the nine months ended September 30, 2004 compared to net cash outflows of $3.3 million in the nine months ended September 30, 2003.  The increase of $4.5 million in cash generated from operations resulted primarily from a reduction of net losses by $5.7 million.  The operating cash inflows for the nine months ended September 30, 2004 resulted primarily from non-cash expenses and by increases to accrued compensation and deferred revenue billings, offset to a lesser extent by net losses.  The operating cash outflows for the nine months ended September 30, 2003 resulted from net loss incurred and a decrease in accrued compensation , offset by an increases in deferred revenue billings and accrued restructuring, and decreases in accounts receivables and prepaid expenses.

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The Company’s investing activities resulted in net cash outflows of $2.2 million in the nine months ended September 30, 2004 and net cash inflows of $21.4 million in the nine months ended September 30, 2003.  The net outflows in the nine months ended September 30, 2004 were the result of the purchase of short-term investments and capital expenditures.  The net cash inflow in the nine months ended September 30, 2003 was primarily the decision by management to reduce the length of maturity on the Company’s investments.  The decision caused many investments to be classified as cash and cash equivalents instead of short-term investments.  This inflow was offset by capital expenditures in the nine months ended September 30, 2003.

Financing activities generated $756,000 and $265,000 in cash in the nine months ended September 30, 2004 and 2003, respectively.  These funds were generated from proceeds received from stock issuances related to the Company’s stock option and employee stock purchase plans.

As of September 30, 2004, the Company had no long-term obligations other than operating leases related to facilities utilized by the Company.  The following table summarizes the minimum lease payments for these operating leases as of September 30, 2004:

in thousands	Operating leases
Through September 30, 2005	$	1,403
Through September 30, 2006	897
	$	2,300

The Company believes that its capital requirements, in large part, depend on future results of operations and achieving profitability. The Company expects to devote resources to research and development efforts, to expand sales efforts and marketing lead generation programs, to fund capital expenditures, and to provide for working capital and other general corporate purposes. Management believes that the existing cash and short-term investment balances of $41.1 million will be sufficient to meet the working capital and capital expenditure requirements for at least the next twelve months.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Interest Rate Risk

The Company’s exposure to market risk for changes in interest rates relate primarily to the change in the amount of interest income the Company can earn on its investments. The Company does not use derivative financial instruments in its investment portfolio. The Company had short-term investments of $3.0 million at September 30, 2004. The Company’s short-term investments consist primarily of bank certificates of deposit. The Company considers all investments with original maturities of less than one year, but greater than 90 days from the respective balance sheet date to be short-term investments. These investments are subject to interest rate risk and will fall in value if market interest rates increase. The Company believes a hypothetical increase in market interest rates by 10.0% from levels at December 31, 2003, would cause the fair value of these short-term investments to fall by an immaterial amount.  Since the Company is not required to sell these investments before maturity, the Company has the ability to avoid realizing losses on these investments due to a sudden change in market interest rates. On the other hand, declines in the interest rates over time will reduce interest income.

Foreign Currency Risk

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

Item 4.  Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) as of September 30, 2004. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2004, the Company’s disclosure controls and procedures were (1) designed to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the Company’s Chief Executive Officer and Chief Financial Officer by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

No change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 30, 2004 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Part II. Other Information.

Item 1.  Legal Proceedings.

See Note 4 to the Company’s unaudited condensed consolidated financial statements in Item 1 – Part I of this Quarterly Report on Form 10-Q, which is hereby incorporated by reference.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

Not applicable.

Item 3.  Defaults Upon Senior Securities.

Not applicable.

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

Not applicable.

Item 5.  Other Information.

Not applicable.

Item 6.  Exhibits.

The following exhibits are included herein:

10.1	Separation and Release Agreement between the Company and Kevin G. Kerns dated September 14, 2004
10.2	Employment Agreement between the Company and David McCrabb dated July 30, 2004
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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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 12, 2004.

Apropos Technology, Inc.

/s/FRANCIS J. LEONARD

Francis J. Leonard
Chief Financial Officer and Vice President
(Principal Financial Officer and Authorized Officer)

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EX-10.1

Exhibit 10.1

SEPARATION AND RELEASE AGREEMENT

Apropos Technology, Inc., an Illinois corporation (the “Company”), and Kevin G. Kerns, an employee of the Company (“Executive”), enter into this Separation and Release Agreement (“Agreement”) as of the 14th day of September, 2004.

WHEREAS, Executive has been employed by the Company and certain of its affiliated entities;

WHEREAS, Executive and the Company are parties to an Employment Agreement, dated January 1, 2000, as amended (the “Employment Agreement”);

WHEREAS, Executive and the Company are parties to an Employee Noncompetition, Nondisclosure and Developments Agreement, a copy of which is attached hereto as Exhibit A (the “Noncompetition Agreement”);

WHEREAS, Executive and the Company have agreed that Executive’s employment with the Company and its related and affiliated entities will terminate as of the Separation Date as defined below; and

WHEREAS, Executive and the Company have negotiated and reached an agreement with respect to all rights, duties and obligations arising between them, including, but not limited to, any rights, duties and obligations that have arisen or might arise out of or are in any way related to Executive’s employment with the Company and its related and affiliated entities, the Employment Agreement and the conclusion of that employment.

NOW, THEREFORE, in consideration of the covenants and mutual promises herein contained, it is agreed as follows:

1.           Resignation.  Executive acknowledges he resigned as President and Chief Executive Officer, as a director of the Company, and from any fiduciary or other position with the Company’s subsidiaries or employee benefit plans effective July 30, 2004.  The Company acknowledges and agrees that on July 30, 2004 Executive (i) ceased to be a director or officer of the Company for purposes of Section 16(b) of the Securities Exchange Act of 1934 as amended, and Rule 144 promulgated under the Securities Act of 1933, as amended, and (ii) ceased to have access to material nonpublic information concerning the Company, and (iii) ceased to be subject to Company-imposed black out restrictions on trading in Company stock.  Executive’s employment with the Company shall end on September 30, 2004 (the “Separation Date”).  Until the Separation Date, Executive shall remain an employee under the direction of and reporting to the President and Chairman of the Company (subject to vacations and compensating time off) and shall continue to (i) receive his annual Base Compensation of $230,000, less withholding required by law, in monthly installments as currently paid; (ii) vest at the rate of 625 shares per month in the 26,339 unvested stock options (as of August 10, 2004) currently held by Executive and issued under the Company’s 2000 Omnibus Incentive Plan (the “Stock Option Plan”); and (iii) participate in the Company’s health insurance plan in accordance with its terms.

2.           Severance Payment.  Executive shall be entitled to the Severance Payment of $230,000, less withholding required by law, payable in monthly installments as provided in Section 7(a) of the Employment Agreement.  Such payments shall commence with the pay period beginning October 1, 2004 and continue for twelve months.  Executive shall be entitled to no other rights or benefits under the Employment Agreement or other Company practices and policies, except as stated in this Agreement, but shall continue to comply with Executive’s continuing obligations under the Employment Agreement, as well as his obligations under the Noncompetition Agreement which shall remain in full force and effect.

3.           Consulting Services.  Executive agrees to be available at mutually convenient times (which will not interfere with Executive’s other responsibilities) to the Company’s management to provide consulting services for up to the hourly equivalent of two (2) days per week during the three (3) months following the Separation Date at no additional compensation; provided, however, that all out-of-pocket expenses reasonably incurred by the Executive in connection with such consulting services shall be reimbursed by the Company in accordance with its normal procedures.  The parties agree that in connection with the consulting services the Executive will not receive material nonpublic information which would prevent Executive from exercising his vested options, or buying or selling Company stock.

4.           AMT Recoveries.  The Company hereby waives and releases its right to recover or receive reimbursement for any alternative minimum tax credit available to Executive, including any AMT Recoveries as defined in the Loan Termination Agreement, dated as of December 27, 2002 (the “Loan Termination Agreement”).  The Loan Termination Agreement is hereby terminated and shall be of no further force or effect.

5.           Stock Options.  Executive shall be entitled to rights provided under previously granted stock options pursuant to the terms thereof which have vested as of the Separation Date.  The Company shall accelerate the vesting of the 114,800 option shares previously granted to Executive under the Stock Option Plan which were scheduled to vest in February 2005 and amends such option to provide for a 12 month period of exercise following the Separation Date.  All other vested options must be exercised within three (3) months following the Separation Date.  The Company will assist the Executive in the cashless exercise of all vested options, in accordance with Section 3 of the stock option agreements governing each option, for the period during which such options are exercisable; provided, Executive delivers shares of Company stock held for more than six (6) months.  Executive acknowledges that the 114,800 options shares scheduled to vest in February 2006, and the 25,714 option shares scheduled to vest monthly have not vested, shall not vest and shall be terminated.  The Company will assist in the prompt removal of all restrictive legends on any certificates evidencing restricted Company common shares held by Executive and the exchange of such certificates for certificates representing unrestricted shares to the extent consistent with applicable law.

6.           Receipt of Other Compensation.  Executive acknowledges and agrees that, other than as specifically set forth in this Agreement and notwithstanding any provisions of the Employment Agreement, or any other agreement, understanding or Company policy or plan, he is not and will not be due any compensation or amounts or benefits, including, but not limited to, compensation for unpaid salary, unpaid bonus, severance and accrued or unused vacation time or

2

vacation pay from the Company and its related and affiliated entities, except as stated in this Agreement.  As of and after the Separation Date, Executive will not be eligible to participate in any of the health benefit plans of the Company, except as stated in Section 7.  The Company shall promptly reimburse Executive for business expenses reasonably incurred in the ordinary course of Executive’s employment on or before July 30, 2004, but not previously reimbursed; provided the Company’s policies of documentation and approval are satisfied.

7.           Other Benefits.

(a)           Executive shall be eligible to elect Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”) continuation coverage under the group medical and dental plan of the Company as of the Separation Date (or such earlier date, if any, on which Executive qualifies for such an election), provided that such COBRA continuation coverage shall terminate in accordance with COBRA and the terms of the group medical or dental plan.

(b)           Executive shall be entitled to vested and accrued benefits, if any, if and to the extent provided by the Company’s qualified benefit plans (other than the Stock Option Plan) all as of the Separation Date.

8.           Representations and Warranties.  (a) Executive hereby represents and warrants to the Company as follows:

(1)           Authority.  Executive has full legal capacity and all requisite power and authority, without the consent of any other person, to execute and deliver this Agreement and to carry out the transactions contemplated hereby.

(2)           Validity.  This Agreement has been duly executed and delivered and constitutes the lawful, valid and binding obligation of Executive, enforceable in accordance with its terms.  The execution and delivery of this Agreement will not conflict with any law, agreement or other obligation to which Executive is subject.

(3)           Executive represents that Executive has not engaged in any breach of fiduciary duty or criminal activity towards the Company.

(b)           The Company hereby represents and warrants to Executive as follows:

(1)           Authority.  The Company has full legal capacity and all requisite power and authority, without the consent of any other person, to execute and deliver this Agreement, and to carry out the transactions contemplated hereby.

(2)           Validity.  This Agreement has been duly executed and delivered and constitutes the lawful, valid and legally binding obligation of the Company, enforceable in accordance with its terms.  The execution and delivery of this Agreement will not conflict with any law, agreement or other obligation to which the Company is subject.

9.           Return of Property - Ownership of Information.  By the Separation Date, Executive will promptly return to the Company (regardless of where located or stored) all reports,

3

files, memoranda, records, computer equipment and software, credit cards, cardkey passes, door and file keys, computer access codes or disks and instructional manuals, and other physical or personal property which he received or prepared or helped prepare in connection with his employment with the Company and its related and affiliated entities, and Executive will not retain any copies, duplicates, reproductions or excerpts thereof.  The ownership and right of control of all reports, records, programs, data bases, processes and supporting documents prepared by, for or on behalf of Executive during his employment are vested exclusively in the Company and remain the exclusive property of the Company.

10.         Cooperation. Executive agrees to cooperate with the Company in the truthful and honest investigation, prosecution and/or defense of any claim in which the Company may have an interest (subject to reasonable limitations concerning time and place), which may include (subject to arranging mutually agreeable times for such activities which will not interfere with Executive’s other responsibilities; and subject to the Company paying reasonable out-of-pocket expenses incurred by the Executive and, in the case of extraordinary expenses, only at the Company’s prior and specific request) making himself available to participate in any proceeding involving the Company, allowing himself to be interviewed by representatives of the Company, participating as requested in interviews and/or preparation by any of the Released Parties of other witnesses, protecting the applicable legal privileges of the Released Parties, appearing for depositions and testimony without requiring a subpoena, and producing and/or providing any documents or names of other persons with relevant information, all without claim of privilege against the Released Parties.

11.         Release By Executive.

(a)           Executive on behalf of himself, his heirs, executors, administrators and assigns, does hereby knowingly and voluntarily release, acquit and forever discharge the Company and its related and affiliated entities, successors, assigns and past, present and future shareholders, directors, trustees, officers, employees, agents, and attorneys (the “Released Parties”) from and against any and all charges, complaints, claims, cross-claims, third-party claims, counterclaims, contribution claims, liabilities, obligations, promises, agreements, controversies, damages, actions, causes of action, suits, rights, demands, costs, losses, debts and expenses of any nature whatsoever, known or unknown, suspected or unsuspected, foreseen or unforeseen, matured or unmatured, which, at any time up to and including the date hereof, exists, have existed, or may arise from any matter whatsoever occurring, including, but not limited to, any claims arising out of or in any way related to Executive’s employment with the Company and its related and affiliated entities and the conclusion thereof or the stock options, which Executive, or any of his heirs, executors, administrators and assigns and affiliates and agents ever had, now has or at any time hereafter may have, own or hold against the Released Parties.  Executive acknowledges that in exchange for this release, the Company is providing Executive with total consideration, financial or otherwise, which exceeds what Executive would have been given without the release.  By executing this Agreement, Executive is waiving all claims against the Released Parties arising under federal, state and local labor and antidiscrimination laws and any other restriction on the right to terminate employment, including, without limitation, Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. § 2000e et seq., 42 U.S.C. § 1981, the Civil Rights Act of 1991, the Age Discrimination in Employment Act, as amended by the Older Worker Benefit Protection Act,

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the Americans with Disabilities Act, the Family and Medical Leave Act, the Illinois Human Rights Act, or for breach of contract (including, without limitation, the Employment Agreement or the stock options), for misrepresentation, for defamation, for wrongful discharge under the common law of any state, for infliction of emotional distress or for any other tort under the common law of any state.  This release shall run to and be binding upon Executive and his heirs and assigns.

(b)           EXECUTIVE SPECIFICALLY WAIVES AND RELEASES THE RELEASED PARTIES FROM ALL CLAIMS EXECUTIVE MAY HAVE AS OF THE DATE OF EXECUTION OF THIS AGREEMENT (“EXECUTION DATE”) REGARDING CLAIMS OR RIGHTS ARISING UNDER THE AGE DISCRIMINATION IN EMPLOYMENT ACT OF 1967, AS AMENDED, 29 U.S.C. § 621 (“ADEA”), INCLUDING ANY CLAIMS BASED ON THE CONCLUSION OF EXECUTIVE’S EMPLOYMENT BY THE COMPANY.  EXECUTIVE FURTHER AGREES:  (A) THAT EXECUTIVE’S WAIVER OF RIGHTS UNDER THIS RELEASE IS KNOWING AND VOLUNTARY AND IN COMPLIANCE WITH THE OLDER WORKER’S BENEFIT PROTECTION ACT OF 1990; (B) THAT EXECUTIVE UNDERSTANDS THE TERMS OF THIS RELEASE; (C) THAT THE BENEFITS CALLED FOR IN THIS AGREEMENT WOULD NOT BE PROVIDED TO ANY EMPLOYEE TERMINATING HIS EMPLOYMENT WITH THE COMPANY AND ITS RELATED AND AFFILIATED ENTITIES WHO DID NOT SIGN A RELEASE SIMILAR TO THIS RELEASE, THAT SUCH PAYMENTS AND BENEFITS WOULD NOT HAVE BEEN PROVIDED HAD EXECUTIVE NOT SIGNED THIS RELEASE, AND THAT THE PAYMENTS AND BENEFITS ARE IN EXCHANGE FOR THE SIGNING OF THIS RELEASE; (D) THAT EXECUTIVE HAS BEEN ADVISED IN WRITING BY THE COMPANY AND ITS RELATED AND AFFILIATED ENTITIES TO CONSULT WITH AN ATTORNEY PRIOR TO EXECUTING THIS RELEASE; (E) THAT THE COMPANY AND ITS RELATED AND AFFILIATED ENTITIES HAVE GIVEN EXECUTIVE A PERIOD OF AT LEAST TWENTY-ONE (21) DAYS WITHIN WHICH TO CONSIDER THIS RELEASE; (F) THAT EXECUTIVE REALIZES THAT FOLLOWING EXECUTIVE’S EXECUTION OF THIS RELEASE, EXECUTIVE HAS SEVEN (7) DAYS IN WHICH TO REVOKE THIS RELEASE BY WRITTEN NOTICE TO THE COMPANY AND IF NOT REVOKED THIS RELEASE SHALL BE EFFECTIVE ON THE EIGHTH DAY AFTER THE DELIVERY DATE, (G) THAT THIS ENTIRE AGREEMENT SHALL BE VOID AND OF NO FORCE AND EFFECT IF EXECUTIVE CHOOSES TO SO REVOKE, AND IF EXECUTIVE CHOOSES NOT TO SO REVOKE, THAT HIS RELEASE THEN BECOMES EFFECTIVE AND ENFORCEABLE, AND (H) EXECUTIVE DOES NOT RELEASE OR WAIVE ANY RIGHT OR CLAIM WHICH HE MAY HAVE UNDER THE AGE DISCRIMINATION IN EMPLOYMENT ACT, AS AMENDED BY THE OLDER WORKERS BENEFITS PROTECTION ACT, WHICH ARISES AFTER THE EXECUTION DATE; PROVIDED THAT EXECUTIVE ACKNOWLEDGES AND AGREES THAT ANY CLAIM UNDER THE AGE DISCRIMINATION IN EMPLOYMENT ACT RELATING TO HIS SEPARATION FROM EMPLOYMENT WITH THE COMPANY OR COMPENSATION OR EMPLOYEE BENEFITS ISSUES HAS ARISEN PRIOR TO THE EXECUTION DATE.

(c)           Nothing contained in this Section 11 shall release the Company from any obligation under this Agreement, from claims for indemnification or other obligations under the

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Indemnity Agreement dated February 15, 2000 or for vested benefits under the Company’s qualified employee retirement benefit plans.

12.         Release By Company.

(a)           In reliance upon and conditioned upon the representations by Executive contained in this Agreement, the Company hereby releases Executive from any and all claims, suits, demands, actions or causes of action of any kind or nature whatsoever, whether the underlying facts are known or unknown, which the Company has or now claims, or might have or claim, pertaining to or arising out of Executive’s employment by the Company.  This release shall run to and be for the benefit of Executive and his heirs and assigns.  This release shall run to and be binding upon the Company, and its successor and assigns.

(b)           Nothing contained in this Section 12 shall release Executive from any obligation under this Agreement, including, without limitation, Executive’s continuing obligations under the Employment Agreement, the Noncompetition Agreement and ongoing fiduciary and confidentiality obligations thereunder; provided, however, that the Post-employment Period under the Noncompetition Agreement shall be deemed to have commenced on July 31, 2004.

13.         Confidentiality.

(a)           Executive reaffirms and agrees to comply with the terms of the Noncompetition Agreement, which is incorporated herein by reference.

(b)           Executive and the Company agree that they will keep confidential, to the full extent permitted by law, the terms of this Agreement, all performance hereunder and all circumstances relating to Executive’s separation from the Company; provided, however, that Executive and the Company may disclose the same as required by law (including, but not by way of limitation, the filing of this Agreement with the Securities and Exchange Commission), for purposes of tax reporting, pursuant to legal process, in an action to enforce this Agreement, to claim benefits under this Agreement or under Company benefit plans in which Executive is a participant or beneficiary, to members of Executive’s immediate family, legal advisors, and to persons from whom Executive seeks financial advice.

(c)           Executive agrees not to assist or advise any current or former employee with respect to potential rights or claims against the Company.

14.         Non-Disparagement.  No director or executive officer of the Company will take any action intended in any way to disparage Executive or make or solicit any comments or statements to the media or to other persons outside the Company that may reasonably be considered to be derogatory or detrimental to Executive’s professional reputation.  Executive will not take any action intended in any way to disparage the Company or make or solicit any comments or statements to the media or to other persons that may reasonably be considered to be derogatory or detrimental to the professional reputation of the past or current Released Parties.  If an employment reference or any other similar inquiry from a third party is requested about Executive (provided, that such requests are directed to the Chairman or President of the

6

Company), the Company will state that by mutual agreement between Executive and the Company Executive resigned his employment and will provide other factually accurate information only to the extent that Executive requests it and releases the Company and its personnel in connection with such statements.

15.         Covenant Not to Sue.  To the maximum extent permitted by law, Executive covenants not to sue or to institute or cause to be instituted any action in any federal, state, or local agency or court against the Released Parties with respect to the subject matter of the release in Section 11.  Notwithstanding the foregoing, nothing herein shall prevent Executive from instituting any action required to enforce the terms of this Agreement.  In addition, nothing herein shall be construed to prevent Executive from enforcing any rights Executive may have under the Employee Retirement Income Security Act of 1974.  While Executive may file a charge with state or federal agencies, Executive agrees not to seek or accept any money damages or any other relief upon the filing of any such administrative charges or complaints (or judicial proceedings arising from such charges).

16.         Executive’s Understanding.  Executive acknowledges by signing this Agreement that Executive has read and understands this document, that Executive has conferred with Executive’s attorney regarding the terms and meaning of this Agreement, that Executive has had sufficient time to consider the terms provided for in this Agreement, that no representations or inducements have been made to Executive, except as set forth in this Agreement, and that Executive has signed the same KNOWINGLY AND VOLUNTARILY.

17.         Non-Reliance.  Executive represents to the Company, and the Company represents to Executive, that in executing this Agreement they do not rely and have not relied upon any representation or statement not set forth herein made by the other or by any of the other’s agents, representatives or attorneys with regard to the subject matter, basis or effect of this Agreement or otherwise.

18.         Severability of Provisions.  In the event that any one or more of the provisions of this Agreement or the Noncompetition Agreement is held to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions will not in any way be affected or impaired thereby.  Moreover, if any one or more of the provisions contained in this Agreement or the Noncompetition Agreement are held to be excessively broad as to duration, scope, activity or subject, such provisions will be construed by limiting and reducing them so as to be enforceable to the maximum extent compatible with applicable law.

19.         Non-Admission of Liability.  The parties agree that neither this Agreement nor the performance by the parties hereunder constitutes an admission by any of them of any violation of any federal, state or local law, rule or regulation, common law, breach of any contract, or any wrongdoing of any type.

20.         Non-Assignability.  The rights and benefits available under this Agreement are personal to Executive and such rights and benefits shall not be subject to assignment, alienation or transfer, except to the extent such rights and benefits are lawfully available to the estate or beneficiaries of Executive upon death.

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21.         Notice.  Any notice to be given hereunder shall be in writing and shall be deemed given when mailed by certified mail, return receipt requested, or personal or receipted overnight delivery service addressed as follows:

To Executive at:

Kevin G. Kerns

2210 Edgebrooke Drive

Lisle, IL 60532

To the Company at:

Apropos Technology, Inc.

One Tower Lane

Oak Brook Terrace, IL 60181

Attention: Chairman

22.         Entire Agreement.  This Agreement, which incorporates Executive’s continuing obligations under the Noncompetition Agreement, sets forth all the terms and conditions with respect to compensation, remuneration of payments and benefits due Executive from the Company and its related and affiliated entities and supersedes and replaces any and all other agreements or understandings Executive may have had with respect thereto.  It may not be modified or amended, except in writing and signed by both parties.

23.         Choice of Law.  This Agreement shall be construed in accordance with the laws of the State of Illinois without regard to its choice of law rules.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

	APROPOS TECHNOLOGY, INC.
/s/ Kevin G. Kerns	By:	/s/ Keith Crandell
Kevin G. Kerns	Keith Crandell

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EXHIBIT A

APROPOS TECHNOLOGY, INC.
EMPLOYEE NONCOMPETITION,
NONDISCLOSURE AND DEVELOPMENTS AGREEMENT

In consideration and as a condition of my employment or continued employment by Teledata Solutions, Inc., an Illinois corporation (the “Company”), I hereby agree with the Company as follows:

1.  During the period of my employment by the Company (the “Employment Period”), I will devote my full time and best efforts during normal working hours to the business of the Company.  During the period of my employment by the Company and for six months thereafter, I agree that I will not, directly or indirectly, alone or as a partner, officer, director, employee or stockholder of any entity, (a) engage in any business activity that is in competition with the products or services being developed, manufactured or sold by the Company, or (b) solicit or do business with any customer of the Company or any potential customer of the Company.  During the period of my employment and for two years thereafter, I agree that I will not directly or indirectly, alone or as a partner, officer, director, employee or stockholder of any entity, solicit, interfere with or endeavor to entice away any employee of the Company.  The period following the termination of my employment during which a restriction applies (the “Post-employment Period”) shall be extended by the length of any period of time during the Post-employment Period during which I am in violation of this paragraph plus the length of any court proceedings necessary to stop such violation.

2.  I will not at any time, whether or after the Employment Period, reveal to any person or entity any of the trade secrets or confidential information concerning the organization, business or finances of the Company or of any third party that the Company is under an obligation to keep confidential (including but not limited to trade secrets or confidential information respecting inventions, products, designs, methods, know-how, techniques, systems, processes, software programs, works or authorship, customer lists, projects, plans and proposals), except as may be required in the ordinary course of performing my duties as an employee of the Company, and I shall keep secret all matters entrusted to me and shall not use or attempt to use any such information in any manner that may injure or cause loss or may be calculated to injure or cause loss, whether directly or indirectly, to the Company.  Further, I agree that during and after the Employment Period I shall not make, use or permit to be used any notes, memoranda, reports, lists, records, drawings, sketches, specifications, software programs, data, documentation or other materials of any nature relating to any matter within the scope of the business of the Company or concerning any of its dealings or affairs otherwise than for the benefit of the Company, it being agreed that all of the foregoing shall be and remain the sole and exclusive property of the Company, and that immediately upon the termination of my employment I shall deliver all of the foregoing, and all copies thereof, to the Company, at its main office.

3.  If at any time or times during my employment, I shall (either alone or with others) make, conceive, create, discover, invent, or reduce to practice any invention, modification, discovery, design, development, improvement, process, software program, work of authorship, documentation, formula, data, technique, know-how, trade secret or intellectual property right whatsoever or any interest therein (whether or not patentable or registrable under copyright,

A-1

trademark or similar statutes (including but not limited to the Semiconductor Chip Protection Act) or subject to analogous protection) (herein called “Developments”), then:

(a)  such Developments and the benefits thereof are and shall immediately become the sole and absolute property of the Company and its assigns, as works made for hire or otherwise;

(b)  I shall promptly disclose to the Company (or any persons designated by it) each such Development;

(c)  as may be necessary to ensure the Company’s owners of such Developments, I hereby assign any rights (including, but not limited to, any copyrights and trademarks) I may have or acquire in the Developments and benefits and/or rights resulting therefrom to the Company and its assigns without further compensation; and

(d)  I shall communicate, without cost or delay, and without disclosing to others the same, all available information relating thereto (with all necessary plans and models) to the Company.

Notwithstanding the foregoing, this Paragraph 3 shall not apply to Developments for which no equipment, supplies, facility, or trade secret information of the Company was used and which was developed entirely on my own time, unless (a) the Development related (i) to the business of the Company, or (ii) to the Company’s actual or demonstrably anticipated research or development, or (b) the Development results from any work performed by me for the Company.

4.  I will, during and after the Employment Period, at the request and cost of the Company, promptly sign, execute, make and do all such deeds, documents, acts and things as the Company and its duly authorized agents may reasonably require:

(a)  to apply for, obtain, register and vest in the name of the Company alone (unless the Company otherwise directs) letters patent, copyrights, trademarks or other analogous protection in any country throughout the world and when so obtained or vested to renew and restore the same; and

(b)  to defend any judicial, opposition or other proceedings in respect of such applications and any judicial opposition or other proceedings or petitions or applications for revocation of such letters patent, copyright, trademark or other analogous protection.

In the event the Company is unable, after reasonable effort, to secure my signature on any application for letters patent, copyright or trademark registration or other documents regarding any legal protection relating to a Development, whether because of my physical or mental incapacity or for any other reason whatsoever, I hereby irrevocably designate and appoint the Company and its duly authorized officers and agents as my agent and attorney-in-fact, to act for and in my behalf and stead to execute and file any such application or applications or other documents and to do all other lawfully permitted acts to further the prosecution and issuance of

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letters patent, copyright or trademark registrations or any other legal protection thereon with the same legal force and effect as if executed by me.

5.  I agree that any breach of this Agreement by me will cause irreparable damage to the Company and that in the event of such breach the Company shall have, in addition to any and all remedies of law, the right to an injunction, specific performance or other equitable relief to prevent the violation of my obligations hereunder, without the necessity of a bond or other security.  I further agree and acknowledge that the post-employment and non-competition provisions set forth in Paragraph 1 hereof, and the remedies set forth in this paragraph, are necessary and reasonable to protect the business of the Company.

6.  I understand that this Agreement does not create an obligation on the Company or any other person or entity to continue my employment.

7.  No claim of mine against the Company shall serve as a defense against the Company’s enforcement of any provision of this Agreement.

8.  I represent that the Developments identified in the pages, if any, attached hereto as Exhibit A comprise all the unpatented and unregistered copyrightable Developments that I have made, conceived or created prior to the Employment Period, which Developments are excluded from this Agreement.  I understand that it is only necessary to list the title and purpose of such Developments but not details thereof.

9.  I hereby represent that, except as I have disclosed in writing to the Company, I am not a party to, or bound by the terms of, any agreement with or obligation to any previous employer or other party to refrain from using or disclosing any trade secret or confidential or proprietary information in the course of my employment with the Company or to refrain from competing, directly or indirectly, with business of such previous employer or any other party.  I further represent that my performance of all the terms of this Agreement and as an employee of the Company does not and will not breach any agreement or obligation to keep in confidence proprietary information, knowledge or data acquired by me in confidence or in trust prior to or during my employment with the Company, and I will not disclose to the Company or induce the Company to use any confidential or proprietary information or material belonging to any previous employer or others.  I have not entered into, and I agree I will not enter into, any agreement, either written or oral, in conflict with the terms of this Agreement.

10.  Any waiver the Company of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach of such provision or any other provision hereof.

11.  I hereby agree that each provision herein shall be treated as a separate and independent clause, and the unenforceability of any one clause shall in no way impair the enforceability of any of the other clauses herein.  Moreover, if one or more of the provisions contained in this Agreement shall for any reason be held to be excessively broad as to scope, activity, subject or otherwise so as to be unenforceable at law, such provision or provisions shall be construed by the appropriate judicial body by limiting or reducing it or them, so as to be enforceable to the maximum extent compatible with the applicable law as it shall then appear.

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12.  My obligations under this Agreement shall survive the termination of my employment regardless of the manner of such termination and shall be binding upon my heirs, executors, administrators and legal representatives.

13.  The term “Company” shall include Teledata Solutions, Inc. and any of its subsidiaries, subdivisions or affiliates.  The Company shall have the right to assign this Agreement to its successors and assigns, and all covenants and agreements hereunder shall inure to the benefit of and be enforceable by said successors or assigns.

14.  This Agreement shall be governed by and construed in accordance with the internal laws of the State of Illinois.  Any claims or legal actions by one party against the other arising out of the relationship between the parties contemplated herein (whether or not arising under this Agreement) shall be governed by the laws of the State of Illinois and shall be commenced and maintained in any state or federal court located in Cook County, Illinois, and both parties hereby submit to the jurisdiction and venue of any such court.

IN WITNESS WHEREOF, the undersigned has executed this Noncompetition Nondisclosure and Developments Agreement as a sealed instrument as of the 19th day of March, 1996.

/s/ Kevin G. Kerns

Signature

Kevin G. Kerns

Name –Please Print

Address:

455 Buena Vista

Redwood City, Ca 94061

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EX-10.2

Exhibit 10.2

APROPOS TECHNOLOGY, INC.

One Tower Lane

Suite 2850

Oakbrook Terrace, IL  60181

July 30, 2004

Mr. David E. McCrabb, Jr.

17600 Bruce Avenue

Los Gatos, CA  95030

Dear Mr. McCrabb:

It is my pleasure to confirm with you our offer to you for the position of President and Chief Executive Officer of Apropos Technology, Inc. (the “Company”).  The points below set forth the terms of your employment which will be effective as of August 16, 2004:

•Your annualized salary will be $300,000, payable in accordance with the standard payroll practice of the Company.

•As you know, the Company has recently instituted the 2004 Incentive Bonus Award Program (the “Program”) for Senior Executives.  You are hereby granted a Target Award of $200,000 pursuant to the terms of the Program, as modified by this letter.  In lieu of the “Total Revenue” test contained in the Program, the following “Total Revenue” test will be applicable:

Combined GAAP Revenue for Q3 and Q4 2004	Percent of Target Award
Less than $10,609,347	0	%
$10,609,348 - $11,213,410	20	%
$11,213,411 - $11,616,119	50	%
$11,616,120 - $12,018,827	75	%
$12,018,828 and over	100	%

Assuming you remain employed by the Company at December 31, 2004, you will receive not less than a $100,000 minimum payment, even if the performance criteria are not satisfied.  In addition, in the event of a Change of Control (as defined in the Program) prior to year end, you will receive your entire Target Award of $200,000.

•We understand that you will periodically be commuting from your home in California.  The Company will reimburse you for reasonable travel expenses and temporary living expenses while in Chicago.  These expenses will include a short-term apartment conveniently located near the Company’s office, as well as automobile expense and reimbursement for coach airfare between Chicago and California.

•You will assume the role of President and Chief Executive Officer on August 16, 2004, in a full-time capacity, at which time your compensation also will commence.

•You will be entitled to all customary benefits provided to Company employees, including vacation, subject to the right of the Company to amend, modify or terminate any benefit plans or policies.

•It is expected that you will devote all of your customary working hours to the attention of the affairs and activities of the Company.

•You represent that you are not breaching any contractual relationship or other obligation toward any other person or entity by entering into this employment relationship with the Company and performing the duties contemplated hereby.

•By executing this Agreement, you agree to the confidentiality, ownership of invention, noncompetition and related provisions contained on Annex A hereto.  The term “Employee” in the Annex refers to you.

Your employment is at will and may be terminated by you or the Company upon thirty days advance written notice (or pay in lieu of such notice) for any reason or no reason.  All payments described above are subject to applicable withholding requirements.  This Agreement shall be governed by the substantive laws of the State of Illinois and not the conflict of law rules.  This letter is intended to confirm the benefits and terms of our offer and represents our entire agreement.  It may be executed in counterparts.  You have not relied on any representation other than as contained in this letter.  No amendment of these terms is effective if not in writing.  Your execution of this letter will convey your agreement to those benefits and terms.  We look forward to working together.

	Very truly yours,
	APROPOS TECHNOLOGY, INC.
	By:	/s/ Keith Crandell
		Keith Crandell
		Chairman; Compensation Committee
Accepted and Agreed:
/s/ David E. McCrabb, Jr.
By: David E. McCrabb, Jr.

ANNEX A

1.             Confidentiality.   Employee understands and agrees that Employee’s employment creates a relationship of confidence and trust between Employee and the Company with respect to (a) all Proprietary Information (as defined below), and (b) the confidential information of others with which the Company has a business relationship.  The information referred to in clauses (a) and (b) of the preceding sentence is referred to in this Agreement, collectively, as “Confidential Information”.  At all times, both during Employee’s employment with the Company and after its termination, Employee will keep in confidence and trust all such Confidential Information, and will not use or disclose any such Confidential Information without the written consent of the Company, except as may be necessary in the ordinary course of performing Employee’s duties to the Company.  The restrictions set forth in this Section will not apply to information which is generally known to the public or in the trade, unless such knowledge results from an unauthorized disclosure by Employee, but this exception will not affect the application of any other provision of this Agreement to such information in accordance with the terms of such provision.

2.             Ownership of Inventions.   Employee agrees that all Inventions (as defined below) which Employee conceives or develops, in whole or in part, either alone or jointly with others, prior to or during the term of Employee’s employment with the Company which may relate in any manner to the actual or anticipated business, work, research, development or investigations of the Company, or which result, to any extent, from the work performed by Employee for the Company, or use of the Company’s Proprietary Information, premises or property (the foregoing being hereinafter collectively referred to as “Company Inventions”) will be the sole property of the Company.  The Company will be the sole owner of all patents, copyrights and other proprietary rights in and with respect to such Company Inventions.  To the fullest extent permitted by law, such Company Inventions will be deemed works made for hire.  Employee hereby transfers and assigns to the Company or its designee any proprietary rights which Employee may have or acquire in any such Company Inventions, and Employee waives any moral rights or other special rights Employee may have or accrue therein.  Employee agrees promptly to disclose to the Company, or any persons designated by it, all Company Inventions which are or may be subject to the provisions of this Section.  Employee agrees to execute any documents and take any actions that may be required to effect and confirm such transfer and assignment and waiver.  The provisions of this Section will apply to all Company Inventions which are conceived or developed during the term of Employee’s employment with the Company, whether before or after the date of this Agreement, and whether or not further development or reduction to practice may take place after termination of Employee’s employment.  The provisions of this Section will not apply, however, to any Inventions which may be disclosed in a separate Schedule attached to this Agreement prior to its acceptance by the Company, representing Inventions made by Employee prior to employment by the Company.  The foregoing restrictions do not apply to an invention for which no equipment, supplies, facility or trade secret information of the Company was used and which was developed entirely on Employee’s own time, unless (a) the invention relates (i) to the business of the Company or (ii) to the Company’s actual or demonstrably anticipated research or development,

or (b) the invention results from or is the product of any work performed by Employee for the Company in the scope of Employee’s efforts on behalf of the Company.

3.             Noncompetition.  Employee agrees that, while employed by Company and for a period of eighteen (18) months following termination of his employment with Company, regardless of the circumstances under which Employee’s employment is terminated and regardless of whether the termination was voluntary or involuntary or with or without cause, Employee shall not, directly or indirectly, whether as a partner, owner, principal, agent, advisor, employee, employer, officer, director, shareholder or in any other capacity:

(a)           Engage in, advise or provide services in the Territory to any person or entity engaged in any business that is in any material way directly competitive with the business conducted by the Company.  The Territory shall mean the United States and those countries in Europe in which the Company distributes products.

(b)           Solicit for employment or employ or otherwise engage any person employed by the Company during Employee’s term of employment or request, or advise any such person to leave such employment or service of the Company.

Notwithstanding the foregoing, Employee may make investments in publicly-held corporations if such investment is limited to not more than five percent (5%) of the outstanding issue of such security.

Employee agrees that if he breaches this agreement, then the eighteen (18) month restrictive period shall be extended and shall not expire until eighteen (18) months after Employee permanently ceases to breach this Agreement.

4.             Enforcement.

(a)           Employee acknowledges that, for the breach of any of the covenants contained in this Annex, the Company will suffer irreparable damages for which the remedy at law will be inadequate, and that, an injunction may be entered against Employee by any court having jurisdiction, restraining Employee from breaching or continuing the breach.  Employee consents to the personal jurisdiction of DuPage County, Illinois, and the United States District Court for the Northern District of Illinois for purposes of enforcement of this Annex.  Resort to such equitable relief, however, shall not be construed to be a waiver by the Company of any other rights or remedies that the Company may have for damages or otherwise.  Should a court determine that either the scope or territory covered by the covenants is unreasonably extensive or the period of the covenants unreasonably long, it may amend the terms of such covenants so as to make such covenants reasonable and enforceable.

(b)           Employee hereby acknowledges the necessity of protection of the Company against Employee’s competition and that the nature and scope of such protection has been carefully considered by Employee and the Company.  Employee and the Company hereby agree that the unique nature of the business of the Company

requires the protection specified in this Agreement.  The consideration provided for these covenants is deemed to be sufficient and adequate to compensate Employee for agreeing to the restrictions contained herein.  Employee acknowledges and represents that Employee can continue to earn sufficient compensation without breaching any of the foregoing restrictions.  The scope and period provided and the area covered are expressly represented and agreed by the Employee to be fair, reasonable and necessary.

(c)           The covenants and provisions of this Agreement are severable.  The Company and the Employee agree that the restrictions imposed herein are reasonably necessary to protect the legitimate business interests of the Company.   However, if any provision or covenant of this Agreement were held to be unenforceable as written, then the Company and the Employee agree that the provision or covenant shall be construed in order that it shall be enforced to the greatest extent possible and, if such construction and enforcement is not possible, then the remainder of this Agreement shall be enforced as if such invalid covenant or provision were not contained in this Agreement.

*     *     *

Proprietary Information.   As used in this Annex, “Proprietary Information” means information which the Company possesses or to which the Company has rights which has commercial value.  Proprietary Information includes, by way of example and without limitation, trade secrets, product ideas, designs, configurations, processes, techniques, formula, software, source and object code, domain names, improvements, inventions, data, know-how, copyrightable materials, marketing plans and strategies, sales and financial reports and forecasts, and customer lists.  Proprietary Information includes information developed by Employee to be used in the business of the Company, whether before or in the course of Employee’s employment by the Company or otherwise relating to Inventions which belong to the Company, as well as other information to which Employee may have access in connection with Employee’s employment.

Inventions.   As used in this Annex, “Inventions” means any and all inventions, developments, creative works and useful ideas of any description whatsoever, whether or not patentable.  Inventions include, by way of example and without limitation, discoveries and improvements that consist of or relate to any form of Proprietary Information.

Company.  For purposes of this Annex, all references to the “Company” will be deemed to include Apropos Technology, Inc., its successors, and its direct or indirect subsidiaries and affiliates.

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, David McCrabb, certify that:

1.I have reviewed this report on Form 10-Q of Apropos Technology, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4.The Registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c)Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect the Registrant’s control over financial reporting; and

5.The Registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent function):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date: November 12, 2004
	s/ David McCrabb
	David McCrabb, interim Chief Executive Officer and President

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Francis J. Leonard, certify that:

1.I have reviewed this report on Form 10-Q of Apropos Technology, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4.The Registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:

d)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

e)Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

f)Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect the Registrant’s control over financial reporting; and

5.The Registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent function):

c)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

d)Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date: November 12, 2004
	/s/ Francis J. Leonard
	Francis J. Leonard, Chief Financial Officer, Vice President and Principal Executive Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Apropos Technology, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned Chief Financial Officer of the Company hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002 that based on their knowledge: 1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and 2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods covered in the Report.

/s/ David McCrabb
David McCrabb, interim Chief Executive Officer and President
/s/ Francis J. Leonard
Francis J. Leonard, Chief Financial Officer, Vice President
	November 12, 2004

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

The foregoing certification is being furnished to the Securities and Exchange Commission as an exhibit to the Form 10-Q and shall not be considered filed as part of the Form 10-Q.